Weekly 6 June 2020

Record Arctic oil spill

Hello! This week our top story is a catastrophic oil spill in the Russian Arctic that has shone a spotlight on the practices of mining titan Norilsk Nickel, a symbol of post-Soviet capitalism. We also look at opportunities for fraud in the upcoming constitutional referendum, and the final split between state-owned bank Sberbank and internet giant Yandex.

Environmental disaster in the Russian Arctic

The fragile Russian Arctic this week experienced its most serious environmental disaster in history when over 20,000 tons of diesel leaked from a fuel reservoir at an electric power station. The fuel has already made its way into the soil, local rivers, and one of the area’s largest lakes, and is likely to reach the Arctic Ocean. The federal authorities took five days to react.

  • The accident occurred at an electric power station on the outskirts of the city of Norilsk on May 29 and sent 20,000 tons of oil (about 150,000 barrels) into water systems leading to the Kara Sea. The cause has yet to be determined, and many have speculated melting permafrost could have damaged the fuel reservoir. Rescue services deployed barriers to seal off Lake Pyasino, the country’s 16th largest lake, but they failed to stop large amounts of diesel. The clean-up will take at least a decade, according to estimates (Rus) by the Environment Ministry. But the impact will be felt even longer as elements of the toxic fuel will remain, continuing to poison the water and the land.
  • Experts believe this was the largest accident in the history of the Russian Arctic, and Greenpeace compared it to the 1989 Exxon Valdez disaster that dumped about 41,000 tons into the sea off the Alaskan coast. Russian ecology watchdog Rosprirodnadzor said the environmental damage would be over $1 billion.
  • President Vladimir Putin held a video call Wednesday to discuss the disaster. He announced a formal state of emergency and scolded the local governor and managers from the electric company that runs the power station — his traditional tough-guy act. The electric company is a subsidiary of mining giant Norilsk Nickel owned by Russia’s richest man, Vladimir Potanin.

  • Norilsk Nickel is one of the most important symbols of post-Soviet Russian capitalism. It arose out of the world’s largest nickel plant, which was built by forced laborers in the 1930s on permafrost 300 kilometers north of the Arctic Circle. In total, 400,000 prisoners passed through the camps in Norilsk. The plant was privatized in 1995 as part of a controversial scheme in which oligarchs bought oil and metals companies at discounted prices in exchange for extending loans to the government. Then-banker Potanin was the architect of the scheme, and he and his partner, Mikhail Prokhorov, got control of Norilsk Nickel for a loan worth just $170 million. On Thursday, Norilsk Nickel had a market capitalization of more than $51 billion on the London Stock Exchange (even after its shares had fallen 10 percent following news of the accident). 
  • Modern Norilsk is home to 180,000 people and entirely dependent on Norilsk Nickel (the company owns all the city infrastructure). Norilsk is both one of the most remote, and most polluted, cities in the world. 
  • The catastrophe is unlikely to result in serious problems for Potanin. He is the most experienced and politically astute of Russia’s billionaires, and has excellent relations with the government. The words ‘Norilsk Nickel’ were not even said during Putin’s Wednesday video call, and Potanin didn’t say anything publicly about the accident until Friday during another of Putin’s video calls (Rus). Putin was polite with Potanin, saying only that prevention would have cost the company less than the clean-up. 

Why the world should care

Events in Norilsk are a warning of the dangers facing the pristine Arctic environment of northern Russia. As the country ramps up oil and gas extraction and melting permafrost poses a bigger and bigger threat to infrastructure, similar disasters are all but inevitable.

Constitutional referendum set for 1 July amid fraud fears

Skeptics believe Russia’s race to ease lockdown is because Putin wants to hold a vote on constitutional reform — that would allow him to remain president until 2036 — as soon as possible. This week, Putin announced that the referendum will be held on 1 July. From the Kremlin’s point of view, there are good reasons for haste: Putin’s approval rating has dropped during the pandemic and social distancing rules will make vote rigging much simpler.

  • Officially, the referendum will take place on 1 July, but, in reality, voting will last a week and the polls will be open from 25 June to avoid large crowds. This date was not chosen at random: major public celebrations of the 75th anniversary of the Soviet victory over Nazi Germany will be held the day before (postponed from the usual date of 9 May). The Kremlin is hoping the festivities will provide a “mobilizing effect” of “enthusiasm and positivity”, a source told (Rus) Vedomosti newspaper.
  • Putin announced the raft of proposed constitutional amendments back in January. There are 206 changes in total, but the most important is an amendment allowing Putin to ‘reset’ his presidential term count, meaning he could stand for re-election in both 2024 and 2030. Other changes will expand the powers of the presidency, and significantly reduce the scope of the Constitutional Court.
  • Holding the referendum as the number of coronavirus cases in Russia is decreasing slowly appears odd. But the Kremlin is making a political calculation that sooner is better amid Putin’s falling approval ratings. Only 27 percent of respondents named Putin as a politician whom they trust in an April survey conducted by the state-owned Russian Public Opinion Research Center (VTsIOM). His popularity has been hit by declining real incomes, which are unlikely to recover until at least the end of 2020.
  • The epidemic also offers many opportunities to falsify results. Ways to bend the rules were described (Rus) in detail this week by Grigory Melkonyants, director of voting rights NGO Golos. Not least is that COVID-19 provides an excuse for ramping up early voting and voting from home, both of which are easier to manipulate. And when it comes to polling stations, social distancing rules mean voting booths will be disinfected every hour, giving many opportunities for zealous officials to engage in ballot stuffing.
  • According to the latest survey by VTsIOM, 67 percent of the electorate plan to vote and 61 percent say they will vote in favor of the changes. This is less than Putin received in the last presidential election, but propaganda efforts will redouble over the coming weeks. Traditionally, celebrities (Rus) are involved in this sort of campaigning, which often generates controversy. Outrage erupted this week over a video (Rus) produced by a company controlled by Evgeny Prigozhin, a tycoon known as ‘Putin’s chef’ who allegedly founded the St. Petersburg ‘troll factory’ and mercenary company Wagner. The clip suggested if the constitutional changes were defeated, gay marriages could be legalized, and gay couple allowed to adopt. YouTube deleted the video after complaints.

Why the world should care

Putin had grand political plans for 2020. Lavish Victory Day celebrations were meant to accompany a referendum preparing the ground for his triumphant elevation to monarch-like status. But it was all blown off course by the epidemic and all now looks more risky.

Yandex and Sberbank give up on ‘Russian Amazon’

Russia’s biggest internet company, Yandex, and the country’s largest bank, state-owned Sberbank, have ended their ‘Russian Amazon’ project. The Bell learnt this week that the JV created by the two companies in 2018 to dominate the local e-commerce market will be broken up. At the same time, Yandex will sell shares valued at $600 million to investors expected to include Russia’s second biggest state-owned bank, VTB, and billionaire Roman Abramovich.

  • The details of a divorce agreement between the two companies were confirmed to The Bell by four sources close to the negotiations. Yandex will buy Sberbank’s 45 percent stake in their jointly-owned company Yandex.Market, while Sberbank will acquire 25 percent of Yandex’s payment system, Yandex.Money. The value of the deal has not been disclosed, but Yandex will almost certainly be the one to pay.
  • Yandex and Sberbank inked their e-commerce JV in 2018, and Sberbank head German Gref said at the time that the project would become ‘Russia’s Amazon’. Just a year later, The Bell was one of the first media outlets to report (Rus) on tensions between the partners. It turned out that the two companies had several overlapping projects and were competing with each other. Sberbank was seeking broad integration with Yandex, and offered to buy a major stake in the internet company — but Yandex’s shareholders didn’t like this idea. Last year, Sberbank began seeking other e-commerce opportunities, and bought 20 percent of Russia’s second largest internet company, Mail.Ru Group. A major competitor of Yandex, Mail.Ru Group is developing taxi and food delivery services, and has an e-commerce JV with China’s Alibaba Group.
  • At the same time as the Sberbank deal, Yandex is preparing an offering of up to 5% of its junior Class A shares (which trade on the NASDAQ). The terms of the offering have not yet been disclosed, but Abramovich’s investment vehicle, Millhouse, and VTB may both participate, according to sources who spoke to The Bell. Some of the funds raised may go to help finance the Sberbank deal. It may or may not be a coincidence, but after Yandex and Sberbank began to fall out, VTB drew closer to Yandex. VTB helped Yandex develop a new management structure that saved it from intense pressure from the government and, earlier this year, VTB Capital was named lead bookrunner for the Yandex.Taxi IPO in the U.S. alongside Morgan Stanley and Goldman Sachs.
  • Yandex shares fell sharply at the beginning of 2020, but they have risen 45 percent since the end of March. The company is currently valued at $13.8 billion.

Why the world should care

Online shopping in Russia is booming, and there is a bitter struggle underway to seize market share. A parting of ways between Sberbank and Yandex has been on the cards for months, but the official divorce will mark a major shift in the e-commerce landscape.