1. Skripal’s poisoning and the conflict with the UK shuffled the cards in the Russian presidential election
The most important topic in the run-up to the election has become the rapidly developing conflict between Russia and the UK over the poisoning of former Russian intelligence and MI6 double agent, Sergei Skripal. We won’t write about the conflict and the circumstances surrounding the poisoning — for almost two weeks the affair has unfolded on front pages across the globe, and the British public are more interested in Skripal than they are in their own prime minister.
For the moment, the affair appears, at least publicly, to not have been thoroughly investigated. Many questions remain — for example, how did British authorities determine that Skripal was poisoned with “novichok”, about which nothing is known and whose existence is not even confirmed by the Organization for the Prohibition of Chemical Weapons? Against Russia is of course a long record of murders abroad (for example, that of Alexander Litvinenko, or of the former president of Chechnya, Zelimkhan Yandarbiyev) and also Putin’s denial, and later admittance of the annexation of Crimea by Russian soldiers. Russian denials have come to carry little weight abroad.
Russia will elect a president this Sunday. Vladimir Putin will be comfortably reelected; the second and third place finishers are each expected to receive no more than 6-8% of the vote. We can draw one conclusion from behavior of the Russian authorities in relation to the Skripal affair: it does not appear to be a high level, well thought out and pre-planned pre-election operation.
- The first thing which is striking is the difference between the two main external political subjects involving Russia in the last month.
- The first — Putin’s speech about Russia’s new nuclear arsenal — was clearly a well planned event ahead of the elections. Right after his address, Putin gave a long interview to NBC, Russian television ran taped, prerecorded features, generals began one after another to report on successful rocket launches, and the Ministry of Defense invited the public to vote on how to name the new weapons.
- In the second event, the propaganda machine couldn’t figure out at first how it should react. The first report on the Skripal affair in television news was only run on the third day after the poisoning and it sounded almost like a confession: the news announcer addressed “professional traitors” and warned them about the dangers of such a profession and advised them not to take up residency in the UK. Over the next days, the Skripal affair became the leading topic on state television channels, but no one spoke anymore to the traitors, and television hosts blamed the affair on “British provocation”.
- In the case of new nuclear weapons, Putin was the central figure, and this is logical ahead of an election: the nation is under threat from external dangers, and a strong leader is ready to defend the country. In the case of Skripal, it’s almost as if Putin isn’t there: during this entire time he commented only once about the situation and didn’t say anything about traitors, nor about a hostile environment: “Look, we are busy here with agriculture,” Putin said to a BBC reporter, “As you can see, the aim is to create good conditions for people’s lives, and you ask me about some tragedies. Get to the bottom of things first, and then we’ll talk about this.”
- Finally, the biggest conflict with the UK in the last 10 years (and it was unavoidable given the substance used which carries a high risk of accidentally poisoning others who come into contact with it) in the week before the election almost completely overshadowed news of the election itself. It’s not very logical, given the government’s goal of maximizing turnout, on which all efforts have been focused.
Why the world should care
The Skripal affair will determine the development of the conflict between Russia and the West in the near future. Is it possible to conclude from the behavior of the Russian authorities that Russia didn’t play a part in the poisoning? Of course not. One thing is clear: the poisoning does not appear to have been a carefully planned operation in which the government had everything under control.
Yes, the new conflict with the West mobilizes Putin’s voters and improves his result in the ballet box. Yes, the West does not consider Russia’s elections to be legitimate, and their view of the Skripal affair doesn’t make it any better. But what we will never believe — is that Putin is ready next Monday to find an article about his victory in The New York Times positioned below a headline featuring new details about the poisoning of some spy.
2. The conflict with the UK threatens Russians living in the UK, from the middle class to oligarchs
An estimated 300,000 Russian citizens live in the UK, and for them the conflict between the two countries over the Skripal poisoning is really bad news. Foreign Secretary Boris Johnson blamed wealthy Russians close to Vladimir Putin. But major businessmen are not afraid of new scrutiny, while the middle class is worried about UK visas and extending their permanent residency permits.
- According to Boris Johnson, the law on Unexplained Wealth Orders (UWO) could be used against Russians — this allows for the arrest of foreign owned property with unclear origins, the owners of which must prove that their assets have not been acquired with dirty money.
- The primary asset of Russians in Britain is expensive real estate. Russian UK residents include Chelsea owner Roman Abramovich and Arsenal co-owner Alisher Usmanov. A highly ranked Russian government official, Deputy Prime Minister Igor Shuvalov, also owns an expensive flat in London.
- A Russian businessman, living in Europe and owning real estate in London, told The Bell that he has been labeled a “Politically Exposed Person”. He is therefore subject to additional checks, not only in the UK, but in all other European countries, as well. This means primarily problems with banks — sometimes they refuse to work with him simply to not have any connection to him. But even if they do agree to work with him, the compliance procedure is so detailed that it would be tricky for British authorities to uncover anything new, the businessman joked.
- Another Russian in London told The Bell that all wealthy Russians living in the UK have “come to their own conclusions” long before the Skripal scandal — those who believed it safer to bring their money out of Russia already did so, and those who thought they would stay in the country for the long haul did everything they could to minimalize potential problems with the governing authorities.
- Another prominent Russian businessman with real estate in the UK was indignant, “What stopped them from checking everything in detail earlier? Lawyers went over everything, the banks too, and if they closed their eyes to certain things, then that happened on Johnson’s turf, not on ours.”
The middle class
- The Bell spoke with five legal consultants working in the UK. Their Russian clients are worried about potential problems with entering the country, and are inquiring if they could be stripped of their British citizenship, or of their UK-registered companies.
- Another legal specialist told The Bell that he is advising his clients, in order to avoid new inquiries, to look into the possibility of re-registering their companies in other legal jurisdictions, for example – in the Caribbean islands or in Cyprus.
- Despite the fact that local banks already have quite strict compliance procedures, UK authorities could increase checks into sources of income for wealthy Russians, particularly for those educating their children at private British schools, suggested Alexandr Zakharov, a partner with Paragon Advice Group.
- If checks are increased or new sanctions are introduced, banks and legal firms may choose to minimalize their contact with Russians or begin to refuse to work with them, lawyers told The Bell
- In the City of London, there are already legal firms which refuse to work with Russians, confirmed Richard Alexander, Professor of Financial Law at SOAS University of London
Why the world should care
It will become even riskier to work with Russian money in the UK — but lawyers involved will probably benefit financially from the present situation.
3. Foreign investors stick to Russian sovereign debt despite sanctions
International sanctions against Russia didn’t scare off foreign investors. By the beginning of February 2018, the percentage of Russian sovereign debt held by foreign investors rose (Russian) to 33.9%, on par with the record high set in 2012. Investors continue to calculate that the likelihood of making a profit investing in Russian securities outweighs potential risks from sanctions.
- Sanctions against Russian government debt could have been introduced at the beginning of February, but the U.S. Treasury Department decided against introducing additional sanctions because these sanctions would have hurt international investors.
- Investors expected this decision; throughout January they continued to buy Russian government debt. We do not yet have data for February, but the cost of credit default swaps (CDS) for Russian government debt fell by mid-March. This implies that the market continues to believe in the country’s decreasing credit risk.
- After the beginning of the British-Russian scandal, credit default swaps for Russian debt went up, but after Theresa May’s statement announcing relatively modest sanctions, the price of Russian CDS fell again on Wednesday.
- Returns on investments in Russian government debt, as well as investor interest in these instruments, will remain stable (Russian), as long as the difference between the Bank of Russia’s key rate (currently 7.5%) and the Fed’s funds rate (1.25%-1.5%) is more than four percentage points. This allows international investors to earn profits on carry trades.
- However, the spread between the rates is gradually decreasing, and the difference could reach 4 p.p. by the end of this year. The Bank of Russia will have to move faster (Russian) to reduce rates, in order to help fulfill Vladimir Putin’s promise to reduce mortgage rates for Russian buyers. By the end of this year, the Russian rate might reach 6.25%-6.75%, while the Fed rate, according to the latest forecasts, could rise to 2.35%. This could provoke a massive sale of Russian government debt by foreign investors.
Why the world should care
For foreign investors, Russia remains a place where you can still make money — and if something will interfere with this, it won’t be Western sanctions.
4. What the youngest Russian billionaire who lost his fortune thinks about business in Russia
Businessman Maksim Nogotkov built one of Russia’s largest retail chains and founded one of the country’s first internet banks. In 2012, at the age of 35, he was the only Russian included in Forbes’ list of young billionaires. After the beginning of the financial crisis in Russia in 2014, Maksim lost his business and his fortune, and moved to California with almost nothing. Liza Osetinskaya, founder of The Bell, learned (unfortunately the video is only in Russian) what the billionaire who lost almost everything thinks about modern Russia.
- About losing his business: People took on a lot of debt under the assumption that their salaries will continue to grow. But salaries stopped growing and began to fall. Every third person to whom we loaned money to in Russia didn’t pay us back. This began before the annexation of Crimea. But if not for Crimea, I would still be in Russia running my company.
- On the annexation of Crimea and the war in Ukraine: As a Russian person, I felt and still feel a part of the decisions that were made regarding Crimea and Donbass. I see it as military aggression which Russia has used vis a vis its neighboring countries. I find this very difficult on an emotional level, because voluntarily or involuntarily I was a part of this.
- On business in Russia today: The mood has changed. There were the 1990s, the 2000s, when everything developed quickly and there were empty spaces in the market. There were no good retailers, oil was booming. There was a boost of energy and a feeling of optimism. The people who were successful at this time had these elements to their personalities. Now it’s time for optimization. Different people will find success.
- About life as an emigrant: There is a period of adaptation when you understand that you don’t have a driver, nor a secretary, and people don’t answer your letters, all of which would have been nonsense in Russia. But that takes about nine months, and then everything is fine.
- On presidential elections in Russia: It takes a lot of money to win an election these days. Obama’s campaign cost one billion dollars. In Russia, I don’t know how much it costs, but standing behind Putin there is an enormous Russian state economy. To seriously run against Putin, a candidate must have a billion dollars. It’s impossible today to win an election without this kind of money.
- On Russian interference in U.S. elections: I believe it. It could have been outsourced. For example, the Trump team looked for ways of spreading information on Twitter, Facebook and other platforms, and they found these teams with very cheap labor costs, and this work was carried out by them. Or a Russian oligarch decided to gift Trump the team. But I don’t think that this was taken very seriously. What happened in America happened as a result of domestic factors, not because Russia interfered.
- On the U.S. Treasury’s “Kremlin List”: I saw the list. It’s strange. The first thing that comes to mind is that people know about Russia about as much as we know about Bangladesh. When I read the list I had the feeling that these people don’t understand anything about Russia.
- On the Russian opposition: I am skeptical about people who fight against something for too long. I try to support people who fight for something specific. If people are for too long fighting simply against everything, and then they come to power, then you get Lenin, Mao, Stalin, Pol Pot.
Why the world should care
If you have a business or plan on opening a business in Russia, it’s useful to know what a person who has experienced both success and loss in the country thinks about the current business climate and which dangers he sees.
Peter Mironenko, The Bell
This newsletter is made with the support of the Investigative Reporting Program at UC Berkeley.