Around the Sectors with Alex Nice
Regulators, mount up!
Last week the Central Bank confirmed plans to merge B&N Bank and Otkrytiye, two major banks bailed out in the second half of 2017. The Central Bank insists that the new bank will be privatised once merger has been completed. Speaking at the end of last week, Elvira Nabiullina, the head of the Central Bank, said that once the clean up of the banking sector has been completed its focus will be on expanding competition. According to Mikhail Zadornov, the chairman of Otkrytiye, the merger may take nine to twelve months to push through. However, there are reasons to expect that the new bank will remain under Central Bank control significantly longer than a year. The history of mergers involving failing financial institutions in Russia is not a happy one; even if the failing assets of the two banks are hived off into a separate bank, it’s unclear in the current climate who would be a potential buyer of the bank, and at what price. The Central Bank has now put over Rb1trn into bailed-out banks, however there are indications that deposits are starting to recover.
In recent days the Central Bank has also announce measures to change its reserve requirements to incentivize lending to businesses looking to expand production, while increasing the cost of financing for mergers and acquisitions. The Central Bank has given mixed signals about the motivation for this – Nabiullina stated that last week that lending for M&As was riskier suggesting this was a prudential measure, but she also seemed hinted that the Central Bank was seeking to stimulate the economy through the regulatory change, noting that “not all lending has the same effect from the point of view of economic growth.”
As noted in the Brief last week, Vladimir Putin has reportedly given his approvalfor the United Aircraft Corporation (OAK) to be absorbed into the giant Rostec holding. This would appear to be yet another victory for Rostec’s head, Sergei Chemezov, but could create problems for the development of OAK’s new passenger planes, the MS 21, if it leads to an expansion of western sanctions. Irkut, the OAK subsidiary that manufactures the MS 21, remains reliant on foreign suppliers for a significant share of the plane’s components. Meanwhile, responding to government initiatives to support the domestic airline industry, Aeroflot announced last week that it would lease 50 MS 21s from Rostec.
Energy Outlook with Nick Trickett
Darth Vader and Luk(oil)
Rosneft is planning to issue at least 15 billion rubles in bonds to finance investments. The company is committing to developing the Arctic Pobeda field as well as further exploring the Kara Sea, an easier proposition if prices remain higher for longer. But in a somewhat unsurprising turn internationally, Rosneft is not talking participation in the Azar field in Iran despite maintaining its interest in working with Iran’s NIOC. With Sechin now setting his sights on the auction for rights to the Khara-Tumus field in Russia’s Arctic north, it’s likely that domestic expansion is superseding expansion into Iran where Vagit Alekperov has worked hardest to keep Lukoil ahead of its Russian peers.
Lukoil is throwing 120 billion rubles at a gas refining complex linked to the Budyonovsk field, a play to reduce its dependency on Gazprom and join Rosneft in pushing back against the monopolist. The complex lies on the Caspian. Tellingly, Alekperov stressed Lukoil’s attempts to create jobs in the northern Caucasus in its 2018 plan as well as Lukoil’s increase in the quality of refined fuels. He knows that to survive the next reshuffle, he has to better prove Lukoil’s value to the national interest. Russian ambassador to Iran Levan Djaragyan notably left out Rosneft when interviewed about Russia’s interests in long-term cooperation on Iranian oil and gas projects, a small but significant nod in Lukoil’s direction. With the election looming, Iran and Iraq are the likeliest crown jewels to prove the company’s worth for Russian foreign policy.
Rosatom is still looking for partners for the Akkuyu nuclear plant in Turkey, estimated to cost $22 billion. Its tanker arm Rosatomflot is set to order LNG tankers from Finland as it begins to spend on its newly acquired Arctic fiefdom. The company has also entered in a Hungarian-Russian joint venture to build a 1 MW hydroelectric plant in South Africa. This mini-hydro plant could prove to be a new strategy for the nuclear giant to project influence across countries in Africa and elsewhere as it eyes up its Chinese competition. Egypt’s provision of reactor technology is as much about China’s Belt and Road as about pretensions of kicking the U.S. out of the Middle East.
Word on the Street with Anna Nadibaidze
This week in Telegram gossip…
Putin’s Federal Assembly address, originally scheduled for this week, could take place on Feb. 27. Possible reasons for the delay include disagreements between the administration and government, a desire to coordinate the speech with the election campaign, and the looming Olympics which might overshadow an earlier address.
Many Telegram channels expect an actual sanctions list, based on the Kremlin’s telephone book published last week, to be released very soon. Who will be on it? With regards to businessmen, it’s more or less clear, but with government officials not so much, as many stand to change positions after election.
Last week we wrote about possible post-election reforms. This week, some insiders’ thoughts of which ministers might face the sack, even before the end of the campaign: Rogozin (Defense industry), Medinsky (Culture), Donskoy (Environment).
On the arrests of officials charged with embezzlement and the dismissal of Dagestan’s government: it’s unlikely this ‘clean-up’ will spread into other regions of the North Caucasus. This is a political move against specific people. Charges could be made against the oligarch Magomedov brothers, who are linked to Medvedev. If rumors about the end of Medvedev as PM are true, then this would make sense.
Meanwhile, Economy Minister of Tatarstan Artyom Zdunov is expected to become the new PM of Dagestan. This move could be part of an effort to strengthen the Dagestan-Tatarstan connection and to balance Kadyrov’s clout, writes @ShaltayBabay.
We’ll need to wait until March for the election campaign to really pick up. “The Hateful Eight” are now mobilizing resources and compromising evidence against each other. It’s good that they’re only eight on the ballot – “less wasted paper!” says @kaktovottak.
Politics and Regions with Chris Jarmas
North Korea sanctions put Far East in awkward spot
This week, let’s take a break from Vladimir Putin, Alexei Navalny, and Ksenia Sobchak (who is also taking a break from campaigning to speak at CSIS). Here’s one obscure plotline I’m following instead: U.N. sanctions, which Russia signed in December, require that all DPRK laborers working overseas return home within 24 months – but that deadline is stoking center-periphery tensions. While Moscow sets policy unilaterally, regions in the Far East – highly dependent on foreign labor to offset declining populations – are left to deal with the consequences. In January, for instance, Primorsky Krai governor Andrei Tarasenko appealed to the Kremlin to allow his region to keep their ten-thousand-strong North Korean workforce. In Sakhalin, they ask if the region “can survive without laborers from North Korea.”
This week, Russia’s ambassador to North Korea signaled to regional authorities that Moscow expects their help fulfilling Russia’s U.N. obligations: “Many governors, in order to report early fulfillment [of the U.N. resolution], have begun to send away their North Korean laborers.” But that prompted a quick response from Primorsky Krai officials, who released a statement of their own the next day: “No one is forcibly sending North Korean laborers home. They have the right to stay in Russia until their work authorizations expire.” Russia’s obligations to fulfill U.N. sanctions, it seems, add one more stressor to a growing list of tensions caused by a hyper-centralized system.
But that’s not the only problem. In an extensive interview, Russian regional expert Natalia Zubarevich highlights the country’s most fundamental problem in center-periphery relations: incredible budgetary inequality. Just 35-37 percent of inter-budgetary transfers are aimed at reducing inequality; the rest of the cash, says Zubarevich, flows to whomever the Kremlin favors at the moment. Right now, that’s Crimea, which in 2017 received almost as much transfer revenue as the entire Far-Eastern Federal District combined.
Weekly Wrap-Up with Aaron Schwartzbaum
K is for ‘Ksenia’
It’s been an interesting week here in Washington, D.C., with presidential candidate Ksenia Sobchak coming to town just over a month before Russia’s election. Since her visit has made news, I wanted to dedicate today’s column to the topic, particularly her speech at the Center for Strategic and International Studies (CSIS), which I attended. Off the bat, Sobchak presented very well. She clearly knows how to address a Western audience, perhaps even better than the broader Russian electorate. She earned applause for a conciliatory (if politically ridiculous) note on Ukraine, several feminist points she made, and some self-depricating humor, too.
I was fortunate enough to ask Sobchak a question, namely about her message to struggling Russians in the regions beyond Moscow and Saint Petersburg, where the opposition has struggled to make inroads. Her answer was revealing, I think: she aims to link the poverty many households are experiencing to rampant corruption. That’s interesting in that as a strategy (insofar as she has one), it overlaps entirely with Alexei Navalny’s. Given she’s being allowed to run, its hard to imagine that overlap is a coincidence. Ultimately, if you’re participating in a Russian presidential election, you have a tacit or explicit agreement with the Kremlin. In this case, to draw disaffected Navalny supporters to the polls, and generally, help the electorate let off steam.
But it would be unfair to call Sobchak’s run an entirely or even mostly cynical venture. She is very clearly thinking beyond this year, and perhaps beyond 2024 as well. Why else would she be on a credibility-building expedition to Washington so close to the election? In that regard, there’s a certain mismatch in her relationship with the Kremlin: Putin’s team has a short-term use for her (they don’t tend to think too far ahead…) while she has a much longer-term use for them. Does that mean propelling herself onto state television in order to build name-recognition? Political aspirations beyond her promised Duma run? We don’t know. But I’ll be keeping an eye on her: if there’s anything that Ksenia Sobchak has proved in the last seven or so years, it’s that she knows how to read the room.
Name in the News
Sergei Chemezov, chief executive of RostecCorporation, one of Russia’s largest and most influential companies, is considered to be an essential actor in Putin’s informal politburo. But his path to Moscow was not an easy one. Born in 1952 in a small Siberian mining suburb of Irkutsk, he grew up in a dangerous neighbourhood next to the city’s prison. For this reason, young Sergei practiced boxing and even took part in competitions. After graduating with distinction from what is today the Baikal State University of Economics and Law, he began his career at the Irkutsk Research Institute for Rare and Nonferrous Metals, and then moved to Moscow – but didn’t stay there long. From 1983 to 1988, he was head of the delegation of the Luch Industrial Research Association in East Germany, where he crossed paths with young KGB agent Vladimir Putin. They lived in the same apartment block in Dresden.
After returning to Moscow, Chemezov became deputy CEO of Sovintersport, a sports agency, until 1996, when he was appointed Chairman of the Department for Foreign Economic Relations, with the help of Putin’s recommendation. From 2000 to 2007, he served as deputy CEO, and then as CEO of Rosoboronexport, Russia’s state agency for military exports. He did not find arms trade shameful or immoral: “if you want to live in peace, prepare for war”, he said at the time. Given his lack of knowledge about weapons exports, at first he was not very successful at this job. But he was determined to completely reorganize Russia’s defense export network and soon became CEO of the newly-created state corporation Rostekhnologii, which encompassed Rosoboronexport. In 2012, the company was rebranded into Rostec. Since its creation, Rosetc has been expanding its holdings. Today, it controls around two thirds of Russia’s defense industry. The company has earned the nickname of “Rospylesos” (Ros-vacuum cleaner) for its efforts to ‘suck in’ all of the country’s industry.
Unlike other officials, Chemezov doesn’t hide his family from the media. He has three sons: two of them are businessmen, while the youngest is still in school. Since 2004, Chemezov has been married to Ekaterina Ignatova, who holds 70% of the stocks of an automatic gearboxes company and owns a restaurant chain, in addition to many other investment projects. Her daughter Anastasia, a model and businesswoman, is part of the family as well. Chemezov enjoys hunting, mostly moose and wild boars, and believes that a love of weapons is a natural thing for men. He owns a fair few guns, many of them gifts. At the same time, he is described as a calm man who never raises his voice. Chemezov, to note, holds the title of Lieutenant General, but states that he only wears his uniform on Victory Day – the rest of the year, he’s a businessman. It remains to be seen what aspirations this businessman holds for the future of Russia’s defense industry…