Last Week In Review

Around the Sectors with Alex Nice

Last week the Higher School of Economics Development Centre released its latest Consensus Forecast, which aggregates projections for Russia’s economy from 22 professional forecasting organisations in Russia and abroad. A summary of forecast for 2018-24 is set out in the table above. The consensus is that the Russian economy will expand at around 1.7% a year. Whether as a result of inertia or offsetting factors (higher oil prices due to geopolitical tensions), the forecasters in aggregate have not revised down short-to-medium term projections as a result of the April US sanctions, despite the fact that they affected new sectors.

Analysts continue to see Russia’s growth potential at around 1-2% a year in the short and medium term, in line with the conclusion reached by IIkka Korhonen of the Bank of Finland in 2015. Growth of 1.7% a year to 2024 would actually represent a pick-up in performance from the past decade – in 2008-17 the economy expanded by just 1.1% a year. Nevertheless, it is likely to well below Vladimir Putin’s target that the economy should grow faster than the global average rate in his fourth presidential term to overtake Germany as the fifth largest economy in purchasing parity terms (the IMF expects the world economy to grow by 3.8% annually in 2018-23). Even the Ministry of Economic Development, which shares responsibility for implementing some of the growth-related decrees, does not have particularly high expectations for a pick-up in the economy.

Does it matter if the Russian economy grows at just 1-2% a year in the medium term? In a paper published in the midst of  the crisis in 2016, the economist Philip Hanson argued that a similar economic outlook would not lead to a conflict between guns and butter – it would be compatible with further growth in military spending without additional cuts in consumption. The forecasters appear confident that macroeconomic stability will be retained – the consensus has inflation at close to target in every year to 2024. Moreover, with oil averaging around $60/barrel, the National Wealth Fund will quickly reach the Ministry of Finance’s 7% of GDP goal. At that point, there may be more funds available to throw at a range of infrastructure projects.

The Energy Fix with Nick Trickett

Baghdad has again asserted that Rosneft’s contracts with Iraqi Kurdistan violated its constitution, though it’s clarified that it “won’t strongly affect our relationship” with Russia. However, their willingness to note that Lukoil and Gazprom respect Baghdad’s legal sovereignty when signing contracts should be another reminder that Rosneft’s proclivity for charging in and asking forgiveness instead of permission does have limits. The news parallels Rosneft’s “tests” easing OPEC production cuts. The company estimates it can bring over 100,000 bpd of production online in a few days. In order to bring domestic benzine prices down, the company has also suggested reducing exports of refined products. Rosneft has to delicately balance its social role for points with the Kremlin while pressuring OPEC production cuts as much as possible.

Lukoil is looking to build a polypropylene plant with a capacity of 150,000 tons a year in Bulgaria, adding to its Balkan portfolio. It’s also hoping to buy into the Azeri gas fields Umid and Babek in the Caspian, a logical parallel move after announcing it would freeze its projects in Iran due to sanctions risks. The move is no surprise given the company’s conservative spending plans, a play meant to improve shareholder – and CEO Vagit Alekperov’s – returns.

Despite Lukoil’s caution, word broke that Pakistan and Russia were close to signing a pipeline deal that would transport gas from an unnamed Iranian field to Pakistan. But given that the source was Pakistan Today and Gazprom or Rosneft would have to finance this large project largely out of pocket – China distrusts Russia’s SOEs at this point – it’s unclear where the money comes from. The project would be a good leading indicator for Russian SOEs’ willingness to take risks in Iran, particularly as the proposed pipeline would further undermine Turkmenistan’s attempts to build TAPI.

The Grapevine with Anna Nadibaidze

This week in Telegram channels:

The new Presidential Administration structure has been agreed upon, reports @russica2. Insiders also say Vladislav Surkov could become Ambassador to Belarus, a new aide dealing with foreign affairs is due to replace Yuri Ushakov, while presidential envoys are being decided this week.

@politburo2 points out that the Audit Chamber already became a ‘quasi-silovik’ structure under Tatyana Golikova, as its verifications often ended up in judiciary cases. Judging from this week’s Kudrin-Putin meeting, the trend will intensify, transforming the Audit Chamber into a powerful lever in the hands of those with political will.

Russia’s national anti-corruption plan expired in 2017 and the country is currently left without a roadmap to fight corruption at the federal level. Why the delay with coming up with a new one? The country is already lagging behind global anti-corruption trends, and without a key strategy document it risks being even more isolated, comments @CorruptionTV.

According to @paradox_friends, if Sobyanin manages to make his campaign a success with a high turnout and a serious competitor (not ‘à la Grudinin’), Medvedev will no longer be the number 2 politician in Russia.

@seryikardinal predicts changes in governors in the Northwestern Federal District (previously other channels pointed out particularly Murmansk Oblast and St. Petersburg Oblast as regions to watch) and serious updates within Gazprom in the coming months.

Defense Corner with Nick McCarty

On Monday, 4 June, The Bell’s Anastasia Yakoreva released an exclusive story detailing Russia’s (and Putin ally Dmitry Prigozhin’s) growing economic interests in Africa. Other nations like China and the US have long viewed Africa as a potentially lucrative investment, but Russia’s economic ties invariably come with a few fresh twists. The Bell’s report indicates Russia has offered Sudan’s President Omar Bashir, who the International Criminal Court has accused of genocide, the engineering experts and geologists needed to exploit the country’s vast gold deposits. These scientists would be supplied by a new Prigozhin company, M Invest, and would operate alongside other Russian companies already operating in the country.

Prigozhin’s technical experts won’t be alone. As the BBC reported in December, over 100 Wagner mercenaries have been hired to help train and equip the Sudanese Army, and more may be on their way to protect the growing Russian investment (a strategy Wagner has become well acquainted with in the Syrian Civil War). Of course, the presence of Wagner mercenaries should not be overblown. After all, it makes little sense for Russia to draw any unnecessary ire so far from home, especially while the Syrian conflict draws on.

Indeed, while Russia grows its ties in the Sub-Sahara (Wagner mercenaries have also been spotted in the Central African Republic), Russia’s primary interest in Africa still lies to the north in the traditionally friendly areas of North Africa. As the Russian economy holds steady and oil and natural gases prices creep steadily higher, it seems likely that will only continue to grow. In 2014 Russia inked a $1 billion tank deal with Algeria, while Russian tourism in North Africa has grown steadily over recent years and looks to expand following the decision to lift the travel ban to Egypt in April.

Politics and Regions with Fabrice Deprez

This week and until the end of June, most Russian political parties will be holding primaries to choose their candidates for the September mayoral, gubernatorial and regional (local councils and parliaments) elections. In Moscow, the primaries held by the Yabloko liberal party mostly served to highlight the continuing inability of the Russian opposition to organize themselves effectively, as the winner of the primary immediately announced he would not run in the mayoral election.

The problem is different for United Russia, which concluded its primaries on June 3. Per official data, 2.8 million voters chose between 5867 candidates across 30 regions. The party hailed the primaries as a success, saying each position had been disputed by an average of 5 candidates, compare to 3.5 last year (numbers which haven’t been independently verified).

Ostensibly, primaries are portray as a way to stimulate internal competition and reduce nepotism. But this approach is dampened by the party’s fear of losing control and the fact that, as soon as an election actually matters (such as gubernatorial elections), candidates are hand-picked by the Kremlin or by regional elites, turning the primary into something of a role-playing game for party officials.

Local cases do show that primaries can be used for other, more ad-hoc purposes, such as co-opting discontent. In the Kemerovo region, one of the winners in the United Russia primaries for the elections of the local council was Igor Vostrikov, a local businessman who lost his wife, sister and three children in the mall fire that killed 60 people on 25 March. After the fire, Vostrikov became involved in local protests against the administration, gaining national fame when the deputy-governor accused him of performing a “PR stunt”. For a short time seen as a potential threat to local stability, Vostrikov has been swiftly integrated into United Russia’s political machine, where he is unlikely to exert much influence.

Injustice League with Allen Maggard

The term “Russian justice” carries with it a certain air of irony. The Russian criminal justice system’s tendency of railroading defendants in order to satisfy the whims of elites and state interests constantly undermines the rule of law. Recently, procedural “reforms” are being used to improve the Russian legal system, but do not question the court’s role itself.

Consider case number А40-101102/2017, wherein the plaintiff, OOO Profit Trade, filed a legal action in the Moscow Arbitration Court (ASgM) on 5 June 2017 seeking to reclaim US$21.5m in unpaid debts from OOO Direktivno Capital. OOO Profit Trade originally acquired this debt claim from OAO Bank Rossiyskiy Credit, which had previously extended a credit line to OOO Direktivno Capital in November 2013. Responding to OOO Profit Trade’s suit, OOO Direktivno Capital – which did not appear in court – filed a petition requesting that ACgM adjourn the case, arguing that it had fulfilled its obligations toward OAO Bank Rossiyskiy Credit three years prior. OOO Direktivno Capital further contended that OOO Profit Trade falsified evidence in support of its claims and asked for additional time to collect counterevidence.

ASgM declined to satisfy OOO Direktivno Capital’s petition. So too did the Ninth Appellate Arbitration Court (9-AAS), which reasoned that the defendant should have presented these materials in the court of first instance, noting that Article 9.2 of the Administrative Procedure Code (APC) holds litigants responsible for all consequences arising from their non-adherence to court procedures. OOO Direktivno Capital subsequently appealed this ruling to the Federal Arbitration Court for the District of Moscow (FASMO). On 11 May 2018 FASMO determined that ASgM and 9-AAS had themselves committed procedural violations that infringed upon OOO Direktivno Capital’s right to a fair hearing by denying its requests to present its own evidence, and thus ordered a retrial.

Russia’s Supreme Court has been pushing for “common sense” procedural reforms that protect entrepreneurial interests from “unreasonable prosecution”.  This seems like a positive development, but the Supreme Court has concentrated on clarifying procedural issues rather than steering the judiciary away from its accusatory tendencies. The Russian judiciary is structurally tilted towards prosecution, resulting in judges of lower courts reprimanding defendants for failure to follow procedural guidelines – guidelines which the judges themselves overlook because the current configuration of power rewards them simply for passing judgement, not for adjudicating arguments.

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