Around the Sectors with Alex Nice
How to sanction-proof an economy
As Bear Market Brief noted last week, the Russian government has announced that Promsyazbank, which was taken over by the Central Bank in December last year, will be turned into a state-run bank to serve the defence sector. The aim is to shield major banks from the risk of further US sanctions; in early January, for example, Alfa Bank, one of the few large banks still in private hands, announced that it would no longer provide loans to the defence sector (provoking an angry response from Dmitry Rogozin that the bank did not have permission to lend to the sector anyway).
Channeling lending to the defence sector through a single special-purpose vehicle is likely to exacerbate problems of ineffective procurement and increase the risk of corruption in the defence sector. Promsvyazbank will be headed by Petr Fradkov, who as the Financial Times notes, has no experience in the banking sector and was deputy chief-executive at VEB, another special-purpose state investment vehicle, when it ran up immense debts as a result of directed lending to poorly conceived infrastructure projects. The defence sector has historically struggled to keep a lid on production costs. In December 2016 the Ministry of Finance was obliged to spend Rb700bn restructuring commercial loans of defence sector to reduce the debt burden on the sector.
This is just one of a number of measures the government has taken to try to insulate the economy and leading businessmen from the impact of further sanctions. Last week, the Ministry of Finance announced plans for a $3bn Eurobond for Russian investors wishing to repatriate funds. More esoterically, presidential advisor Sergei Glazyev has proposed creating a state-run cryptocurrency to conduct sensitive financial transactions. Further policy proposals are likely to be forthcoming in the next couple of years to both expand a parallel “deglobalized” financial system within Russia, and encourage the development of a multilateral financial architecture with selected partners that does not involve US institutions or the dollar.
In sectoral news, Kommersant reports that the government may be starting to respond to intense lobbying from the telecoms sector regarding implementation of the infamous Yarovaya Law. From mid-2018, companies will be required to store large volumes of communication and user data for access by the security services, involving large expenditure on data storage facilities. However, a number of normative acts regulating how the law will operate have still not been adopted. According to Kommersant, the storage requirements may be adjusted, and the deadline for compliance pushed back from July to October.
Energy Outlook with Nick Trickett
Russia pushes back on sanctions headwinds
With German partner Basalt-Actien-Gesellschaft, Rosneft is planning to invest 500 million Euros into Germany over the next five years with a focus on a bitumen plant project. The move is clearly a counterpunch against sanctions by ratcheting up lobbying pressure in Berlin as the company faces sanctions headwinds: it wants to expand the Druzhba pipeline to supply the bitumen project. Finally, the company may struggle to acquire a license for the Begichevskiy oil field in Terpei-Tumus on the Laptev Sea. Rostec failed in its own attempt. Lukoil has been excluded from competition.
Turkey has reportedly authorized the second string of Gazprom’s Turk Stream pipeline. Indian importer GAIL renegotiated an LNG supply contract with Gazprom – 23 instead of 20 years and lower prices due to competition on Asian markets and with Novatek. Gazprom will likely lose money on the contract when prices drop in warmer months, a sign of the company’s declining ability to set gas prices. The company also accepted defeat in the Stockholm Arbitration Court against Ukraine’s Naftogaz. Europe’s legal structures, LNG markets, and domestic competition are steadily chipping away at the company’s power as the elections loom and Gazprom’s lobby may lose out.
Lukoil is planning to increase production at the West Qurna-2 field in Iraq to 450,000 bpd in 2019. By 2024, the field will be producing 800,000 bpd. The announcement is a savvy reminder to Baghdad that Lukoil, unlike Rosneft, can be trusted. The company is also expanding its presence in China by cutting a deal with Xuzhou Construction Machinery Group Ltd. to supply them service oils. The company is selectively and intelligently picking spots to maximize profits and defend itself domestically while avoiding any explicitly political dealings.
Smaller player Russneft has requested a tax exemption for an oil field in Yurga due to “social tension.” If granted, the exemption would add on to a growing trend of firms seeking exemptions to develop remote reserves with differing justifications and building up infrastructure that many locals will likely end up paying to use (such as roads). In related news, Rosgeologiya is expecting a 2.5-5% increase in investments into prospecting as Russia’s firms look for more supplies and profits domestically in a sanctions environment.
Word on the Street with Anna Nadibaidze
This week in Telegram gossip…
The web domain putin2018.ru, Putin’s campaign website, was registered back in 2010, when presidential terms were extended to 6 years. Kremlevski Mamkoved points out that putin2024.ru, putin2030.ru and putin2036.ru are already taken. Only putin2042.ru remains free…
On Medvedev’s political prospects: there’s a chance he could resign, but in the short run, this will cause more turbulence and disorientation among the elite, according to Ustinov. However if Putin may still opt to fire the unpopular PM to boost his vote share or turnout.
Putin’s campaign team still has no clue when the main points of his agenda will be revealed. A very small team, including Peskov and Vaino, is working on it. Nezygar says that much of the program will be modified according to the foreign policy agenda.
In the wake of a failed Year of the Environment, important changes will soon affect the Ministry of Environment. Most of the team will get fired, but the intrigue lies in the future of the nephew of infamous oligarch Suleiman Kerimov, Murad. With his uncle unable to protect him (he’s under house arrest in France), Murad find himself with a gift basket from Igor Sechin, somebody he’s had several spats with.
On the recent violence in Russian schools: many were outraged by the lack of coverage of these tragic events in Russian state media. But after all, headlines are reserved only for “positive” news, like Putin’s plunge into frigid water for Orthodox Epiphany.
Politics and Regions with Chris Jarmas
Regions join battle for election turnout
Kommersant reported on Thursday that “the regions have joined the battle for turnout.” As the March 18 presidential election approaches, the Kremlin has likely given up on its ambitions 70/70 objective – 70 percent for Putin with 70 percent turnout – but a Levada Center poll in late November predicted turnout of just 53 percent. So what are the regions doing to boost enthusiasm for a contest with a predetermined outcome? In Nizhny Novgorod, the authorities are relying on workplace mobilization: employees at industrial enterprises will be expected to visit the polls – and show proof – and if possible, to bring their relatives. This is nothing new in Russia, as Columbia University’s Timothy Frye has written; a 2012 survey, for instance, showed that 33 percent of workers in Russia thought that it was possible for their employer to find out how they voted. The increased focus on worker mobilization by regional governments adds another data-point to the Kremlin’s turnout woes.
In other regional news, the Kremlin has taken an unprecedented step to hem-in subnational debts. Authorities in Khakassia and Kostroma will no longer be allowed to make decisions concerning their own expenditures – Moscow will handle that for them. The two regions have run up large debts to the federal center, having taking advantage of near-zero interest rates offered by Moscow in 2016 and 2017 to help highly-leveraged regions swap out high-interest commercial loans with cheaper “budget credits.” However, the Ministry of Finance cancelled this program in 2018. Instead, the Kremlin has arranged for state banks to offer financing to needy regions at a rate equal to the Russian Central Bank’s key rate (currently 7.75%) plus one. It’s still a cheaper alternative to commercial loans, but the new program means that between 2017 and 2018, the cost of regional debt-financing has increased by almost 80 times. This news comes against the backdrop of a national economy which is improving overall, but continues to diverge at the regional level. (We have previously covered the regional-debt issue in the Bear Market Blog).
Weekly Wrap-Up with Aaron Schwartzbaum
A word on fake institutions
Exactly how fake are Russia’s fake political institutions? Under Putin, the Kremlin grown to rely on several political parties for a number of ends. United Russia is the institutional driver of the Kremlin’s agenda; not quite a rubber stamp, but something like one. Meanwhile, ‘opposition’ parties such as the Communist Party (KPRF) and neither-liberal-nor-democratic Liberal Democratic Party (LDPR) in effect serve to mop up popular disaffection.
But what happens when these fake political institutions lose their importance? United Russia enjoys an overwhelming majority in the Duma, and despite Putin keeping his distance, has become a vital tool in turning out support. Perhaps so much so that membership in and affiliation with the party is becoming diluted. In other words, Russians getting involved with United Russia are doing so because that’s what one does to get into politics, not because of any adherence to a particular ideology. Meanwhile, reports have suggested that the Kremlin doesn’t know what to with its own opposition parties these days, especially given their diminished Duma presence. To put it another way, Russia’s political order is to a certain extent flying on autopilot these days.
What’s the point here? I think that in the long-term (think Putin’s successor), the biggest political threat to Putinism may not be non-systemic opposition (think Navalny), but the systemic opposition (think KPRF). Why? In order to be a real fake political party, you need to have real organization and infrastructure. Grudinin, the Communist Party’s dark horse, isn’t about to launch an upstart populist campaign, but could another figure down the road, in a Russia where Putin’s successor has less political weight? I think that’s a possibility. And its a risk withhistorical echoes, too: the demise of the Soviet Union was in effect a story of fake institutions suddenly becoming real ones.