Brief Columns: Week of September 4th

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ENERGY OUTLOOK

Two developments in oil and gas dominated the last week in Russian energy: Rosneft reached a long-term supply deal as well as an oilfield exploration deal with China Energy Company and Gazprom’s subsidiary company for the Nord Stream 2 gas pipeline received 324 million Euros in financial obligations from its European partners despite uncertainty around sanctions.

Rosneft’s supply deal is most important for the firm as China’s firms traditionally pay large amounts of cash upfront and Rosneft has needed a financial infusion to cover holes on its balance sheet. The deal also increases the company’s direct access to the Chinese market and could help it develop more onshore oil reserves without Western partners.

Gazprom needed good news since its net profits are down more than a third this year, straining its ability to finance the Nord Stream, Turk Stream, and Power of Siberia projects simultaneously. However, Denmark may pass a law to deny the Nord Stream pipeline access to Danish territorial waters, which would force a change in route for the pipeline. Nord Stream 2 still limps ahead, but uncertainty around responses to the project outside of Germany is mounting.

Getting less ink, Rosneft is reportedly lending more to Kurdistan ahead of its independence referendum. Rosneft has already signed finance deals with Kurdish producers and is seeking to develop Kurdish oil deposits, a side effect of sanctions and lack of access to offshore technology. Were Kurdistan to declare independence, it’s exceedingly difficult to predict the political dominoes but Rosneft is angling to exploit them. Similarly underreported, Lukoil and Gazpromneft have officially submitted plans to develop oilfields in Iran. Lukoil relies on the Caspian region for its future growth, selling assets elsewhere due to sanctions or capital needs. Expect more oil diplomacy in Iran and Iraq to follow for Russia’s oil firms.

BANKING/FINANCE/MACRO

This week in Banking/Finance/Macro, the Central Bank of Russia (CBR) rescued Bank Otkritie in one of the biggest bail-out moves in the country’s banking history to prevent a gradual but progressing banking crisis in the country.

Otkritie – the largest private lender in the Russian financial market, ranking 8thby its assets – has managed to rise to the top ranks of Russia’s banking sector over the past couple of years. By taking over other lenders, including a pension fund and an insurance fund, it became so large that at some point regulators ranked it among the country’s top 10 systemically important banks – too big to fail – and provided it with liquidity support worth billions of dollars during the crisis. Nonetheless, amid worries about its expansive and risky loan portfolio, Otkritie has suffered a steady outflow of its deposits exacerbated by surprise downgrading in early August of the bank’s ranking by ACRA – Russia’s Kremlin-backed ratings agency.

While intended to calm the market, the CBR’s bail-out move in this fresh case of bank insolvency suggests that Russia’s banking system has not fully recovered from the recession that formally ended in late 2016. The attempts to nurse Otkritie bank to health ahead of March 2018 presidential elections do not appear to be uncalculated either. Maintaining confidence in the banking sector is critical for the Kremlin ahead of upcoming elections, in which Valdimir Putin is expected to run for the 4th term, accentuating the country’s budding economic recovery.

Regardless of its intentions and outcomes, the bail-out will likely cause concern about the wider state of the Russian banking sector among stakeholders, fuel speculations about the incidence of similar problems in other big Russian banks, and bring to question CBR’s supervisory performance.

POLITICS/REGIONS

This weekend, Russian political observers will turn their attention to gubernatorial elections; Ramzan Kadyrov has stirred the pot in Russia’s response to the situation in Myanmar; and opposition leader Alexei Navalny suffers another assault (but not zelyonka!).

16 Russian regions are preparing for gubernatorial elections, set to take place this Sunday, September 10. As Fabrice Deprez appraised the situation in the Bear Market Blog this week, surprises are unlikely: Kremlin-backed candidates are expected to win across the board. In absence of competition, Russian political observers are expecting low turnout. In the words of one analyst, with the March 2018 presidential election approaching, this weekend’s gubernatorial elections represent a key “dress rehearsal” for the Kremlin.

Chechen Republic leader Ramzan Kadyrov turned to social media to criticize the Kremlin’s support of Myanmar’s government throughout its crackdown on the country’s Rohingya Muslim minority. “Even if Russia will support the devils who are committing the crimes, I am against the position of Russia. I have my own view, my own position,” Kadyrov said in a live Instagram video on Saturday. Several protests in support of Myanmar’s Rohingya have taken place across Russia, from Karachay-Cherkessia to Moscow. The Chechen leader’s remarks made waves in light of Kadyrov’s reputation as “Putin’s foot-soldier” – a reliable supporter of Kremlin policies.

Opposition figure and anti-corruption activist Alexei Navalny is no stranger to foreign objects launched in his direction. Only this time, on Wednesday at Moscow’s Domodedovo airport, unidentified assailants threw bratwursts his way.

WEEKLY WRAP-UP

First off, hope you all have enjoyed the brief thus far! The team and I are quite excited to be working on it. On the topic, if you ever have feedback, do shoot us an email! Also, if you’d like to write for us.

Transitory factors. Rumors of Russia’s imminent demise are exaggerated, but so are rumors that it’s roaring back. While there’s no doubt that the economy had a good summer – see August deflation, another bumper crop, 6 months in a row of growing auto sales, it is important to look at that in context. The Central Bank continues to warn that at least monetarily, many of the current trends are ‘one-offs’ – so not really trends at all. And while the current budget is very conservative, working off $40/brl oil, Russia seems set for some real fiscal turbulence next year (see story 3 today). Here’s the bottom line on what we’re seeing: stabilization into a pattern of stagnation and a gradual erosion of economic planners’ capacity to wing it. The former may mean some improving indicators as people get used to slow growth. The latter is a concerning long-term trend with real political implications, especially as the season of electoral ‘gifts’ (i.e. higher spending) draws near.

And some not-so-transitory ones. “Elite infighting” is one of my least favorite terms (though not quite as bad as “hybrid war”), but I think the ongoing Ulyukayev-Sechin saga and Ramzan Kadyrov’s public disagreementwith Russian foreign policy are the sort of thing we’ll see more in the coming years. Particularly Putin’s political capital necessarily wanes — I’m assuming he leaves office in 2024. Call that infighting, lobbying (Kadyrov has been known to stir up trouble when he wants something), or jockeying; I’m expecting more of it. I’m also watching Kadyrov with interest: curious how the Kremlin will handle him (or not) after this latest stunt.

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