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Hello! This week you can read the results of a fascinating investigation into how the Kremlin manipulates Telegram, a favorite source of news for the Russian elite. We also have analysis of the fallout from the incident in the Kerch Straits, a growing confrontation between the authorities and the rap community and the resolution to negotiations over how big business will fund Putin’s infrastructure plans. Finally, if you want some light entertainment, read about an eye-watering clerical error and the love of fancy dress at Russia’s second largest bank.

How the Kremlin mastered Telegram in less than a year

The Kremlin has turned communication platform Telegram into a useful political tool

What happened

In the last two years, the Telegram messaging service, founded by Russian entrepreneur Pavel Durov, has become the most important social media tool for political insiders. Now an investigation (Rus) by Proekt has revealed that the service, intended as an un-hackable communication tool, is being manipulated by the Kremlin’s PR teams.

  • As the number of free media outlets continues to decline and information about those in power increasingly hard to come by, a new source of information has become fashionable in Russia: Telegram channels. These channels look like chats, where just one person is writing, and are, more often than not, anonymous. The topics vary widely, from fashion to Excel shortcuts. But the most popular are those about politics and the economy. Officially, Telegram has been banned since April 2018, but this hasn’t prevented the service from becoming the third most popular messenger in Russia after WhatsApp and Viber, with an 18% market share. Its core audience is government officials, journalists and other influential people.
  • Almost all the most popular political Telegram channels attract readers by publishing anonymous rumors or, simply, made up stories about changes in the Kremlin or the government. At the end of 2016, the presidential administration realized that the distribution of information via a trusted channel to the right audience was an important asset. Several million dollars were dedicated to “conquering” Telegram and every Kremlin official responsible for propaganda and domestic politics now has a network of Telegram channels. During the 2018 presidential elections, they all worked to help get Vladimir Putin re-elected, but they are otherwise weapons for infighting between officials.
  • It’s not just the government that’s in on the Telegram game. Russia’s largest state company, Rosneft, reportedly spent $170,000 on buying the most well known Telegram channel aggregator, which highlights popular posts. The most-read channels offer paid posts, which you can buy for $500 to $3,000 per post. You can also simply pay not to have anything negative written about you. The most popular topic for a block on negative comments is banks, one of the most corrupt forms of business in Russia.

Why the world should care

The Russian government understands the propaganda game very well. Well enough to transform a new but influential platform for independent media into a Kremlin-controlled information channel in the space of just a year.

Naval conflict in the Kerch Straits unlikely to have serious consequences

What happened

A new escalation in Russia’s undeclared war with Ukraine has forced President Donald Trump to cancel his meeting with Putin at the G20 and European countries have called for new sanctions. But the reaction of the markets shows that no one believes there will be serious consequences. Both governments are using the border conflict for domestic political gain.

  • The first direct confrontation between Russia and Ukraine took place on November 25 in the Kerch Straits off the coast of Crimea, the Ukrainian region Russia annexed in 2014. Ukrainian naval vessels tried to pass through the straits, but Russian boats attacked them and impounded the vessels, injuring several Ukrainian sailors in the process. Now, Russia is accusing Ukraine of trying to illegally cross the border, and Ukraine accuses Russia of military aggression. In the aftermath, Ukrainian President Petro Poroshenko introduced martial law. His political opponents say this was an attempt to influence the outcome of the presidential elections in March; polls show Poroshenko is currently trailing Yulia Timoshenko, the candidate with whom Russia would prefer to work.
  • The EU, NATO and the U.S. criticized Russia, and Trump, who spent 4 days without commenting, eventually cancelled his planned meeting with Putin at the G20 summit in Buenos Aires. This must have been painful for the Kremlin: on Thursday morning, Putin’s press secretary, Dmitry Peskov, had spoken at length about the importance of the encounter.
  • On the first day after the incident, the Russian market suffered, and the ruble lost 1.5% against the U.S. dollar. But that was it. By Tuesday, the Russian Ministry of Finance had no trouble issuing €1 billion of Eurobonds at 3%. The interest rate shows that the geopolitical risks were already priced in and haven’t increased noticeably, according to debt market analyst Alexander Kudrin. After falling on Monday, the ruble returned to its earlier levels and on Thursday it strengthened even as Trump tweeted about cancelling his meeting with Putin.

Why the world should care

Over the last year, the number of international investors putting money in Russia has fallen, but those who remain generally ignore the headlines. The most important variable for Russian securities is new U.S. sanctions and the market does not believe the current escalation makes another round of sanctions any more likely.

A standoff between popular rappers and the authorities is deepening

What happened

Tension is building in a confrontation between young musicians and the authorities, which we wrote about last week. Famous rappers organized a concert in Moscow support of one of their number who was arrested, and officials have started publicly speculating about what ‘to do’ with the problematic musicians. Another five concerts were cancelled this week: since the beginning of the year 20 concerts have been banned (Rus).

A scene at the Red Square from a videoclip by one the banned performers, IC3Peak
  • Usually, concerts are not officially banned: the local authorities simply ask venues to refuse to let musicians perform. Officials argue that the lyrics of these musicians propagate the use of narcotics and other “information that is forbidden to distribute among children”. But the real reason for the restrictions might be political statements in the lyrics and the popularity of the performers. For example, in a music video made by group IC3Peak’s (which had several of its concerts banned this week) the singer pours kerosene on herself in front of the building where the Russian government sits and eats raw meat by Lenin’s tomb.
  • However, the government is already responding. Political veteran Sergey Naryshkin, director of the foreign intelligence service and head of a government commission on literature, said rappers should be given state grants. This sounds very much like a case several years ago when Moscow City Hall tried to promote their preferred graffiti artists with financial support, while painting over the works of artists they didn’t like.
  • Rapper Husky, who was arrested last week, was released from jail after a successful appeal. That same day, three of Russia’s leading rappers, Oxxxymiron, Basta and Noize MC, who under normal circumstances would never perform together, gave a joint concert in support of Husky. For many fans, attending the concert was a political statement – similar to how many gave money to save liberal publication The New Times when it was recently hit with a huge fine. Husky decided to give the money donated in his support to his defense team and to other musicians who have had their concerts cancelled.

Why the world should care

Civil society’s response to the banned rappers is typical form of political protest in a country where real protests (like those in neighboring Ukraine) are impossible. Understanding this, the government’s instinctive reaction has been to quash one half of the protest — and buy the loyalty of the other.

Big business agrees favorable terms to fund Putin’s infrastructure plans

What happened

Major Russian private companies are helping Putin fulfill his election campaign promises, but they have managed to arrange to do this without compromising on profits. The government announced that businesses are prepared to invest $150 billion in Putin’s infrastructure construction program. But in reality, this is largely an illusion. Some private companies on the list don’t have enough money and the government is promising to provide 70% of the financing.

  • After his victory in this year’s presidential election, Putin announced a program for government spending in his new term aimed at improving quality of life. In just six years, the government plans to commit $450 billion. With sanctions and almost no economic growth, it is difficult to come up with the necessary funds, particularly given the government’s post-election promise not to raise taxes.
  • The most controversial idea was put forward by an influential economic advisor to Putin, Andrei Belousov: this summer he proposed taking $8.5 billion from metals and chemical producers (money earned on the back of high commodity prices in 2017) to fund Putin’s program. This would be a violation of an important Russian tradition. Normally, business helps the government financially on a voluntary basis and when it can benefit from doing so. In exchange for help, companies receive other benefits or government funding. The first example of this was President Boris Yeltsin’s re-election in 1996 when oligarchs traded their support during the campaign for privileged access during a cut-price privatization.
  • Belousov’s suggestion raised eyebrows among billionaires and liberal economists in the government, but Putin himself was positive. After three months of discussions, a compromise emerged. Businessmen promised to invest $50 billion in projects of their choosing, while the government agreed to give another $100 billion in the form of tax breaks, subsidized credit and budgetary funds. Everyone left the final meeting with Putin content. Only one person voiced any concern: well known skeptic Alexei Kudrin. He said the initial idea was strange (forcing businesses to share their profits) and the solution was even stranger (handing businesses money from the state).

Why the world should care

The social contract between the government and major businesses remains as it always was: supporting the government must be profitable for billionaires, whether they are new oligarchs, Putin’s friends, or billionaires who made their fortunes in the 1990s.

Comedy and errors at VTB, the country’s second largest bank

What happened

VTB this week made the Russian market nervous — and provided a little entertainment. The bank accidentally reported that it had issued a $12 billion loan to one of the poorest countries in the world — the Central African Republic, currently in the midst of a civil war. But this embarrassment didn’t stop VTB’s head, Andrei Kostin, from becoming the talk of the town in Moscow this week when, at a party for investors, he appeared in an elaborate Obi-Wan Kenobi costume and made jokes about “Death Star” sanctions.

  • The information about a $12 billion loan to the CAR that appeared in VTB’s financial statement was a real scare for the bank’s minority shareholders, who have seen the value of their holdings fall by 50% over the past two years. The information was initially taken seriously as Russia has business interests in the African country. Russian mercenaries operate in the CAR, and companies controlled by their sponsor, Yevgeny Prigozhin, plan to develop gold and diamond mines in the country. But it was hard to believe the information because of the size of the loan: $12 billion is six times the African country’s GDP. One day later, this information disappeared from the financial statement. It turned out that the bank’s managers accidentally wrote CAR instead of Cyprus, where VTB has a subsidiary bank: the booking codes for the countries CF and CY are next to each other in an alphabetical list. Several other strange bit and pieces that surprised journalists were also removed from the financial statement: for example, a loan of $150 million to the Vatican.
  • But the scandal didn’t stop Kostin from hosting the party of the year for those attending VTB’s large annual investor conference. Kostin took the stage dressed in an Obi-Wan Kenobi costume, while his deputy, Yuri Solovyev, appeared as Luke Skywalker. Executives joked about the “Death Star” threatening the Republic with sanctions, and promised investors that The Force will be with them. Facny dress is already a tradition for VTB: at the same party last year, Kostin and Solovyev appeared dressed as Soviet leaders Josef Stalin and Nikita Khrushchev.

Why the world should care

Star Wars themed parties are unlikely to calm minority investors at VTB, which has lost half its market value over the last two years. And the amazing mistake in VTB’s financial statements is actually not all that surprising: Russian analysts aren’t shy about highlighting the low quality of VTB’s management, citing this as a reason not to buy the bank’s shares.

Peter Mironenko

Anastasia Stognei contributed to this newsletter. Translation by Tanja Maier, editing by Howard Amos.

This newsletter is supported by the Investigative Reporting Program at UC Berkeley