Last Week in Review

Sectors with Alex Nice

Despite promises, the state puts on weight

On January 24th Andrey Kostin, the head of state-owned VTB, Russia’s second-largest bank, suggested that the bank may look to acquire Vozrozhdeniye (Renaissance), a mid-sized bank controlled by Aleksey and Dmitry Ananyev. After taking over control of the Ananyevs’ Promsvyazbank in December, the Central Bank demanded that the brothers reduce their holding in Vozrozhdeniye to 10% by March 18th. The tight time-frame suggests the bank is likely to be sold at a discount, and may not give potential buyers sufficient time to assess the quality of the bank’s assets. Given the advantages enjoyed by state institutions in terms of depositor confidence and financing costs, it’s not clear if private investors will be interested in acquiring these banks, and whether they will be able to compete effectively. On January 26th the Russian ratings agency Expert RA reduced Vozrozhdeniye’s rating by four notches, and warned that the bank could be taken over by the Central Bank if a buyer cannot be found by March.

A bill intended to prevent state companies from restricting competition in tenders passed its first Duma reading last week. The bill restricts the criteria that state companies can set for small and medium-sized businesses applying for tenders (critics of the bill argue that it will lead to applications from unqualified companies). The latest data from the Ministry of Finance suggests that an extraordinary 94% of state procurement is not competitive, imposing major costs on the economy. Despite the above, the state’s role in the economy expanded a little further last week after Vladimir Putin approved a proposal from Sergei Chemezov’s Rostec to consolidate full control over the air ambulance service. This will secure an order for over 100 helicopters for Russian Helicopters, a Rostec subsidiary, by 2035.

Foreign investors in Russia’s dairy sector are continuing to encounter problems with the authorities as they lobby for changes to new regulations on veterinary certification. Rosselkhoznadzor has called for the Investigative Committee to open a criminal case against PepsiCo and its management for alleged breaches of safety regulations and the use of expired milk in the production of cheese at factories in Russia. Analysts link the move to the company’s public objections to Mercury, the new system of electronic veterinary certificates (covered in the Bear Market Brief on October 16th 2017). In December 2017 another foreign player, Danone, threatened to take Rosselkhoznadzor to court for claiming that it had found antiobiotics in milk produced in its factory in Vologograd Region. In the same month, Rosselkhoznadzor accused PepsiCo of commercial espionage and hacking to acquire internal documents from the agency.

Energy Outlook with Nick Trickett

Hydrocarbon behemoths push abroad

After yesterday’s reveal on CAATSA sanctions, Rosneft is pressing ahead stating that it expects no risks on prepayments of Venezuelan oil supplies. Perhaps that’s because Baghdad is not looking to punish the company for closing deals in Kurdistan despite its protests at the time of the referendum that any and all deals were functionally illegal. The aura of confidence comes as Moody’s has upped the firm’s credit rating to Baa3. But another domestic fight is looming for Sechin in Moscow. The Federal Anti-Monopoly Service is suggesting that Rosneft sell 20% of Bashneft. Watch what happens next with the elections looming and the shape of the next cabinet and its links to Gazprom still unclear.

Gazprom, meanwhile, holds on to 54% of Lithuania’s gas market. To wit, that’s an increased share over last year, but it’s due to lower prices – LNG production in the Baltic has seriously disrupted the company’s pricing dominance. It appears that the company is looking to move into South America with a proposed tight gas project in Argentina. With Turk Stream over half completed, it’s likely that Gazprom will begin shifting money towards smaller production projects abroad to keep pace with Rosneft’s international expansion where possible. Gazprom has also just issued a 32.78 billion ruble tender to help expand condensate production at the Kirinskiy field on Sakhalin island.

It’s official that the Directorate for the Northern Sea Route, key to future Arctic governance of Russia’s maritime Arctic territory, will be housed in the same building as Rosatom’s headquarters. Though not new, the fact that Rosatom has now officially sealed its control of the Northern Route speaks volumes to the relative balance of power between actors among Russia’s energy giants and firms. Despite Alexei Likachev’s inclusion on the Kremlin list published in Washington, the company is touting growing international orders. The company’s policy influence is growing considerably at a time when is Russia facing nuclear energy export competition from China.

Word on the Street with Anna Nadibaidze

A coming shakeup at Foreign Affairs Ministry?

There are any questions remain regarding the U.S. “oligarch list”: where are key figures like Anatoly Chubais and Central Bank’s Elvira Nabiullina (are they on the “secret” sanctions list)? And why spend $4 million in order to copy/paste the Russian government’s and Forbes’ websites?

Gossip about what happens after election continues to evolve: many expect an increase of the pension age and other important changes to the constitution. Vladislav Surkov could be moved from his post as negotiator on Ukraine issues, Minister of Culture Medinsky may get the sack as well, and United Russia may be completely rebranded.

On ex-governor Nikita Belykh’s corruption trial: the majority of channels thinks the prosecution’s demand of 10 years of prison is exaggerated, to say the least (that’s even more than Ulyukaev!). Given Belykh’s health problems, those 10 years are more of a death sentence.

Some Ministry of Foreign Affairs gossip: Alexander Grushko, former Russian envoy to NATO and recently appointed Deputy Foreign Minister, could perhaps replace Lavrov as the Foreign Minister this spring: the latter is rumored to be sick. But Grushko already had this chance when he was Deputy FM in 2005-2012, writes Ustinov.

Nezygar summarizes the roles of Putin’s election opponents:

  • Communist candidate Grudinin brings higher turnout
  • Navalny and his boycott bring more votes for Putin
  • Sobchak takes away votes from Grudinin

Politics and Regions with Chris Jarmas

Turnout, by any means necessary

The common refrain on Russia’s upcoming presidential election is that Putin will win by a large margin, but turnout will falter in a predetermined contest. But the Kremlin’s expectations for turnout on March 18th remain sky high. The latest poll from less-than-independent pollster VTsIOM predicts that 71 percent of Russians will vote, exceeding not only the Levada Center’s November prediction (by almost 20 percent!), but also exceeding the Kremlin’s own stated goal of 70 percent. In recent months, it had appeared as if the Presidential Administration was backing off of this mark, sensing that it would prove unrealistic. Recall that elections in Putin’s Russia are not competitions between candidates, but rather contests among chinovniki to pull off the best results in their district, city, oblast, or okrug. The new figures – and the return of the arbitrary 70 percent mark – raises the stakes for ambitious officials seeking to impress the Kremlin as Putin begins his fourth and possibly final term.

What’s this mean for observers? You can expect “excesses” – and you can expect westerns to wonder why the regime would rig an easily-winnable election. Understanding how Russia really works provides an answer. In a column this week for, Grigory Golosov untangles the principal-agent problem in Russian governance. Assigned a litany of tasks, ill-resourced peripheral authorities must choose which to execute and which they can afford to ignore without rebuke from the Kremlin. In the wake of several waves of governor-firings in 2017, you can bet that thе vertikal’ is feeling insecure about March 18 – and that means trying to boost turnout by any means necessary.

Weekly Wrap-Up with Aaron Schwartzbaum

What If? Putin vs. Navalny in a fair election

Here’s a scenario I’ve thinking about: what would happen if Navalny were allowed to compete fairly with Vladimir Putin. By that I mean no more arrests, allowed on the ballot, permitted (featured, in fact) on state TV, granted federal funding, the works. A completely fair election, in short. Oh what we would pay to see a debate in that campaign! My hunch? Vladimir Putin would still win, though by far less than usual. Despite Navalny’s charisma and populist reach, I’d argue that Putin’s inevitable appeal to stability remains a salient political force, albeit decreasing so.  As does Putin’s ‘strong Russia’ foreign relations agenda, historically a glaring weak spot for the opposition. Navalny himself hasn’t articulated much on that front besides some opposition to immigration (toned down from his past approach) and belief in ‘spending more money at home’…

That said, recall that Navalny drew almost a third of the Moscow vote when he ran for mayor, with nowhere near the profile or resources Sobyanin had. With the inroads his message has made beyond the capital and with a still-sputtering economy, I think he could well capture a similar slice of the vote across Russia. Let’s say 35-40%. But following up on my piece last week, and given the political reality here, I see a figure like the Communist Party’s Grudinin as a far more likely candidate to mount an upstart populist campaign some day… Thoughts on the matter? We’d be thrilled to hear them – get in touch!

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