Weekly 28 March 2020

Putin’s populist rescue plan

Hello! This week, our focus is on Russia’s response to COVID-19: we examine both Putin’s emergency economic plan and the new restrictions on daily life. Away from the pandemic, we look at why new owners at leading business daily Vedomosti likely mean censorship, Pavel Durov’s upcoming defeat at the hands of U.S. regulators, and why more and more Russians are nostalgic about the Soviet Union

Can new taxes, handouts and a holiday soften Russia’s economic pain?

As the U.S. passed a $2.2 trillion legislation package this week to help those hit by the coronavirus, Russian President Vladimir Putin also unveiled a raft of emergency economic measures. Putin promised financial help for business owners, but simultaneously hit them with the burden of a nationwide, week-long paid holiday, and new taxes. Russia is the only country in the world to introduce populist taxes in response to the pandemic: the government will spin them as a levy on the wealthy, but the middle class will also be squeezed.

Putin announced the crisis plan Wednesday in a televised address, shortly after he donned a hazmat suit to visit a Moscow clinic treating COVID-19 patients. The main measures were:

  • New welfare handouts. Families with small children will receive 5,000 rubles ($65) per month during the crisis. Payments for those registered as unemployed will be increased by the same amount, making total unemployment benefits equal to the minimum wage of 12,100 rubles a month. If you suffer a 30 percent or more drop in income, you will also be allowed to defer credit payments.
  • The major blow to business was the announcement that next week will not be a working week, but employees will receive full salaries, and employers will not be compensated. Officials have said that, in Moscow, the week-long holiday may be extended for another week.
  • Small and medium-sized businesses were promised several handouts, most importantly — a reduction in employee contributions from 30 percent to 15 percent, and a half-year tax holiday (except on VAT). Small companies in difficult positions will be offered a half-year reprieve on credit payments.
  • New taxes. Not only will there be a 13 percent tax on the interest earned on bank deposits and bonds worth over 1 million rubles, but Putin threatened to withdraw from tax treaties if foreign governments interfered with a new 15 percent tax on interest and dividend payments that leave the country via offshore holdings.

With these taxes, the government is attempting to present itself as redistributing wealth in a time of crisis, although, in reality, only the second measure is ‘a tax on the wealthy’. In order to maintain the illusion, Putin had to get creative with the numbers.

  • In his address, Putin said that the income tax on deposits will affect less than 1 percent of overall deposits. The next day, the rhetoric changed: his press secretary Dmitry Peskov said this would actually be “less than 10 percent”. In reality, the official statistics show that such deposits comprise 55 percent of the banking system, and $12,500 is a relatively common amount to have in a savings account.
  • At the same time, Putin exaggerated the importance of the second new tax, on owners of offshore companies. While he said these people currently pay a 2 percent tax in Russia, in actual fact, owners using Cypriot companies pay a Russian tax of 5 percent, and those with offshore entities in other countries pay 10 percent.
  • Both taxes will be introduced no earlier than next year, and have no direct connection to the coronavirus. Most analysts agreed that Putin was simply using the situation to announce unpopular measures (after VAT rises in 2018, Putin pledged there would be no increase in the tax burden on businesses before 2024).

The new taxes didn’t cause much of a fuss, mainly because small companies are not focused on tax optimization, but on survival. For service sector companies, mass layoffs are unavoidable in the current crisis, even if Russian labor law makes this risky and expensive. At the beginning of this week, Prime Minister Mikhail Mishustin warned companies over resorting, but if you can’t let employees go and you aren’t making any money, how can you pay them salaries? Long delays in salary payments in Russia are a criminal offense.

Putin met Thursday with business owners and the hero of the meeting was the owner of popular Moscow cafe chain, Anastasia Tatulova. She almost cried during her speech:

“I will try to ask you [this question] without tears, but it is a real tragedy, an absolute tragedy… You should not promise to send in the prosecutors if we fire people. In actual fact, I don’t care any longer: if I do one thing, it’s criminal charges; if I do another it’s criminal charges; and if I do nothing then I’m bankrupt.”

There are no reliable estimates yet of the impact of the coronavirus on the economy, but 20 percent of companies plan (Rus) to cut salaries, and 30 percent have already done so.

Why the world should care

Private businesses outside the natural resources sector are always the first victim of any crisis in Russia. There is little doubt that the state’s share in the economy will grow as stricter measures are required to manage the pandemic and the economic downturn accelerates.

Moscow leads in coronavirus restrictions

In his televised address, Putin said little about restrictions on daily life to combat the coronavirus. But these are gradually being introduced across Russia, with Moscow pioneering stricter measures as it seeks to contain the country’s largest outbreak.

  • The number of confirmed COVID-19 cases in Russia is rising rapidly. At the beginning of this week there were about 50 new cases a day; on Thursday there were 196. Officially, there have been 4 deaths from the coronavirus, but, there are questions about the reliability of this number and several individuals with COVID-19 who died were officially registered as having passed away for a different reason. As for testing, while officials claim Russia is one of the world leaders in testing, with over 223,000 tests since 12 February, many are wary of this data, and there is evidence (Rus) that the tests used by Russia can be ineffective.
  • Most of the coronavirus cases identified so far have been in the Russian capital, and Moscow Mayor Sergei Sobyanin announced Thursday that the city will impose new restrictions to coincide with the week-long break that has been dubbed ‘Putin’s holiday’. These mandate the closure of the capital’s major parks, and the shutting down of all retail outlets, including bars, cafes, restaurants, beauty salons and hairdressers. Places of worship will remain open, but Sobyanin asked people to refrain from visiting. The Russian capital closed all schools late last week, and, from Tuesday, all over-65s were ordered to stay at home. Moscow’s famous Bolshoi Theater announced Thursday that ballets and operas would be broadcast free on YouTube for the first time ever.
  • While companies are moving employees to work from home, many in Moscow still require staff in the office. Notably, Russian officials have made little effort to educate people about how to reduce transmissions via social distancing.
  • Restrictions similar to those in Moscow have been put in place in St. Petersburg, Russia’s second largest city, but the picture across the rest of the country varies wildly. One region in Russia’s northwest, Karelia, has closed all public transport, but in most regions little has changed. Prime Minister Mikhail Mishustin said (Rus) Friday that Moscow’s measures should be extended nationwide, but this has yet to happen.
  • Even as most Russians continue operating more or less normally, the country as a whole has sealed itself off from the outside world. The authorities grounded all international flights beginning Friday, with the exception of special planes bringing back Russian citizens from abroad.
  • Putin’s apparent reluctance to be associated with restrictive measures means regional leaders are taking a leading role in Russia’s crisis response. Moscow mayor Sobyanin in particular has been at the forefront. During a government meeting Tuesday, Sobyanin even appeared to urge Putin to impose stricter controls, warning that “not everyone in the regions understands”.

Why the world should care

Putin said Thursday that he hopes Russia will defeat coronavirus in 2-3 months, and the country is taking a noticeably different approach to European states. But delays rolling out restrictions across the country make a huge outbreak more likely with each passing day.

Censorship fears after ownership change at leading business daily

The future of one of Russia’s most influential newspapers, Vedomosti, looked bleak this week after new owners took control. The new editor-in-chief — media manager Andrei Shmarov, 64, whose career peaked in the 1990s — did not dispute that state-owned oil giant Rosneft now has a say in editorial policy at Vedomosti. During his first meeting with staff, Shmarov said that he doesn’t read the newspaper, and doesn’t approve of the paper’s editorial policy. Journalists have already begun resigning.

  • The sale took place very quickly. On March 12, Meduza reported the newspaper’s shareholders were in negotiations to sell to media manager Konstantin Zyatkov and investment banker Alexey Golubovich. On March 18, the parties announced a deal and, 6 days later, Vedomosti had a new editor-in-chief and editorial director.
  • The buyers are an unlikely fit for a high-brow business publication. Konstantin Zyatkov is the son of Nikolai Zyatkov, who was famous in the 1990s as the editor-in-chief and owner of daily Argumenti i Fakit, a gossipy title hugely popular among pensioners. Today, the father and son team publish Nasha Versiya (literally ‘Our Version’), a conspiracy-ridden tabloid that is well known in the world of black PR. Golubovich is an investment banker who, in the early 2000s, worked for then-billionaire Mikhail Khodorkovsky. When Khodorkovsky was arrested, Golubovich fled Russia, only to return in 2007. At first he testified (Rus) in Khodorkovsky’s defense, but then he made accusations of his own and the charges against him were dropped. He now owns Latvian-registered investment firm Arbat Capital.
  • New editor-in-chief Shmarov was one of the senior editors of Russia’s first business daily, Kommersant, in the 1990s. Later, he founded conservative business magazine, Ekspert and, at the end of the 2000s, set-up the online media platform Snob, using money from billionaire Mikhail Prokhorov. For a while, Prokhorov plowed over $6 million a year into the loss-making publication.
  • Shmarov met (Rus) with Vedomosti journalists for the first time Wednesday, and if his goal was not to spook already worried staff, then the meeting was a catastrophe. He told the assembled journalists that he had stopped reading Vedomosti after an article he didn’t like, and expressed ignorance about Dogma (the name for Vedomosti’s editorial rules used by almost all professional media outlets in Russia). Adding fuel to the fire, the new editor-in-chief went on to say that there was nothing strange about an owner editing articles, and that he thought disgraced U.S. producer Harvey Weinstein should not have been jailed. Finishing his remarks, he revealed that he doesn’t like Vedomosti’s opinion section, and described one columnist, prominent academic Sergei Guriev, as a poor economist.
  • Shmarov made little effort to reject the widely-held belief that oil giant Rosneft was now calling the shots at Vedomosti. Asked whether Rosneft press secretary Mikhail Leontiev had taken part in selecting the newspaper’s new management, Shmarov refused to rule it out, adding that he had known Leontiev for decades.
  • Few have any doubts that Shamrov’s appointment means the beginning of real censorship at Vedomosti. Senior journalist Ivan Safronov resigned the same day, and the editor of the opinion section, Maria Zheleznova, handed in her notice the day after. According to The Bell’s sources, most of Vedomosti’s staff are now looking for new jobs — but the approaching crisis means this is easier said than done.

Why the world should care

Vedomosti is not simply Russia’s leading business daily, it is also the gold standard for the country’s independent media. The new management looks like they are ready to sacrifice Vedomosti’s standards, and its reputation. It’s not a big jump to conclude that the Kremlin, which — without a doubt — approved the new owners, is sending a wider signal about the viability of independent media in Russia.

IN BRIEF

Durov on verge of U.S. legal defeat

A New York court ruling issued Wednesday means the Securities and Exchange Commission (SEC) will almost certainly be successful in its legal bid to block the launch of Russian billionaire Pavel Durov’s new cryptocurrency, Gram. The conflict between the founder of messaging app Telegram and the U.S regulator is over the classification of Gram tokens, which Telegram sold to investors for $1.7 billion to raise funds to develop its TON blockchain platform. This week’s ruling stated that “the SEC has shown a substantial likelihood of success in proving that Telegram’s present plan to distribute Grams is an offering of securities.” If the court does finally come down on the side of the SEC, finding that Gram is a form of security, it would not only jeopardize the project’s future, but mean Telegram had already broken the law by not obtaining advance approval for Gram.

Most see Soviet Union as highlight of Russian history

Nostalgia for the Soviet period is known to be widespread among Russians today, but even some experts were shocked by a survey (Rus) released this week by independent pollster Levada Center. The poll showed 75 percent of Russians agree with the statement that “the Soviet epoch was the best time in the history of our country.” Just 18 percent said they did not agree. In response to other questions, 63 percent said they believed the collapse of the Soviet Union wasn’t inevitable, while 65 percent expressed regret at its passing.

Peter Mironenko, Howard Amos