Putin Stokes Paranoia About the Web BY ERIK C NISBET AND SARAH MIKATI 2/18/15 AT 11:41 AM Newsweek

President Vladimir Putin of Russia may fear that the Internet is a CIA project, but unfortunately he is not alone.

According to a recently released study about how the Russian public views the Internet, his views are widely shared by large portions the Russian population.

In fact, our research concludes that the Russian public’s distrust of Western sources and dissident information on the Internet creates a “perceptual filter” that bolsters Putin’s foreign and domestic policies.

A deep distrust of the Internet—domestic and foreign

Based on a survey of 1,600 individuals (see details below), almost half of all Russians believe that information on the Internet should be be censored. Likewise, two out of five Russians distrust foreign media and nearly half of Russians believe foreign news websites need to be censored.

These attitudes are partly driven by the fact that 42 percent of Russians believe the Internet is being used by foreign countries against Russia.

In contrast, Central Russian TV news, heavily dominated and controlled by the Russian government, is a primary source of information for 84 percent of Russians and trusted by 90 percent of all Russians.

Put together these attitudes about a malicious foreign influence over the Internet and perceived threats to political stability from domestic anti-government blogs and websites and you have a toxic mix.

Large majorities of Russians have negative feelings toward anti-government online content. These feelings translate into significant portions of the public supporting censorship—of social network groups that organize anti-government protests (46 percent); of on-line videos by the dissident rock band Pussy Riot (45 percent) and of bloggers that call for regime change (43 percent).

Based on these perceived external and internal threats, it should not be a surprise that the Federal Russian Security Service is the organization most trusted as the regulator of the Internet.

A deliberate government campaign

The prevalence of these perceptions amongst the Russian public is no accident.

For some time, the Russian government has been weaving two complementary narratives. The first is that foreign countries use their technological dominance over the Internet to pursue economic, political and military objectives in Russia. The second is that home-grown online activists and “extremists” use the Internet to destabilize Russia’s political system.

These narratives have provided the justification for a range of regulatory initiatives by the Russian government over the last two years.

Popular (which is officially defined as 3,000 daily readers or more) blogs and websites have to be officially registered. All websites and social media platforms have to physically store six months of user data inside Russia. Since November 2012, a blacklist law allows the Russian government to filter and block any websites or social media deemed to contain offensive material. A foreign media ownership law that took effect in October 2014 led CNN International, for example, to cease broadcasting inside Russia.

All this can be seen as a larger project by the Russian government to further tighten control over the flow of news and information.

Previously, the Internet had been less censored and more pluralistic than the government-dominated mass media. This meant Russians had access to a wider range of views and information than was available in Russian TV news and newspapers.

The new focus on Internet regulation and foreign broadcasting will allow the Putin regime greater control over the Russian public’s access to information, regardless of whether it stems from within or outside Russia.

What’s more, the Russian public’s support for government regulation provides an extra “psychological firewall” against alternative sources of information. And this firewall—being based on belief—is particularly difficult to circumvent.

Russia is not alone

Russia is not the only illiberal democracy increasing control over domestic and foreign online content while attempting to convince its citizens of the threat posed by a free and open Internet.

The Turkish government, for example, has followed a similar path in recent years with its attempts to block anti-government online and social media content. The recently elected Turkish president went so far as to call social media “the worst menace to society.”

In both the Russian and Turkish cases, Internet censorship and information control help the regimes’ efforts to build and maintain public support, or at least passive acceptance, for their foreign policy objectives.

The Turkish government has attempted to block information about its possible support of Islamic extremists fighting the Assad regime inside Syria.

In Russia, government domination of the news cycle has been instrumental in driving the sky-high approval ratings of President Putin (in the mid to high eighties) since the annexation of Crimea and conflict in eastern Ukraine, even as the Russian economy has gone into free fall.

The Russian public has very different views about the situation in Ukraine from the Western public. Even though the Russian government has denied the formal involvement of Russian troops in eastern Ukraine, the Russian media’s depictions of the Ukrainian government as ultra-nationalist, fascist, Western puppets has led [55 percent of Russians to feel positively about the Russian volunteers fighting with Ukrainian separatists. In fact, 45 percent of Russians support the idea of Russian military troops joining the fight.

The Internet and U.S. foreign policy

Promoting media and Internet freedom—and with it public understanding and demand for these freedoms—should be considered among key American foreign policy priorities as suggested by former Secretary State Hillary Clinton back in 2010.

As we see with Russia, autocratic-leaning governments may use increased Internet regulation and propaganda against dissident voices as a means to close the remaining cracks in the information bubbles surrounding their citizens.

Once hardened, these information bubbles allow governments to build further support for their illiberal regimes and to pursue their foreign policy objectives without the democratic accountability that can prevent unprovoked international conflict—as Russia has been doing in Ukraine over the past year.

The ConversationThis article was originally published on The Conversation. Read the original article.

Russia’s aggression in Ukraine is part of a broader, and more dangerous, confrontation with the West THE ECONOMIST FEB. 15, 2015

THE pens were on the table in Minsk, Belarus’s capital, for the leaders of France, Germany, Russia and Ukraine to sign a deal to end a year-long war fuelled by Russia and fought by its proxies.

But on February 12th, after all-night talks, they were put away. “No good news,” said Petro Poroshenko, Ukraine’s president. Instead there will be a ceasefire from February 15th. A tentative agreement has been reached to withdraw heavy weaponry.

But Russia looks sure to be able to keep open its border with Ukraine and sustain the flow of arms and people. The siege of Debaltseve, a strategic transport hub held by Ukrainian forces, continues. Russia is holding military exercises on its side of the border. Crimea was not even mentioned.

Meanwhile the IMF has said it will lend Ukraine $17.5 billion to prop up its economy. But Mr Putin seems to be relying on a familiar Russian tactic of exhausting his negotiating counterparts and taking two steps forward, one step back. He is counting on time and endurance to bring the collapse and division of Ukraine and a revision of the post-cold war world order.

Nearly a quarter-century after the collapse of the Soviet Union, the West faces a greater threat from the East than at any point during the cold war. Even during the Cuban missile crisis of 1962, Soviet leaders were constrained by the Politburo and memories of the second world war.

Now, according to Russia’s chief propagandist, Dmitry Kiselev, even a decision about the use of nuclear arms “will be taken personally by Mr Putin, who has the undoubted support of the Russian people”. Bluff or not, this reflects the Russian elite’s perception of the West as a threat to the very existence of the Russian state.

In this view Russia did not start the war in Ukraine, but responded to Western aggression. The Maidan uprising and ousting of Viktor Yanukovych as Ukraine’s president were engineered by American special services to move NATO closer to Russia’s borders.

Once Mr Yanukovych had gone, American envoys offered Ukraine’s interim government $25 billion to place missile defences on the Russian border, in order to shift the balance of nuclear power towards America. Russia had no choice but to act.

Even without Ukraine, Mr Putin has said, America would have found some other excuse to contain Russia.

Ukraine, therefore, was not the cause of Russia’s conflict with the West, but its consequence. Mr Putin’s purpose is not to rebuild the Soviet empire–he knows this is impossible–but to protect Russia’s sovereignty.

By this he means its values, the most important of which is a monopoly on state power.

Behind Russia’s confrontation with the West lies a clash of ideas. On one side are human rights, an accountable bureaucracy and democratic elections; on the other an unconstrained state that can sacrifice its citizens’ interests to further its destiny or satisfy its rulers’ greed. Both under communism and before it, the Russian state acquired religious attributes. It is this sacred state which is under threat.

Mr Putin sits at its apex. “No Putin–no Russia,” a deputy chief of staff said recently. His former KGB colleagues–the Committee of State Security–are its guardians, servants and priests, and entitled to its riches. Theirs is not a job, but an elite and hereditary calling. Expropriating a private firm’s assets to benefit a state firm is therefore not an act of corruption.

When thousands of Ukrainians took to the streets demanding a Western-European way of life, the Kremlin saw this as a threat to its model of governance. Alexander Prokhanov, a nationalist writer who backs Russia’s war in Ukraine, compares European civilisation to a magnet attracting Ukraine and Russia. Destabilising Ukraine is not enough to counter that force: the magnet itself must be neutralised.

Russia feels threatened not by any individual European state, but by the European Union and NATO, which it regards as expansionist. It sees them as “occupied” by America, which seeks to exploit Western values to gain influence over the rest of the world.

America “wants to freeze the order established after the Soviet collapse and remain an absolute leader, thinking it can do whatever it likes, while others can do only what is in that leader’s interests,” Mr Putin said recently. “Maybe some want to live in a semi-occupied state, but we do not.”

Russia has taken to arguing that it is not fighting Ukraine, but America in Ukraine. The Ukrainian army is just a foreign legion of NATO, and American soldiers are killing Russian proxies in the Donbas. Anti-Americanism is not only the reason for war and the main pillar of state power, but also an ideology that Russia is trying to export to Europe, as it once exported communism.

Anti-Westernism has been dressed not in communist clothes, but in imperial and even clerical ones (see page 77). “We see how many Euro-Atlantic countries are in effect turning away from their roots, including their Christian values,” said Mr Putin in 2013.

Russia, by contrast, “has always been a state civilisation held together by the Russian people, the Russian language, Russian culture and the Russian Orthodox church.” The Donbas rebels are fighting not only the Ukrainian army, but against a corrupt Western way of life in order to defend Russia’s distinct world.

Mistaken hopes

Many in the West equate the end of communism with the end of the cold war. In fact, by the time the Soviet Union fell apart, Marxism-Leninism was long dead. Stalin replaced the ideals of internationalism, equality and social justice that the Bolsheviks had proclaimed in 1917 with imperialism and state dominance over all spheres of life. Mikhail Gorbachev’s revolution consisted not in damping down Marxism but in proclaiming the supremacy of universal human values over the state, opening up Russia to the West.

Nationalists, Stalinists, communists and monarchists united against Mr Gorbachev. Anti-Americanism had brought Stalinists and nationalists within the Communist Party closer together. When communism collapsed they united against Boris Yeltsin and his attempts to make Russia “normal”, by which he meant a Western-style free-market democracy.

By 1993, when members of this coalition were ejected by pro-Yeltsin forces from the parliament building they had occupied in Moscow, they seemed defeated. Yet nationalism has resurfaced. Those who fought Yeltsin and his ideas were active in the annexation of Crimea and are involved in the war in south-east Ukraine.

Alexander Borodai, the first “prime minister” of the self-proclaimed Donetsk People’s Republic, who fought with anti-Yeltsin forces, hails Mr Putin as the leader of the nationalist movement in Russia today.

Yet for a few years after Mr Putin came to power he built close relations with NATO. In his first two presidential terms, rising living standards helped buy acceptance of his monopoly on state power and reliance on ex-KGB men; now that the economy is shrinking, the threat of war is needed to legitimise his rule.

He forged his alliance with Orthodox nationalists only during mass street protests by Westernised liberals in 2012, when he returned to the Kremlin. Instead of tear gas, he has used nationalist, imperialist ideas, culminating in the annexation of Crimea and the slow subjugation of south-east Ukraine.

Hard power and soft

Mr Putin’s preferred method is “hybrid warfare”: a blend of hard and soft power. A combination of instruments, some military and some non-military, choreographed to surprise, confuse and wear down an opponent, hybrid warfare is ambiguous in both source and intent, making it hard for multinational bodies such as NATO and the EU to craft a response.

But without the ability to apply hard power, Russia’s version of soft power would achieve little. Russia “has invested heavily in defence,” says NATO’s new secretary-general, a former Norwegian prime minister, Jens Stoltenberg. “It has shown it can deploy forces at very short notice…above all, it has shown a willingness to use force.”

Putin drew two lessons from his brief war in Georgia in 2008. The first was that Russia could deploy hard power in countries that had been in the Soviet Union and were outside NATO with little risk of the West responding with force.

The second, after a slapdash campaign, was that Russia’s armed forces needed to be reformed. Military modernisation became a personal mission to redress “humiliations” visited by an “overweening” West on Russia since the cold war ended.

According to IHS Jane’s, a defence consultancy, by next year Russia’s defence spending will have tripled in nominal terms since 2007, and it will be halfway through a ten-year, 20 trillion rouble ($300 billion) programme to modernise its weapons.

New types of missiles, bombers and submarines are being readied for deployment over the next few years. Spending on defence and security is expected to climb by 30% this year and swallow a more than a third of the federal budget.

As well as money for combat aircraft, helicopters, armoured vehicles and air-defence systems, about a third of the budget has been earmarked to overhaul Russia’s nuclear forces. A revised military doctrine signed by Mr Putin in December identified “reinforcement of NATO’s offensive capacities directly on Russia’s borders, and measures taken to deploy a global anti-missile defence system” in central Europe as the greatest threats Russia faces.

In itself, that may not be cause for alarm in the West. Russian nuclear doctrine has changed little since 2010, when the bar for first use was slightly raised to situations in which “the very existence of the state is under threat”. That may reflect growing confidence in Russia’s conventional forces.

But Mr Putin is fond of saying that nobody should try to shove Russia around when it has one of the world’s biggest nuclear arsenals. Mr Kiselev puts it even more bluntly: “During the years of romanticism [ie, detente], the Soviet Union undertook not to use nuclear weapons first. Modern Russian doctrine does not. The illusions are gone.”

Mr Putin still appears wedded to a strategy he conceived in 2000: threatening a limited nuclear strike to force an opponent (ie, America and its NATO allies) to withdraw from a conflict in which Russia has an important stake, such as in Georgia or Ukraine. Nearly all its large-scale military exercises in the past decade have featured simulations of limited nuclear strikes, including one on Warsaw.

Mr Putin has also been streamlining his armed forces, with the army recruiting 60,000 contract soldiers each year. Professionals now make up 30% of the force. Conscripts may bulk up the numbers, but for the kind of complex, limited wars Mr Putin wants to be able to win, they are pretty useless.

Ordinary contract soldiers are also still a long way behind special forces such as the GRU Spetsnaz (the “little green men” who went into Crimea without military insignia) and the elite airborne VDV troops, but they are catching up.

Boots on the ground

South-east Ukraine shows the new model army at work. Spetsnaz units first trained the Kremlin-backed separatist rebels in tactics and the handling of sophisticated Russian weapons. But when the Ukrainian government began to make headway in early summer, Russia had regular forces near the border to provide a calibrated (and still relatively covert) response.

It is hard to tell how many Russian troops have seen action in Ukraine, as their vehicles and uniforms carry no identifiers. But around 4,000 were sent to relieve Luhansk and Donetsk while threatening the coastal city of Mariupol–enough to convince Mr Poroshenko to draw his troops back.

Since November a new build-up of Russian forces has been under way. Ukrainian military intelligence reckons there may be 9,000 in their country (NATO has given no estimate). Another 50,000 are on the Russian side of the border.

Despite Mr Putin’s claim last year that he could “take Kiev in two weeks” if he wanted, a full-scale invasion and subsequent occupation is beyond Russia. But a Russian-controlled mini-state, Novorossiya, similar to Abkhazia and Transdniestria, could be more or less economically sustainable.

And it would end Ukraine’s hopes of ever regaining sovereignty over its territory other than on Russian terms, which would undoubtedly include staying out of the EU and NATO. Not a bad outcome for Mr Putin, and within reach with the hard power he controls.

The big fear for NATO is that Mr Putin turns his hybrid warfare against a member country. Particularly at risk are the Baltic states–Latvia, Estonia and Lithuania–two of which have large Russian-speaking minorities.

In January Anders Fogh Rasmussen, NATO’s previous secretary-general, said there was a “high probability” that Mr Putin would test NATO’s Article 5, which regards an attack on any member as an attack on all–though “he will be defeated” if he does so.

A pattern of provocation has been established that includes a big increase in the number of close encounters involving Russian aircraft and naval vessels, and snap exercises by Russian forces close to NATO’s northern and eastern borders. Last year NATO planes carried out more than 400 intercepts of Russian aircraft.

More than 150 were by the alliance’s beefed-up Baltic air-policing mission–four times as many as in 2013. In the first nine months of the year, 68 “hot” identifications and interdictions occurred along the Lithuanian border alone. Latvia recorded more than 150 incidents of Russian planes entering its airspace.

There have also been at least two near-misses between Russian military aircraft and Swedish airliners. This is dangerous stuff: Russian pilots do not file flight plans. They fly with transponders switched off, which makes them invisible to civil radar. On January 28th two Russian, possibly nuclear-armed, strategic bombers flew down the English Channel, causing havoc to commercial aviation. Such behaviour is intended to test Western air defences, and was last seen in the cold war. Mr Stoltenberg calls it “risky and unjustified”.

Since 2013, when Russia restarted large-scale snap military exercises, at least eight have been held. In December the Kremlin ordered one in Kaliningrad, an exclave that borders Lithuania and Poland, both NATO members. It mobilised 9,000 soldiers, more than 55 navy ships and every type of military aircraft. “This pattern of behaviour can be used to hide intent,” says General Philip Breedlove, NATO’s most senior commander. “What is it masking? What is it conditioning us for?”

A huge problem for NATO is that most of what Russia might attempt will be below the radar of traditional collective defence. According to Mr Stoltenberg, deciding whether an Article 5 attack has taken place means both recognising what is going on and knowing who is behind it.

“We need more intelligence and better situational awareness,” he says; but adds that NATO allies accept that if the arrival of little green men can be attributed “to an aggressor nation, it is an Article 5 action and then all the assets of NATO come to bear.”

For all the rhetoric of the cold war, the Soviet Union and America had been allies and winners in the second world war and felt a certain respect for each other. The Politburo suffered from no feelings of inferiority. In contrast, Mr Putin and his KGB men came out of the cold war as losers.

What troubles Mr Stoltenberg greatly about Mr Putin’s new, angry Russia is that it is harder to deal with than the old Soviet Union. As a Norwegian, used to sharing an Arctic border with Russia, he says that “even during the coldest period of the cold war we were able to have a pragmatic conversation with them on many security issues”. Russia had “an interest in stability” then, “but not now”.

Meddling and perverting

Destabilisation is also being achieved in less military ways. Wielding power or gaining influence abroad–through antiestablishment political parties, disgruntled minority groups, media outlets, environmental activists, supporters in business, propagandist “think-tanks”, and others–has become part of the Kremlin’s hybrid-war strategy. This perversion of “soft power” is seen by Moscow as a vital complement to military engagement.

Certainly Russia is not alone in abusing soft power. The American government’s aid agency, USAID, has planted tweets in Cuba and the Middle East to foster dissent. And Mr Putin has hinted that Russia needs to fight this way because America and others are already doing so, through “pseudo-NGOs”, CNN and human-rights groups.

At home Russian media, which are mostly state-controlled, churn out lies and conspiracy theories. Abroad, the main conduit for the Kremlin’s world view is RT, a TV channel set up in 2005 to promote a positive view of Russia that now focuses on making the West look bad.

It uses Western voices: far-left anti-globalists, far-right nationalists and disillusioned individuals. It broadcasts in English, Arabic and Spanish and is planning German- and French-language channels.

It claims to reach 700m people worldwide and 2.7m hotel rooms. Though it is not a complete farce, it has broadcast a string of false stories, such as one speculating that America was behind the Ebola epidemic in west Africa.

The Kremlin is also a sophisticated user of the internet and social media. It employs hundreds of “trolls” to garrison the comment sections and Twitter feeds of the West. The point is not so much to promote the Kremlin’s views, but to denigrate opposition figures, and foreign governments and institutions, and to sow fear and confusion.

Vast sums have been thrown at public-relations and lobbying firms to improve Russia’s image abroad–among them Ketchum, based in New York, which helped place an op-ed by Mr Putin in the New York Times. And it can rely on some of its corporate partners to lobby against policies that would hurt Russian business.

The West’s willingness to shelter Russian money, some of it gained corruptly, demoralises the Russian opposition while making the West more dependent on the Kremlin. Russian money has had a poisonous effect closer to home, too. Russia wields soft power in the Baltics partly through its “compatriots policy”, which entails financial support for Russian-speaking minorities abroad.

econ 2The Economist

Mr Putin’s most devious strategy, however, is to destabilise the EU through fringe political parties (see box).

Russia’s approach to ideology is fluid: it supports both far-left and far-right groups. As Peter Pomerantsev and Michael Weiss put it in “The menace of unreality”, a paper on Russian soft power: “The aim is to exacerbate divides [in the West] and create an echo-chamber of Kremlin support.”

Disruptive politics

Far-right groups are seduced by the idea of Moscow as a counterweight to the EU, and by its law-and-order policies. Its stance on homosexuality and promotion of “traditional” moral values appeal to religious conservatives. The far left likes the talk of fighting American hegemony.

Russia’s most surprising allies, however, are probably Europe’s Greens. They are opposed to shale-gas fracking and nuclear power–as is Moscow, because both promise to lessen Europe’s dependence on Russian fossil fuels. Mr Rasmussen has accused Russia of “sophisticated” manipulation of information to hobble fracking in Europe, though without producing concrete evidence.

There is circumstantial evidence in Bulgaria, which in 2012 cancelled a permit for Chevron to explore for shale gas after anti-fracking protests. Some saw Russia’s hand in these, possibly to punish the pro-European government of the time, which sought to reduce its reliance on Russian energy (Gazprom, Russia’s state-controlled gas giant, supplies 90% of Bulgaria’s gas).

Previously, Bulgaria had been expected to transport Russian oil through its planned South Stream pipeline, and its parliament had approved a bill that would have exempted the project from awkward EU rules. Much of it had been written by Gazprom, and the construction contract was to go to a firm owned by Gennady Timchenko, an oligarch now under Western sanctions.

Gazprom offered to finance the pipeline and to sponsor a Bulgarian football team. The energy minister at the time later claimed he had been offered bribes by a Russian envoy to smooth the project’s passage. Though European opposition means it has now been scrapped, the episode shows the methods Moscow uses to protect its economic interests.

In all this Mr Putin is evidently acting not only for Russia’s sake, but for his own. Mr Borodai, the rebel ideologue in Donetsk, says that if necessary the Russian volunteers who are fighting today in Donbas will tomorrow defend their president on the streets of Moscow.

Yet, although Mr Putin may believe he is using nationalists, the nationalists believe they are using him to consolidate their power. What they aspire to, with or without Mr Putin, is that Russians rally behind the nationalist state and their leader to take on Western liberalism. This is not a conflict that could have been resolved in Minsk.

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Germany’s economic policy is hurting Europe, the world, and itself Business Insider  / The Economist

FROM Washington to Athens, politicians and economists who often have little in common all agree that Germany under Chancellor Angela Merkel is largely wrong about economic policy.

Germany’s apparent economic strengths–the lowest unemployment in two decades; steady, if low, growth; a balanced federal budget–mask weaknesses and policy errors, they say.

A first mistake is to insist that troubled euro-zone countries such as Greece not only make structural reforms to their economies, but simultaneously cut spending and borrowing (depressing demand).

But a second is domestic. Given low interest rates, now would be a golden opportunity to borrow and invest more at home, boosting the economy and providing a Keynesian stimulus to the entire sluggish euro zone. Instead, Germany is investing less than in the past and less than most other countries (see chart).

Raising investment could also deal with another imbalance in the German economy: its current-account surplus, the largest in the world, which has just set another record in 2014 of EUR220 billion ($250 billion), over 7% of GDP. By definition, this surplus measures the excess of savings over investment. Invest more, and the surplus would shrink or even disappear.

Such thinking has fans even in Germany. Marcel Fratzscher at the German Institute for Economic Research in Berlin thinks that German strength is an “illusion” given its large “investment gap”. Public investment in Germany–shared by the federal, state and local governments–has fallen from 6% of GDP in 1970 (in the West) to 2% now. Roads, bridges, broadband internet and much else could do with more money.

The German Marshall Fund has said that 40% of bridges in Germany are in “critical condition”. The Cologne Institute for Economic Research, another think-tank, reckons that the capital stock of German machines has not risen in real terms since 2008. Markus Kerber, director of the German Federation of Industries, a trade association, says that a “long-term investment-offensive is needed” to sustain growth.

But other German economists are sceptical about claims of underinvestment. Christoph Schmidt, chairman of the German Council of Economic Experts, which advises the government, thinks published ratios of investment as a percentage of GDP can be misleading when compared both across time and between countries.

France, for example, has a lot of public housing. Germany does not, and this skews the numbers. Reunification in 1990 caused a one-off investment boom in both parts of the country. And whereas other countries had property crashes, Germany did not. In that case, at least, skimping on housebuilding was sensible.

Yet the trend of declining public and private investment remains clear. A recalculation to fit European Union norms lifts Germany’s investment ratio from 17% to 19%, by including companies’ research and development spending. But that is still low. Why is this?

Most investing is done by private firms. But German ones have for years preferred to invest abroad, not at home. Mr Fratzscher regrets this: he reckons that German investment abroad has yielded an annual return of 10% over 20 years whereas foreign investment in Germany has made more like 15%.

The main reason for low domestic investment, says Michael Hüther, the Cologne institute’s director, is uncertainty and nervousness over the future. Continuing anxiety over Greece and the euro has been especially damaging.

More recently worries about Russia, which is more commercially entangled with Germany than with other big Western economies, have unsettled the business climate. But the biggest problem for many businessmen may be benighted government policies.

These start with Germany’s “energy transition,” a plan to exit simultaneously from fossil fuels and nuclear energy. The main policy is a huge subsidy to solar and wind. The surcharge that many firms have to pay on a unit of energy is larger than the entire cost of electricity paid by firms in America. Half the firms polled by Mr Hüther’s institute claim that this makes any new investment unattractive.

Many also complain, in a country that has an ageing, shrinking population, about a shortage of skilled workers despite Germany’s admired apprenticeship system. Mrs Merkel’s government, under the influence of her Social Democratic coalition partners, has made things worse by letting some workers retire at 63, rather than at 67, as previously envisaged.

In the housing market, owners are put off investment by a cap on rents in many cities. A new federal minimum wage is yet another measure that will add costs for business.

The best way to boost investment is to fix these policy errors, argues Mr Schmidt. On energy, even if the government insists on sticking to its emissions targets, it could leave the choice of technology to the market.

The pension age could be raised again; the minimum wage should be lower. And public investment should be raised. Gustav Horn, head of the Macroeconomic Policy Institute, part of a foundation with links to the trade unions, reckons that a 1% increase in euro-zone public investment would boost GDP by 1.6%.

Yet Germany led resistance to calls for more public money to be put into the European Commission’s planned investment programme. At home it is constrained by the constitutional “debt brake”, adopted in 2009, which requires state governments to balance their budgets by 2020 and the federal one to do so by 2016.

Wolfgang Schäuble, the finance minister, has beaten the timetable, balancing the budget in 2014. He and Mrs Merkel are proud of the “black zero”, which demonstrates that Germans sticks by the rules, as others should. The books may balance, but Germany is a long way from rectifying its investment shortfall at home.

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China Offers Russia Help With Currency Swap Suggestion By Bloomberg News – Dec 22, 2014, 2:35:41 AM

Two Chinese ministers offered support for Russia as President Vladimir Putin seeks to shore up support for the ruble without depleting foreign-exchange reserves.

China will provide help if needed and is confident Russia can overcome its economic difficulties, Foreign Minister Wang Yi was cited as saying in Bangkok in a Dec. 20 report by Hong Kong-based Phoenix TV. Commerce Minister Gao Hucheng said expanding a currency swap between the two nations and making increased use of yuan for bilateral trade would have the greatest impact in aiding Russia, according to the broadcaster.

The ruble strengthened 4.1 percent against the dollar today amid the signs of willingness by China, the world’s second-largest economy, to prop up its neighbor. Russia, the biggest energy exporter, saw its currency tumble as much as 59 percent this year as crude oil prices slumped and U.S. and European sanctions hurt the economy. President Xi Jinping last month called for China to adopt “big-country diplomacy” as he laid out goals for elevating his nation’s status.

“Many Chinese people still view Russia as the big brother, and the two countries are strategically important to each other,” said Jin Canrong, Associate Dean of the School of International Studies at Renmin University in Beijing, referring to the Soviet Union’s backing of Communist China in its first years. “For the sake of national interests, China should deepen cooperation with Russia when such cooperation is in need.”

Swap Line

Russian President Vladimir Putin, left, shakes hands with his Chinese counterpart Xi Jinping, right, before their meeting at the Asia Pacific Economic Cooperation (APEC) summit in Beijing, China, on Nov. 9, 2014. Photographer: Mikhail Klimentyev/AFP/Getty Images
China and Russia signed a three-year currency-swap line of 150 billion yuan ($24 billion) in October, an agreement that can be expanded with the consent of both parties. The People’s Bank of China published a chart detailing how such an agreement works in a microblog dated Dec. 19 and the official People’s Daily newspaper said today that the explanation was provided to address concerns the nation could suffer losses if Russia used the facility to obtain funds.

“As all we pay out and receive in return are renminbi, we don’t have to bear exchange-rate risks,” the PBOC said in the microblog, using an alternative name for the yuan. The swap amount can be adjusted to allow for changing circumstances and prevailing exchange rates, rather than pre-determined, are used, it said.

China is promoting the yuan as an alternative to the dollar for global trade and finance and the PBOC has signed currency-swap agreements with 28 other central banks to encourage this. The nation’s foreign-exchange reserves of $3.89 trillion are the world’s largest and compare with Russia’s $374 billion.

“Irreplaceable Partner”

“Russia is an irreplaceable strategic partner on the international stage,” according to an editorial today in the Global Times, a Beijing-based daily affiliated with the Communist Party. “China must take a proactive attitude in helping Russia walk out of the current crisis.”

Still, “China’s help for Russia will be limited,” the editorial said. While China can offer capital, technical and market support, it can’t address Russia’s economic structure and excessive reliance on energy exports, the editorial said.

China signed a three-decade, $400 billion deal to buy Russian gas earlier this year. Oil imports from Russia hit an all-time high in November, according to China’s General Administration of Customs.

Russia isn’t in talks with China about any financial aid, said Dmitry Peskov, a spokesman for President Putin, on Dec. 20.

Argentina

Russia wouldn’t be the first country in financial strife to turn to China for support this year. Argentina’s central bank utilized a cross-currency swap with the PBOC to stem a slide in the peso, which dropped 24 percent against the greenback this year as the government defaulted on dollar bonds. The peso has weakened 0.3 percent this month following a similar decline in November.

A similar move by Russia could help stabilize the ruble, according to Jan Dehn, the London-based head of research at Ashmore Group Plc, which manages about $70 billion in emerging-market assets. It would also bolster Chinese efforts to make the yuan a global reserve currency, he wrote in a Dec. 18 report.

To contact Bloomberg News staff for this story: Fion Li in Hong Kong at fli59@bloomberg.net; Xin Zhou in Beijing at xzhou68@bloomberg.net

To contact the editors responsible for this story: James Regan at jregan19@bloomberg.net Malcolm Scott

Russia’s fast track to ruin DECEMBER 16, 2014 AT 1:26 AM BBC

Here are the numbers that explain why the Russian economy is imploding in the face of a tumbling oil price and Western sanctions.
Oil and gas energy represents two thirds of exports of around $530bn (£339bn). Without them, Russia would have a massive deficit on its trade and financial dealings with the rest of the world – which is why Russia’s central bank expects a capital outflow of well over $100bn this year and next.

And public expenditure is almost completely supported by energy-related revenues. In their absence, the government would be increasing its indebtedness by more than 10% a year, according to IMF data.

So the massive and unsustainable non-oil deficits in the public sector and trade explain why investors don’t want to touch the rouble with even the longest barge pole.
And Western sanctions, imposed to punish Putin for his Ukraine adventure, make it all the harder for Russia’s undersized non-oil economy to trade the country out of its mess.
Desperate government?

Little wonder then that the rouble has halved this year, more-or-less in line with the tumbling oil price.

That raises the spectre of rampant inflation – prices are already rising more than 9% a year on the backward-looking official measure.
And there is the twin nightmare of a fully fledged slump: Russia’s central bank expects the economy to contract not far off 5% next year.

But even so the decision of Russia’s central bank to raise its policy interest rate from 10.5% to 17% is eye-catching (ahem).
It might work to stem the rouble’s fall. Then again it could reinforce investors’ fears that the government is increasingly desperate and powerless in the face of a market tsunami.
Global ripples

Russia isn’t bust yet. In the middle of the year, it was projected by the IMF to hold reserves equivalent to about a year’s worth of imports. That will probably be down to nearer 10 months now, but provides some kind of cushion.

What does it mean for the rest of us? Well it doesn’t help that Russia is sucking demand from a global economy that is already looking a bit more ropey, as the eurozone stagnates and China slows.

As for the exposure of overseas banks – at $364bn, including guarantees – that is serious but not existentially threatening (and loans made by UK banks are just a few percentage points of that).

There are also about half a trillion dollars of Russian bonds trading, with about a third of those issued by the government. Most of those will be viewed by investors as junk, even if they are not officially classified as such by the rating agencies.

Or to pull it all together, Russia is massively leaking cash. And absent an entente with the West over Ukraine, which does not look imminent, it is challenging to see how the hole can be plugged.

Shell Venture Starts Fracking Giant Russian Shale Oil Formation

Shell Venture Starts Fracking Giant Russian Shale Oil Formation
By Stephen Bierman
January 13, 2014 5:56 AM EST

Royal Dutch Shell Plc (RDSA) and OAO Gazprom Neft began a drilling campaign to assess the potential of Siberia’s Bazhenov formation, reckoned to be one of the world’s largest deposits of shale oil.
Salym Petroleum Development, the venture between Shell and Gazprom Neft, has started drilling the first of five horizontal wells over the next two years that will employ multi-fracturing technology, according to a statement today.
The Bazhenov layer, which underlies Siberia’s existing oil fields, has attracted Shell and Exxon Mobil Corp. (XOM) because it’s similar to the Bakken shale in the U.S., where advances in drilling technology started a production boom. Exxon will also start a $300 million pilot project drilling in a different part of the Bazhenov with OAO Rosneft (ROSN) this year.
“This is a big theme for Russia,” according to Ildar Davletshin, an oil and gas analyst at Renaissance Capital in Moscow. “Bazhenov holds as much resources as has been produced in Russia to date. The question is what portion of it can be recovered and at what cost.”
The first horizontal well follows three years of study on the prospect, which included three vertical wells, 3D seismic, coring and well logging in the Upper Salym area, according to the Salym statement.
“Bazhenov development is an important element of our growth strategy,” Oleg Karpushin, head of Salym Petroleum Development, said in the statement. “We hope that the pilot project will allow us and our shareholders to make a decision about moving to a large-scale development of the Bazhenov formation in the Salym fields.”
To contact the reporter on this story: Stephen Bierman in Moscow at sbierman1@bloomberg.net
To contact the editor responsible for this story: Will Kennedy at wkennedy3@bloomberg.net
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