Cashing In On Color Revolution

MOSCOW, Russia -- There is a widely held view that the revolutions in Georgia, Ukraine and, most recently, Kyrgyzstan have somehow been a victory for the United States and a slap in the face for poor old Russia. Certainly, the new pro-NATO and pro-EU regimes seem to spell the end of President Vladimir Putin's dream of a Slavic superstate. But the economic interests really benefiting from these revolutions are not American, but Russian.



In Georgia, Ukraine and Kyrgyzstan, the revolutions deposed political circles that had maintained a tight grip on the economy. That tight, monopolistic grip meant it was very hard for any foreign business, Russian ones included, to be treated fairly or to get access to key assets. The best assets always went to local insiders.

A good example is the Kryvorizhstal steel mill in Ukraine. Severstal, a Russian steel company, put together a strong bid for the mill when the government of Leonid Kuchma and Viktor Yanukovych privatized it last year. But the auction was rigged in favor of local oligarchs, who bought the asset at a lower price than Severstal offered. Putin's supposed close relationship with the Kuchma-Yanukovych government did not count for much.

Even when Russian companies were able to buy assets in Ukraine, they found themselves subject to the sort of arbitrary regulatory attacks that are a natural part of closed, corrupt economies. Mobile TeleSystems, for example, found itself almost stripped of UMC, the Ukrainian mobile company and MTS's largest foreign asset, thanks to a local political imbroglio.

The new government, by contrast, has made opening up the Ukrainian economy to foreign investors a priority. It has said all investors, domestic and foreign, will be treated equally.

This will naturally benefit Russian investors most because Russian companies are easily the biggest foreign investors in the former Soviet Union. President Viktor Yushchenko has already met with a large delegation of Russian business leaders. Vasily Siderov, the CEO of MTS, said after the meeting, "We heard what we wanted to hear. The regulators will treat market players and government equally and this will only help our business." Severstal could be a front-runner for the Kryvorizhstal mill when it is eventually resold, while other Russian companies, such as Vneshtorgbank, have already increased their investment in the post-revolutionary
Ukraine.

A similar situation exists in Georgia. The new government may receive generous financial support from the United States, but the companies reaping the benefit of the improved investment climate under the new regime are almost exclusively Russian.

So far, under Kakha Bendukidze, the larger-than-life minister on reforms coordination, Georgia has sold a manganese production plant to Yevrazholding and a bank to Vneshtorgbank. He also wants to sell the country's main gas pipeline to Gazprom. This profoundly startled the U.S. ambassador in Tbilisi, Richard Miles, who says selling the pipeline could undermine Georgia's energy independence, in which the United States has invested so much time and money.

Bendukidze says this is nonsense -- the pipeline runs straight to the Russian border and can only be used for Russian gas. As a dyed-in-the-wool liberal, he does not really care whether a company is Russian or American, just who is offering the best price.

And the companies offering the best bid for Georgian assets are Russian. Indeed, they're offering the only bid. Western companies are still very reluctant to invest in Russia, let alone in Georgia or in Kyrgyzstan.

What little American investment there has been in Georgia has ended badly. U.S. company AES bought the Tbilisi electricity generator but made many enemies in its rather crass attempts to reform it. The CEO was eventually murdered. When it decided to sell the asset, there was only one bidder, Unified Energy Systems. UES is currently doing a much better job at turning the company around and making a profit because it understands better how to do business in an environment like Georgia.

Thus, Russian companies have benefited the most from the post-revolutionary liberalization and regeneration of the Georgian economy. The more the new government succeeds in improving the business climate in Georgia, the more money Russian companies will make there. This point seems to be lost on the Russian military hard-liners intent on destabilizing Abkhazia.

And so, finally, to Kyrgyzstan. The situation there is more complicated because there is a danger the revolution will actually worsen the country's business climate. The Kyrgyz revolution may have a positive effect on the country's economy, by removing the economy from the monopolistic grasp of the Akayev family and acting as a powerful warning to future political leaders not to rule the country for the sake of their family rather than for the general public. As in Ukraine and in Georgia, the economy could be opened up to greater foreign investment, and Russian companies would stand to benefit most.

As in Ukraine and in Georgia, Russian companies found themselves suffering under the caprices of the corrupt former regime. Alfa Telecom, for example, initially bought BITEL, the country's main mobile company, from former President Askar Akayev's son Aidar. However, Aidar then decided he wanted to keep the company, so he took it back. There are indications that Alfa may be successful in securing ownership of the asset now that the family has been booted out.

However, the new government in Kyrgyzstan has so far not shown itself capable of protecting property rights, and some local businesspeople have used the confusion in government to grab assets. It is in the interests of Russian companies to make sure that the Kyrgyz revolution succeeds, that the new government is less corrupt than the old one and that it treats foreign investors fairly. Russian businesses would benefit most from a more honest and open Kyrgyz economy. UES and Russian Aluminum are already thought to be considering multimillion-dollar investments in metal and hydroelectric power projects in the country.

But there is an important point to be made. Russian companies will be welcome in the "near abroad" only if they are seen as good corporate citizens who are not mere extensions of Russian state policy. If Russian officials try to use Russian business as a way to meddle in other countries' affairs, then Russian businesses will find themselves barred from more and more deals, and Russian influence and prestige will be reduced.

If, on the other hand, Russian businesses act like good corporate citizens, they will naturally dominate the former Soviet Union and even Eastern Europe, and will project a brand of a progressive, prosperous "Russia, Inc.," which will naturally attract neighbouring countries into Russia's sphere of influence.

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