Last Week In Review

Around the Sectors with Alex Nice

As reported in the Financial Times last week, the price of the major bank bailouts in 2017 continues to rise. Mikhail Zadornov, the chief executive of Otkrytiye, told the newspaper that the bailout may exceed the US$27bn (1.7% of 2017 GDP) currently allocated. As Chris Miller discusses in a recent article for the FPRI, these bailouts in part reflect some of the indirect costs of western sanctions. Following the imposition of sanctions in 2014, several private banks grew rapidly and borrowed heavily from the Central Bank, using these funds in part to support sanctioned companies.

The government is continuing to channel funds through the banking system to support sanctioned individuals and companies, however it has now effectively converted Promsvyazbank, which was bailed out in December last year, into a special purpose vehicle to evade sanctions and support the defence sector. Reuters reported on 19 March that Viktor Vekselberg’s Renova Group, which was sanctioned by the US on 6 April, has paid off a loan of over 1bn Swiss Francs (US$1bn), having received a credit line from Promsvyazbank in early May. All of this means that foreign investment and lending in the economy is increasingly being replaced by Russian money, backstopped in some way or other by the state.

Meanwhile, Alexey Mordashov, whose company Power Machines was placed under sanctions by the US in January, is continuing to lobby for state support. Among other things, he is pushing the government to oblige electricity producers participating in the government’s modernisation programme to source gas turbines from Power Machines. The sums involved are large – the government is currently examining its modernisation programme for the electricity generation sector, which is expected to cost 3.5trn rubles (US$56bn) to 2035, including 1.35trn rubles ($22bn) for thermal power plants.

Finally, the Duma has put on hold a bill which would punish companies for implementing foreign sanctions. Following the gutting of the counter-sanctions bill discussed last week, this is further evidence that business is currently enjoying some success in pushing back against poorly conceived responses to Western sanctions. The problems with the bill are manifold – how do you determine whether a company is refusing business because of sanctions. As Vedomosti points out, even the Ministry of Finance could potentially fall under the terms of the bill, as it has promised in its Eurobond prospectus not to use funds raised to support sanctioned companies.

The Energy Fix with Nick Trickett

The biggest story in Russian energy over the last week was Beijing’s rebuke of an offshore natural gas project that Rosneft began drilling in Vietnam’s offshore. Here’s my take on it for The Diplomat, in case you didn’t catch it from yesterday’s brief, but the basic issue is how the Kremlin reacted. Press secretary Dmitry Peskov was adamant that Rosneft had not consulted with the Kremlin. The presidential administration can’t back Rosneft openly because doing so would mark a change in policy towards the South China Sea, tacitly endorsing Vietnam’s claims as Rosneft is doing. The dustup is likely to come up when Putin visits Beijing next month and expect more damage control.

Novatek has just created an Arctic shipping company, hoping to capture 55 million tons of LNG cargo market share by 2030. CEO Leonid Mikhelson has stated that the “LNG glut” is greatly exaggerated, pointing to figures that China’s imports were up 56% in Q1 and recent developments in South Korea looking to move away from nuclear towards natural gas. Dmitry Kobylkin, ostensibly a company man for Novatek and governor of the Yamalo-Nents region, has just become the head ministry of the country’s environmental protection agency. But he has good relations with all the major players, don’t expect Novatek to benefit.

The Power of Siberia is reportedly 83% complete, huge news as Gazprom needs to establish a link to the Chinese market it can then expand before Novatek can reliably deliver LNG outside the current 5-month window possible due to weather and ice conditions. The European Commission is leaning on Ukraine to offer Gazprom discounted transit fees, a means of addressing the company’s primary claim that transit via Nord Stream 2 will be cheaper. An asset swap deal between Gazprom and Austria’s OMW is in the works, raising concerns in Norway as it would give Gazprom access to reserves on Norway’s continental shelf. Brussels will be watching closely too.

The Grapevine with Anna Nadibaidze

This week in Telegram channels:

Summary of the new Cabinet by @kozlovdaily:
A few surprises: Dmitry Patrushev as Agriculture Minister, former bodyguard Yevgeny Zinichev as Emergencies Minister, Dmitry Kobylkin as Environment Minister.
What was expected: Medvedev is slowly losing control over the Cabinet, as the siloviki and political groups and clans are getting more influential.

Conclusion: It will be interesting to see how long this configuration of the Cabinet will last.

Meanwhile, @kremlin_mother_expert reveals that new Agriculture Minister Dmitry Patrushev’s (and also son of ex-FSB director Nikolai Patrushev) seems to have plagiarized much of his PhD thesis.

@kremlebezBashennik explains that Sergei Chemezov’s influence is expected to increase, as Sergei Kulikov, a Rostech director who has been Chemezov’s aide for more than 10 years, is being considered for the role of First Deputy Chairman of the Military-Industrial Commission’s Board. This nomination marks the beginning of a new configuration for the defense industry bloc (which will be headed by new Deputy PM Yury Borisov, also considered to be Chemezov’s man).

Many channels point out the strengthening of Moscow Mayor Sergei Sobyanin’s position within the new Cabinet, especially with the appointment of Construction Minister Vladimir Yakushev, who succeeded Sobyanin as Tyumen Oblast Governor. @horoshy notes that this was perhaps the first instance of Sobyanin engaging in significant lobbying.

New Head of the Audit Chamber Alexey Kudrin mentioned his participation in developing the new weapons that Putin presented in his speech to the Federal Assembly. @obrazbuduschego notes that heading the Audit Chamber does not mean acting as the “main liberal populist” and that Kudrin is shooting himself in the foot by making such statements.

On former Deputy PM Igor Shuvalov reportedly becoming new head of VEB Bank: @mislinemisli suggests that previous head Sergei Gorkov would not have been able to manage finances, especially with the amounts required for Putin’s new May decrees, and his links with Trump’s son-in-law were not helpful either. But despite Shuvalov being sent there to “give more weight” to the bank, it will remain a “financial black hole which won’t survive 6 months without the government’s help”.

Defense Corner with Nick McCarty

On Monday, 21 May, Vladimir Putin met with Indian Prime Minister Narendra Modi in Sochi, where both confirmed their countries longstanding ties in what Modi called a “privileged strategic partnership”. Among these ties is extensive cooperation between the two countries’ military establishments, links Putin was quick to emphasize in his welcoming remarks.

Despite these warm words, Modi’s trip comes as New Delhi continues to reconsider its longstanding defense partnership with Russia. India is one of Russia’s largest arms importers and 12 per cent of the global arms market. Due to recent sanctions, some Indian banks have suspended operations within Russia. Despite Secretary Mattis’ call for an Indian exemption to the Countering America’s Adversaries Through Sanctions Act (CAATSA), India remains wary of future enforcement action.

The sanctions come on the heels of India’s withdrawal last month from its joint fifth-generation fighter project and a host of other Indian complaints around cost overruns and production delays. They threaten a host of future big budget Russian defense exports to India, including a US$5.5bn sale of the S-400 missile defense system with Almaz-Antey, a sanctioned firm.

Russia also has slated additional naval construction deals worth an estimated $6.5 billion with India. The loss of  traditional export partner would have significantly affect Russia’s defense industry, which employs around 2.5 million people and remains dependent on foreign exports for nearly 30 per cent of production.

Though New Delhi may be reconsidering some of its cooperation, it is doubtful India can draw back cooperation with Russia much in the short term. Much of its conventional forces are still dependent on Soviet and Russia platforms, and any move away from that might threaten readiness levels. This dependence will force India to do what it can to lobby for CAATSA waivers and exceptions (which may not be forthcoming) where it can and skirt them where it cannot.

Regions and Politics with Fabrice Deprez

The Center for Social and Labor Rights counted 52 labor protests across Russia in the first three months of 2018, the lowest number since the 2008-2014 period (which saw an average of 46 protests in the first quarter).

It’s a very sharp fall from the 87 protests counted last year in the same time period, especially since that number had been decreasing quite slowly until now (101 protests in Q1 2015 and 91 in Q1 2016). But it’s too early to say how significant this is: such a sudden decrease could be explained by the presidential campaign, with regional authorities propping up local companies to increase turnout. Meanwhile, wage arrears, traditionally the main cause of work protests, have been steadily rising since the beginning of the year.

Another big political and regional story is the resignation of Ekaterinburg mayor Evgeniy Roizman, in reaction to an earlier decision to cancel mayoral elections in the city. Roizman, mostly known in the West as the only opposition-minded head of a major Russian city, told local outlet Znak that he did not yet have any plans for the future but had received “lots of offers”.

Roizman’s authority in the city was very limited, with Kremlin-appointed regional governor Evgeny Kuyvashev holding most power. But his five-year term as mayor gives him experience very few other opposition figures can boast, as well as good name recognition. It would therefore not be surprising to see him try and take a bigger role in the Russian opposition movement: most recently, Roizman supported Navalny’s call to boycott the presidential election, and his resignation gave new strength to rumors about a possible Navalny/Roizman alliance. It’s not clear whether Navalny will be ready to share the spotlight however, and the liberal opposition’s track record when it comes to cooperation between strong-minded figures is notoriously poor.

Tracking Transitions with Alex Nice

Thirteen ministers from Dmitry Medvedev’s last government were not reappointed when he presented his new cabinet to Vladimir Putin in mid-May. This included big hitters such as Arkady Dvorkovich, who was appointed co-president of the Skolkovo Foundation, and Igor Shuvalov, who, according to sources at RBC, will be announced on Monday as the new head of VEB, the Russian development bank and corruption sinkhole.

The most common career move for those leaving government (nearly one-fifth of all cases) is to become a presidential or prime ministerial advisor. The position of presidential and prime ministerial advisor is also usefully ambiguous. Conferring little formal power, it can be used to ease people out of top-level politics. In other cases, it is a means to keep them on the team, as with Alexey Kudrin, who after being dismissed as Finance Minister in September 2011 was appointed to the Presidential Economic Council.

Only a handful of individuals have retained significant formal influence after leaving government. These include Elvira Nabiullina, who moved from the Ministry of Economic Development to the Central Bank via a brief stint as presidential advisor; Yury Chaika, who moved from the Justice Ministry to become General Prosecutor; and Mikhail Fradkov, who headed up the SVR (external intelligence service) after resigning as prime minister in 2007.

Mikhail Kasyanov, who claims to have declined an offer from Putin to head the Security Council after being dismissed as PM in 2004, is the only high-level official to have moved into the opposition after having served under Putin. Overall, those who move out from the top-tier of public office usually land softly, and few high-level officials drop out of the system entirely. Several ministers have been the subject of corruption investigations, such as former Defence Minister Anatoly Serdyukov. These tend to be dropped after the minister steps down. This makes the trial and conviction of former economy minister Aleksei Ulyukayev in 2017 a shocking outlier.

Weekly Tea with Aaron Schwartzbaum

Let’s talk about Aleksandr Fak, a Sberbank CIB analyst fired along with his boss this week for a report critical of Gazprom. The surprise in this whole plotline is not that Gazprom (and other SOEs) engage in value-destroying projects to benefit selected businesses, usually led by those close to Putin. Nor is it that Fak got fired for taking Gazprom’s name in vain, especially after his prior treatment of Rosneft last year (we salute his analytical cojones, of course). What the story really points to is the closing of Russia’s information space in a way that goes far beyond Telegram.

Namely, and concerningly, it is becoming increasingly difficult to know what is happening in Russia’s economy. An ongoing counter-sanctions drive will allow companies and banks tied to the defense sector to hide information about their ownership, and meanwhile, the picture of industrial output is clouded because much of defense sector activity is classified. On top of that, state statistics agency Rosstat was moved under the wing of the Ministry of Economic Development roughly a year ago, presenting a fairly obvious conflict of interest: MinEcon is charged with boosting growth. Growth adjustments last year and shenanigans concerning real income growth early this year haven’t done much to bolster the agency’s credibility, either. The list of similar stories goes on, and now, SOEs (not just their managers!) are evidently sacrosanct.

What all the above means is that margin of error around Russia’s trajectory (pick a number from one to 10 indicating how the country is doing) is wider. That means it is both harder to know exactly where things stand and may be headed. That does not mean things are necessarily worse or better than they seem, the issue is that we cannot know. Beyond that, and relating to the rent distribution central to Gazprom’s business model, a quasi-related thought: part of the reason the push for a digital economy is so fascinating is because it creates, essentially out of thin air, a new source of revenues. We’ll see who gets the contracts…

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