Weekly 5 October 2018

Russia has drawn up a plan to ditch the U.S. dollar

The most important stories on Russia this week

What happened

The Russian government has a new programme to reduce its dependency on the US dollar, which will be signed within two weeks by Prime Minister Dmitry Medvedev. The Bell was the first media outlet to report on the plan, citing three sources who are involved. The dollar will not be banned, but Russia is trying to reduce its role in international trade and create a financial infrastructure independent of the greenback. But it is a big question whether Russia can make this a reality, and whether it could ever be attractive for foreigners.

  • At the moment, we only know what the plan is designed to achieve in general terms: it is aimed at reducing the share of the dollar in Russia’s cross-border payments. The goal is, over time, to convert transactions with Russia’s largest trading partners, China and the EU, into yuan and euros. For countries within the Eurasian Economic Union, the idea is to move contracts into rubles. Tax benefits are being considered for Russian exporters who pay foreign partners in rubles, according to Finance Minister Anton Siluanov. These exporters will also be allowed not to repatriate revenue, though, in all other cases, foreign currency denominated revenues must be transferred back to Russia.
  • In July, the head of VTB, Russia’s second largest bank, Andrei Kostin, gave President Vladimir Putin specific suggestions to expand ruble use and asked for the president’s support, which Putin gave a few days ago. The details of Kostin’s mysterious plan have still not been disclosed, but parts have been used by the government. Despite promises not to ban the dollar, such a process will be painful for foreign companies, even with the first conceivable options.
  • Firstly, the prices for most of Russia’s exports are dollar denominated. Secondly, if Russian suppliers demand to be paid in rubles, foreign partners will have two choices: either hold Russian currency (unlikely considering the ruble’s volatility), or they could compromise and pay in another currency, like euros or yuan. The question then arises – who pays for the cost of conversion?
  • Another Russian attempt to weaken the dollar’s grip was revealed this week in a proposal to give foreign companies access to Russia’s domestic payments system. The Central Bank launched this system in 2014 when there was a real risk of Russia being blocked from SWIFT as a part of sanctions. Up until now, the system has just 400 participants, mostly banks and corporations. In fact, it is unclear how actively it is used and there are doubts about its overall success. But the Central Bank has said it is in negotiations to give access to BRIC countries and members of the Eurasian Economic Union – and that China, Iran and Turkey have expressed interest. In addition, there are discussions about Russia joining the European analogue of SWIFT (which the EU is creating for companies that continue to trade with Iran despite U.S. sanctions).

Why the world should care

If your business is tied to Russia, it’s time to think about whether you’re ready to make payments in rubles or currencies apart from the dollar? Are you ready to take on additional currency risk or do you want the Russian side to deal with that? For now, we don’t know the details about how the dollar will be jettisoned, so this isn’t a call to action, rather, a warning. Based on statements by officials and The Bell’s sources, though, a warning is justified.

2. The Russian billionaire who bought Trump’s Florida mansion is suing Sotheby’s

What happened

One of Russia’s richest men, Dmitry Rybolovlev, wants $380 million from Sotheby’s auction house in an upcoming court case. The businessman believes that Sotheby’s employees helped art dealer Yves Bouvier defraud him of $1 billion while he acquired paintings by Leonardo da Vinci, Gustav Klimt and other famous artists. In the West, Rybolovlev is best known as the buyer of Trump’s mansion in Palm Beach, for which he paid $95 million — more than double what Trump had bought it for four years earlier.

  • Billionaire Rybolovlev is named in the U.S. Treasury Department’s Kremlin List, but he was not among other wealthy individuals hit with sanctions in April and this is logical: the businessman has hardly spent any time in Russia over the last eight years. He lives in Monaco, where he owns a football club and has residency. The purchase of Trump’s mansion for $95 million in 2008 made Rybolovlev a suspect in the “Russian inquiry”, particularly after it emerged that Trump paid only $41 million for it four years earlier.
  • Works of art are Rybolovlev’s most expensive investments. Since 2003, he has spent more than $2 billion on paintings by Leonardo da Vinci, Pablo Picasso, Amedeo Modigliani and other legendary painters. Swiss art dealer Bouvier bought these paintings for Rybolovlev, who claims he was fleeced by Bouvier for 30-40% of the purchase price of each acquisition. For example, Bouvier bought Leonardo da Vinci’s Salvator Mundi for $83 million and then promptly sold it to Rybolovlev for $127 million. As a result, Bouvier allegedly made $1 billion from Rybolovlev, of which he paid $100 million as a kickback to Rybolovlev’s translator and trusted intermediary, Tatyana Rappo. Rybolovlev discovered the scam in 2015 and, since then has been — unsuccessfully — trying to sue Bouvier.
  • Like many other Russian billionaires, Rybolovlev made most of his wealth in the 1990s, buying shares in potassium deposits and chemical factories in the Urals. It was a dangerous business. Also like others, Rybolovev cooperated with local gangsters and, in 1996, was even accused of ordering a contract killing for which he spent several months in prison before being acquitted by the Supreme Court. In 2010, Rybolovlev became one of only a few Russian businessmen to successfully convert assets acquired in the 1990s into cash. The businessman sold a controlling stake in the world’s largest potash producer, Uralkali, for $7 billion. In 2011, Forbes estimated Rybolovlev to be worth $9.5 billion, but this figure has since decreased.
  • As soon as Rybolovlev sold Uralkali, he immediately went on a buying spree. In 2011, he bought Monaco Football Club and spent an estimated $800 million on the team. The same year, his daughter set a new record in the New York real estate market with the purchase of apartments with Central Park views for $88 million. The following year, Rybolovlev bought actor Will Smith’s Hawaiian retreat for $20 million. The billionaire is now building a $500 million yacht for himself that is over 100 meters long. “He spends money like a drunk sailor,” said the lawyer representing Rybolovlev’s ex-wife, who filed for divorce in 2008.

Why the world should care

Rybolovlev’s story shows that Russian oligarchs have a variety of motives, and that you shouldn’t judge a book by its cover. Paying twice the price for Trump’s mansion doesn’t necessarily imply a desire to overpay: it could just be extravagance — or, if you believe lawyers on the other side, an attempt to hide money from his ex-wife.

3. Socialite Ksenia Sobchak may be one step closer to the St. Petersburg governorship

What happened

The Kremlin’s election problems might provide Russians with a new electoral show. After the disappointing results of the Kremlin’s candidates in regional elections, Putin has fired 8 governors in the last week. The most serious victim was Georgy Poltavchenko, the head of Putin’s hometown, St. Petersburg. The city is due to have governor elections in 2019 and TV star Ksenia Sobchak, the daughter of Putin’s former boss, could run for office. Sobchak played the role of Kremlin-approved liberal candidate in the last presidential election.

  • A former KGB officer famous for his devotion, Poltavchenko has governed St. Petersburg for seven years and would have been up for re-election in 2019. But he was fired on Thursday. As an honorable pension, Putin offered Poltavchenko the position of head of United Shipbuilding Corporation, the largest shipbuilding holding in Russia. This isn’t a bad sinecure: last year the state-owned company had revenues of $90 million.
  • Poltavchenko’s replacement as governor is Alexander Beglov, a long-time member of the Presidential Administration. This neatly demonstrates how the Kremlin doesn’t really want to change anything when it comes to regional politics: Poltavchenko and Beglov have almost identical biographies. They both know Putin from early 1990s St. Petersburg and they both worked for many years in the Presidential Administration, are non-public figures and considered to be personally loyal to the president.
  • The mystery around the elections, scheduled for September 2019, will unravel in less than a year. Ksenia Sobchak, founder of the Party of Change, has said she “doesn’t exclude” the possibility of running for governor. When the rumors of Poltavchenko’s firing were just beginning, Sobchak wrote: “You could said that I am the reason why Poltavchenko resigned!” The question is about Sobchak’s actual intentions. “It is a serious announcement. No one talks about intending to run if he or she hasn’t really considered the possibility. Sobchak is really concerned about the future of St. Petersburg,” Sobchak advisor Timur Valeev told The Bell. “We gently hinted to Sobchak that running would be not a bad idea from the point of view of promoting the party,” said Andrey Nechaev, another Sobchak advisor. In conversations with The Bell, both men talked about the nomination as if it was already a done deal.
  • Outside Russia, Ksenia Sobchak is most famous for her participation in the last presidential election (The Bell wrote about this in detail). Inside Russia, Sobchak was the star of a popular reality TV show in the early 2000s, but is also known for her 5 million Instagram followers and as the daughter of Anatoly Sobchak, the first mayor of St. Petersburg. It was under Anatoly Sobchak’s wing that Putin quickly rose from obscure KGB colonel to deputy mayor. Years later, when Putin was head of the FSB, he saved Sobchak from corruption charges by spiriting him abroad. This almost familial connection with Putin is the reason why many liberal Russians refused to vote for Sobchak in the 2018 presidential election. They saw her as a Kremlin spoiler candidate. Opposition leader Alexei Navalny, who wasn’t allowed to stand, criticized Sobchak as a stalking horse. In the end, Sobchak only got under 2% of the vote, but her obvious political ambitions surprised many.
  • After recent election scandals, it is likely the Kremlin will be keen for Sobchak to run in St. Petersburg. “Everyone with whom I spoke on the other side of the Kremlin wall is pleased with how she performed in the presidential elections,” said political expert Konstantin Gaaze, adding that Sobchak could win 20% of the vote in St. Petersburg if she can do a deal with other opposition candidates. For the Kremlin, this would be a win-win situation. It will be possible to say “we let candidates run who were a serious threat to those in power,” Gaaze explained.

Why the world should care

The 2013 Moscow mayoral election in which Aleksei Navalny was a candidate was the last major competitive election in Russia. If Ksenia Sobchak runs for governor of St. Petersburg, this wouldn’t imply a truly competitive election, but for the Kremlin, such an election line-up would be a good indicator of the liberal, pro-Western mood in major Russian cities.

4. Corruption arrest sheds rare light on illicit big business in Russia

What happened

A new shocking corruption case is beginning in Russia that might shed light on the riddle behind the largest recorded bribe in Russian history, 9 billion ($140 million) which was paid by an ordinary police colonel, Dmitry Zakharchenko, in 2016. This week, businessman Valery Markelov was arrested on bribery charges. Markelov and his partners earned billions of dollars from state contracts, in particular from contracts with state-owned monopoly Russian Railways.

  • ‘Colonel Zakharchenko’s Billions’ has been the big mystery in the annals of Russian corruption for the last two years. In September 2016, Zakharchenko was arrested in Moscow. When his apartment was searched, investigators found 9 billion rubles in cash. Its origins are completely unclear and Zakharchenko has said he saved billions while working for the police. It was obvious this was one of those rare moments when information about serious shadow businesses became public.
  • Two years later we have our first answer to the riddle: on October 2, 2018, Valery Markelov was arrested on charges of attempting to bribe Zakharchenko. Markelov is a major businessman, but not a public figure. Together with his partners, Alexey Krapivin and Boris Usherovich, he owned the 1520 Group of Companies. These firms are involved in railroad construction and engineering. The number 1520 in the name refers to the width of Russian railway tracks (in most countries tracks are narrower — 1425mm). Markelov, Krapivin and Usherovich became the main contractor for Russian Railways in the mid 2000s. The father of one of the partners, Krapivin, worked as an advisor to the president of Russian Railways, old friend and dacha neighbor of Putin, Vladimir Yakunin. In 2015, Yakunin was fired, but this didn’t interfere with business. In 2017, 1520” received Russian Railways contracts worth 218 billion rubles ($3.75 billion) and was ranked first in the Forbes’ rating of Russian state contractors.
  • The money made from Russian Railways contracts was allegedly moved abroad by Markelov, Krapivin and Usherovich through offshore firms. Colonel Zakharchenko provided the protection for this transfer of funds to the West. Of course, the policeman and the railway businessmen couldn’t have acted alone — it’s likely Zakharchenko’s bosses and managers of the railway monopoly also had a stake in the lucrative business. But we will almost certainly hear nothing about them. According to The Bell’s sources, criminal charges could not have been brought against the owners of 1520 without Putin’s approval. This means that the case may continue, and arrests could lead to the highest levels of major state companies.

Why the world should care

In the West, everyone has heard of billionaires like Roman Abramovich or Putin’s friends who became super-rich, like Arkady Rotenberg. But Russia’s super-wealthy elite does not stop there: the owners of major shadow businesses may not even appear in Forbes famous list.

Other important stories, briefly

  • Putin’s most unpopular reform is apparently complete: the president has now signed a law that will increase the pension age. In reality, however, reform continues. For example, on October 1 we learned that Russians will be included in a new voluntary pension savings plan without their permission. But there will be no more dramatic and unpopular announcements. Soon we will find out how this is impacting Putin’s approval rating. According to the last poll, Putin’s rating was at its lowest level since 2013.
  • Lawyers have discovered a formality that may allow them to send Aleksei Navalny to prison following his latest arrest. Under Russian law, three arrests for participating in unsanctioned protests within 180 days is grounds for a felony case. Moreover, the arrest gives the authorities a reason to change the suspended sentence which Navalny is currently serving to a prison sentence. The opposition politician could be handed a prison sentence of up to 5 years if the Kremlin were to deem it necessary.

Peter Mironenko

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

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