Russia’s new government disappoints those hoping for economic reforms

1. Russia’s new government disappoints those hoping for economic reforms

Dmitry Medvedev; Photo credit: Government.ru

What happened

Russia’s new government has still not been announced, but the illusion that it might be capable of carrying out economic reform has been more or less shattered. Dmitry Medvedev has again been named Prime Minister — this wasn’t a surprise to anyone. Medvedev has already named 10 of his deputy prime ministers, with practically no new faces among them — five deputy prime ministers were in the last government, two held earlier ministerial posts, and the three newcomers either served in the government or in the presidential administration for at least six years. Finally, former finance minister, Alexey Kudrin, who developed an economic strategy for the new presidential term, was offered — instead of a leading position in the presidential administration as a negotiator with the West — to lead the Audit Chamber, a second tier role in this parliamentary body of financial control.

• Anton Siluanov will be responsible for the economy in Medvedev’s new cabinet; he was Minister of Finance in the last cabinet. Siluanov served as Kudrin’s deputy for seven years, and he followed the lead of his predecessor — he tried reduce budgetary spending, and despite carrying less political weight, he succeeded in much of what he tried to do. It is telling that in the opposite role to his — deputy prime minister for social issues — will be filled by another former Kudrin MinFin deputy, Tatiana Golikova. She will be responsible for the largest expenditures of Putin’s fourth term — health care and education.
• In another spending role — infrastructure development, for which the plan is to spend no less than RUB 11 trillion ($180 billion) over six years, it is likely that one of Vladimir Putin’s longest serving allies will be named to the post, Dmitry Kozak. Kozak worked with Putin in the 1990s in the city government of St. Petersburg. He will also be responsible for industry and the energy sector. These are difficult sectors for the government as they are dominated by state companies, led by Rosneft CEO, Igor Sechin.
• Another important economic role, deputy prime minister of construction — was given to Vitaly Mutko, the former minister of sport who received a lifetime ban by the International Olympic Committee for his role in the Russian doping scandal. In announcing this choice, Medvedev didn’t hide the reason — the desire to show that Russia “will not give in to external pressures”. It is difficult to believe this, but neither Duma deputies, nor the Prime Minister himself, could stop themselves from laughing during the announcement (video in Russian) — the future leader for construction is also infamous for having been responsible for the construction of the St. Petersburg stadium, the cost of which increased during construction from RUB 6 billion to RUB 47 billion (approximately $800 million).
• The fate of the author of Putin’s economic program for his fourth term, Alexey Kudrin, was not clear for a long time, and after articles were published in FT and Bloomberg, everyone expected Kudrin to be named deputy head of the Presidential administration — a more important position than the corresponding role in the government. The news that Kudrin will be offered (Russian) the role of head of the Audit Chamber was unexpected — as it is clearly a second tier role. The Audit Chamber’s primary function is to control budgetary expenditures, but it plays absolutely no role in determining economic policy. At first glance, this offer looks damaging to Kudrin, but power in Russia often depends not just on one’s title and functional role, but also on one’s personal relationship with Vladimir Putin and the informal responsibilities which arise from this relationship. If Kudrin, who since 2011 has refused several times to return to the government, accepts the offer, this might mean that he has been promised the opportunity to influence government policy.

Why the world should care

The Russian government is not left without professional economists and doesn’t promise catastrophic failures, but it is difficult to believe that a new cabinet, which is 90% comprised of old ministers, will be capable of leading serious reforms.

2. U.S. pullout of the Iran nuclear deal is an unexpected gift for Russia

What happened

It is highly unlikely that Donald Trump thought about this when he signed the order to pull out of the nuclear deal with Iran, but his decision was a real present for Russia and for Vladimir Putin. The increase in the price of crude was of real benefit to the Russian economy and already led to a record strengthening of the rouble. Disagreements between Europe and the U.S. over sanctions against Iran may also hinder the operations of any sanctions against Russia.

• By May 10, the price of Brent rose to $77/bbl, and economists from the Bank of America Merrill Lynch published a forecast that crude might rise to $100/bbl by 2019. For the Russian government, which will have to spend at least $125 billion on new, pre-election promises made by Vladimir Putin, this is really good news.
• For Russians, it is of course, also good news. First, on the first day of trading after the news of the pullout from the Iran deal broke, the rouble strengthened more than any other currency globally, rising by 2.4% against both the U.S. dollar and the Euro. The rouble is strengthening for the first time in a long time alongside crude prices — at the beginning of April, when the exchange rate was falling over U.S. sanctions, it appeared that the eternal link between crude and the rouble was broken. Second, stable growth in the price of crude could allow the government to hold off on tax increases, which only a few months ago seemed to be the only way of raising money to fund Putin’s promises. Now the Russian budget receives $40 from every barrel of crude that is exported — everything on top of this is set aside in the reserve fund. At the end of April, for the first time since last year, there were discussions of raising this take to $43.
• It’s still difficult to predict if the Kremlin will be able to benefit from the conflict between the U.S. and Europe over Iranian sanctions — but the situation suggests that this just might be the case. The effect of any U.S. anti-Russian sanctions depends on whether or not they will be adhered to by European companies which are threatened by secondary sanctions. The sanctions against Rusal already proved that European countries are capable of convincing the U.S. to compromise if European companies are threatened economically. If Europe will directly refuse to follow U.S. demands vis a vis Iranian sanctions (just as it did in 1996 with Libya происходило), this would give, if not a guarantee, at least some hope that Europe would behave the same way in response to sanctions which would hurt European businesses.

Why the world should care

If the traditional link between the rouble rate and and the price of crude will start working again, this could make the Russian market more predictable for investors — but as long as the conflict with the U.S. continues, the risk of new sanctions will take precedence.

3. The Russian billionaire who owned 10% of Facebook will make money on Putin’s digital dreams

What happened

Ahead of the presidential election, Vladimir Putin promised Russians that he will not only spend trillions on health care and education, but he also promised a “technological breakthrough”. Such promises are made before each new term, but this time it’s serious — last summer, Putin, according to government officials, “became fascinated with the digital economy”. Billionaire Alisher Usmanov, Russia’s main technology investor (net worth $12.7 billion per Forbes), plans to make money off of this.

• On the next day following Putin’s inauguration, Usmanov, one of the most influential state companies, Rostec, and Russia’s third largest bank, Gazprombank, which is close to Putin’s friend, Gennady Timchenko, announced that they are creating a new company, MF Technologies, which should eventually become something like Russia’s answer to Alibaba or Tencent. The new company was given initial capital of $500 million — Usmanov offered the JV a controlling stake of voting shares in internet giant, Mail.Ru Group, and Gazprombank and Rostekh will both pay in with cash. Usmanov will be the controlling shareholder in the new company, and his main task will be to create a digital financial platform for money transfers and online lending, as well as an investment fund which will invest in and earn money from Russia’s largest companies going digital.
• “I don’t use the internet, I develop it”, – Usmanov said in his video statement directed towards to Alexey Navalny, who accused Usmanov of corruption. Usmanov’s ambitions in the IT sector are impressive. In 2009-2010, the investment fund DST Global I, which Usmanov controlled together with another Russian tech investor, Yury Milner, bought 10% of Facebook, which was then valued at $10 billion. Usmanov’s net profit on this deal alone is estimated to be at least $2 billion. Since then, Usmanov invested in Apple, China’s Alibaba, and JD.com, and in Russia he owns the country’s second most valuable internet company, Mail.Ru Group.
• Over the past two years, the billionaire has made money in government programs which require that businesses transition to electronic reporting. In 2017, all Russian businesses were required to have online cash registers — at this point Usmanov invested $8.3 million into an online cash register operator. From 2019, Russia will introduce mandatory electronic labels for clothing, cigarettes, medicines and other consumer goods. Businesses will have to spend at least $500 million to meet these requirements, and the operator of this system will be a joint Usmanov-Rostec company.
• Investments in Russian internet projects are a logical next step for Usmanov. He himself didn’t get hit with U.S. sanctions, but his close partner, Andrei Skoch, did, together with Oleg Deripaska and other Russian billionaires who in April found their names on the American SDN List. Skoch owns only 30% of their joint holding USM, so for now the company isn’t under threat — but making new investments abroad at this time given the current situation would be risky.

Why the world should care

If Usmanov, with government support, is successful in building even something halfway towards a Russian Tencent, this could make the lives of many Russians more convenient, but at the same time, it would also further isolate Russia’s online infrastructure.

4. Chechnya’s leader suggests allowing Vladimir Putin to run for a fifth term

What happened

The first offer to allow Vladimir Putin to run for president for a fifth time was made on the day after Putin’s fourth inauguration. The author of the idea, Chechnya’s leader, Ramzan Kadyrov, has used his ultra-loyalty to Putin to maintain an autocratic regime in his own republic. The suggestion is in conflict with Russian law.

• The suggestion was made not just in words — the Chechen parliament drafted and forwarded to the State Duma a proposed constitutional amendment which would give the president the power to run for three terms in a row instead of two. This is necessary, in order “to give the people the chance to determine their future”, according to the draft amendment. In April, Chechnya’s leader, Ramzan Kadyrov, said (Russian) that Vladimir Putin has “no alternative” and as long as he is in good health, “we should not think about another head of state”.

• The suggested amendment doesn’t have a real chance of getting passed — over the past 12 years, the State Duma only accepted seven pieces of draft legislation from the Chechen parliament and all were passed over. But this isn’t likely to upset Kadyrov. For him, such announcements are his ceremonial public demonstrations of his unwavering loyalty to Putin. Kadyrov has been making similar statements since he first took leadership of the Chechen republic in 2007. Ahead of the 2008 elections, when Putin wasn’t able to run for a third term in a row, and in the end still maintained power, by giving the presidential post to his prime minister, Kadyrov said (Russian), “Why can you be president for life in Kazakhstan? Or in Turkmenistan? Why is that not possible in Russia?”. Already after the election, in 2009, Kadyrov again repeated (Russian) that he would like to see Putin as “president for life”.

Why the world should care

In reality, such radical statements are never taken seriously in Russia — but in this context, decisions then taken by the authorities appear to be more acceptable compromises. Ahead of the 2008 elections, several different options were put forward which would have allowed Putin to remain president. The head of the upper house of parliament, Sergey Mironov, suggested that the presidential term be extended from 4 to 7 years ahead of the election, and the deputy speaker of the lower house of parliament, Lyubov Sliska, suggested allowing the president to run for three instead of two terms. All of these proposals were passed over — but right after the election, the term for the next president (who, not surprisingly, was Putin) was extended from 4 to 6 years. 2024, when Putin’s current term will come to an end, is still far away, but Kadyrov’s suggestion has certainly already been noted in the Kremlin.