Being a member of unprivileged social class in Russia is equal to miserable lifestyle and literal death. The system of social benefits in my country is very ill-designed due to its fragmentation, lack of legislative support and poor financing.
After the collapse of the Soviet Union, the abolishment of centrally planned economic system resulted in drastic economic decline and social hardship. Complicated by the effects of wage and price liberalization, the social consequences of market-oriented transition triggered a general decline in the standard and quality of life for the majority of Russian citizens. very important consequence of the Soviet system of social provision and social security was that people had very few social risks because the state took care of their education, job placement, health and child care, accommodation and provision for old-age or disability. Accustomed to state paternalism, people lacked enough initiative and were unprepared to cope with hyperinflation, unemployment or social insecurity in general.
In that mess associated with the rapid system change Russia also lacked visionary leaders who could facilitate the transition. Yeltsin did very little to improve the social benefits system[1]. It all started (and ended) with Putin, who introduced significant reforms in 2002. The most important one was the pension reform. Due to the aging of Russian, there was an urging need for the improvement in pension provisions for elderly. Veterans, people who defended their country or those who spent their life slavishly working for the greater good of the no-longer existing Soviet system were left with nothing. I can barely imagine how these people feel (even though I am a witness to it) given that they believed in and worked hard for something that just disappeared at once and did not leave any means for survival. Literally. Elderly people were standing on the streets begging for money like homeless. If they did not have children who had enough funds to support them they were forced to live in extreme poverty.
Going back to 2002 reforms, Putin started acting as soon as he accepted presidency in 2000. The key players and his assistants in this uneasy task were Mikhail Kasianov (prime minister at that time), Mikhail Dmitriev (Deputy Minister of Economic Development and Trade), and Mikhail Zurabov (representing interests of The Russian Pension Fund [PRF] – a huge bureaucratic structure with more than ten thousand personnel working all over the country). However, there were conflicting interests on the two sides. Dmitriev was a protagonist of radical market-oriented reforms while Zurabov and his colleagues in PRF opposed any radical change for obvious reasons. Kasianov had to leverage those conflicting interests in the limited amount of time given him by Putin as the head of the National Council for pension system reforms.
The scheme of the proposed reforms intended to consolidate all of the PRF funds; in short, the new system consisted of three parts: basic part (fixed by the government), insured part (earning-related pension) and funded part (formed in individual accounts based on returns from savings in the PRF). Three laws that regulated that change were passed in 2001. However, this new system required for additional legislative reforms such as “Law on Investments of the Funded Part of Labor Pension,” “Law on Amendments to Law on Non-state Pension Funds,” and “Mandatory Occupational Pension Law.” Needless to say, the process to finalize and pass those laws was very complicated, in large part due to opposition, and the last reform wasn’t accepted until 2004. Moreover, the administrative and organizational issues hampered the implementation or institutionalization of the new pension system in Russia. One was the selection of pension asset management companies for the funded part. Another one was the eligibility of applicants to select from those companies; and finally, the lack of initiative on citizens’ part. The majority of people barely understood what pension asset management meant and did not trust financial institutions to handle their savings. This goes back to financial literacy issues and the above mentioned repercussions of the Soviet equal benefit system.
As a result, Kasianov was fired, Dmitriev resigned, and Zurabov was appointed as the Minister for Health Care and Social Development. In the spring of 2004, almost at the same time as the reform of Government administrative structure, a new wave of social reforms backed by the President arrived. A bill was proposed to replace the nation’s pervasive social benefits (such as discounts on transportation, medicine, and other necessities) with monetary compensations, so-called monetization of welfare benefits. The bill repealed 41 laws and amended 155 others to end benefits introduced in the Soviet era to millions of retirees, military veterans, the disabled and Chernobyl cleanup workers, etc. This change caused an immense wave of social protest, which resulted in “babushka revolution” in 2005. People demanded an increase in basic (fixed) pension or mitigation of the monetization reform, both of which were eventually satisfied in the subsequent years.
So, did the reforms work in the end? The answer is that we are far from the end yet. Since 2002, only 4-5% of future pensioners have transferred their accrual assets under the management of private investment companies or independent pension funds, which indicates that Russians are simply not ready to use the accrual system effectively. In 2006 the average state pension in Russia rose 15.3%, year-on-year to 2,726 rubles (about $103 in 2006 dollars) per month. This amount still does not seem reasonable. However, it is questionable whether we need another pension reform in Russia. In my opinion, the Minister of Finance Alexei Kudrin had a point in his speech at the Healthcare and Social Development Ministry’s board meeting on April 18th. He said that instead of repeating the scenario of 2002, it is necessary to correct the existing pension system in order to raise pensions and boost the quality of social services.
“We will prepare proposals to stabilize the pension system and increase pensions, for which purpose we will be ready to sacrifice our dearest, the National Wealth Fund,” Kudrin promised.
The Finance Ministry will also draft proposals to reform the single social tax, which are expected to apply starting in 2010, according to Kudrin. Note to the reader: the effects of the unified social tax currently include practice of paying salaries “under the table” and avoidance of tax payments by both businesses and individuals. He stressed that the pension system should be a top priority for the government over the next 20-30 years. Seems like Putin wanted to concentrate on that too, but his reforms went off track. Let’s hope for the best.
[1]There were two occasions in the 1990s when the Yeltsin government tried to institute substantial reforms in the pension system. First, in 1995, the Government worked out the “Concepts of the Pension System Reform in the Russian Federation,” which included the idea of setting up a three-pillar pension system for the first time in Russia. However, this “Concept” was not realized. Second, in 1998, a new “Pension Reform Program” was publicized. It included a plan of introducing a funded mechanism to finance retirement pensions. This program was relatively well designed, but didn’t last long enough to be materialized because of the financial crisis that took place in August of 1988.
Aeroflot Russian Airlines is a national Russian carrier. The company was established in 1923 (yes indeed during Soviet times) and has now been turned into a state owned [51%] bureaucracy with 45% market share of international flights. Aeroflot is based at Moscow Sheremetyevo International airport. The airline provides domestic and international passenger services to 96 destinations in 49 countries, operating about 302 flights daily. During the Soviet era, the airline performed multiple functions ranging from heavy lifting to crop-dusting. In fact, the communist regime did not allow any competition in the airline industry[1][1]; therefore, quality control was at minimum and innovation attempts were illicit. There are records of approximately 127 accidents involving Aeroflot aircraft and 6,875 fatalities (plus 20 people killed on the ground), making an average of 54.13 fatalities per accident since 1953. From September 15, 1983 until August 2, 1990 Aeroflot service to and from the United States was interrupted due to the KAL 007 incident, following an executive order by Ronald Reagan revoking Aeroflot's license to operate flights into and out of the United States. The incident consisted of a Korean jet departing from JFK being shot down by a Russian pilot as it violated the Soviet airspace. However, I do not intend to paint a dismal picture of Aeroflot’s history. Indeed, the company has made tremendous efforts to improve its services. Even though it is still the national carrier, after the collapse of the Soviet Union, Aeroflot started to introduce major fleet and safety improvements in order to comply with international standards. For instance, the company has been hiring British consultants to help re-position its brand image as a reliable airline. Aeroflot has also upgraded its fleet of western-built aircrafts. It has a total of 24 A320/A319 jet planes for short-haul flights in Europe and 11 Boeing 767 planes for long-distance routes. In the spring of 2004 the airline started an aggressive expansion on the domestic market aiming to gain 30% share by 2010. On April, 2006 Aeroflot has become a member of the global alliance SkyTeam. By joining the international alliance, Aeroflot has proven its reliability and has increased the number of destinations worldwide. Nonetheless, its position as an investor and a business partner is still rather shaky. For instance, the long-awaited acquisition of the Italian national carrier Alitalia by Aeroflot never took place. In April 2007 Aeroflot has made a bid for all or part of the Alitalia as one of three potential buyers to meet a deadline set by the Italian Ministry of Finance. Aeroflot joined the largest Italian bank, UniCredit, to bid for most of the 49 percent stake in Alitalia, which was selling its shares in hopes that a private owner will revive the unprofitable airline. At that moment Alitalia had a market capitalization of $1.74 billion (while Aeroflot’s market value was estimated at $ 3.2 billion). Most foreign analysts were skeptical that the deal would go through. Turned out, they were correct. In June 2007 Aeroflot has abandoned its bid, motivating withdrawal by lacking access to the "critical information" on the commercial and operational aspects of Alitalia's business. The Italian carrier was still in need of a rescue and saw Air France KLM as a potential bidder (much preferred to Aeroflot by the way). However, the talks were shortly suspended. That left Alitalia with just its smaller rival Air One and the buyout firm MatlinPatterson Global Advisers as possible buyers. On April 18, 2008 Aeroflot surprised the business world again by its decision to re-consider the acquisition of Italian national airline. Putin met with Berlusconi on the picturesque island of Sardinia and has announced that Aeroflot will resume talks on buying the Italian government's 49.9% stake in airline Alitalia. The leaders also discussed the possible suspension of visa requirement to enter EU for the Russian citizens. But going back to Aeroflot’s business – the airline behaved like a capricious lady on the Alitalia deal, which justifies the lack of trust from international partners. All that being said, it is quite risky to deal with Russian air – you might get shot if entering the post-soviet airspace (like KAL 007) or you may never see monetary follow up if you are thinking of a financial partnership with Aeroflot. P.S: I still fly Aeroflot since it is the only direct flight from Moscow to LA); frankly, their service is not bad after all. [1] Funny enough, one of the very few Soviet advertising attempts involved Aeroflot. It promoted flying with national carrier despite the fact that the soviet citizens could not physically chose a non-Aeroflot flight since there was no competition whatsoever. The ads were meant to encourage people to travel by plane versus train.
Russia has the world’s largest natural gas reserves: 1,680 trillion cubic feet, according to EIA. It is also number one in gas production and export as of 2005. However, in the age of globalization, it is not easy for Russia to cope with increasing demand for natural gas from EU, declining resources in the major gas fields, and out-of-date political agreements with various countries that do not reflect the market price of natural gas.
Russia exports large amounts of natural gas to the post-soviet countries such as Ukraine, Belarus, Armenia, Georgia, Moldova, and Azerbaijan. Second largest consumer of the Russian gas is the EU, with countries like Germany, Italy and France being top 3 Russian natural gas importers in 2005. Turkey, Japan and other emerging Asian markets also stimulate Russian gas exports, rising domestic demand. This is on the buyer side. On the seller side, we have almost a single producer, Gazprom, a state-operated monopoly [50.002 per cent] which accounts for over 90% of the country’s gas extraction and production. After its acquisition of Sibneft, Gazprom has become the largest gas company in the world. With reserves of 28,800 km³, it controls about 17 percent of the world's gas reserves. In addition, the giant operates the longest pipeline network (150,000 km), and controls assets in banking, insurance, media, construction and agriculture. Gazprom’s shares are one of the most attractive instruments of Russian Stock Exchanges. Shares can be bought or sold through a broker (investment companies and commercial banks), at a Gazprombank’s office, or directly from a shareholder while signing the purchase and sale contract. In my opinion, Gazprom epitomizes Russia’s dependency on the natural resources, which creates an opportunity for the government to control industries and move political figures. For instance, the former chairman of Gazprom, a fellow with a funny last name meaning ‘bear’ in Russian is now the head of the state. There are even rumors going on that Putin might replace Medvedev at Gazprom. While people speculate on the possible power rearrangements, one is true about Gazprom: being involved with the gas giant means being involved in politics.
It is interesting to look at Russia’s = Gazprom’s relationship with Ukraine, the largest gas consumer among the post-soviet countries. Historically, Russia has been supplying gas to Ukraine at very low prices for using its land to transmit natural gas to Europe. According to the contract signed by Gazprom and Naftohaz Ukrainy in 2002, the payment for the transfer of Russian natural gas through Ukrainian pipeline system had been made in the form of barter exchange – up to 15% of gas pumped through the Ukrainian territory was taken as payment for the transfer. At the same time Russia supplied gas to Ukraine at ridiculous price of about $50 per 1,000 cubic meters compared to the market rate of about $230 per 1,000 cubic meters [this rate is highly averaged because Russia does not have set gas standards]. This goes back to the Soviet Union times, when the pipeline system was built. It was functioning and no one paid attention to inefficiencies created due to prolonged lead times and heavily subsidized prices to our neighbors. While countries like Ukraine got used to “free gas” and started abusing the barter privilege, Russian government finally decided to revise the agreement in 2005. The negotiations had started when Russia offered Ukraine a price increase to $150 per 1000 cubic meters along with increased transit fees. Such price hike was met with initial objection and further contemplations. Gazprom was unwilling to wait until Ukranian government makes up its mind and pushed the price increase even higher to $230 per 1000 cubic meters. The Ukranian president, V. Yushenko claimed that their gas industry will become inefficient if the price rose above $90 per 1000 cubic meters; however Putin has made it very clear that he no longer wants to subsidize Ukraine, selling them gas for a price lower than that paid by the Russian citizens. Unable to reach an agreement, Russia simply cut off its supply of gas to Ukraine on January 1. Even though Gazprom assured its Western partners that the supply to European countries will not be affected, it was. Gazprom accused Naftohaz Ukrainy [Ukranian state gas company] of stealing the gas intended to transfer to EU. The funniest part is that Naftohaz accepted the blame and gave an excuse of withholding gas in order to cope with cold weather in January. Political tension with Ukranian “orange government” was at its peak, nonetheless loosing European customers was not a joke for Gazprom. Therefore, after 3 days, Russian gas giant agreed to a sell its produce to RosUkrEnergo, a trading company that also imports natural gas from Central Asia, at the market price of $230 per 1000 cubic meters. The contract is also subject to review each year and may be adjusted to new market prices.
Currently, issues regarding gas supplies are still remain. This year Ukraine accumulated debt for the months of January and February, which resulted in two incremental cut offs of 25% in March. The Ukranian government motivated their unwillingness to pay by saying that Russia did not pay its transit fees for those months. In turn, Putin announced that Gazprom has not received the invoice. After negotiations, the two sides have reached an agreement which implied concession to Gazprom of a joint venture with Naftogaz to market gas to Ukrainian consumers. However, the Ukranian Prime Minister Yulia Timoshenko disagreed. She wanted Naftogaz to restore its monopoly.The dispute resulted in new tensions between Ms. Tymoshenko and Mr. Yushchenko on the Ukranian side and the fury of Kremlin on the Russian side. What this all means to the European countries is unreliability of the Russian gas supplies that can be held hostage by Ukranians at any day.
Lastly, there have been debates upon Ukraine entering the WTO and how this entry will affect its gas relations with Russia. Now most experts agree that the effects will be insignificant since the WTO imposes no restrictions on the transportation of gas. Russian sources believe that there is a small difference in gas transportation fees, but Ukraine could have easily raised them before joining the Organization.
Along
with many other factors, Internet usage statistics are usually seen as an
indicator of the economic development of a country. In that sense,
globalization highly affects the borderless cyberspace bringing intelligence
and facilitating operations of users worldwide. On the other hand, Internet
delivers all sorts of information, some of which may not necessarily be
beneficial to the development of an individual, and of a country as a whole. I
found it interesting to look
at the recent statistics and trends of internet
usage in Russia.
Internet Usage Statistics in Russia:
29,400,000 Internet
users as of June/07, 20.8% penetration, according to POF.
For
comparison:
Total internet users
in Europe and in the World: [Internet World Stats, October 2007]
- Europe: 321,853,477
- World: 1,173,109,925
Total internet users by country and share of world users: [Source: Internet World Stats, October 2007]
§ US: 210,575,287 (18% share) [Nielsen//NetRatings, July, 2007]
§ China: 162,000,000 (13.8%) [CINIC, June, 2007]
§ Japan: 87,540,000 (7.4%) [eTForecasts, August, 2007]
§ Germany: 50,426,117 (4.3%) [Nielsen//NetRatings, August, 2007]
§ India: 42,000,000 (3.6%) [IWS, August, 2007]
§ UK: 38,512,837 (3.5%) [Nielsen//NetRatings, August, 2007]
This means, that Russia’s share comes up to about 2.5% of world users. Even though this does not seem like an impressive number, what is important is the rate of the user interface growth. The US remains the largest market for internet use with 153.4 million users, but that number is only up 2% over the last year. In contrast, BRIC countries are competing to out-pace each other in growth. Particularly in Russia, internet use rose 21% [to 12.7 million] over the last year. Importantly, it is not only the households that are getting connected to the global web, but also schools, colleges, health care institution, small firms and other public and private organizations across the country. What this also means, is that the gap between the sophisticated lifestyle of large Russian cities and small provincial towns is slowly being narrowed.
However, there are several political issues that may hinder the pace of the usage growth. More specifically, authorities are trying to tighten regulation of the Internet, arguably the country's most vibrant venue for political discussion. According to rights activists, prosecutors have closed down several regional Internet sites critical of the authorities, saying they did not have the proper registration.
Nonetheless, Russia’s new president Dmitry Medvedev has a different view on the development of the Russian cyberspace. Speaking at the opening of the 12th annual Russian Internet Forum, held in the suburban area outside of Moscow, Medvedev addressed what he called "the delicate question of the relationship between freedom of speech and responsibility" online. He admitted to be an avid consumer of Internet news and reassured the web users that authorities would take a measured approach to policing the Internet. In his speech he acknowledged the importance of blogs and opinion sites and dismantled the rumors of the about a crackdown on free speech in cyberspace. Frankly, I don’t even understand how that would be possible)
In addition, when he still was the first deputy prime minister, Medvedev oversaw a program to put every Russian school online. He also claimed to promote Internet use as part of a program “to develop a knowledge-based economy and reduce Russia's dependence on oil and gas exports.” Although this is a very bold statement, let’s give Medvedev credit for his attempt to build an image of the non-totalitarian president.
