The major stories you need
to understand Russia

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1. Russia’s sovereign Reserve Fund dries up after several years of budget deficit

What happened:

Russia’s sovereign Reserve Fund, which was built up over the years with profits from oil exports, is empty and has ceased to exist, the Finance Ministry announced on Tuesday. The Russian government still has $65 billion in a second sovereign fund to cover planned budget shortfalls, but it might not last long.

  • Russia started saving money in the period when oil prices were high, between 2000 and 2011, on the initiative of Alexei Kudrin, Putin’s most trusted liberal economist and Finance Minister. At its high point in September 2008, the Reserve Fund held $142 billion.
  • By 2014, when oil prices had plummeted and Western sanctions had put an end to economic growth, there was only $87 billion left. Budget shortfalls grew from 0.5 percent of GDP in 2014 to 3.5 percent in 2016 and ate up the remaining reserves.
  • Russia still has $65 billion in the National Wealth Fund (NWF). It was established in 2008 to help finance Russian pensions, but was actually used to fund government-backed investment projects. Now this $65 billion is the only fund left to cover budget deficits, estimated at $21.8 billion in 2018.
  • Oil prices are rising again. On Thursday, Brent broke through $70 for the first time since 2014. This gives reserves a chance to recover. In 2018, the Finance Ministry is planning to purchase $35 billion of foreign currency reserves, which could go to the NWF.
  • Spending, however, is also increasing, as the government is coming up with costly projects in the run-up to the presidential election.

Why the world should care:

The reserve funds are a backup for the riskier parts of state budget spending, like international military operations.

2. What to watch on Russia in 2018

What happened

We have compiled a list of the main events of the upcoming year, which we’ll be watching closely.

  • Presidential election in March 2018. Surely there will be no surprise takeovers. With 61% support even according to independent polls (Russian), Vladimir Putin has already virtually won. Still, there are several plots to follow:

    1) The election fraud. The most important task for the Kremlin is high voter turnout, which must demonstrate Putin’s popular support. The target is set at 70%, but the forecasts say (Russian) that just 52-54% of voters are going to show up. This situation may lead to massive election fraud, which in 2011 became a cause for mass protest. It is questionable, however, that now the resentment would be as high.

    2) Alexey Navalny and Ksenia Sobchak. The opposition leader Navalny, whom Putin has just called the U.S. pick for Russian presidency, was not cleared to run for president. Instead, he will use his national supporter network to campaign for a boycott that may lower the overturn. Ksenia Sobchak, a TV star turned presidential candidate, will run and use the 2018 election as a chance to strengthen her position as a future candidate for Western-oriented Russians.

  • New U.S. sanctions. The new U.S. sanctions are the most discussed topic among the business people in Russia in the beginning of 2018. Those who fear of being included on the black list of oligarchs close to the government (which is due to be submitted to the Congress on January 29) are trying to save their assets in the West. In the meantime, the bankers discuss economic impact of possible extension of the sanctions on Russian sovereign debt. The government is still moderately optimistic. As The Bell has learned (Russian), it has just given up the idea to introduce foreign exchange restrictions, which was discussed as a way to protect the economy form the sanctions.

  • Russian hackers and trolls. If the Russian cyber warfare command is real and still on duty, then the next main target should be the November midterm elections in the U.S. The Fancy Bear group has struck again this week, this time releasing emails of the World Anti-Doping Agency and the International Olympic Committee.

  • Oil price. The most important factor for the Russian economy. The rate of the ruble, the ability of the government for budget spending, and the welfare of the population depend on the price of the barrel. If it starts falling, the government will have to look for non-economic ways to retain popular support, which may give birth to new bold initiatives in foreign policy.

Why the world should care

Even if Robert Mueller’s team doesn’t release new evidence of the Russia-Trump collusion, Russia has a chance to be all over the world’s news for the second year in a row. And we’ll be covering it for you from the Russian side.

3. Russian internet entrepreneur launches $5 billion ICO to challenge global payment systems

What happened:

The messaging app Telegram, boasting 150 million users worldwide, is reportedly planning to launch its own cryptocurrency with a $5-billion ICO in March 2018. The ultimate goal is to build a blockchain payment system that can rival Visa and Mastercard.

  • Telegram owner Pavel Durov was the founder of Russia’s largest social network Vkontakte, which now has 97 million monthly users.
  • In 2014, Durov sold Vkontakte and left Russia to found Telegram, an encrypted messaging app which has made a name for itself by refusing to hand over user data to government agencies.
  • In Russia, Telegram has been under constant threat of being shut down for refusing to cooperate with the authorities. Telegram is also the most popular messaging app in Iran with 40 million users. It was blocked after mass protests erupted in the country in December 2017, but most users continued using the app through VPN.

Why the world should care:

Telegram is arguably the most successful internationally recognized product of Russian origin in the world right now. Its reputation as a secure app with a zero-tolerance policy towards government demands could now help promote it as a secure payment system. In Russia Telegram has become a distribution channel for a variety of media, including those who support and oppose the Kremlin. According to Durov, the app has about 10 million users in Russia, rivaling Facebook’s share in Russia (15 million monthly users), and it is widely used among Russia’s business and political elite.

4. How a fortnight of New Year’s holidays hurt the Russian economy

What happened:

Russia is still waking up from its long New Year celebration. The official holiday is at least 10 days long — this year, from Dec. 29 to Jan. 9. In fact, the entire country stops its normal working schedule from about Dec. 20 to Jan. 15.

Western-oriented Russians love speculating about the economic damage the long holidays cause. Every year, FBK consulting estimates the negative economic impact of the break at around 1.5 percent of GDP.

The solution, it might seem, would be for Russia to just cancel the holidays to boost the economy. But the figures say that the main problem is not the long break itself. On average, Russians rank among the world’s top-5 for hours spent at work. It is their low labor productivity that sends these hours into the trash can.

Why the world should care:

If you tried to get in touch with Russians to do business after Dec. 29 and received no response, you shouldn’t be surprised. For better results, try send a reminder next week.

Peter Mironenko, The Bell