McCain Would Evict Medvedev From G-8, Push Russia on Democracy

May 6 (Bloomberg) -- President George W. Bush said in 2001 that he had looked Russian leader Vladimir Putin in the eye and ``was able to get a sense of his soul.'' Senator John McCain says he looked into Putin's eyes ``and saw three letters: KGB.''

McCain, 71, the presumptive Republican presidential nominee, favors expelling Russia from the Group of Eight club of industrial powers. He calls for forging a ``League of Democracies'' to confront Putin and hand-picked successor Dmitry Medvedev, who takes over tomorrow, on Russian threats against former Soviet republics and rollbacks of domestic freedoms.

The candidate's approach to Russia signals that he has aligned himself with hard-line foreign-policy advisers who favor democracy promotion above all and rejects advocates of doing business with authoritarian regimes when it suits U.S. interests.

McCain's aggressive policy may encounter difficulties because the U.S. needs support from Russia, a nuclear power, on critical issues such as containing Iran. Russia's economy, enriched by oil exports, also is less vulnerable to outside pressure than at the start of Bush's presidency.

``McCain is going to be dealing with an ascendant Russia,'' said Robert McFarlane, national security adviser under President Ronald Reagan. By contrast, Reagan ``benefited from dealing with a Soviet Union that was pretty much in decline.''

Eyes `Turned Back'

Russians are aware that McCain's rhetoric is harsher than that of the Democratic presidential candidates, Senators Hillary Clinton and Barack Obama. Medvedev said Feb. 26 that he wanted to work with a ``modern'' U.S. leader rather than one ``whose eyes are turned back to the past.''

McCain's turn toward those who favor confronting Russia has left ``realist'' supporters such as former Secretary of State Henry Kissinger out in the cold for now, said Dimitri Simes, who heads the Washington-based Nixon Center, a foreign-policy research institution.

``While McCain has a lot of prominent, distinguished realists who support him, have access to him and remain friends with him, none of them imply that they have real influence on him at this point,'' Simes said in an interview.

Nonetheless, Kissinger and McFarlane suggest the Arizonan may temper his views on Russia once in the White House.

``I am sure that Senator McCain will over time state a fuller view of his convictions,'' Kissinger said last month on Bloomberg Television's ``Political Capital with Al Hunt.''

Challenging Russia

McFarlane said a McCain administration will be dominated at first by ``neocon redux'' advisers who favor challenging Russia at every turn. He predicts such a policy will founder on the reefs of Russia's rising economic power.

``For the first year you're going to see, very likely, disagreement, public sniping'' between McCain and Russian leaders, McFarlane said at an April 28 forum at Simes's center. ``If there's good news, it is that in the second year all those youngsters will get fired and maybe we'll settle down to a more really realistic presidency.''

The candidate's chief foreign policy adviser, Randy Scheunemann, said McCain means what he said -- and that he is the true realist. Challenging Russian leaders' misconduct is the only practical way to change their behavior, Scheunemann said in an interview.

``The Russians have made a very cold calculation of what their interests are,'' said Scheunemann. ``They will pursue those interests until they understand that there will be some cost to them.''

Obama, Clinton

Both Obama, 46, of Illinois, and Clinton, 60, of New York, oppose as counterproductive, as does Bush, the expulsion of Russia from the annual G-8 summit.

``Our response is, help us understand how kicking them out of the G-8 is going to help the democratic activists inside Russia,'' Obama's main Russia adviser, Stanford University scholar Michael McFaul, said in an interview.

Obama believes the U.S. can do business with Russia on arms control and counter-terrorism ``and talk with them about democracy at the same time,'' McFaul said.

Clinton, like McCain, has mocked Bush's ``soul'' comment about Putin. ``He was a KGB agent,'' she said on Jan. 7. ``By definition, he doesn't have a soul.'' Her comments about Russia have been more critical than Bush's, without providing specifics on tougher policy proposals.

In a March 2 statement greeting Medvedev's election, Clinton said she would test his stated desire for a new start in relations with ``eyes wide open,'' working together on joint concerns such as terrorism and nuclear proliferation while clarifying ``what America's priorities are and that we will stand up for them.''

NATO Inclusion

While all three candidates back the eventual inclusion of Ukraine and Georgia into the North Atlantic Treaty Organization, they differ over another sore point with Russia, a U.S. plan for a missile-defense system in Europe. McCain supports the plan as protection from Iranian ballistic missiles; Clinton and Obama say Bush is rushing to deploy unproven technology.

Given this political landscape, most Russian leaders prefer an Obama presidency, if only because he has avoided McCain's and Clinton's Putin-bashing, said Alexei Pushkov, a Russian foreign- policy analyst and television commentator.

``The best was Obama; he didn't say anything,'' Pushov said.

Medvedev Boxed In by Oil as Putin Bequeaths Economic `Dead End'

May 5 (Bloomberg) -- When Vladimir Putin hands Dmitry Medvedev the keys to the Kremlin on May 7, he may be locking his presidential successor into an economic box.

Russia is riding so high on rising oil and gas prices that it has little incentive to diversify beyond commodities. The energy industry produced more than two-thirds of the nation's export earnings and more than a third of the state's 2007 revenues, which totaled $315 billion.

The government has ignored advice from the World Bank and other organizations to invest in other industries, start-up companies and infrastructure. Instead, the central bank has amassed $530 billion in gold and foreign-currency reserves; Putin has put $130 billion of that in a sovereign-wealth fund that would provide no more than a two-year cushion if energy prices fall.

``This route may lead to a dead end,'' Economy Minister Elvira Nabiullina said at a Finance Ministry meeting last month. ``We no longer have the advantages of a cheap ruble, cheap labor'' after a decade of average annual economic growth of 7 percent that pushed up wages and the currency, making Russia less competitive.

At the same time, the political system Putin, 55, created discourages changing course. Russia is, in effect, a one-party state, with Medvedev handpicked by Putin to become president, while Putin installed himself at the head of the United Russia party and has laid plans to become prime minister. Regional governors, once elected, now are Kremlin appointees, most of them United Russia members.

Easy Victories

With a heavy boost from the state-controlled media, United Russia won December's parliamentary election with 64 percent of the vote; Medvedev, 42, won 70 percent in the March presidential vote.

``There's no prospect of dislodging the current political system because there are no democratic mechanisms in Russia,'' says Stanislav Belkovsky, a former Kremlin adviser who heads the Institute of National Strategy in Moscow. ``A change of regime can only come about if it collapses from within.''

There's little chance of that, because the party, with 2 million members, is dominated by elites who control much of the country's wealth and have a stake in the status quo. Russia's top 100 billionaires -- including eight United Russia members in the parliament -- have $522 billion in combined assets, Forbes magazine says. They benefit from a business system beset by bribery and largely directed by government officials.

Outside Investment

``Russia needs to start tackling areas such as corruption, reducing the role of the state and improving the rule of law,'' says Chris Weafer, chief strategist at UralSib Financial Corp. in Moscow. Otherwise ``they're not going to get the level of investment they need'' from outside Russia.

At the moment, there's little reason to tackle such issues, and won't be as long as the commodities boom rolls on. Crude-oil prices, at $116.32 on May 2, have more than quadrupled since Putin came to power in 2000, driving a 70 percent increase in Russia's gross domestic product.

The state's share of Russia's oil production has risen to 44 percent, from 6 percent in 2000, after it took over most of OAO Yukos Oil Co. and OAO Sibneft, Weafer says. The gas industry is almost entirely in the hands of state-run OAO Gazprom, the world's largest producer.

Gold and Currency

Russia's gold and foreign-currency reserves, up more than 40-fold from $12.3 billion in 1998, would allow it ``to carry on with everything as is if there's a soft drop'' in energy prices for ``a year or two,'' says James Beadle, manager of about $200 million in bonds and stocks at Pilgrim Asset Management in Moscow.

A sharper or more sustained fall in energy prices might be another matter. The World Bank and the Organization for Economic Cooperation and Development have urged Russia for years to reduce its reliance on oil and other commodities with volatile prices.

Economic ``growth remains highly dependent on the prices of oil and gas,'' a 2002 World Bank report said. The Paris-based OECD warned in 2004 of ``distorted development associated with over-reliance on the natural resources sector.''

``If we are talking about creating an innovative economy, we shouldn't be building our long-term strategy on oil and gas,'' says Vladimir Golovnev, a United Russia member and deputy head of parliament's economic policy committee.

A Top Priority

Before being replaced by Nabiullina as economy minister in September, German Gref said building up infrastructure to boost non-commodities industries and start-up businesses was a top priority.

So far, though, government officials have yet to do much more than talk about such problems. ``We are looking at a period of years when oil dependency will remain very high,'' Weafer says. ``To start real growth in other areas, Russia will have to spend a lot of money on building up infrastructure'' that has been neglected for years.

The state did move last year to begin using some of the money Putin squirreled away, increasing spending by 40 percent and creating a state nanotechnology company and a development bank to channel funds to other industries.

A state-run seed-capital firm, OAO Russian Venture Company, was set up in August 2006 with 5 billion rubles ($211 million). The cabinet this year plans to outline a program to become a global high-technology leader by 2020.

``We need to create good conditions for small- and medium- size businesses,'' says Golovnev. ``Business is the foundation of any economy. It's the goose which lays the golden egg, but to lay golden eggs it must grow up from a chick.''

Extorting Bribes

Small and mid-size companies account for 15 percent of Russia's GDP, compared with at least 40 percent in western Europe, says Golovnev, himself an entrepreneur who employs 12,000 people at a work-clothing manufacturer he and three friends started in 1992. Golovnev, 38, says corrupt officials extorting bribes prevent the success of other entrepreneurs.

Yury Neshitov, 60, a hydro-construction engineer who studied at the St. Petersburg State Polytechnic Institute, says he has been unable to generate interest for his apartment- ventilation system in Russia and began seeking European investors.

``The top-down efforts to stimulate venture-capital financing in Russia have been inefficient,'' Neshitov says. ``Bureaucratic control has meant kickbacks and lack of transparency.''

Berlin-based anti-graft watchdog Transparency International last year said that businesspeople and analysts perceive Russia as being among the most corrupt countries of 180 it studied, with a ranking of 143. Deputy Prosecutor-General Alexander Buksman estimated in November 2006 that corrupt Russian officials take about $240 billion in bribes a year.

Under Putin, the country has suffered from ``colossal corruption, with no parallel in Russian history,'' former Deputy Energy Minister Vladimir Milov and former Deputy Prime Minister Boris Nemtsov said in a February report.

Medvedev has pledged to combat corruption, which he says pervades the government on ``an enormous scale.''

Myanmar Cyclone Death Toll Reaches 10,000, Junta Says (Update3)

May 6 (Bloomberg) -- The death toll from the tropical cyclone that slammed into Myanmar is at least 10,000 and will probably rise, the junta said, making the storm Southeast Asia's deadliest natural disaster since the 2004 tsunami.

About 3,000 people are missing in the Irrawaddy delta region, Myanmar government ministers told international diplomats yesterday, the United Nations news agency IRIN said. Power was knocked out in the former capital, Yangon, and drinking water was contaminated in the city of 5 million people.

``At least eight townships are completely or mostly destroyed,'' said Pamela Sitko, a Bangkok-based worker with the Christian relief group World Vision, who has spoken with colleagues in Myanmar. State media in the country formerly known as Burma reported that ``anywhere from 10,000 to 20,000 people are now dead,'' she said.

In the town of Bogalay alone ``we are getting reports that there are 10,000 dead,'' said Debbie Stothard, a spokeswoman for the civic group Alternative Asean Network on Burma.

The U.S. yesterday offered an initial $250,000 in aid to the country, which is among the world's least-developed, while castigating its military leadership for failing to alert citizens to the approaching cyclone.

``Although they were aware of the threat, Burma's state-run media failed to issue a timely warning to citizens in the storm's path,'' First Lady Laura Bush said from the White House.

New Constitution

Myanmar, a nation of 47.8 million people, is regularly hit by cyclones that form in the Bay of Bengal between April and November. Tropical Cyclone Nargis struck as Myanmar, which has been ruled by the military since 1962, prepares to hold a referendum on May 10 for a new constitution before elections scheduled for 2010.

The junta vowed to press ahead with the referendum after the storm, Agence France-Presse reported, citing a state-run newspaper. The U.S. State Department says the referendum is an attempt by the military to retain power.

Stothard condemned the decision to hold the referendum. ``More and more people are going to die and the regime might not have much of a Burma to rule after this,'' she said from Bangkok.

2004 Tsunami

The disaster is the worst in the region since a 9.1 magnitude earthquake offshore from Aceh on Indonesia's Sumatra island in December 2004 caused a tsunami that swept across the Indian Ocean, devastating coastal communities and leaving more than 220,000 people dead or missing.

``The UN will do whatever it can to provide urgent humanitarian assistance,'' Secretary-General Ban Ki-moon told reporters in New York. ``Because of the lack of communications, we are not quite sure what will be the total extent of damages and casualties. I am very much alarmed by incoming views that casualties have risen to more than 10,000, according to Myanmar's Foreign Ministry.''

Nargis packed winds of 120 miles (190 kilometers) per hour when it struck the coast, sending the sea surging as much 12 feet (3.5 meters).

The government declared a state of emergency in five low- lying provinces, mostly in the rice-growing Irrawaddy delta, where villages were flattened by winds and rain, the UN said.

Myanmar may have to import rice because of ``huge'' damage to crops, said Chookiat Ophaswongse, the head of the Thai Rice Exporters Association.

Rice Exports

The country would probably have exported about 400,000 metric tons of rice this year because of soaring global prices, up from normal shipments of about 100,000 tons, he said in an interview on Bloomberg Television. The storm will definitely ``jeopardize'' exports and it's possible Myanmar will have to import some rice, he said.

State radio warned people to drink boiled water and be wary of mosquitoes and snakes, AFP said.

Houses in Yangon use electricity to pump water, and with power supplies cut by the storm there will be a ``huge water shortage,'' Jyri Rantanen, acting head of disaster management in the Asia Pacific for the International Committee of the Red Cross, said by telephone from Kuala Lumpur.

A UN disaster-assessment team was dispatched to Bangkok, and the world body is prepared to provide a grant from the $500 million Central Emergency Response Fund, created to rush aid to nations in need, spokesman Farhan Haq said.

Stockpiled Food

The UN Children's Fund and its Development Program, which have offices in Myanmar, stockpiled food, water and medicine before the storm. They will distribute water-purification tablets, plastic sheeting, food and cooking sets in Yangon and the delta region.

Flooding, blocked roads and disrupted communications are hampering efforts to assess the extent of the damage, according to the world body.

The junta has requested international assistance and UN officials are engaged in talks with Myanmar authorities on how best to help, IRIN cited Richard Horsey of the UN Office for the Coordination of Humanitarian Affairs as saying.

``Discussions are taking place in New York and on the ground about what is needed,'' he said.

Asian Stocks Fall for First Time in Three Days; Banks Decline

May 6 (Bloomberg) -- Asian stocks declined for the first time in three days, led by financial companies, after Kookmin Bank and St. George Bank Ltd. reported profit fell amid turmoil in credit markets.

Kookmin, South Korea's biggest bank, dropped to a one-week low and St. George Bank, Australia's fifth-largest, tumbled the most in three weeks as bad debts and funding costs rose. Shinhan Financial Group Ltd. retreated in Seoul on lower net income. China Petroleum & Chemical Corp., the nation's largest refiner, slumped after crude oil prices surpassed a record $120 a barrel.

``Results so far are not showing that things are turning around, especially in the financials,'' said Leslie Phang, Singapore-based head of private client investments at Schroders Plc, which manages $275 billion. ``Earnings estimates in Asia haven't been lowered enough to take into account the macroeconomic headwinds.''

The MSCI Asia Pacific excluding Japan Index lost 0.2 percent to 498.29 as of 1:52 p.m. in Hong Kong, halting a two-day, 2 percent advance. Financial shares fell 1.1 percent, the biggest drag among the regional benchmark's 10 industry groups.

Japan's markets are closed for a holiday. Australia's S&P/ASX 200 Index lost 0.5 percent, while China's CSI 300 Index dropped 1.5 percent, the region's largest decline. About half of Asia's benchmarks retreated.

BHP Billiton Ltd., the world's biggest mining company, advanced after copper futures gained. South Korea's Posco rose after it agreed to buy a stake in Sandfire Resources NL, an Australian minerals explorer.

Banks Drop

U.S. stocks fell yesterday, sending the Standard & Poor's 500 Index lower for the first time in three days. Macy's Inc. led a decline among retailers on concern record oil prices will damp consumer spending and Yahoo! Inc. tumbled the most in almost two years after Microsoft Corp. abandoned its $50 billion bid for the company.

Kookmin, South Korea's biggest bank, lost 3.4 percent to 69,100 won, declining for the first time since April 24. The company said first-quarter net income fell 47 percent, prompting Morgan Stanley and UBS AG to cut their ratings on the stock.

Shinhan dropped 3.2 percent to 57,000 won, set for its largest loss since March 13. South Korea's second-largest financial company said first-quarter profit retreated 35 percent on higher funding costs.

St. George, RBA

``While the thinking prevalent a month ago that the world is over for the financial markets is no longer there, you'll still see some more writedowns by banks,'' said David Ng, who helps manage about $1 billion at Hwang-DBS Asset Management Sdn. in Kuala Lumpur. ``We don't doubt there will still be credit weaknesses'' in some banks, he said.

St. George dropped 3 percent to A$26.91, the biggest retreat since April 14, after saying net income declined 10 percent. Chief Executive Officer Paul Fegan cut his forecast for earnings per share growth to 8 percent to 10 percent for the full-year, from 10 percent estimated in February.

The Reserve Bank of Australia today left interest rates unchanged at a 12-year-high of 7.25 percent after reports in the past month showed consumer and business confidence slumped, retail sales slowed and home building fell.

Malayan Banking Bhd. dropped 3.1 percent to 7.75 ringgit, set for the lowest close since January 2004, after Citigroup Inc., UBS and Macquarie Group Ltd. cut their share-price forecasts for Malaysia's largest bank. The company said yesterday it will pay as much as 60.3 billion rupees ($916 million) for a 20 percent stake in Pakistan's MCB Bank Ltd.

Record Crude

China Petroleum, the nation's largest oil refiner known as Sinopec, dropped 2.8 percent to HK$8.47, its biggest decline since April 14, on speculation profit from making gasoline, diesel and kerosene will be squeezed by the rising cost of crude.

Crude oil for June delivery yesterday rose to an intraday high of $120.36 a barrel after the Institute for Supply Management's index of non-manufacturing businesses, which make up almost 90 percent of the U.S. economy, grew for the first time since December, signaling higher energy use.

Cnooc Ltd., China's biggest offshore oil explorer, jumped 2.5 percent to HK$13.84 in Hong Kong.

BHP Billiton advanced 0.8 percent to A$44.49. Rio Tinto Group, the world's third-biggest mining company, rose 2.1 percent to A$141.84. Newcrest Mining Ltd., Australia's largest gold producer, added 2.9 percent to A$29.13.

Copper prices advanced 3.3 percent yesterday in New York, while gold added 1.9 percent.

Posco Acquisition

Posco, Asia's third-biggest steelmaker, climbed 3.8 percent to 512,000 won, on course for its highest close since April 7. The company agreed to buy a 19.9 percent stake in Sandfire Resources for A$7.2 million ($6.7 million).

In the Philippines, Manila Electric Co. slumped 8.3 percent to 72 pesos, its biggest retreat since Sept. 3 and the largest decline on MSCI's Asian index. Credit Suisse Group cut the stock's rating to ``underperform'' from ``neutral,'' saying the company will probably be unable to raise its rates this year because of political pressure to control electricity prices.

Nine Dragons Paper (Holdings) Ltd., China's biggest maker of containerboard used for packaging, had the regional index's largest gain. The shares jumped 11 percent to HK$10.14 in Hong Kong after saying it will buy a paper maker in Vietnam.