Ever more reliant on cheap foreign credit and high commodity prices, Russia has been confronted with the inherent flaws of its economic model through the economic and financial crisis.
     The global credit crunch has provoked a massive and abrupt capital flight, reversing the high capital inflows of previous years, which fuelled a consumption and investment boom.
     The price collapse of oil and other commodities have inflicted a second severe external shock.
     External shocks have been amplified by structural weaknesses, plunging Russia into a widespread and deep recession.
     Over the first nine months, Russia’s GDP has contracted by 10% compared to last year.
     Though still contracting by 9.4% over the third quarter compared to the same period last year, the economy grew slightly when compared to this year’s second quarter, indicating that Russia is crawling out of recession as its terms of trade have improved significantly.
     For the whole of 2009 a contraction in the vicinity of 8% is expected, compared to an average growth of 7% over the past decade.
     The current situation – defined by such outdated capital goods -- require that the country undertake a major investment push. It also reveals the country’s dependency on foreign capital.
     Despite a number of promising reforms at the start of his tenure, economic policy during the Putin years focused on the commodities sector and the reversal of the chaotic privatizations of the nineties.
     State enterprises are dominant in the major sectors in the Russian economy. Ever-rising energy export revenues have been used to create national champions in the commodities sector and the heavy industry, while little attention has been paid to diversifying the economy or improving the investment climate.
     Anti-crisis measures have further increased the share of the Russian State in the economy to more than 50%.  Struggling with an often outdated and inefficient stock of capital goods, Russia is in dire need of large investments. Industries, which excelled in Soviet times are falling out of step with technologically more advanced competitors abroad.
     As the country lacks deep domestic capital markets for providing long-term financing, Russia depends heavily on foreign investments. (See Story)
     These are at a rather low level, however, when compared to regional peers or other emerging markets.
     The large capital inflows in previous years were mostly composed of loans, not of more direct investments, which tend to be more stable.
     This explains the sudden and enormous capital reversal Russia had to endure when international markets became highly averse towards emerging markets and called in loans.
     Investment needs are particularly high in the vital energy sector. Although the country has vast oil and gas resources, new capital-intensive reclamations are necessary to make up for exhausting fields.
     The growth in oil and gas output has been slowing down and recently turned negative. Red tape barriers, the overall investment climate and the taxation system are to blame for lacking investment.
     Fiscal revenues, along with the ruble rate, export numbers, economic growth and stock markets are all subject to the whims of international oil prices.
     Diversification of the economic structure should therefore be a primary objective for Russian politicians.      President Medvedev recently described Russia’s raw-material dependency as ‘humiliating’ and ‘primitive’. It is doubtful, however, that politicians will take action towards diversification given the intertwinement of politics and the commodities sector.
     The most pressing issue at the moment is the banking sector.

      Russia has some 1,100 banks, many of which are undercapitalized and are highly exposed to one sector or even a single large company.
     Massive government interventions have allowed the sector to survive without major casualties. Asset quality has been deteriorating, however, and could trigger a second round of crisis in the banking sector. This would mean that lenders would further freeze credit granting, resulting in slower recovery.
     Anti-crisis measures taken by the government entail the risk of budgetary deterioration, meaning a ballooning non-oil deficit and the failure to replenish fiscal reserves needed to safeguard the economy from future commodity price fluctuations. Existing reserves are being depleted at present as the government scrambles to finance the deficit.
     The international crisis has uncovered the profound flaws of Russia’s growth model and has confronted the country’s leaders with several structural problems.
     The sense of urgency seems to fade, however, with the oil price picking up and Russia slowly moving out of recession. This threatens to once more postpone radical but vital reforms, which could in the long run result in economic stagnation.
     The smartest foreign companies now operating inside Russia are the ones who keep in mind that Moscow is not everything.
      The Russian Federation comprises 83 regions. They vary widely in terms of economic development, economic structure, population size, land area as well as resource endowments.
     By means of a rating on the regions’ potential and risk, analysts have identified a list of 9 regions with the best investment climate in Russia.
     These are the city of Moscow and Moscow Region, St. Petersburg, Samara Region, Krasnodar Territory, Nizhni Novgorod Region, Republic of Tatarstan, Rostov Region and Republic of Bashkortostan.
     Taken together, they account for 45% of Russia’s GDP and host 7 of the 11 Russian cities with over one million inhabitants. Regional economic structures differ considerably, with some depending mainly on agriculture, others on extractive industries, retail trade or manufacturing.
     The global financial crisis has hit Russia and its regions hard.
     Social unrest has occurred in a number of cities and regions, fuelled by rising unemployment and the slump in commodity prices.
     The economic downturn has also put pressure on regional budgets and increased the weight of transfers from the federal center.
     The crisis has again highlighted the need for modernization and diversification of the Russian economy.
     Taken by FDI activity in recent years, it seems that opportunities abound in several non-energy-related sectors. Besides unmet demand for many products there are large infrastructure shortages as well. However, conditions for doing business will need to improve in order for (foreign and domestic) investment levels to increase in a more sustainable fashion.
      Russia’s 83 regions vary greatly in terms of population and geographical size, market access, resource endowments and level of economic development. An appropriate regional economic policy is essential to avoid too much divergence among the regions.
     According to the World Bank, an effective strategy for regional development would need to balance three pillars: equalization policy, active regional policy and spatial policy.
     Regional development strategies in Russia used to focus on equalization policy via a transfer system between the centre and the regions. A more active regional policy moved into the spotlight with the establishment of special economic zones in 2005.
     The SEZs fall into different categories, with some built around existing growth centers and others of a greenfield type.
     Whether especially the greenfield SEZ will prove successful is still uncertain given distortions in the allocation of labor and capital as well as potentially high opportunity costs.
     Some of the tourism SEZs may face constraints due to lack of accessibility and underdeveloped infrastructure.
     To make matters worse, the current economic crisis puts future infrastructure spending at risk.
     Another factor for the success of active regional policy is the commitment of the regions themselves.
     In this context, it is positive that the SEZs have been selected in a competitive process among the regions.
Gordon Feller

Incongruity
Of Awards

     Incongruity of the month (March) is a publication giving “Best Airport Awards” at USD$75 buck a head fancy dinner during March IATA World Cargo Symposium in Vancouver while also acting as main sponsor of Airports Council (ACI) International Cargo Conference with all the bells and whistles going on during the same week in Seattle, Washington USA.
     What is it?
     Aside from two major organizations looking like they are playing gotcha with each other by holding their conferences at the exact same time—is ACI, a dedicated airport organization not good enough to act as venue for these awards?
     We sent an email to Bill Frainey, an executive at DFW who is speaking and much in evidence at the ACI Cargo event to try and get some answers.
     Bill passed our question request over to DFW public relations who wrote to us, and we wrote back.
     We are still awaiting DFW response and in the meantime have written to the boss at ACI, Angela Gittens as well.
     The import of these awards is in question, is our feeling.
     Air cargo awards were the subject of an Air Cargo News FlyingTypers story, "Who Profits From Awards" earlier this week.

Air Cargo News FlyingTypers leads the way again as the world’s first air cargo publication to connect the industry to the broadly expanding and interactive base for social commentary—Twitter.
     Here are updates from Twitter. To be added to this 24/7/365 service at no-charge contact: acntwitter@aircargonews.com

February 26:  AA Cargo named John Tiliacos VP cargo operations succeeding Mark Najarian, who is now AA MD JFK International Airport in New York.

February 24:  Indian Railway cut freight rates for rice, wheat and lentils to help slow food prices inflation now near an 11-year high.

February 24:  Back to profit Virgin Blue Australia’s second-largest airline, has agreement “in principle” with Boeing for up to 50 B737-800s.

Christian Becker
Director Russia & CIS
Lufthansa Cargo

Kyle Porter
Sales Manager, NA
Northern Air Cargo

Kay Kratky
CEO
Jade Cargo

February 24:   Cathay Pacific Airways and Air China inked accord to form air cargo joint venture.

February 24:   Air France A380 flying CDG/ JNB impacts schedules. By May 1 ten scheduled AF flights a week will be cut to seven- all A380s.

February 24:   British Airways & partners to build Europe’s first sustainable jet-fuel plant in East London to convert waste materials into kero by 2014.

February 24:  Air France and China Southern talking pax joint venture. AF Cargo sold two yet to be delivered B777Fs at a loss to FedEx .

February 24:   Starting March 28 Emirates goes 5X weekly DXB/NRT as EK & JAL expand their code share in affect since 2002 DXB/KIX.

     On April 18, 2010, the members of the JFK Rotary Club will be hosting their major fundraiser, The Thomas Carmody Memorial-JFK Rotary Club,"5K Runway Run".
     The Rotary Club of JFK International Airport was founded in 1970 as one of JFK Airport’s leading local service organizations.
     The first 5K Runway Run occurred in April 1972 and has gone off every year since then without a hitch, raising money for others as well as a good time for race participants.
     The JFK 5K is a unique race with the main JFK runway closed to aircraft landing and taking off. Aircraft are routed to a secondary runway during the race so it is business as usual at the big airport with the unusual spectre of hoards of people running around the runway and taxi areas.
     During its history the race has never been canceled. The Rotary Club works closely with airport authorities to ensure the security programs in place are strictly adhered to.
     Runners actually run on the longest Runway at JFK, which is almost 14,000 feet, although only a short portion of the main runway is used for the race.
     The funds raised from the "JFK Rotary Club ~ 5K Runway Run" are used to support organizations such as The Gift of Life International Inc.; for terminally ill children from countries with limited medical and technological services; Boy Scouts “Air Explorer” Program; a co-ed program for students who have a career interest in the aviation industry. The Mill Neck Manor School for the Deaf; a group that enhances the quality of life for people who are deaf, or who have other special communication needs.
     In addition, to the above charities this year JFK 5K will donate some race proceeds to “Haiti Earthquake Relief Effort”.
     JFK 5K is slated for Sunday, April 18, 2010 at Bldg. 14 – JFK Int’l Airport; Registration begins at 7:30 a.m. and the race begins promptly 9:00 a.m.
     Sign-up to run or walk in the race, family & friends are welcomed – strollers are permitted on the runway.
More:  www.JFKRunwayRun.org

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