Archive for October, 2009

Crashing Russia’s all-cash culture

Tuesday, October 27th, 2009

Because building an entire banking sector from scratch in 20 years makes for some wild swings, Russians put their trust in cash. In Russia, the first thing you do when you get your monthly salary is withdraw it all, and pay for everything with tangible, fungible cash.

You buy your groceries with cash, pay for your winter boots with cash; heck, you even pay for real estate in cash. But how do you use cash for amorphous things like Internet service or to prepay your cell phone?

In the last ten years, a rapidly growing shadow banking system has sprouted up in Russia to service these small payments by turning cash into electronic currency, or e-money. And now that this sector has reached the $1 billion mark – and this in a crisis – and has expanded to include 10 million customers, e-money business owners are getting antsy about government regulation.

Their problem? There isn’t any. However paradoxical, this is an understandable fear in a country where government pressure on businesses is becoming more and more suffocating, and where legal gray areas can be used to bring a business to its knees. (Often, this also depresses the market valuation of these companies.)

And now that the Kremlin and the Russian Central Bank have noticed these legal blind spots, the need to mold regulation right is even more urgent for the various e-money players. This month, they have banded together to form the Electronic Money Association (AED) in order to lobby the Russian parliament (the Duma) for clear – and favorable – legal definitions of their business.

The association’s goal is regulation based on the flexible and nuanced European model, which outlines six types of e-commerce entities. To date, Russia has zero.

In fact, e-commerce is barely described in the Russian legal system, partially because of the natural lag time before law catches up to fast-moving technology, partially because there is no consensus here on how to regulate this industry. For instance, because e-commerce uses the language of banking – checks, currency – some in Russia have suggested that it be brought under the preexisting banking framework. But these companies are no banks.

Here’s how it works: Say you want to pay your web provider for a month’s worth of service. You take your cash and feed it into one of 200,000 ATM-like terminals scattered all over the country. (Qiwi, which owns the largest network of these, is a member of AED.) Then, depending on which company you use, you either direct your money for an on-the-spot payment to your provider (WM Transfer Ltd.’s WebMoney service is popular in Russia), or fill up a virtual “wallet” from which the funds can be distributed later to merchants of your choosing. (Search engine Yandex operates a digital wallet called Yandex.Money payment system. For more on Yandex, see “Google’s Russian Threat.”)

WebMoney and Yandex.Money account for more than 90% of the e-money market and account for hundreds of thousands of daily transactions, some for sums as low as $7, to, say, play a round of World of Warcraft.

These are small transactions, usually topping out at $250 for bigger-ticket items like air or train tickets, but the need for them is evident: WebMoney, which controls 54% of the Russian e-money market and deals with several currencies (including a gold-based one), has doubled in size every year since its creation. Overall market growth rates have slowed a bit but given that Russian internet penetration is still low and growing faster than anywhere in Europe, it only means there’s room to expand.

And as more Russians get online, they’re bound to turn to the web to handle some of their basic transactions. First, there are the convenience and trust factors. Banks in Russia have been known to vanish overnight with the savings of millions, yet opening an account in one is extremely difficult. (“My 18 year-old son tried to open an account and the bank demanded to see a real-estate deed – for a debit card!” says Peter Darahvelidze, an executive with WebMoney.)

Furthermore, in a country sprawling across six time zones and bound together with an infirm infrastructure, even getting to a bank might be difficult. E-money services, points out Mikhail Mamuta of the National Partnership of Microfinance Market Participants, “are also a form of economic development and fighting poverty.”

E-money has also become extremely popular with Russian and international merchants (Telecom company Skype gets most of its Russian payments through Yandex.Money) because it cuts down on fraud and false “charge-backs” (when a customer declares a credit-card purchase to have been made without his knowledge), which are rampant in Russia.

E-money companies have put in place various measures to deal with this. Yandex.Money, for example, does not allow a charge back if there was no technical problem with the transaction. (Some players in this business – like some terminal operators and mobile micropayment companies — are less than legitimate and have raised suspicions of money laundering. It is yet another reason that the bigger players are looking for careful regulation.)

But as the sector continues to grow, some natural foes have started to trouble the waters. Many banks, for example, are reluctant to see any inroads made into their market share yet who are too unwieldy and uninterested to build any e-commerce interfaces of their own. The Association of Russian Banks, for instance, viciously fought recent reforms targeting payment terminals.

And certain conservative members of parliament have begun speaking openly about the illegality of e-money, demanding that these companies apply for banking licenses – which means would require them to have at least 5 million euros in assets.

Rather than wait for the anvil to fall, however, the Electronic Money Association has taken a proactive approach, pushing for legislation that will spell out, exactly, what kinds of legal entities companies like WebMoney are. To that end, they have formed a working group in the Duma to hammer out legislation and to resolve some key dilemmas. Who, for example, will be allowed to participate in this sector: just banks? Just internet companies? Both? And who will regulate the industry: an industry association or the Russian Central Bank? What kind of documentation will a virtual system need to provide this regulator? Will the new regulation significantly raise operating costs?

The law is rumored to be passed before the new year, but, “so far, there is no ready text,” says Maria Panferova, a member of the Duma working group. “The goal at this stage is to work out the conceptual framework of the legislation.”

Victor Dostov, an e-money pioneer and head of the Association, hopes that this legislation will pass more smoothly this time and that banks recognize that this is not a natural niche for them.

“These companies collect all the crumbs, make a roll out of them, and then put it in the bank,” Dostov says. “The bank still gets the money.” He points out that Deutsche Bank and Citibank tried to get in on this business in the United States and then quickly figured out that it wasn’t worth the hassle. “No one is interested in killing the hen that lays – well, maybe not the golden egg, but the little silver eggs,” he says, adding. “At the end of the day, we just want to sleep soundly at night.”

Crashing Russia’s all-cash culture [Fortune]

The Potemkin Duma

Friday, October 23rd, 2009

The Kremlin doesn’t rig elections; it engineers them. This is something everyone in Russia, no matter what their rhetoric or political persuasion, knows and accepts. So when recent local elections returned some unusual results, the only surprise was the intensity of the backlash.

On Sunday, Oct. 11, 76 of Russia’s 83 regions went to the polls in some 7,000 regional and municipal elections. In the weeks leading up to the event, the government pushed and pushed Russians to register to vote. But because these were local elections in a country where everything is centered on the so-called Kremlin “power vertical,” and because Russians, long shut out of the process, don’t much believe in participatory democracy anymore, only about 30 million (out of 140 million) registered. And when the day came, even fewer showed up to vote. On Election Day in Moscow, which was holding elections for the Moscow Duma, turnout was a meager 29 percent. If government employees and their families hadn’t been forced to vote, the figure would have been much, much lower.

All of which is to say: No one cares. Russian elections are a known and tightly choreographed quantity. The joke making the rounds in Moscow when Dmitry Medvedev was up for election in the spring of 2008 was Medvedev’s mom calling on election night, frantically asking if he’d won. “Mom,” he says, “don’t you fuck with me, too.” Even the opposition parties — the “loyal opposition” successfully co-opted and neutered by the Kremlin — don’t mind the fraud as long as they still get to play ball.

Because no one cares, it’s the same every time: An election is held, a few dedicated pensioners vote, and United Russia — the party of power, the party of the Kremlin, the party of Putin — reasserts its overwhelming primacy.

And this time, at least at first, it seemed like everything would unfold as planned. On Oct. 11, United Russia swept back into control of political offices up and down the country’s command chain by huge, double-digit margins. In the Moscow Duma elections, for instance, United Russia took 32 of the 35 seats (that is, 91 percent), leaving three seats to the Communists, and forcing out the Kremlin-engineered A Just Russia Party (SR) and the liberal Yabloko Party entirely. The number of parties in the chamber was cut in half. (A United Russia deputy told me, somewhat disingenuously, that his party colleagues in the Moscow Duma were dismayed to be stuck with just the Communists. “Before, Yabloko just sat there and criticized us. But so what? It was food for thought,” he said. “Now we have to listen to three Communists. And their criticism isn’t usually constructive.”)

The fact that two parties were forced out of the Moscow Duma was suspicious, as was the fact that the results trickling in on Oct. 11 so obviously diverged with exit polls. Several elections across the country also smelled a little funny. From Derbent, in Dagestan, came tales of a third of polling stations never opening, while others closed early. In Astrakhan, observers were beaten and forced from the stations while whole ballot boxes were tossed out. Moscow was, as always, the epicenter. A video of a young man emerged detailing how he facilitated “carouseling” voters around town to vote multiple times, using the Moscow mayor’s name as a password. (A few days later, he reappeared and claimed he had been drunk when he made the statement. Someone had clearly gotten to him.)

Most egregious was the result in the Khamovniki neighborhood of Moscow, where Yabloko chairman Sergei Mitrokhin and his family went to vote — and where not a single vote was registered for Yabloko. (Yesterday, a local court annulled the results in Khamovniki and ruled for a recount.)

It was a bit much even for those used to such Kremlin antics. But still, it all could have passed without remark, because, still, no one cares. And absolutely no one expected the plot twist: On October 14, three days after the elections, Vladimir Zhirinovsky, leader of the nationalist right-wing LDPR party, stood up before the federal Duma and declared the election results unacceptable. He and his party, he said, were leaving, and they wouldn’t come back until the Central Election Committee chairman was fired and until they could secure a face-to-face with Medvedev. Then the leader of A Just Russia (SR), a center-left party engineered by the Kremlin to serve as an opposition magnet, got up and said her people were out of there, too. Then the Communists followed, and all of a sudden, only United Russia was left in the chamber.

No one knew what to think. After all, nothing like this had happened in a very, very long time. Although insiders knew LDPR was planning a walkout, no one thought the others would follow. And even if the fraud was over the top, the Communists, LDPR, and SR weren’t exactly the opposition. They were loyal and accommodating, and had fully bought into the Kremlin’s system — from which they benefited hugely. “This is an alarm bell,” says Gennady Gudkov, the leader of the People’s Party of the Russian Federation. “If even this most tolerant, most cooperative opposition unites and walks out, it’s a sign of trouble. And it means we’ve had it up to here.”

But was this the first sign, as many Moscow liberals hoped with baited breath, of a meaningful rumble, of a color revolution? Was this an echo of this summer’s unrest in Iran after a fraudulent and widely disputed election? Or was it simply another charade? Was the walkout an event orchestrated by one Kremlin apparatchik to get back at another Kremlin apparatchik, as some conspiracy theorists alleged?

In the meantime, United Russia took advantage of the opposition’s absence. On October 15, the party tore through an entire day’s docket, passing all proposed pro-Kremlin laws before the lunch recess, at an estimated speed of one law every three minutes. (Of course, the rush was unnecessary. The party has 315 of 450 seats in the Duma. That means that not only can party leaders pass whichever laws they want, but they can change the Russian constitution, too. Alone.)

By Friday, after Medvedev put in a quick phone call to Zhirinovsky, LDPR was back, quickly followed by the SRs. But the Communists held out the longest, only returning on Wednesday because, they said, it would be irresponsible not to fight the Kremlin’s proposed 2010 budget. (It passed anyway.)

The opposition continues to scream about the delegitimization of Russian democracy and this Saturday they will meet with Medvedev at the presidential dacha, where they will demand the annulment of certain results, the firing of the Electoral Committee chairman, and Duma reforms that will allow deputies to speak longer.

Duma representatives insist they will keep fighting, but they are, at this point, simply saving face. The revolution is very much over.

This is primarily because it was never about the legitimacy of Russian elections or democracy in the first place. Given its dominance of the airspace and the Kremlin’s fine touch at engineering results, United Russia would have swept the elections without lifting a finger. The fraud was unseemly and, quite simply, extraneous. And, though it may have angered some Duma deputies, that’s where the discontent ends. The most recent poll by the Levada Center, a prominent Moscow polling organization, found that not only were 55 percent of Russians not surprised by the election results, more than half couldn’t even answer whether they were satisfied with the election in their region. When Iran exploded in protests this summer, just as Ukraine had in 2005, after disputed elections, it was because Iranians believed their vote was a vector for change. Russians, however, know better. “During the Orange Revolution [in Ukraine], people had something invested in their vote — there was feeling behind their votes,” says Masha Lipman of the Carnegie Moscow Center. “Here, you can falsify as much as you want because the voter has nothing invested in it.” (There was a protest in Moscow on Thursday night, but it was organized and attended primarily by Duma deputies and members of various thinly populated political organizations.)

The far more likely reason for the Duma walkout was the deputies’ own fear they might be next on the Kremlin’s list: First, they force out the party representatives in the regional organizations, like A Just Russia Party and Yabloko, and then they come for the big dogs like Zhirinovsky and Communist Party chair Gennady Zyuganov. “Being a deputy is a lucrative business in Russia. And their well-being depends on the Kremlin’s benevolence. This isn’t about fair or unfair elections but about people’s lives and livelihoods,” Lipman says. “The discontent people here are the well-fed deputies.”

Some deputies don’t even dispute this. “Of course, we imagined ourselves in their shoes and realized, yes, it’s going to be bad for us,” Duma deputy Valery Zubov says. “The regional Duma elections are in March; the federal Duma elections are in two years. If they do the same thing then, then our party thinks we shouldn’t even participate in the farce.”

And, for its part, the Kremlin is eager to grant the opposition leaders an audience with Medvedev because the Kremlin needs the tightly controlled, beautifully ornamental opposition as much as the opposition needs the Kremlin.

“Here’s an image for you,” says Vladimir Ryzhkov, an independent politician and former speaker of the Duma (before he was forced out by the Kremlin). “Here’s this Potemkin village of democracy with a few crooked huts of opposition on the outskirts. In the center of town, you have a huge red-brick palace with high fences, in the New Russian style. That’s called United Russia. And the huts on the outskirts are afraid they will be burned down and kicked out of the village.

“Maybe, in the next elections, United Russia will be more reserved,” he continues, “but the substance won’t change: United Russia will have the overwhelming majority and will rule unopposed. The Potemkin village will remain a Potemkin village.”

The Potemkin Duma [Foreign Policy]

Sheesh Kabob!

Thursday, October 1st, 2009

It started off as an article about a cleverly named kabob house in Moscow and quickly became yet another a story of political coercion and muzzling of the press. Less than a week after the article came out, Nashi, the pro-Kremlin youth group, is demanding that the journalist who wrote it, Aleksandr Podrabinek, be kicked out of the country and stripped of his Russian citizenship. After death threats and an attempted break-in at his apartment, Podrabinek is now in hiding, announcing on his blog that “in the interests of security, I am limiting my contacts.”

Partly, this is the same, tired story of the Kremlin intimidating the last remnants of a once-free press. But it’s also a story about a country still fighting over the meaning (and ownership) of patriotism, over the return of Soviet symbolism, over where the Soviet Union ends and Russia begins, and over how to talk about the martyrdom and the crimes of World War II.

Here’s how it happened: the restaurant in question opened in July, calling itself the Anti-Soviet Kabob House because of its location across the street from the Soviet Hotel. Har har. But to an association of elderly veterans, it wasn’t just a bad pun, and they complained to the local authorities. The name, they said, mocked their sacrifices in World War II—which, with casualties over 20 million, has become the most sacred of cows in Russia. It is known there, officially, as the Great Patriotic War. (Putin recently showed just how sacred it is when he refused to acknowledge, for the sake of Russian pride, Soviet crimes in Poland in 1939.) Not only that, the veterans’ group said, but the name also besmirched the homeland for which they fought, and they demanded that it be changed.

News of this uproar leaked on September 17. By the 18th, the owner of the café announced that the authorities had interceded and he had been forced to change the name to Soviet Kabob House. As workmen prepared to take down the “Anti-“, the café’s owner remarked wryly that now “the debate is about saving the kabob house even without the name,” he said. “We’d be happy just to be able to stay open at this point.”

This kind of pandering to hypervocal and hypersensitive veterans—and harping on a mythically clean and valorous Soviet past—caught Podrabinek’s eye. No fan of Soviet power (he had been sentenced to a Siberian labor camp twice, once in 1978 and again in 1980, for criticizing the Soviet Union), Podrabinek penned a takedown of the veterans group in, a liberal opposition online publication.

He bemoaned the fact that the owners of the kabob house gave in to the veterans’ demands and excoriated the veterans for their false patriotism. “Your homeland isn’t Russia,” he wrote. “Your homeland is the Soviet Union…. And the Soviet Union is not the place you imagine in your schoolbooks or your lying newspapers,” he said referring to the robustly nostalgic Communist press. “It’s not just a place of astronauts and overfulfilled agricultural quotas,” Podrabinek continued, “it’s also a place of peasant uprisings, the victims of collectivization and Holodomor; it’s hundreds of thousands shot in Cheka basements and millions tortured in the Gulag to the sounds of the rotten [Soviet] anthem.” But Podrabinek was careful to make a distinction: “Yes, we should respect those who fought Nazism, but not those who defend Soviet power.”

Evidently that was not caveat enough: two days after the piece came out, the same local authorities who had forced the kabob-house name change went to the offices of Novaya Gazeta (Anna Politkovskaya’s liberal newspaper) to complain about Podrabinek—who didn’t work there. Then came the protests from veterans. Finally, the president of Nashi, a patriotic youth group often likened to the Hitler Youth, said “we will demand [Podrabinek’s] departure from the country.” Not for writing anything anti-Russian, mind you, but for writing something anti-Soviet—for being tough on a country that no longer exists.

Podrabinek’s address and phone number appeared online, and now Nashi members are picketing his house around the clock. On Tuesday, the youth group filed a lawsuit demanding that he apologize to the veterans (an idea that resonates in the Russian blogosphere) or be deported.

For its part, the Kremlin has allowed the crackdown to thunder on without comment. It has a long, close association with Nashi and has encouraged these neo-Soviet displays before. (A renovated subway station recently opened with a Stalin quote restored in giant, prominent letters, and, last week, Kremlin ideologue Vladislav Surkov praised Nashi for the group’s supposedly pivotal role in forcing the Obama administration to back down from its missile defense shield in Eastern Europe.)

Podrabinek says on his blog that he has received information from “trustworthy sources” that people “at the highest levels have made the decision to deal with me in any way necessary.” In a country ranked third most lethal for journalists, this is no empty threat. Nor is Podrabinek a stranger to Kremlin strong-arming. In 2004, after he helped with the publication and distribution of ex-KGB agent Alexander Litvinenko’s book, security services seized the copies he imported into Russia and called him in for questioning. (He reportedly refused to answer questions.) In 2006, he was arrested in Minsk for protesting the dubious reelection of Belarus president Alexander Lukashenko.

And so, just as Russia tells the Committee to Protect Journalists that it will act on what is now an embarrassing number of attacks on the press, Nashi continues its harassment and Podrabinek remains in hiding, not answering requests for an interview. Only here can a man risk losing his life over a café name.

Sheesh Kabob! A Restaurant Snafu Reveals Lingering Nostalgia for the Soviet Union [Newsweek]