Around the Sectors with Alex Nice
Boeing, Boeing, Gone
As the Duma starts to debate a bill on counter-measures against the US in response to the sanctions imposed on April 6th, titanium monopolist VSMPO-Avisma has started to lobby against any restrictions on exports to the US. The company warned legislators that it accounts for a third of the titanium used globally by the aviation industry and exports 70% of its production. VSMPO-Avisma has a long-standing joint-venture with Boeing. VSMPO-Avisma plans to launch a new factory this year to supply forged titanium to the US company, which accounts for 35% of all sales. VSMPO-Avisma’s ties with Boeing survived the 2014 sectoral sanctions despite the fact that it is majority owned by Rostec. Given the importance of the joint venture for VSMPO-Avisma, it seems unlikely that the government will impose export restrictions, however in the current atmosphere nothing can be excluded.
Interestingly, in contrast to previous rounds of sanctions, the Russian response is being channelled through a framework bill adopted by the legislature, rather than imposed directly by government resolution or presidential decree. This may have been done to provide a forum for industry lobbies to influence the bill, suggesting the government wants to avoid counterproductive measures that hurt the Russian economy. It may also reflect the fact that Russia has very few options to impose meaningful economic costs on the US. A framework sanctions bill allows Russian officials to talk tough while the actual measures adopted by the president may be relatively modest. Given the limited economic levers available, Western policymakers should worry more about what alternative, asymmetric responses may be formulated.
Speaking at the exquisitely timed Moscow Stock Exchange Forum last week, Elvira Nabiullina insisted that the new sanctions did not present a risk to financial stability. According to Vedomosti, however, the Central Bank has been making discrete enquiries with major banks to assess the impact of the depreciation of the rouble and major fall in the stock market. Sberbank, which saw its value fall 17% at the start of last week, said that loans to Rusal accounted for less than 2.5% of assets. In the event of further depreciation of the rouble, which would put pressure on companies holding foreign-currency denominated loans, the Central Bank could renew its policy of temporarily allowing banks to use the old exchange-rate when calculating their capital adequacy.
Meanwhile in the aviation sector, Russia’s ambitions to challenge the dominance of Boeing and Airbus in the civilian aviation sector continue to be held back by the inability to develop an adequate domestically produced engine. As a result, Nezavisimaya Gazeta reports that the CR929, a joint venture between China’s COMAC and Russia’s United Aviation Corporation, is likely to use engines produced by Rolls Royce. The CR929 is a 250-300 seater wide-body aircraft intended to launch in 2025, at a cost of $16-20bn.
Energy Outlook with Nick Trickett
The FAS and the Furious
The Federal Anti-Monopoly Service (FAS) has warned Rosneft over market behavior that artificially drove up gasoline prices. Basically, Rosneft opted to buy Ai-92 gasoline (the equivalent to ‘regular’ in the states) from Surgutneftegaz during a regular trading session on the St. Petersburg Exchange, despite a standing informal understanding that a vertically-integrated oil company make purchases from each other in an additional session where it’s just a matter of finding consumers for the supplies on the market. By making the purchase during the regular trading session, Rosneft, which controls about half of gasoline sales on the exchange, reduced available supply and therefore increased prices nearly 2%. That behavior, argues FAS, is anticompetitive and harmful to consumers. Rosneft faces a potential 90 billion ruble fine if it doesn’t address FAS’s concerns, unlikely as it may be that the company pays in full. Meanwhile, the oil giant has also recent just launched sales of Ai-95 (gasoline rated at Euro 6, or clean by EU standards).
Gazprom is willing to maintain 10-15 bcm of gas transit through Ukraine as long as Ukraine proves that any transit contract is competitive. Meanwhile, Nord Stream 2 has received all necessary permits to build in Finnish waters. On the dividends front, Gazprom paid out 20% of net profits via dividends to the state, but MinFin has planned the 2018 budget for dividend payments at 50% of net profits. Just as Rosneft is pushing its institutional limits with FAS and the St. Petersburg Exchange, Gazprom is trying to fight off paying its share this year.
Gazprom Neft is set to build Russia’s first LNG bunker barge by 2020. Particularly with the passage of legislation mandating the use of Russian-made vessels for Russia’s Arctic sea routes, expect problems meeting contract needs as LNG exports rise, financing is lacking, and ship exporters like South Korea lose out on contracts signed before the imposition of the regulation.
Lastly, Lukoil is now expecting to sign deals on oilfield investments in Iran in 3-4 months. Odds are pretty good that the Trump Administration rips up the JCPOA, which will compromise investments once again due to sanctions risks. Lukoil’s international strategy depends heavily on Iran.
Word on the Street with Anna Nadibaidze
This week in Telegram gossip…
Who has a commercial interest in pushing to block Telegram? Many have pointed the finger at businessman Alisher Usmanov, but @russica2 identifies Andrey Cheglakov, ex-VP of Rostelekom and head of New Cloud Technologies (NOT), which is developing domestic office programs and owns a corporate messenger service. Rumors say NOT has been actively using its connections with officials to lobby for a VPN ban amongst other measures against competitor Pavel Durov.
Rosneft chief Igor Sechin made it (finally) to court for the Ulyukayev case last week, and testified that the ex-minister could not influence the privatization of Bashneft. @mislinemisli thinks Sechin’s testimony made the corruption case look like even more of a huge farce, whereas @politjoystic surmises that Sechin decided to attend because otherwise, Ulyukayev’s sentence might have been changed.
Rumors that Alexei Miller might resign from Gazprom spread around channels and media over the last week, but the company refuted the statements, strangely enough, through a sports media outlet, notes @papagaz.
Gubernatorial and mayoral election campaigns have unofficially started, comments @treli_solovya. While Sergei Sobyanin seems to be safe, Andrei Vorobyov’s reputation is sinking due to the Moscow Oblast landfills scandal and nothing seems to help: neither his alliances with top officials, nor his PR strategies (despite millions of rubles spent on them).
@seryikardinal says that Vladimir Potanin has a chance to consolidate full control over Nornickel thanks to relations with Deputy PM Alexander Khloponin, recent sanctions against Deripaska, and Abramovich’s intention to sell a part of his shares. This could make Potanin among the most powerful businessmen in Russia.
Politics and Regions with Chris Jarmas
On to the next election
The 2018 presidential election-like event may be behind us – but Moscow is still thinking about turnout. On Wednesday, the Moscow city Duma adopted a bill to extend voting hours for mayoral, city Duma, and municipal elections until 10pm.Whereas Moscow produced 60 percent turnout in this year’s presidential vote, the city’s 2013 mayoral election drew in turnout of just 32 percent. With the Kremlin’s “70 at 70” (70% of the vote at 70% turnout) largely fulfilled at the national level, regional leaders must now concern themselves with their own electoral statistics.
Down the road in Volokolamsk, meanwhile, protests over a local landfill, which has been releasing toxic fumes for months, are continuing despite pressurefrom the regional authorities. It’s not just Volokolamsk, either – according to Vedomosti, last weekend protests were held against local landfills in 13 Moscow Oblast cities. While these protests have not turned overtly political at the national level – though calls for Moscow Oblast’s governor to step down have persisted – it’s worth asking why the authorities are paying such close attention to the situation. The fact is, ecological protests in Russia attract public engagement far more than political protests. According to one Levada Center poll, environmental movements are supported by nearly 60% of the population, and fully 17% are prepared to participate themselves in an ecological protest. These figures are far higher than corresponding support for political movements – and, as in 2012-2013, there may be a conscious effort on the part of the Volokolamsk protestors to keep their movement from becoming overtly politicized (a common refrain in 2012-2013, when activists seized on national political unrest to forward local initiatives, was “We are not the opposition!”)
Finally, in other news, former longtime governor of Kemerovo, Aman Tuleyev, who stepped down after last month’s tragic fire at the Winter Cherry shopping mall, will reportedly be leaving Russia for medical treatment abroad. Davay do svidaniya.
Weekly Wrap-Up with Aaron Schwartzbaum
So Roskomnadzor walks into a bar…
Not a great week for Roskomnadzor, eh? In understanding what happened with the agency’s overzealous crackdown on Telegram this week, one that led to disruptions to numerous other apps and services (potentially ATMs today…) Kommersant’s Deputy Editor in Chief Dmitry Butrin just about summed it up in a joke he posted. One day at school, little Vova (exactly like ‘little Johnny’ in the states) turns up to class totally beaten up: he’s got a split lip, black eye, and bloody nose. The teacher, shocked, asks him “Vova, what happened!?” Vova replies “I went canoeing with my dad and a wasp landed on my face.” The teacher, taken aback, questions “wow, it stung you that bad?” “No,” Vova says, “dad killed it with an oar.”
I’d note two things: first, this week has been a huge embarassment for the agency and Russia’s image as a cyber superpower, though Roskomnadzor is certainly no FSB or GRU. Might that lead to a demonstrative harder line on the next company/app opts not to play nice with security services (looking at you, Facebook)? That’s definitely a chance. Also, while you were looking away, the Duma finally issued guidance on the draconian Yarovaya Laws, which is far more of a big deal for the telecoms sector than the Telegram crackdown: the costs necessary to store data as mandated by the law will likely prove astronomical. We’ll be watching for whether the sector gets another reprieve with the law, which at least on paper, is due to be implemented in only three months.
One more story that didn’t make the brief this week: Sberbank announced it will pay out 36% of profits in dividends for 2017. The bank had a really good year, netting 748.7 billion rubles ($12.2 billion) in net profit, with depositors flocking to it during a wave of banking sector instability. Two broader implications: first, state companies continue to do well while private ones are struggling. Look no further than Rusal, which is rather conspicuously warning it may turn to mass layoffs to stay afloat (read: it wants and needs a bailout). Second, MinFin really just can’t get its way on state enterprise dividends. If they are unable to make German Gref pay 50%, how on earth are they going to get Igor Sechin to? We don’t see that happening. In any case, higher oil prices mean that the dividends are a less pressing concern than they were, say, last year: there’s more budget cash to go around.
All for now! Stay tuned for for some exciting staffing news and updates on plans for the future of the brief early next week.