Last Week In Review

Around the Sectors with Alex Nice

US sanctions implemented in early April contributed to a downward revision of Russia’s growth outlook for 2018. The EBRD trimmed its forecast by 0.2 percentage points to 1.5% on May 9, and the HSE Development Centre reduced its forecast from 1.9% to 1.7%. But from the office of Finance Minister Anton Siluanov, who looks set to become the only first deputy prime minister in the new government, the short-term outlook looks relatively encouraging. With the oil price far above the $43.8/barrel baseline set in the budget, the Ministry of Finance has revised up its revenue forecast and currently anticipates a surplus of 0.45% of GDP, against a deficit of 1.3% as projected in the budget law. This adjustment was put forward before the latest US sanctions, but since then oil prices have climbed higher on uncertainty over Iranian production, while the ruble remains weaker than it was at the end of March.

Despite Putin’s commitment to expand spending on health, education and infrastructure in his new May decrees, MinFin has no current plans to revise up spending this year, which remains frozen in nominal terms. The high oil price will also lead to a rise in the liquid assets of the National Welfare Fund (NFW, which after the liquidation of the Reserve Fund last year is Russia’s only sovereign wealth fund). In March, Siluanov reiterated that by law the minimum level of the NWF is 7% of GDP or around Rb7trn. As of the May 1, the value of the Fund was just under Rb4trn, or 4.1% of GDP, meaning there will be no immediate windfall for infrastructure or other spending. If and when the 7% target is reached, expect a new flood of appeals for state support and investment.

The economic outlook has also been boosted by the government’s apparent decision to soften its countersanctions in response to industry lobbying. The latest draft of the countersanctions bill removes reference to any specific sectors or products to be targeted, leaving it to the government to determine which goods or raw materials from “unfriendly foreign governments” should be hit. Given that the Russian response could simply have been imposed by presidential decree, the fact that the leadership elected to run the process through the legislature was an encouraging sign from the start that they were looking for industry input to avoid counterproductive measures. Of course, armed with arguments of security and/or import substitution narrow business interests may yet succeed in lobbying through measures to harm or eliminate “unfriendly” competition in specific areas.

The Energy Fix with Nick Trickett

Washington’s decision to leave the JCPOA has put some upward pressure on oil prices, but the risk of production collapse in Venezuela is weighing more heavily on investors and companies’ concerns. A lawsuit between ConocoPhillips and PDVSA on the Dutch island of Curacao will draw much interest in Moscow as Venezuela relies on infrastructure in Curacao to mix heavier oils with lighter ones for its export blends. ConocoPhillips wants $2 billion as a result of nationalizations back in 2007. PDVSA’s two biggest creditors are China and Rosneft.

Rosneft’s deal with CEFC China Energy for 14.16% of the company fell through. But Rosneft has pivoted its company strategy to entice another partner – Qatar. Rosneft cut over a trillion rubles worth of short-term debt from its credit portfolio, moving it from 40% to roughly 20% of the company’s 5.5 trillion-ruble debt-load. The move was paired with a pivot towards a $2 billion buyback of company shares for 2018-2020. In doing so, the company lined up support from the Qatar Investment Authority, which wanted higher returns on its existing stake in the company. Qatar is hoping to access Rosneft’s gas reserves in the future and has bought itself more clout.

Gazprom has hinted that it may exceed its 475 billion cubic meter (bcm) production expectations for 2018. The company hopes to press ahead with drilling works on the Sakhalin Island shelf with the aid of foreign equipment in 2019, but would likely have to find an intermediary buyer willing to take on sanctions risk themselves if it wants to import anything from the US or EU. Project documentation is reportedly being finalized for four gas fields in Iran. Onshore fields remain preferable in the face of import restrictions on equipment due to sanctions. Expect deepening interest in Iran if initial projects advance.

The Grapevine with Anna Nadibaidze

This week in Telegram channels:

On the national projects set by Putin’s May Decree, @mislinemisli notes that the plans seem necessary in theory, but there is a huge question mark over the prospect of realizing them. It does not seem like there will be major changes in the structure of the economy, but “do we really need these reforms, when we have so many statements and declarations?”

On former Deputy PM Arkady Dvorkovich reportedly being offered a job on the board of directors of Russian Railways (RZhD): this is a signal to all of pro-Medvedev elite that even if they will lose key jobs, they shouldn’t worry as they will not be left unemployed, says @obrazbuduschego.

Some channels continue to argue that Medvedev will not stay PM for too long. For instance, @seryikardinal says that Medvedev is merely used as spokesperson to announce unpopular measures such a raising the retirement age and the income tax.

Insiders write that Culture Minister Vladimir Medinsky will keep his post in the new government, adding that he “does not have any misunderstandings with his profile’s Deputy PM candidate”. According to @politjoystic, this basically means that Deputy PM candidates have the opportunity to lobby for particular Minister appointments in the new Cabinet.

Channel @paradox_friends argues that the new Cabinet will be different from the old one as it tries to minimize “administrative clinches”. If the goal of the new government is to prepare Putin’s successor, then the principle of divide and rule is not helpful because the successor will not be able (or allowed to) judge between the different political groups’ disputes. Putin’s current and future strategy is therefore to minimize manual control and launch the automatization of the government’s administrative mechanisms.

Defense Corner with Nick McCarty

We were treated to a few symbolically important parade debuts this Victory Day. As Michael Kofman notes, drones and military robots had their day in the sun, most notably with the Uran-9 remote controlled fighting vehicle and a few variants of the Korsar UAV. Both vehicles’ inclusion in the parade reflect Russian defense planning, as they try to mimic U.S. success in limiting personnel’s exposure to enemy fire. Russia has poured money into these unmanned programs and actively pursued warzone testing (though we should be skeptical of looking too much into the Ministry of Defense (MOD) reports of the Uran-9 in Syria). It’s notable then that the Uran-9 seen on Victory Day needed to be carried on a flatbed truck, rather than moving under its own power. Planners may have wanted to avoid an embarrassing prestige project breakdown like the T-14 Armata suffered in its debut at the 2015 parade rehearsal. It eventually had to be towed off the square.

Russia’s military police also made their first appearance since being first established in 2014. Weary of the Military Prosecutor’s inability to fight corruption and deadly hazing, reformers had been fighting for the unit’s creation since Serdyukov’s 2010 reforms. Interestingly, the Military Police have earned headlines not for their crackdowns on military criminality (of which there is plenty, and growing), but rather for their deployments to patrol “liberated” Syrian cities. It appears the Military Police (some of which include all-Chechen units) have managed to avoid casualties, encouraging government trust in their value as positive PR for Russia’s involvement in Syria.

Israeli Prime Minister Bibi Netanyahu appeared at this year’s Victory Day parade for the first time. The visit, paired with one of Israel’s largest cross border strikes of the war against Syrian and Iranian auxiliaries, appears to have paid off. Shortly afterwards, Russia announced it had thought better of  promises to sell the S-300 anti-air platform to Syria. Despite official denials, it seems clear that the visit and reversal are connected in some manner. It’s likely that divergent interests between Moscow and Tehran in Syria as well as fundamental concerns about Moscow’s Syrian counterparts have necessitated a pivot towards Israel.

Politics and Regions with Fabrice Deprez

For years, the Russian political world discussed Alexei Kudrin’s potential return to the Kremlin as a signal that Putin would embrace tough economic reforms. Well, Kudrin is back, sort of: he will be heading the Audit Chamber, an oversight body answering to the Parliament.

For those who hoped to see him take a top position and improve relations with the West, this is disappointing: the Audit Chamber has little policy impact, Kudrin’s appointment wasn’t the result of a coherent plan, and it’s unclear whether he will be able to use the Chamber to effectively oversee the implementation of Putin’s May Decrees. Kudrin may be able to strengthen the influence of the Audit Chamber, an institution that Andrey Kolesnikov describes as “highly personalized”. But Kudrin’s new position points to stability rather than reform for Putin’s new term.

Most changes in the new government are adjustments and not significant. It’s logical that Medvedev kept the position of Prime Minister since appointing anyone else would have jumpstarted talks about a potential successor. Paradoxically, keeping Medvedev could allow Putin to get some real work done before succession questions grind the Kremlin’s work to a halt. This might not be enough if, as Abbas Gallyamov puts it, changes turn out to be mostly “decorative”.

A bill aiming to make the teaching of “national languages” (anything other than Russian) purely voluntary is facing backlash in the regions. The controversy started last year, when Putin complained that some ethnically Russian kids were forced to learn regional languages at the expense of Russian. This hasn’t been well received in regions where language is closely tied to identity. Tatarstan has been at the forefront of the debate, but several civil groups from the Chuvash republic accused two of the bill’s authors this week of “betraying national [as opposed to “federal”] interests”. Introduced in April, debate on the bill has been slow and voting might not happen before the fall session. For regional authorities, this is likely another case of trying to fulfill the Kremlin’s perceived desires while trying not to alienate local elites.

Weekly Tea with Aaron Schwartzbaum

Greetings from beyond the brief! I’ve been positively thrilled with what Nick and the team have been doing with BMB Russia so far and hope you have been, too. This week, two topics caught my eye: first, the fate of former finance minister Alexei Kudrin, and a pension reform push that’s gaining momentum.

I’ve seen commentary to the effect that Kudrin’s appointment to head of the Audit Chamber is a signal that serious reform is not on the agenda for Putin 4.0. For what it’s worth, I think that commentary is correct – major, structural change is not going to come from a budget watchdog, even one imbued with Kudrin’s personal gravitas. However, that argument misses the point that serious structural reform was never going to be on the agenda. Or at least, I do not think that has been a real possibility since plans for major privatizations were shelved in 2016. What Kudrin’s move does signal is a ramping up of what I’ve termed ‘peripheral reform,’ which boils down to making the system work better without fundamentally altering it. You can see it in the wave of technocrats being appointed at the regional level, and Kudrin will most certainly work to improve budget implementation. Yes, such an effort is about saving money now, but it is also about governance after Putin, when the system will have to work on autopilot and efficiency will be all the more important. Former BMB Russia contributor Chris Jarmas often cited Nikolai Petrov, who talked about Russian governance as a question of a steering wheel (making policy) and tire traction (implementing it): since whoever follows Putin will likely have a poorer grip on the former, the latter is critical.

Maybe Kudrin is lucky, too. On the pension front, Dmitri Medvedev has been tasked with delivering what might be Russia’s least popular reform in the past decade. This is different than crisis-related belt tightening, to note: the changes amount to fewer benefits, permanently. On a personal level, Medvedev is not exactly known as a deft political operator – though to his credit, he did get to stick around. But more broadly, I’m less interested in government discussions than how the reform is pitched to the public. That goes beyond Medvedev: the Kremlin has not exactly covered itself in glory when facing unhappy Russians this year. What better than to have a fall guy in that situation. Hang in there, Dima, and have a good one!

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