Last Week in Review

Around the Sectors with Alex Nice



MinFin raises eyebrow at VEB 2.0

Moscow Industrial Bank, one of the 30 largest banks in Russia, has asked its shareholders to invest Rb3.5bn in the first quarter of this year. The management says that the funds are needed to develop the bank’s business, however the Central Bank has previously instructed MIB to build up its capital. According to Fitch, the bank’s capital levels are only just above the regulatory minimum. Despite the ongoing upheaval in the banking sector, however, surveys suggest that public trust in the banking sector remains relatively high. According to the Central Bank’s 2018-20 Strategy for Increasing Access to Finance, only 8.3% of the population do not trust banks.

The Ministry of Finance has raised fresh concerns over the plans for a Project Finance Factory, which will be overseen by VEB. Under the scheme, VEB and other banks will provide long-term financing to projects at a rate of inflation (assumed to be 4%) plus the return on sovereign bonds and a premium not exceeding 3.5%. The finance ministry is concerned that the only performance measure for the scheme is the level of financing for investment projects, while VEB will be obliged to purchase overdue loans. There is therefore the potential for the Project Finance Factory to build up a risky loan portfolio. These concerns seem legitimate. VEB’s lending record is disastrous – the government has had to bailout VEB after major losses on loans for the Sochi Olympics, special state projects and investments in Ukraine. In 2017 Vedomosti suggested that the government had considered winding VEB down – a move the ministry of finance would likely have welcomed.

In a further sign of a rebound in investment, the Association of European Business reported that imports of road-construction vehicles and machinery rose by 50% last year, while domestic production rose 28%. However, government measures to encourage import substitution are continuing to put pressure on foreign players. The government is aiming to increase the share of domestic production to 70% from 38% over the next twelve years, but foreign companies are complaining the localisation rules are discriminatory and unworkable given the size of the market.

Meanwhile Rostec, the sprawling state holding company which as noted last week is seeking to expand its control over the aviation sector, has announced it may pull out of Natsimbio, its joint pharmaceutical venture, if the company loses its status as the single medical supplier to the state.



Energy Outlook with Nick Trickett


Adherence with OPEC deal faces new challenge

Per energy minister Alexander Novak, it would take 5 months for Russia to pull out of the OPEC supply cuts as OPEC signals that Putin himself has provided assurances that Russia will continue cooperating. Russia reportedly cut 170,000 barrels per day (bpd) of production per the deal in January. Considerable skepticism about oil’s rally will strain compliance if prices show signs of plunging again.

But sustained adherence to cuts lines up against a stark new development: U.S. crude exports to China – Russia’s new premier market – reached 400,000 bpd in January. With pipeline capacity expanded, pipeline deliveries of Russia’s ESPO blend reached roughly 588,000 bpd in January, a 66% increase year-on-year. VTB finally issued a 5 billion Euro loan to CEFC, the Chinese purchaser of 14.16% of Rosneft’s shares. Increased oil deliveries to China have strained Russia’s pipeline network and refining complexes to the point that European traders are complaining of serious declines in the quality of Ural blends sold to the European market. If Russia does not lower its prices, European traders will do what they can to look elsewhere.

In a victory for Gazprom and Novatek, the Duma’s Energy Committee has decided that Rosneft’s Pechora LNG project will not be allowed to export gas. The project is linked to an gas reserve estimated at 165 billion cubic meters and Rosneft has expressed confidence that the gas “will find its own place” on the domestic market. Iran’s ambassador to Russia confirmed talks with Rosneft to enter the Azar field once more, though Rosneft interestingly denies them.

Gazprom is planning on reorganizing its export operation in Europe, touting record export figures to Europe (194.4 bcm in 2017), and is beginning to test out blockchain as a means of accounting for shipment ledgers through its oil arm Gazprom Neft. Gazprom Neft’s profits were up 26% year-on-year in 2017. The oil firm will take on greater salience this year since it constitutes Gazprom’s presence in Iraq.

Lukoil is reportedly in talks with Astana to improve terms for investment into Kazakhstan’s oil and gas fields as well as launching its Kandym project in Uzbekistan in April. Alekperov is looking for good news in Central Asia, where Rosneft has a much smaller footprint.



Word on the Street with Anna Nadibaidze



This week in Telegram gossip…

Apparently, Defense Minister Sergei Shoygu was hoping to receive the title of Marshal of the Russian Federation (the highest military rank in Russia) on February 23, the Day of the Defender of the Fatherland. That’s not happening due to recent failures in Syria, especially after claiming that ‘victory’ was declared.

On the interesting design of the electoral ballot, on which Putin’s biography is notably short: Central Election Commission chair Ella Pamfilova explained that the information is from the candidates themselves. Some wonder why include anything about Putin, in that case? Everyone knows him anyway!

Some note that Navalny’s video about PM Dmitri Medvedev was not blocked, and it took a while for business magnate Usmanov to take him to court. But with oligarch Oleg Deripaska, the response was immediate. Does this mean that Deputy PM Prikhodko is more powerful than Medvedev, and Deripaska is more influential than Usmanov?

Chairman of the State Duma Vyacheslav Volodin criticized Economic Development Minister Maxim Oreshkin and even threatened him with prosecution for not having complied with his own Ministry’s regulations. It’s the first time this has happened, and it clearly shows that Oreshkin is losing his privileged status, writes @russica2.

The ‘Cleanup-05’ (05 being Dagestan’s region code) anti-corruption campaign is a typical pre-election tactic used by the Administration to boost Putin’s popularity. However, the administration doesn’t have a clear strategy, so its hard to say what to expect in other regions (particularly Tatarstan and Chechnya).



Politics and Regions with Chris Jarmas



Ksenia takes on Ksyria

This week, presidential candidate Ksenia Sobchak called for a special investigation into the February 7 incident in which Russian citizens, working as mercenaries for the private military contractor Wagner, were among the victims of a U.S. airstrike near Deir Ezzor in Syria. On her Instagram page, Sobchak proposed creating a committee which would release the names of the dead and “identify those guilty of this national disgrace.” Sobchak also pointed out that over 200 Russians have died so far in Syria – hardly an overwhelming figure, but notable since Putin has declared Russia’s mission accomplished multiple times. So why might Sobchak be targeting Russia’s conduction of its campaign in Syria? Those who write off Sobchak’s campaign as entirely a Kremlin machination with no substance whatsoever might have trouble explaining this one. In fact, I think it’s a sign that while her 2018 candidacy reeks of a Kremlin-backed PR stunt, Sobchak’s movements over the next six years are worth watching.

Contrary to what many westerners might think – given Putin’s patriotic rhetoric and all – the war in Syria really isn’t very popular at home. Asked by Levada pollsters in August 2017 if the war in Syria would become Russia’s “new Afghanistan,” over 30 percent of Russians considered it likely. More convincingly, though, 49 percent of Russians thought that their country should conclude its operations in Syria in August 2017, versus 30 percent who favored continuing the campaign. While nobody thinks that Sobchak will make serious waves in the upcoming presidential vote, she has already announced a subsequent 2021 Duma campaign, and her name has been floated in the context of the 2024 presidential race. Russian experts certainly aren’t discounting her ambitions; speaking at Tufts University last week, Andrei Kolesnikov predicted that Sobchak may form a liberally-oriented political party in the next few years. Sobchak’s 2018 run may indeed be a Kremlin ploy to offer the West a softer face to Putin’s authoritarian regime, but if Russia remains embroiled in a proxy war in Syria three or six years from now, Sobchak will find herself on the winning side of a very contentious political issue.



Weekly Wrap-Up with Aaron Schwartzbaum



A Syria of Unfortunate Events

It would be hard to argue there’s been a more pressing topic than Syria this week. Reports on mass casualties from an incident involving U.S. forces continue to trickle in. But a word of caution, and one I’d like to add as I’ve been reporting figures fairly uncritically: there’s much we still do not know about what happened, including the death toll. So what can we say, then? First, whatever the toll was, the number, at least as Russia’s official sources are reporting it, seems to be increasing. The story has also gained legs on Russian social media so at least a subset of Russians know something happened, and perhaps that their government has been awfully quiet. Second, and importantly, we’ve had a narrative flip this week. Not longer than month ago, the Syria operation was a tactical masterstroke that Putin was ready to wrap up and tie a bow on. Now it’s being called an utter debacle.

As is usually the case, I’d argue Russia’s Syria operation is somewhere in between. Putin’s initial move caught just about everybody off guard, a judo move that took advantage of Western dithering. Smart, no doubt. But that judo move rolled Russia into a geopolitical situation from which it has struggled to extricate itself. What ‘withdrawal’ are we on, three? The downing of an Su-25 is particularly telling: if Russia is flying dangerous close air support (CAS) sorties, either Moscow is still playing an involved, tactical roll (not very withdrawal-y, I’d say), or it’s filling in for a weak Assad…probably both. With the number of regional powers and interests involved in the conflict from the get-go, Russia’s exit was always going to be a headache at best.

Separately, I want to take a moment to acknowledge our colleagues and friends at EM Comms, who wrapped up for the time being a 500+ edition run of their Russia daily, the EM AM, this morning. It’s been a fantastic resource for us, and we know quite well how much work daily briefs take – we tip our proverbial hat to you. If you’re joining us from their readership, welcome aboard! We’re thrilled to have you, and if you have any questions/comments, do reach out (that goes for all of you). On the topic of news briefs, we’d be remiss not to pay forward EM’s referral. So if any you just so happen to be curious about India, allow us to recommend Indialogue, a new brief on the block.

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