Russia telecom industry has warned that none other than Skype is a serious threat to national security. The mostly free service is very popular with an increasingly connected Russian population, driving profits from old school telephone use down. Sounds more like whining from a faltering monopoly to me.

At a meeting of the lobby this week, telecom executives portrayed the most popular VoIP programs like Skype and Icq as encroaching foreign entities that the government must control.

“Without government restrictions, IP telephony causes certain concerns about security,” the lobby’s press release said. “Most of the service operators working in Russia, such as Skype and Icq, are foreign. It is therefore necessary to protect the native companies in this sector and so forth.” (Reuters)

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While a great many things have improved in Russia after the fall of Soviet rule, hard infrastructure has stubbornly resisted modernization. Bureaucracy and corruption are the two most likely culprits, but streets, rail and ports seem to have been low funding priorities for the politicians as well. Don’t let this deter you from visiting Russia. The detour and work around are deeply implanted in the psyche of every Russian. People and things seem to move in spite of the obstacles, if more a bit slowly at times.

All countries that have successfully modernized ran into this limiter of economic growth in the early stages, and decisively took to amending the situation. One can confidently say: only those who managed to jump this barrier succeeded in modernizing. Those who threw in their hands were left in the past. Russia, sadly, had nothing to brag about here. From 1995 to 2008, the length of the auto and rail network hardly expanded (comprising 750,000 and 755,000, and 87,000 and 86,000 kilometers [respectively]; Russia by numbers. Official publication. Federal State Statistical Service, 2009, chart 18.9). From 1989 to 2008, the volume of overseas transport fell by 4.8 percent, and the number of airline passengers- by 2.1 times; housing stock put into operation fell by 34%, and connecting to the power grid became a nationwide problem. Leading countries, on the other hand, behaved in a completely different manner. Its customary now to compare Russia with the other BRIC [Brazil Russia India China] countries – and the comparison here is staggering. In Brazil, the length of the road network grew by 65% from 1988 to 2005; the volume of overseas transport by 90%; and the number of airline passengers more than doubled. It’s better not to recall China: in only the last five years, 3.1 billion square meters of housing were built, 480,000 km of automotive and 19,000 km of rail routes; 16 large new airports have been put into operation, the first high-speed trains have been launched, six Chinese ports entered the list of the top 12 sea gateways of the world (moreover, the least busy of them handles more cargo than all of Russia’s ports combined), and connecting to the electrical grid now takes 19 days. (The Other Russia)

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Russia’s car market became the world’s fastest growing only to grind to a near halt in the last few months as the economy sputtered. In the growth stage, every manufacturer in the world rushed to establish a presence in the Russian market while home grown brands went upscale. Now autoVAZ is re-focusing on the bottom of the market.

Details about the new economy car are few, but it is expected to be based on AvtoVAZ’s Lada Kalina and priced at about 180,000 rubles ($4,950), making it the least-expensive new car available on the Russian market if the Zhiguli series is phased out.

The Kalina, a B-segment low-cost car launched in 2005, currently sells at a base price of 250,000 rubles, so slashing the price to 180,000 rubles will require AvtoVAZ to strip it of options like power windows, interior materials, soundproofing and power steering, said Dmitry Agafonov, an automobile researcher with Autostat, which tracks the car industry.

The new car’s closest competitor would be the Daewoo Matiz, which is priced at 204,000 rubles, so demand is likely to be high if AvtoVAZ delivers on price.

“It will be as basic as the classic models but developed 30 years later,” Agafonov said by telephone from Tolyatti, where AvtoVAZ has its headquarters. (St Petersburg Times)

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The Ruble’s value continues to decline as the the government continues to blame the west. Russian participation in questionable foreign securities and credit markets was entirely voluntary. The foolishness of basing an entire nations economy on inflated and historically volatile oil prices was entirely home grown.

The ruble tumbled to 36.41 to the U.S. dollar in trading Monday, breaking through the Central Bank’s target exchange rate less than two weeks after Chairman Sergei Ignatiyev announced that the ruble would not sink below 36.

The drop appeared to be part of an attempt by speculators to test the Central Bank’s resolve to support the ruble, and analysts predicted that the bank would now do everything in its power to keep the currency within its declared trading band.

“If there’s no move in the oil price and the barrier is lifted, I think the credibility of the regulator would be significantly undermined and some extraordinary action would be required,” said Mikhail Galkin, an analyst at MDM Bank. “Credibility is of paramount importance for any central bank.”

The Central Bank set the official exchange rate for Tuesday at 36.17 rubles to the dollar and 46.04 to the euro. (Moscow Times)

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Worldwide, the availability of credit has slowed commerce and threatens to cause a depression. Many feel the crisis is a result of failed government policy in just about every industrialized nation. While governments have resorted to blaming one another an printing more money fro questionable bail outs, they have done little to solve the problem.

One of Russia’s first millionaires who had adopted a strict Orthodox lifestyle, retiring to a cabin in the forest has returned to to public view with a solution. German Stregilov thinks a 21st century world wide bartering system can take the place of currencies and credit.

After spending four years in a wooden hut in a forest outside Moscow, Sterligov has leased out almost an entire floor atop a skyscraper in the Moskva-City business district to launch a global barter system.

Sterligov, who doesn’t watch television and rarely uses the Internet because of his Orthodox religious principles, plans to start facilitating the barter of debt and goods with his company, the Anti-Crisis Settlement and Accounting Center, by early March.

While the global economic crisis didn’t sweep into Russia until September, Sterligov said he sensed that trouble was looming in August and got to work.

“I decided that barter trade would be the right choice for the world in times of liquidity problems and payment delays,” he said in a recent interview.

So from August to November, computer programmers hired by Sterligov created an interactive database allowing the barter of debt and goods worldwide. (Moscow Times)

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Output form Russia’s factories has declined sharply, most likely showing a reaction to lax demand for products. Most of Russia’s press has kept an eerie silence about any economic difficulties, but all indicators are showing recession is in full swing.

Russian industrial production, a strong indicator of economic health, fell 8.7 percent in November, the Kommersant newspaper reports, citing a new report from the Ministry of Economic Development. According to the findings, manufacturing output dropped 10.3 percent; energy, gas and water production and distribution fell 9.3 percent; mining operations, excluding a seasonal effect, fell .6 percent. (The Other Russia)

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Russia has fallen on hard times from the same cause as the rest of the world, but it’s different. Russia’s recent boom was fueled by artificially high, unsustainable oil prices. The high prices are also one of the major causes of the current economic crisis that has erased demand for oil and taken the air out of the speculative bubble that pushed prices so high.

President Dmitry Medvedev said Russia may join the Organization of Petroleum Exporting Countries and reduce production to support the oil price.

“We have to defend ourselves,” Medvedev said in the Ural Mountains city of Kurgan today. “This is our revenue base, both from oil and from gas,” he said. “I believe that we mustn’t rule out any options.”

Defensive measures may include “cutting the volume of oil production and participating in existing organizations of suppliers, and in new organizations, if we can reach such an agreement,” Medvedev said in comments broadcast on state television. (Bloomberg)

My take is that Russia is not likely to join OPEC. Membership in the cartel would limit Russia’s autonomy. Both are likely to cut production, but it should not make much difference. Both OPEC and Russia need to learn that oil above $50 a barrel is not sustainable. When the price goes above $50, the profitability of most non-oil businesses declines, bankrupting their customers. It’s far better to charge your customer a bit less, allowing him to stay in business and continue buying form you rather than banrupt him for a quick short term gain.

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Russia’s recent economic growth has been almost entirely due to its ability to deliver record oil and gas production at record prices. With prices in free fall, Russia’s economy will be stressed much more more than much of the world. With much of its revenues coming from oil, the government’s ability to intervene will be limited, and it’s ambitious spending plans will be scaled back. Hopefully, greater economic diversification will come as a result, but sadly it won’t come without me pain for the average Russian.

“In the short-run, market participants will focus on both OPEC and perhaps even non-OPEC producer responses to balance the market.”

“A temporary drop below $25 is possible if the global recession extends to China and significant non-OPEC production cuts are required,” it said.

“In our view, oil prices could find a trough at the end of Q1 2009 or early Q2 2009 with the seasonal slowdown in demand. Then, as economic activity starts to strengthen, we see oil prices posting a modest recovery in the second half of 2009.” (CNBC)

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Affordable housing has been an elusive goal in Russia for generations. While Russia has experienced a recent building boom, most construction has been focused on housing for the affluent in larger cities. The boom has also been fueled by high energy prices that have proven to not be sustainable. Today the average Russian lives in an environment of very expensive housing that continues to become less affordable with each passing month.

Mortgages have long been the only way to acquire affordable housing in Russia, a country with exorbitantly high real estate prices and over half of the people unsatisfied with their housing. Having shown considerable progress, the system is about to be confronted with the consequences of the global economic slowdown. The impact of Russia’s mortgage crisis will not be nearly as severe as the one in the United States, where mortgages amount to over 60 percent of the GDP compared to just two percent in Russia. But still, the local banks’ new approach to issuing mortgages and rapidly declining incomes will put an end to affordable housing in Russia for a very long time. (Russia Profile)

Today in Russian History

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Trade continues to grow in Valdivostok, which is Russia’s largest Pacific sea port. While the majority of exports are raw materials desitned for Asian countries, the quantities of manufactured goods leaving have also increased. That’s good news for the Russian far east.

The freight turnover of Vladivostok commercial seaport has increased by 36% for a period of ten months in comparison with the same period of the previous year and it is now 5103,1 thousand tons. Thus the annual plan of freight processing is fulfilled for 102%, as the public relations service, referring to production service data, reported to PrimaMedia. In October 2008 the freight turnover of the seaport reached 528,8 thousand tons. The reason for the increase is export, the volume of which was 2518,5 thousand tons for ten months; it exceeded the results of the previous year by 75%. (Vladivostok Times)

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