Last Week in Review

Around the Sectors with Alex Nice


Commercial borrowing resumes growth

As noted previously in the brief, Rusal has announced that it will seek shareholders’ approval to initiate a “Russian roulette” bidding battle for Vladimir Potanin’s stake in Norilsk Nickel. Rusal plans to give more detail to shareholders on the procedure in mid-March, however there are several reasons to doubt whether the forced auction will go ahead. Last Friday, Vedomosti quoted sources close to one of the Norilsk shareholders as saying that rules of the shootout are too vaguely formulated, and the results of the auction could be challenged in London’s High Court. It is also unclear whether Rusal, which is already saddled with heavy debts, would be in a position to raise the funds to buy out Potanin’s share. The winners of the bidding war would be forced to make a buy-out offer to minority shareholders, further increasing the cost of the deal. Analysts told Kommersant that after factoring an offer to minority shareholders, the cost of the deal could reach $20bn, which could only be financed by state banks.

According to the Bank of Russia (CBR), commercial borrowing has started growing in year-on-year terms for the first time since mid-2016. This comes off the back of a significant rise in commercial bond issuance in the fourth quarter of last year and an encouraging pick-up in manufacturing sector growth. In principle, there is significant potential for credit-driven commercial investment. According to BIS data, as of mid-2017 lending to the non-financial private sector was around 80% of GDP, compared with an average of 190% for developing economies. While lending conditions are easing, helped by low inflation and surplus liquidity in the banking sector, demand for loans continues to be back by held high levels of business uncertainty.

The other major sectoral development over the past week was VTB’s acquisition of a 29.1% stake in major retailer Magnit. Magnit performed comparatively poorly in 2017, with revenue growing just 6.4%, compared with 25% for X5, its nearest competitor. The rationale for such a large non-core acquisition by a state-owned bank remains unclear – previous private equity-style deals involving VTB buying stakes in Lenta and Tele2 did not lead to transformative growth in these companies. Meanwhile, the investment further increases the role of the state, and risks undermining tipping the playing field in a sector which has historically been one of Russia’s most productive and competitive. As Leonid Bershidsky noted, the purchase of an iconic retail giant by a state-owned bank is “perhaps the clearest imaginable indictment of President Vladimir Putin’s economic policies.”



Energy Outlook with Nick Trickett



A tie-up with Tayyip

It looks like American investors are lining up to try and buy off the 49.99% of Citgo Rosneft received from its deals with Venezuela’s PDVSA, a $1.5 billion in the making. Citgo controls 5% of the U.S.’s refining capacity. FAS is set to reconsider Rosneft’s petition to Gazprom for access to the Trans-Sakhalin pipeline, a long-running saga over Rosneft’s Far East LNG ambitions. But Rosneft’s gas ambitions are struggling, as it just signed a contract to buy 5 bcm annually from Gazprom due to a lack of its own production. Rosneft’s deal with CEFC China for 14.16% of the company’s shares closed late summer has been pushed back to this June due to trouble with financing. China has Rosneft over a barrel since the company can’t indefinitely rely on debt issuances without increasing its profits considerably and minimizing losses from its geopolitically motivated moves.

Sergei Lavrov put diplomatic work in backing potential Gazprom LNG deliveries to Pakistan in a meeting with his counterpart, a means of exploiting Chinese investments into CPEC for influence. Turkey has reportedly not yet issued permits for the land-based portion of the Turk Stream pipeline, a reminder that Turkey has wielded its leverage to the maximum extent possible in negotiations. The gas giant has revised its production estimates for 2025 upwards to the 520-560 bcm range based on greater domestic demand and expected demand increases in Europe and China. Gazprom has also extended its supply contract with Belarus to the end of 2019 at $129 per 1,000 cubic meters (tcm) this year and $127 per tcm next year.

A subsidiary of Gazprombank bought a 49.5% share of Rosatom’s windpower subsidiary VetroOGK. Rosatom is leaning into wind power given uncertain market outlooks for its nuclear projects, unveiling a plan to build 600 MW of wind power capacity in the Krasnodar region, an investment of roughly $364 million. The company’s AES-2006 and VVER-1200 reactor models face tough conditions on international markets. But preliminary work on the final site for the company’s marquee project in Egypt – essential to Russia’s Middle East ambitions – is now underway. It’s also considering using a small nuclear reactor to power the Pavlovsky mine on Novaya Zemlya in the Arctic, an environmental disaster waiting to happen.



Word on the Street with Anna Nadibaidze



This week in Telegram gossip…

The closer we get to the election, the more scandals we’ll get. Each scandal targets an important official: the Argentinian narco scandal hits at Lavrov, the Prigozhin case involves Vaino, and Surovikin’s potential return to Syria was an attempt at Shoigu’s authority. These moves are mostly about influencing Putin’s opinion of these officials, argues @politjoystic, but it’s difficult to analyze how successful they are with regard to this goal.

Rumor has it that Putin’s decision to name General Sergei Surovikin as commander of Russia’s forces in Syria was opposed by Minister Shoigu and Chief of General Staff Gerasimov, who don’t approve of Surovikin. The Security Council therefore decided not to go ahead with the changes and allow the Ministry of Defense to present its own candidates.
The United Aircraft Corporation will merge with Rostec before the end of the year. Deputy PM Rogozin, currently the OAC’s Vice President, was hoping to make his son as head of the corporation, but now, it seems the whole Rogozin family to be sacked from OAC, and perhaps the government too.

Until March 18, no Russian banks will have their licenses removed by the Bank of Russia, says @fin_govoryn. There are other problems to deal with at the moment. But around April, banks should brace themselves for a new push by Nabiullina.

On S&P’s upgrade of Russia’s sovereign rating, according to @russianmacro, we shouldn’t rejoice just yet: the Russian economy is unlikely to grow in the years to come; S&P does not expect any (positive) changes after the election. The state will continue to be heavily involved in the economy, sanctions will do more harm; budget policy will be weak. All these factors make it unlikely the rating will be upgraded any time soon.

Governor of the Altai region, Alexander Karlin, built a corrupt regional network where no one can do business without a green light from himself and Sergei Loktev, the region’s First Deputy Governor. But now both Karlin and Loktev are in a dangerous situation, fearing prosecution from the siloviki and a similar fate to that of Komi Republic Governor Gayzer. In contrast to other governors, nobody in the Kremlin is backing them, so a change of power in Altai is due.



Politics and Regions with Chris Jarmas



Meanwhile on the campaign trail…

Ksenia Sobchak’s presidential run, most analysts agree, was at least in-part designed to inject life into a dull campaign – and this week, the former reality show star is playing her part well. On Tuesday, a presidential debate on Rossiya-1 turned ugly, as nationalist firebrand Vladimir Zhirinovsky lewdly, aggressively, and at times incoherently berated Sobchak, calling her “a hideous wench” and a “crazy fool.” Unable to get a word in, Sobchak splashed Zhirinovsky with water, in an act that reminded some observers of an incident when Zhirinovsky emptied a bottle of water onto the late Boris Nemtsov during a televised debate.

Sobchak’s campaign stopped short of admitting that the event was staged – but they did admit that the unexpected intensity of the debate was, well, expected. Per Russian campaign rules, networks are not allowed to cut or edit footage of official debates so, according to Sobchak’s campaign manager Timur Valeev, the candidates agreed to circumvent the moderator and debate each other directly: “It’s all we can do…if we all oppose the moderator, he will not have a chance.” The feistiness continued off the stage, as well. On her Instagram page, Sobchak called out Zhirinovsky for his role in Russian politics: “to make it difficult for other candidates to talk about the important things.” For a candidate who has been dubbed “Zhirinovsky for girls,” this analyst might humbly suggest that Sobchak keep from criticizing others for playing spoiler, as Alexei Navalny sits on the sidelines.



Weekly Round-Up with Aaron Schwartzbaum


‘Cutting it’, both ways

Earlier this week, I was pondering what to write about in today’s column when a question from a reader landed in our inbox. It addressed a ‘bigger picture’ section in the February 28th brief, wherein I wrote that Putin using his foreign policy as a domestic policy “won’t cut it anymore.” Asks the reader: “Why not? I feel like we’ve been hearing for 10 years now that the economy would ultimately be Putin’s undoing. Is there a qualitatively different reason why that should be true now?” That’s a great, not to mention highly relevant, question. As such, today I’d like to take a crack at answering it.

I suppose the first thing that needs to be clarified is what exactly “cutting it” means here. In my view, as it relates to Putin, it means making it to 2024 with sufficient political capital to ensure a smooth transition. On Russia’s current trajectory, even with the economy continuing to sputter, I do not see Putin’s undoing on the cards. Note the current trajectory part, though: there are a couple of plausible albeit unlikely scenarios that could get Putin in actual trouble, such as a banking crisis that reaches Sberbank. Again though, that seems highly unlikely.

Let’s look at some numbers. According to polling by VTsIOM in September, policy approval across a number of areas has plunged off post-Crimea highs. The wave of patriotism and popular support generated by Moscow’s grab has, in effect, crashed on the rocks of prolonged economic stagnation. More concerning for the Kremlin is that the last time policy approval was so low was in the restive fourth quarter of 2011. To wit, glancing at the graph again, Putin’s reelection did consolidate some support. But the economy was better then, and the populist-if-unfeasible May Orders certainly helped. Six years later, four of which have seen recession or stagnation, it’s starting to feel like a real zastoi (Russian for stagnation, but with a society-wide connotation – deep, no?).

So can Putin “cut it”? I, for one, am bearish: I do not see where where Putin’s promised growth comes from given the political impediments to reform – though then again, this is the Bear Market Brief. But as I suggested above, the issue here for Putin isn’t really his own political fortune, it’s that of his successor. Thank you for the question, reader! To the rest of you, do get in touch if you ever have thoughts or comments. We’d love to hear from you.

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