Weekly 9 November 2019

Kremlin piles pressure on Apple

Hello! This week our top story is about new legislation moving swiftly through the State Duma that could lead to Apple quitting Russia. We also look at how rich Russians are having their Cypriot citizenship revoked, what is driving the stock market’s record-breaking bull run, why independent TV network Dozhd is on its fourth chief editor in six years, and a draft law that could mean individuals are designated ‘foreign agents’.

New law to target Apple amid Kremlin internet campaign

Major new laws tightening state control over the internet keep on coming. This week, the State Duma passed at the first reading legislation that would require producers of electronic devices (from smartphones to Smart TV) to pre-install Russian apps. Informally, the target is Apple, which never pre-installs non-Apple apps on its iPhones. The company has already hinted that, if the law passes, it might quit the Russian market.

  • The bill requires producers to pre-install Russian apps on all smartphones, tablets, computers and Smart TV televisions sold in Russia. A list of such apps would be drawn up by the government (likely including search engines and web browsers). If the bill becomes law it will go into effect from July 2020.
  • Deputies from all four parties in the Russian parliament were involved in writing the bill, which usually indicates Kremlin approval. Two officials who took part in discussions over the bill told (Rus) The Bell that the Presidential Administration is lobbying for the law. In recent months, Kremlin officials have pushed ministries to support three repressive internet bills: this law; a law banning foreigners from owning more than 20 percent of major internet companies; and a law requiring the identification of all email users.
  • One of these officials told The Bell that — informally at least — the bill is being called the “law against Apple”. The U.S. company does not install any non-Apple apps on its iPhones anywhere in the world, including China. Both sources told The Bell that Apple representatives have warned them the company will not violate its rules for the sake of the Russian market. “We will show you the middle finger: your market is a really small part of our business and its loss would be insignificant,” one official explained what he believed Apple’s position to be.
  • Like the recent sovereign internet law, the “law against Apple” has met resistance from some Russian officials. The Ministry of Communications gave negative feedback on the bill, suggesting it would violate the rights of consumers. But their advice was ignored.
  • Why would the Kremlin want to force Apple to install Russian apps? The main reason is to increase traffic to Russian search engines, sources told The Bell (the authorities have an easier time controlling Russian-made search engines). There are also fears that foreign-made apps may be secretly spying on users.

Why the world should care

The tally of repressive internet laws this year is rising rapidly. This means it is not only harder to build a Russian IT-business, but investing in such businesses is increasingly risky.

The Russian stock market is breaking records

This year — so far — has been one of the most successful ever for the stock market. Over the first ten months of 2019, the Moscow Exchange rose 18 percent and October alone saw 9 percent growth. This week, the index broke 3,000 points for the first time.

Traders cite four main reasons for the bull run:

  • Increased profits and easing geopolitical tension. “It is difficult to call this ‘euphoria’: the process didn’t begin a month ago but back in 2015,” said Alfa Capital analyst Vladimir Bragin. Now, according to Bragin, a calmer geopolitical situation is accelerating growth and major Russian companies are posting higher profits.
  • Generous dividends. An analyst at Raiffeisen Bank, Andrey Polischuk, said growth was being driven by new dividend policies. In 2018, dividends were 1.5 times more than the year before, with state-owned gas monopoly Gazprom having the largest increase. Under pressure from the government, the gas giant this year agreed to pay shareholders 50 percent of net profit ($6.5 billion) — more than double the amount it paid out in 2018.
  • Betting on oil. Another driver of growth is fading fears of declining demand for oil. Investors were calmed by the news that President Donald Trump will likely come to a trade agreement with China and by Britain’s progress toward Brexit. Less demand for oil is one of the main worries for those buying Russian shares.
  • Falling interest rates. Since the beginning of the year, interest rates have fallen 1.25 percentage points to 6.5 percent — and the last rate cut was as high as 0.5%. Many investors expect the Central Bank to continue reducing rates and lower interest rates mean falling bond returns — making Russian shares more appealing.

Why the world should care

Foreign investors continue to see opportunities for growth in Russian stocks and shares despite tension with the West. Since 2014, the amount of foreign money in the Russian market has grown by 58 percent, with U.S. funds making major investments.

Rich Russians are being kicked out of Cyprus

Almost nothing remains of Cyprus’ former reputation as a haven for Russians seeking to get their money abroad. After imposing more stringent disclosure requirements, authorities on the Mediterranean island are now beginning to cancel passports issued to Russians who purchased citizenship via a widely-used ‘golden passport’ investment scheme.

  • In an unprecedented move, Cyprus this week stripped 26 people who had bought passports of their Cypriot citizenship. The names of those affected have not been disclosed, but it is known that they include nine Russians, eight Cambodians, five Chinese, two Kenyans, one Malaysian and one Iranian. Auditors still have to check another 2,000 passports, the government said Friday (this is almost all the passports issued under the ‘golden passport’ program since its 2014 launch).
  • The reason for the campaign is not EU sanctions or a fight against “dirty Russian money” but an October scandal in which it emerged that Cambodian Prime Minister Hun Sen and his relatives bought Cyprus citizenship using funds that had been illegally taken out of Cambodia.
  • Citizenship is given to those who invest €2.5 million ($2.8 million) in the Cypriot economy — normally this is done through the purchase of real estate. Russians are among the most frequent buyers of these so-called golden passports and there are six members of Forbes Russia rich list among (Rus) them including sanctioned billionaire Oleg Deripaska, and the ex-owner of chemicals company Uralkali, Dmitry Rybolovlev, who now lives in Europe.
  • Russians living in Cyprus have also been experiencing problems: in May 2018, representatives of the U.S. Department of Treasury visited the island and recommended all bank accounts held by Russian citizens be checked. Now, local banks are refusing to open accounts for Russian citizens and are demanding Russian clients disclose the historical source of their income. Cypriot banks are also refusing to work with offshore companies that have Russian beneficiaries. As a result, Russians are pulling out money: as much as $2.92 billion in the last two years.

Why the world should care

The number of Russians who want to move their money abroad is increasing, but there are fewer and fewer legal ways of doing this. Devising a new mechanism to spirit money into different jurisdictions would be a very lucrative business endeavor.

TV network Dozhd gets 4th chief editor in 6 years

Journalist Tikhon Dzyadko has been appointed to head TV network Dozhd (TV Rain), making him the 4th chief editor since 2015. The most influential independent network in Russia’s tightly controlled broadcast media space, Dozhd is struggling to turn a profit.

  • Dzyadko will take over the reins at Dozhd in January, replacing Aleksandra Perepelova. The 32-year-old presenter first worked at the network when it was founded in 2010, hosting Dzaydko 3 (with his two brothers) and A Hard Day’s Night, but quit in 2015. He is currently deputy chief editor of RTVi, a privately-owned network orientated at Russians living abroad.
  • Many hope that Dzyadko’s tenure will be longer than his predecessors: Perepelova lasted just over two years in the job after succeeding Roman Badanin, who was there for a little over a year. In February, Dozhd owner Natalia Sindeeva announced (Rus) that the network will be divided into multiple “producer centers”, and editorial policy set by a committee of producers. Dzyadko thinks this is not enough: he said (Rus) this week that it requires a “serious shake-up” and “needs to be re-booted”.
  • Russia’s media landscape is divided between state-controlled outlets and those, like Dozhd, that retain their editorial independence. This division was on display Wednesday at a Moscow conference organized by the Organisation for Security and Cooperation in Europe that was — unusually — attended by journalists from both sides (The Bell founder Elizaveta Osetinskaya was one of the speakers). Inevitably, there were a number of very heated exchanges during panel discussions.
  • Dozhd has struggled financially for most of its existence. When big cable television providers dropped the network in 2015 after it published a poll about the Soviet leadership in World War Two, it shifted its business model toward paid online subscribers. But it has only once in the last five years recorded a profit. In fact, Dozhd’s yearly losses have risen: in 2017, it lost 19.5 million rubles ($300,000) and last year it was 41 million rubles ($640,000) in the red.

Why the world should care

Independent media outlets in Russia are extremely vulnerable, caught between the twin pressures of censorship and the need to break even. The rapid turnover of chief editors at Dozhd underlines how hard it is to find a solution.

In brief

Foreign agents galore

The head of Russia’s parliamentary Commission on Foreign Interference in Russia’s Affairs, Andrei Klimov, promised Friday to pass a law by the end of 2019 allowing individuals to be declared ‘foreign agents’, a loaded Soviet-era term (a controversial law allowing the term to be applied to organizations was passed in 2012). Klimov’s law would mean a person could be declared a foreign agent if they are “distributing information on social media” and receiving foreign financing. Designated individuals would have to create a legal entity, register that entity with the Ministry of Justice, and add the tag ‘foreign agent’ to their posts — or risk a fine of 150,000 rubles ($2,000). Experience shows it’s not difficult for the authorities to impose the label even if an organization — or individual — is not actually receiving foreign funding.

Peter Mironenko