Around the Sectors with Alex Nice
At the St Petersburg Economic Forum last week officials continued to discuss where the money to fund Vladimir Putin’s May Decrees will come from. Anton Siluanov, the Finance Minister, announced plans to create an Infrastructure Fund by 2019, which could grow to the equivalent of 3% of GDP and will be financed by public borrowing.
The oil sector tax maneuver is expected to raise 1-1.6trn rubles (US$16-25.8bn). There has also been speculation that value-added tax (VAT) will rise by two percentage points to 20%, a regressive move hurting consumers that would undermine Putin’s efforts to better target social spending and cut poverty. At the Forum, Siluanov also floated the possibility of reallocating some of Moscow’s revenues to poorer regions – a reasonable suggestion that was quickly rejected by Moscow mayor Sergei Sobyanin and has little chance of being implemented
The sums involved in the May Decrees sound large in aggregate. In reality, the spending targets are relatively modest, particularly given the scale of Russia’s infrastructure needs and the low levels of spending on health and education. In early May Vladimir Putin said that an additional 8trn rubles ($129bn) in spending would need to be found. This equates to only around 1.5% of GDP a year. Following Siluanov’s announcement, his deputy clarified that the Infrastructure Fund would add only 100-200bn rubles (0.1-0.2% of 2017 GDP at $1.6-2.3bn) a year in borrowing compared with 2017-18. He also emphasized that it would not push up inflation because higher state borrowing would reduce opportunities for lending to the private sector.
This must be one of the first occasions that a government minister has presented the crowding out of private investment as official policy. If such crowding-out does occur, then the question arises how the government hopes to get anywhere near the 25-27% of GDP investment rate target by 2024 (from around 20% currently). This would require a transformational change in the business environment to draw in more foreign investment and greater use of retained earnings by companies.
The Energy Fix with Nick Trickett
The St Petersburg International Economic Forum and last week yielded a lot of news for Russia‘s state giants aside from talk of easing OPEC production cuts. Here’s a smattering:
- A new MoU with Iraqi Kurdistan on gas sector cooperation.
- A new MoU with Nigeria’s Oranto Petroleum Ltd. for future oil and gas projects.
- A 12-year supply contract with Ghana for 1.7 million tons annually of LNG.
- A $2.1 billion motor fuel supply deal with partners in Mongolia.
- A framework agreement with Fleet Energy and Fleetliner Energy S.A. in Egypt to study the supply of natural gas to Egypt.
- Rosneft’s Iraqi Bashneft subsidiary opened a new oil field.
- Rosneft has reportedly delayed completing its modernization plans for its refining plant from 2020 to 2027, blaming an unclear tax environment.
- Gazprom settled its anti-trust case with the EU, avoiding fines in exchange for accepting new conditions (profiled below).
- Abu Dhabi’s Mubadala Investment Company (state-owned) bought a 44% stake of a Gazprom Left subsidiary to launch long-term cooperation.
- The company is developing two oil fields in the Nenets region with Lukoil.
- It also signed a protocol with Turkey for Turk Stream, including setting a 10.25% discount on gas deliveries.
- Shell has signed a framework agreement with Gazprom to study the Baltic LNG project.
- Serbia agreed to bring Gazprom into long-term gas storage modernization plans.
Gazprom has avoided fines by agreeing to the EU’s rules, an important milestone for EU energy security, though not a boon for diversification of supply. More broadly, Gazprom appears to be joining Rosneft in cementing financial ties with Gulf oil and gas producers. The trend will only strengthen for Russia‘s state-owned giants given the lack of access to financing elsewhere and evident displeasure in Beijing at how Russia conducts its energy diplomacy.
Rosneft bared its teeth over the weekend. After getting into a silly spat with Sibur’s Gennady Timchenko over its petrochemical ambitions, the company may be tangled up with the Federal Anti-Monopoly Service (FAS). FAS issued a statement blaming Rosneft for increases in motor fuel prices due to its trading practices. But after FAS issued the statement on its website, it suddenly went down, forcing the company to take down the announcement for “technical reasons.” It’s clear Igor Sechin doesn’t want to appear any weaker than his competitors, especially after Timchenko and co. had Alex Fak fired, though we obviously can only speculate on FAS’s website troubles. The move may signal domestic strength, but won’t look good to foreign partners.
The Grapevine with Anna Nadibaidze (@AnnaRNad)
This week in Telegram channels:
@mislinemisli notes that MinFin rejecting Kudrin’s proposals for budget rules was expected. The goal behind Anton Siluanov’s promotion was for Medvedev to tie Kudrin’s hands, so the Head of the Audit Chamber’s ability to use his new role to push for his agenda is doubtful.
@russica2 reports that a topic of lively discussion in the hallways of the SPIEF was the block of Telegram, which – by the way – everyone at the forum was using. Meanwhile, head of Roskomnadzor Aleksandr Zharov was proudly bringing up made-up statistics, with participants naming his behavior ‘Zharov’s degradation’.
On former Yekaterinburg Mayor Evgeny Royzman’s resignation: He made the decision after long consultations with the Kremlin, especially after being guaranteed security and participation in a ‘liberal’ federal project to be launched ahead of next parliamentary elections, says @politjoystic.
According to @kremlebezBashennik, journalist and executive director of Rambler Alexei Goreslavsky could be appointed adviser to the President, perhaps replacing German Klimenko. While similar reports were spread last year, sources say it will happen in the near future.
On Monday, @posposttruth listed ‘problematic’ regional governors: Y. Borisov (Sakha Republic), G. Poltavchenko (St. Petersburg), A. Karlin (Altai), S. Orlova (Vladimir), S. Aksyonov (Crimea), M. Kovtun (Murmansk), V. Pechyony (Magadan), A. Levintal (Jewish Autonomous Oblast). Since then, Borisov, Karlin, and Pechyony resigned – who’s next?
Defense Corner with Nick McCarty (@nickmccart5)
Arkady Babchenko, who served in both the First and Second Chechen Wars as a conscript soldier and later as a volunteer, was shot and killed in Kyiv today. His work, exposing the harsh evil of the war and its toll on all participants, stands as a testament to the bravery of Russian journalists in a defense sector often hidden behind the protective screen of state secrecy and byzantine bureaucracy.
After Putin classified peacetime military casualties as state secrets in 2015, Babchenko and other Russian military journalists fought the decree, taking it to the Supreme Court before the suit’s ultimate dismissal. Babchenko had good reason to fight the decree. Babchenko’s book One Soldier’s War detailed the severe beatings and deaths that were all too common to the Russian army from 1990 to the mid-2000s. It was Babchenko’s revelations that helped limit conscription service from 24 months to 12 months in 2008.
Babchenko’s fight for transparency and humanity within the Russian military is far from finished. Conscription, despite some promises otherwise, is not going anywhere and indeed may have its best years ahead of it.
Politics and Regions with Fabrice Deprez (@fabrice_deprez)
A post-election gubernatorial rotation gained steam this week with the resignation of Yegor Borisov and Vladimir Pecheny, the governors of the Yakutia and Magadan regions. The heads of the Yamalo-Nenets and Tyumen regions were also appointed in the federal government earlier. Changes were expected, but their nature illustrates the continuation of two trends in regional politics: the rise of young technocrats and the importance of delivering electoral results to the centre.
Dmitry Artyukhov, the new head of the Yamalo-Nenets autonomous region, turned 30 in February, making him Russia’s youngest governor and a prototype of the quiet, efficient technocrat that the Kremlin seems to have been favouring lately. He is also a local (his father was the head of United Russia in the neighboring Tyumen region), likely a deliberate move from the Kremlin in order not to alienate local elites.
By contrast, the 63-year-old former governor of the Yakutia region was getting old. Maybe more importantly, in the 2018 presidential election, only 64% of the region’s voters cast their ballot for Vladimir Putin (his country-wide score was 76%). Though changes in regional leadership are rarely explained by a single factor, the ability to secure convincing victories for Vladimir Putin or the United Russia party still plays a major role.
Andrey Vorobyov is a good example of this: since the beginning of the year, the head of the Moscow region (which excludes Moscow itself) has been entangled in a series of protests, as locals took to the streets to denounce foul odors and toxic wastes coming from overflowing landfills. The protests – and the governor himself – made international news. Yet, according to RBC, Vorobyov has been approved by Putin himself to run for re-election in the September gubernatorial election. How so? Putin’s 74% score in the Moscow region, and the fact that his score was only 57% in 2012 (when Vorobyov wasn’t governor yet), might have helped.
Weekly Tea with Aaron Schwartzbaum (@aaron_schwa)
Let’s talk about Russia’s next top model – for economic growth, of course. As reported in yesterday’s brief, a modest reshuffle of the presidential administration seems to be in the works. While figures such as chief of staff Anton Vaino and domestic policy guru Sergei Kirienko are set to stay put, others such as Vladislav Surkov and Sergei Glazyev look set to see the door. Surkov is certainly an interesting figure. Once the Kremlin’s grey cardinal, and given his portfolio including Donbas, his departure may have important implications on the foreign policy side. But Glazyev is who I want to focus on today, because he played a major role in the next top model question in the run-up to the election.
Two camps have come to the forefront in recent years, as least in terms of what Putin was said to be considering for this term: statists and liberals. Neither of those titles are particularly good, to note: business ombudsman Boris Titov is more closely tied to the former but supports measures that would reduce state oversight. Meanwhile, the liberals’ liberalism is mostly confined to economics, rendering them not all that liberal. Glazyev is firmly in the statist camp, known for… suffice it to say unorthodox, highly expansionary proposals and butting heads with Central Bank governor Elvira Nabiullina. That stands in opposition to now-Audit Chamber head Alexei Kudrin and his Center for Strategic Research, favoring sorely-needed institutional changes.
Now that we have a clearer picture of the government, the question is which camp, if either, won. At first glance, it would look like the liberals at least did comparatively better. Glazyev may leave, Siluanov, a product of MinFin, is First Deputy Prime Minister, and Kudrin is now in government, albeit not at the center of things. Putin, meanwhile, has clearly bought into the need for management reform and more social spending. But looking at Russia’s economy, one would be hard-pressed to argue statism is in retreat: the most powerful statists just aren’t in government. Hi, Igor Sechin and Sergei Chemezov. Broadly, a ‘competition between camps’ misses the point: the ideological struggle is more about Putin balancing interests than anything else.