Weekly 21 December 2018

Lifting some sanctions is a boost for the Russian market, blow for Deripaska

Hello! This week we have lots of news about metals tycoon Oleg Deripaska. Our leading story is about how Deripaska struck a deal with the U.S. to get sanctions on his companies lifted, but we also unpick the details of Davos’ decision to invite Deripaska and two other tycoons to the elite forum in Switzerland despite reports the U.S. demanded they be barred. If you’ve had enough of Deripaska, read an analysis of proposed new internet legislation, the highlights of Putin’s annual press conference and find out about the removal of street exchange rate signs, the flashing boards so symbolic for Russians who lived through the 1990s.

Lifting some sanctions is a boost for the Russian market, blow for Deripaska

Oleg Deripaska

What happened

The U.S. Department of Treasury’s announcement on Wednesday that it is lifting sanctions on companies owned by billionaire Oleg Deripaska’s was big news in Russia. Some analysts are suggesting that Russian banks and new sovereign bond issues are now less likely to be hit with future sanctions. But senior officials and friends of Deripaska do not share this optimism: they believe the billionaire was humiliated by being forced to cede control to foreigners.

  • A plan to get sanctions lifted was developed last summer under the leadership of former U.K. energy minister, Lord Gregory Barker, who is the chairman of the board of En+, Deripaska’s holding company. He thought from the beginning that the billionaire would be forced to give up control over his business, but the final terms turned out to be much harsher: Deripaska must reduce his stake in En+ to 44.95% and won’t be able to receive dividends. Management will pass to the board of directors, two-thirds of whom will be either U.S. or U.K. citizens. Deripaska himself will remain under sanctions and unable to receive any income from his companies.
  • The biggest winners from the deal are the minority shareholders and bondholders of aluminum giant Rusal, Deripaska’s largest company (En+ is its primary owner). The new boards of directors mean both companies will be more attractive to investors. Since the news of the lifting of sanctions, Rusal’s share price in Hong Kong (where the company is listed) has risen 25% after the news.
  • Ironically, one winner is another sanctioned Russian billionaire: Viktor Vekselberg. Sual Partners, a company in which Vekselberg holds a 38.5% stake, will still be able to receive dividends from its 26.5% stake in Rusal.
  • Analysts believe that this lifting of sanctions is a positive signal. The decision illustrates a recognition that sanctions against publicly traded companies are bad for the market, according to Sberbank CIB’s former head of research, Alexander Kudrin. And this might mean, he says, that major Russian state banks, specifically Sberbank and VTB, will not be sanctioned in 2019.
  • Deripaska himself doesn’t benefit in any way, according to an acquaintance and a senior Russian official. “He is losing everything. He personally has almost no chance of emerging from U.S. sanctions,” a source acquainted to the billionaire told The Bell. A Russian official agreed: to lift sanctions on his companies, Deripaska has de jure and de facto lost control over his companies and, therefore, over future revenues. “It is difficult to view the decision to lift sanctions as a definitive victory,” he said.

Why the world should care

The U.S. announcement does appear to be good news for public companies in Russia, but it has only an indirect impact on any future decisions by Congress. Moreover, the agreement between En+ and the U.S. Department of Treasury is a unique example of a Russian billionaire consenting to being stripped of his own fortune.

The government’s short-lived boycott of Davos has been called off

What happened

It appears the Russian government, which pledged last month to boycott the World Economic Forum in Davos, Switzerland, over a ban on three sanctioned Russian tycoons, actually wants to send a delegation. The forum’s organizers have said they are prepared to invite the tycoons, but The Bell has learned they also issued a series of demeaning (and unrealistic) conditions. The government pretended ignorance of these conditions and immediately called off the boycott.

An anonymous (but reliable) source in the Russian government first announced last Saturday that Davos had changed its mind and was prepared, after all, to invite Viktor Vekselberg, Oleg Deripaska, and Andrei Kostin, head of state-run bank VTB. He added the conflict was over and Russia would be sending an official delegation.

Two hours later, the forum’s organizers confirmed that Vekselberg, Deripaska and Kostin had all been invited, but didn’t go into details. The Bell subsequently learned (Russian) that this invitation was accompanied by an entire list of — insulting — conditions that will make the tycoons’ attendance difficult from a technical point of view. They include:

  • No U.S. companies or services may take part in organizing the trips of the tycoons to the forum. These include banks, services for booking flights and hotels and even internet servers used to send emails.
  • The forum’s organizers pledged not to help the businessmen organize talks or business meetings. They also said they must be convinced that the Russians will not interact with U.S. citizens or companies in any way during the forum.
  • The sanctioned tycoons cannot participate in any event organized by U.S. citizens.

Economic Development Minister Maksim Oreshkin has already announced that all of the sanctioned tycoons will be at the forum, but the businessmen themselves (and their representatives) have — so far — not confirmed their attendance.  

  • The fuss over Davos’ ban on these three businessmen erupted in November. Switzerland has no sanctions in place against Russia, but the U.S. reportedly insisted that Russian businessmen under U.S. sanctions should be banned. Prime Minister Dmitry Medvedev was upset and pledged Russia would retaliate with a boycott.

Why the world should care

Contrary to its bellicose statements, the Russian government clearly doesn’t want to be left out of this high-profile international forum. All it took was a formal concession (unlikely to change the situation) by the Davos organizers and the government’s rhetoric changed abruptly.  

Draft ‘sovereign internet’ legislation will hone Russia’s online censorship capabilities

What happened

Just before we sent out last week’s newsletter, a draft bill was introduced into Russia’s parliament that would isolate Russia’s internet from the world. The Bell has since taken a closer look at the legislation and discovered it is far from a complete buffer against foreign influence. However, the law would allow the government to block service providers — for example, messaging app Telegram, which they so spectacularly failed to block earlier this year.

The two most important new additions:

  • All Russian internet providers will be obliged to install new equipment, managed by internet watchdog Roskomnadzor, to facilitate bans. At present, the watchdog can only give orders and the providers are responsible for blocking websites. This system is both slow and ineffective.
  • Roskomnadzor will receive much more information from providers, including information that would allow control of points of access to any online resource. Bans will, therefore, become significantly more accurate.

It is clear that the main goal of the law is to facilitate effective blocking of any website or online service. In early 2018, Roskomnadzor attempted the first ever ban in Russian history of a major Western internet service provider, secure messaging app Telegram. The attempt was shambles: the messenger changed hosting services faster than Roskomnadzor could block them and innocent online stores and other services suffered in the crossfire.

Roskomnadzor is obviously smarting from its failure and next year it will be able to have another go. The BBC’s Russian Service has reported that 20 billion rubles ($300 million) will be allocated from the Russian budget to new equipment for online bans. The new system will give Roskomnadzor the ability to accurately block specific resources, rather than just hitting IP addresses as it did during its unsuccessful attempt to take down Telegram.

Why the world should care

The authorities’ attempts to replicate the Chinese model of selective online censorship have so far looked like a bad parody. But this won’t last forever: those in government learn from their mistakes and they are prepared to invest big money to gain control over information flows. 

The best bits from Putin’s annual press conference — explained

What happened

On Thursday, President Vladimir Putin held his annual press conference. It lasted almost four hours, and didn’t yield any revelations — but then no one expected any: the event is a TV entertainment show. Nevertheless, The Bell was watching and here we explain 4 of the most memorable quotes:

Topic: Yevgeny Prigozhin, a businessman known as ‘Putin’s chef’ under U.S. sanctions and tied to the ‘troll factory’ in St. Petersburg and private security company Wagner

Quote: “All of my chefs are employees of the Federal Guard Service. They are military people. I don’t have any other chefs.”

Explanation: At Putin’s press conferences it’s common practice to give the microphone to a couple of liberal journalists to show the president isn’t afraid of tough questions. But Putin dodged a question from a reporter at opposition newspaper Novaya Gazeta who asked whether Wagner is owned by the president’s “personal chef”.

Topic: Russia’s greatness

Quote: “Not long ago, people thought there were no longer such countries [as Russia], but it turns out there are — and can’t be ignored. And 160 million people live here: [Russia’s foreign policy] is not just a wishlist of the country’s leadership, it represents the interests of the people.”

Explanation: Putin loves to remind his audience that the world has “begun to listen” to Russia: he used this phrase to open his recent address to the Federation Council. This time, however, the president was a little confused: according to official data, Russia’s population is 146.9 million, not 160 million. He was probably just trying to make his point more forcefully.  

Topic: Rap music

Quote: “Suicide has become popular among our young people. What do we? All go and hang ourselves? I won’t go first, you [journalists] will be first. But you don’t want to, do you? We can’t allow this among young people. And that’s why I said what I said: we have to take the lead.”

Explanation: Putin is here suggesting taking the lead — not on mass suicide — but on youth rap culture. As we have written, the government only began to notice rap music when local law enforcement cancelled a wave of concerts across the country. Like other officials, Putin said in response that cancellations were excessive, and he has been a cheerleader for the idea of using state money to bring rappers onside, or at least modify their language and ideas.

Topic: World domination

Quote: “Regarding world domination, we know where the headquarters [of the country] trying to do this is located — and it’s not in Moscow.”

Explanation: This was Putin’s response to a question from a Wall Street Journal reporter about whether he wants to run the world. Putin called attempts to portray Russia as striving for world domination a tool that some “Western countries” use to solve “domestic political problems.” 

Passing of an era as street exchange rate signs to be phased out

What happened

A new law banning banks from using street signs to display exchange rates has been signed by Putin. During the 1990s, these flashing red signs, displayed prominently in every Russian city, became the most visible symbol of the new market economy and its attendant financial crises. Over the course of next year, they will be removed.

  • In the Soviet Union, any dealings with foreign currency were considered criminal offenses and carried serious punishments. By the end of the 1980s, the ban had been lifted and Soviet citizens were rushing to buy U.S. dollars. During the hyperinflation of the 1990s, it was pointless to hold savings in rubles and, after receiving their salaries, people bought dollars. In this environment, unregulated currency exchanges opened on every corner and their street signs with exchange rates became an irreplaceable part of the landscape of Russian cities. Without the internet, there simply wasn’t any other way of learning about the gyrations in the currency. Inside, the currency exchanges were usually a small room with a massive steel door and a bullet-proof window, behind which sat the cashier.
  • The ruble’s greatest collapse — two-thirds of its value against the U.S. dollar — took place after the government announced a default on 17 August 1998. “We woke up in a different country” was the headline in newspaper Kommersant. Waiting for hours in lines for hard currency was a horribly frustrating experience: most currency exchanges quickly ran out of hard currency and people were left with rubles devaluing by the hour.
  • The Central Bank eventually began a battle against street currency exchanges and, in 2010, non-bank currency exchanges were banned. In December 2014, there was a moment of deja vous when falling oil prices and Western sanctions caused another ruble collapse. While the situation was not nearly as serious as 1998, it brought back a lot of painful memories. To this day, any serious piece of market-moving news still prompts many to start thinking about what to do with their rubles.

Why the world should care?

A line at a currency exchange has a highly emotive meaning for any Russian. A ban on exchange rate signs is, therefore, an important cultural moment. But it also has a practical impact. Tourists will now have to try harder to find a place to change their money (there are some apps that can help). This isn’t necessarily a bad thing, however: currency exchanges with aggressive street advertising usually had the worst rates.


Ahead of the festive period, we’d like to say a huge thank you for reading The Bell and wish you the very best for the new year. We will be taking a break next week, but the English newsletter will be back on January 5 with a look forward at what to expect in 2019.

Peter Mironenko

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

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

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