Weekly 28 September 2019

Business owners at risk as FSB ignores Putin’s promises

Hello! This week our main story charts how businesses could be stung for trusting the President’s pledges over a tax amnesty. We also look at growing investor nerves ahead of Russia’s biggest ever blockchain launch, how the Kremlin’s censors are turning against their own, more mega profits for a Putin crony, and why low cost flights may finally be taking off.

Business owners at risk as FSB ignores Putin’s promises

Thousands of Russian business owners who took advantage of a tax amnesty promised by President Vladimir Putin have been left feeling fooled this week after learning that his word may not be worth as much as they thought. It emerged Tuesday that the Federal Security Service (FSB) might not have been listening to Putin’s many pledges that Russians who voluntarily declare and repatriate assets held abroad will not be responsible for unpaid taxes, after it was reported that one of those declarations has been used as evidence in a major fraud case.

  • Putin has publicly announced and extended a tax amnesty for those returning capital from abroad on three separate occasions, with the idea of encouraging rich Russians to bring their money back into the country. In just four years, 19,000 people took up the opportunity and in 2018 alone, they declared more than €10 billion in overseas assets.
  • Absolving those who took part in the amnesty of legal responsibility was not just a verbal promise, Russian law was also changed to prohibit investigators from using the declarations filed by business owners as part of the amnesty deal against them.
  • The first wave of the new law in 2015-2016 was the least successful, as businesses had a hard time believing that the declarations would not be used against them. Repeated public promises that this would not be the case were made not only by Putin, but also finance minister Anton Siluanov and the head of the Federal Tax Service, Mikhail Mishustin. In November 2018, Mishustin said that the second wave of the amnesty had been far more popular than the first. “We are very pleased that people believed in this. I admit that people were concerned about the possibility of information leaks. This hasn’t happened,” he said (Rus) in an interview with the Vedomosti newspaper.
  • This week, Vedomosti discovered (Rus) that, in fact, many had made a mistake in trusting the government. Back in 2017, the FSB succeeded in securing a court ruling to withdraw the declaration of Valery Izrailit, the co-owner of a company which is building a port outside St. Petersburg. Izrailit is accused of embezzling 93 million rubles and then transferring it abroad. With the help of his amnesty declaration, the FSB presented evidence in court for the charges against Izrailit. A ruling has not yet been issued.
  • Izrailit’s case is under the special control of the FSB. His partner in the company building the port was Putin’s friend, billionaire Gennady Timchenko. Izrailit himself was considered to be close to the former head of the FSB (who is responsible for the personal security of Putin and other high-ranking officials), Evgeny Murov. Murov was asked to hand in his resignation in May 2016, and Izrailit was arrested half a year later.
  • After the incident with Izrailit was reported, it emerged that he is not the only person who has fallen victim to the amnesty. Well-known tax lawyer Alexey Yakovlev explained (Rus) that tax police often visit businessmen after they have submitted their amnesty declarations as part of the program. Officially the visits are unrelated to the declarations the owners have filed, but police often arrive with complete information about where to find potential violations.

Too much trust in the state often leads to serious problems for Russian business owners, not only in terms of the capital amnesty.

  • This summer, Putin liberalized currency controls, expanding the list of operations which are permitted to be carried out through foreign-held accounts. But this did not help businessman Alexey Ermakov, who took out a loan for $2.6 million from an Armenian bank, which then credited the funds to his account held at the same bank. Ermakov declared this operation with the Russian tax authorities, but was fined 75 percent of the transaction amount (almost $2 million) after the court ruled that the operation should have been executed through a Russian bank account.
  • In early 2018, business ombudsman Boris Titov, appointed by the President to defend the rights of business owners, persuaded those who had fled Russia in the face of criminal investigations to return home. On promises that all unfair cases would be wound-up, 34 applied to come back. One of them, Azamat Kildigushev, who fled Russia in 2016 over a fraud investigation, was particularly unlucky. Before his application, no one had been looking for him. But after, he was put on “Titov’s list”, his name handed to the Kremlin, and an international arrest warrant issued. He said publicly in 2018 he regretted (Rus) reaching out to Titov in the first place. A year later, this April, Kildigushev was arrested in Georgia and is now sitting in jail, awaiting extradition to Russia.

Why the world should care

Normally, the state doesn’t act so brazenly with foreign money in Russia (although Baring Vostok founder Michael Calvey might disagree). But any investor who listens to the promises made by Russian officials should remember: the Russian state is not a unified entity. The FSB and the courts might not care about what — or to who — Vladimir Putin or the finance minister have made promises.

Investors kept in the dark over Pavel Durov’s $1.7 billion blockchain experiment

The clock is ticking for Telegram founder Pavel Durov and his soon-to-launch blockchain platform, the Telegram Open Network (TON), with some investors concerned over poor communication and a lack of updates on the project. Durov raised $1.7 billion from investors in Russia and Silicon Valley for the initiative last spring in an Initial Coin Offering (ICO), but will have to return the money if the platform is not live by October 31. With little over one month until the deadline, investors say they know no more about the project than the rest of us, and those testing the platform report significant aspects still missing.

  • According to the pre-ICO conditions, Durov guaranteed investors that a basic version of the TON blockchain platform will be released by October 31, 2019, pledging to return any investment if he failed to launch by then. Two people who put their own money into the project told The Bell that investors are growing nervous. One complained the Telegram team is not providing any information on the status of TON, aside from rare official letters from the firm, while the second said the company isn’t even responding to requests for information from investors who have put tens of millions of dollars into the project.
  • Investors include major Silicon Valley venture funds such as Kleiner Perkins, Benchmark and Sequoia Capital, as well as Russian billionaires Roman Abramovich, who owns Chelsea football club and Mail.ru co-founder Yury Milner. TON plans to launch as a new blockchain platform with its own cryptocurrency “Gram”, and a payment system which Durov says can rival Visa and Mastercard.
  • Another Russian billionaire David Yakobashvili, who invested $10 million in TON, admitted in a conversation with The Bell that he gets most of his information about the project from the media. Nevertheless, he says he isn’t worried and doesn’t share others’ concerns over poor communication from the company. “If I need to, I can always write a letter, and they will respond,” he said. According to Yakobashvili, the other investors he knows share his opinion. “They trust Durov or know him personally — that is enough for many,” another source told The Bell.

The Bell spoke with developers and other people familiar with the project to understand more about TON. Here’s what we know, one month ahead of the launch.

  • Money. Before announcing the new project, Durov was spending $1 million each month on his messenger service Telegram, using funds he received from the sale of social network VKontakte in 2013 (according to various estimates, he received $300-480 million for his stake). In 2017, Telegram already had an annual budget of $70 million, and by the end of that year, Durov had only a few dozen million left, estimates one of his acquaintances. It is unclear how much of the $1.7 billion raised during the ICO has already been spent.
  • Team. The core team developing TON is composed of just five people, including Durov’s brother, Nikolai, as lead developer. Approximately 15 people in total are working on the project. The small team is one of the main reasons why Telegram itself isn’t working on the actual products and services for its new blockchain, leaving that to a separate company, TON Labs. This is good for everyone, according to sources who spoke with The Bell: Durov and his colleagues are not grabbing the entire project for themselves.
  • Cryptocurrency. Each new Gram which comes into circulation will be one-billionth more expensive than the previous. During the first ICO round, Gram was sold for $0.50, and in the second, for between $1.20-1.70. At launch, the price could be $2.50-3.00, sources estimated for The Bell. Earlier this year, Russian investment bank Aton suggested a launch price of between $2-8, with the potential to grow to $15-30 over the next decade.
  • Timing. In early September, Telegram released (Rus) a version of TON for public testing. Based on documents published by TON’s founders, specialists who spoke with The Bell have concluded that the blockchain does exist, and its development is close to finalised. But all user tools and applications — such as cryptocurrency transfers or its own internet system (Rus) — are unlikely to be ready this year.
  • Risks. As Russia’s communications agency Roskomnadzor is testing new equipment to increase control over the Russian internet, investors are worried about the possibility of a renewed attempt to block Telegram, according to a person familiar with TON’s backers. In addition, it is still unclear how financial regulators in various countries will view the initiative.

Why the world should care

If Durov is successful, it might become one of the most successful tech start-ups with Russian roots. If he fails, it could be an iconic flop, breaking investors’ trust in both Russian start-ups and cryptocurrencies.

Even the most loyal journalists are not safe from Kremlin censorsorship

The opposition media in Russia has already been almost entirely cleared out — and now, even journalists loyal to the Kremlin are facing problems with censorship. This week’s media scandal erupted after a columnist at Izvestia, a notoriously Kremlin-friendly paper, was fired following the publication of an article critical of defense minister Sergey Shoigu. The fired journalist himself is also pro-Kremlin and a supporter of Russian imperialism, but even this didn’t save him.

  • The root cause was an interview defense minister Shoigu gave to newspaper Moskovsky Komsomolets (MK) (Rus). MK is believed to be one of the newspapers which Putin reads personally, and the interview was given with the intention of landing straight on the President’s desk. In the piece, Shoigu tells the story of how he “saved the Russian army” after what he deems to be unsuccessful reforms carried out by his predecessor, Anatoly Serdyukov.
  • Russian military experts, irrespective of their ideological leanings, are of a different opinion — that it was Serdyukov who initiated reforms within the Russian army, and that Shoigu is simply enjoying the benefits of his predecessor’s work. It was Izvestia’s Ilya Kramnik, one of the best known Russian military commentators, who wrote the offending article questioning some of Shoigu’s claims. Izvestia is one of the main leftover newspapers from the Soviet period, and is now part of a media group owned by Vladimir Putin’s friend, Yury Kovalchuk. The day after it was published, the article was removed from the newspaper’s website, and two days later, Kramnik’s contract with the paper was not extended.
  • There is nothing surprising about censorship at media outlets controlled by the state — what is notable is that loyal journalists are becoming the victims. Like most people interested in military history and technology, Kramnik, a navy specialist, is both completely loyal to the government and supports ideas about Russia’s imperial greatness. Yet it would appear that even this isn’t enough to build a successful career in Russia’s state-owned media. In not shying away from his own conclusions, it was Kramnik’s professionalism that led to his dismissal.

Why the world should care

Russia’s media reality is more complex than it may appear from the outside, and is not limited to confrontations along the lines of “opposition” media vs. “state-controlled”. As we saw in the backlash against arrests connected with the Moscow protests, even public figures loyal to the Kremlin are becoming more willing to speak out publicly against the “official line”.

IN BRIEF

Putin’s judo partner cashes in

Putin’s close friend and judo partner, billionaire Arkady Rotenberg, is set to complete what is possibly one of the most profitable deals in the history of post-Soviet business. In 2008, Rotenberg (then not a widely-known figure), bought five construction companies for 8 billion rubles ($320 million) from state-owned gas giant Gazprom. He then merged the individual companies into a firm called Stroigazmontazh, which became Gazprom’s largest subcontractor. Now Rotenberg is selling the company back to Gazprom, but this time for 75 billion rubles ($1.1 billion). The sale, however, is mere kopecks compared to the size of the company and value it brought to Rotenberg. To calculate how much he has earned during the 11 years of Stroigazmontazh, consider the fact that between 2014 and 2018 alone, the firm was awarded government contracts worth 1.5 trillion rubles ($23 billion).

Skies clearing for foreign airlines

Russia’s aviation industry is creeping towards a historic liberalisation, which could see a jump in the number of foreign airlines jetting back-and-forth — even if just in one city. Last week, deputy prime minister Maxim Akimov gave his support for St. Petersburg’s Pulkovo airport to be granted new rights under the Open Skies regime which would allow foreign airlines to fly to St. Petersburg from any country, not just their place of registration. Following his comments, European lowcosters RyanAir, EasyJet and WizzAir have reportedly applied to operate a total of 33 new flight routes out of Pulkovo. Currently, no airport in Russia has such a level of freedom, and airlines can only fly directly to and from their home country (e.g. British Airways only between the UK and Russia, Lufthansa only between Germany and Russia). Such freedoms have existed in Europe for a long time, but the Russian market has always been more rigid. If permitted Pulkovo is expected to be given the green light on a five-year trial basis for five years.

Peter Mironenko