1. Telegram ban flop calls into question Russia’s internet might
All the news out of Russia this week — even U.S. sanctions and Syria — took second stage to the epic battle surrounding the Russian government’s attempts to ban Telegram in Russia. The result — a total defeat for the authorities, who illustrated for the first time that the Russian security services’ ability to control the internet is a myth. This myth fell apart as soon as the state encountered well-organized resistance.
We wrote in detail last week about how and why the Russian authorities, on the request of the security services, decided to ban Telegram, the messenger service popular in major cities. The court’s decision came into effect a week ago, and on Monday the Russian communications watchdog Roskomnadzor began the process of banning Telegram. IT specialists warned earlier that it would be no easy task, but no one foresaw the fiasco that was to come.
How the ban failed
- A ban of internet resources in Russia is quite easily constructed. Roskomnadzor instructs internet providers to block access to the resource’s IP addresses, and after this occurs, the site in question can only be accessed in Russia with the use of VPNs or proxy servers. Until this most recent ban, this worked, but Telegram fought back — and it became clear that Roskomnadzor was only lightly armed. Telegram used a simple but effective tactic. When the communications operators blocked Telegram’s IP addresses, the messenger simply moved to different IP addresses which it prepared ahead of time — and this happened over and over and over. On Wednesday evening, Roskomnadzor admitted during a meeting with providers that the ban was not successful. Even government officials refused to leave the messenger; it is particularly popular among the Russian government elite. The characteristic sign of defeat was when the state television channel RT, which after the ban was announced stopped updating its own Telegram channel, posted to its Telegram channel on Thursday and began using it again.
- In its pursuit of Telegram, Roskomnadzor blocked almost 19 million IP address in Russia belonging to Amazon and Google’s hosting services, which Telegram also used. These addresses represent almost 0.5% of the global internet, so even Google and Amazon clients suffered in the fallout from the ban. Internet stores, educational platforms, and online games all stopped working, the messenger Viber was not able to offer voice calls for a period of time, and some users couldn’t access Slack and Evernote. Telegram itself, thanks to the attention the ban drew, which the whole country followed, experienced record growth in users over the course of the week.
- Telegram was founded in 2013 by the programmer Pavel Durov. Earlier, he founded the Russian social network VKontakte, which is still Russia’s most popular social media network. VKontakte had a contradictory history — on of Durov’s first investors was the son of a famous criminal in Russia. Later, oligarch Alisher Usmanov and a fund close to the head of Rosneft, Igor Sechin, both bought stakes in the company. After a conflict among shareholders, Durov was forced to sell his stake in VKontakte. In parallel with this, Durov faced a conflict with the head of the Russian security services, the FSB, who during the political protests in 2011 demanded that Durov shut down opposition groups in the social network. In the end, Durov left Russia, and he built Telegram from abroad.
- Telegram’s competitive advantage was described by Durov as its security and that all communications in the messenger are inaccessible to the security services of any country. This allowed the messenger to build an audience very quickly. Telegram currently has 200 million users, the most in Iran (40 million), followed by Russia (15 million). With such a marketing strategy, the refusal to cooperate with the security services is not just a matter of principle, but also a necessary business decision. The company, which for the past 5 years grew on the basis of Durov’s personal investments, has now announced the largest ICO in history and has already attracted investments of $1.7 billion during closed rounds of financing. Victory over the Russian security services offers Telegram an advertising campaign which would have been impossible to buy with money.
What happens next
- He didn’t succeed in defeating Telegram, but the head of Roskomnadzor, Alexander Zharov already named his next target — Facebook. Since 2015, Russia has required Facebook and other foreign internet companies to store the data of Russian citizens in Russia. These talks have not been successful, and in 2017 the government even blocked LinkedIn over this issue. The ban looked to be a demonstration of what was possible — LinkedIn had only 2 million users in Russia. In an interview with the pro-government newspaper, Izvestiya, on Wednesday, Zharov promised that if Facebook does not meet these demands, that it will be banned in Russia before the end of 2018.
Why the world should care
- After interference in the U.S. elections, the West considers Russia to be a serious cyberforce. But can Russia really ban major foreign internet services? Is Russia capable of implementing a national firewall a la China? And if not — then how long will it take the country to develop such a system? The case of Telegram and the millions of Amazon and Google IP addresses illustrated that Russian authorities can only cut off a major service, one that has resources and the desire to fight back, together with a majority of foreign sites. Cutting itself off from a global network is not a new idea in Russia. In March, an advisor to the President responsible for the internet announced that from a technical point of view the country is prepared for this. If the country decides to ban Facebook, it may show that the Russian government is ready to take such a big step towards isolating the country.
2. Russian oligarchs continue to lose billions as a result of U.S. sanctions
Two weeks have passed since the new U.S. sanctions against Russian oligarchs were announced, and their problems are growing by the day. Oleg Deripaska, the owner of aluminum producer UC Rusal, has seen his business practically destroyed. Now there are already discussions that the only way to save the company is to nationalize it. Real problems this week also began for Deripaska’s partner, No. 9 on the Russian Forbes list, Viktor Vekselberg, who because of the crash in UC Rusal shares faces margin calls from Western banks and is also now asking the government for help.
Oleg Deripaska, the aluminum magnate who is the primary victim of the new round of American sanctions, continues not only to suffer losses — after this week, his business appears to be close to being totally destroyed as the result of foreign buyers refusal to work with the company. Rusal generates 80% of its revenues from foreign buyers. Here are only the company’s main woes this week:
- As of 17 April, LME halted trading of Rusal products until further notice. NYMEX also withdrew UC Rusal’s permission to trade and deliver aluminum.
- This same day, it became clear that major aluminum buyers in Japan would also refuse to buy Rusal products. Earlier, Japan bought 300,000 tonnes of aluminum from Russia each year, accounting for 10% of Rusal’s export sales. According to UC Rusal’s own statistics, since the sanctions were introduced, the company’s exports have fallen by 20.9%.
- On these two news items, the company fell to it’s cheapest valuation in its history, $2.7 billion. Before the sanctions, Rusal was valued at $8.9 billion.
- Transport companies have refused to work with UC Rusal, including the Danish container ship operator, Moller Maersk and Russia’s largest container transporter, Transcontainer.
- There are also problems with raw material supplies: Australian Rio Tinto announced a force majuere and is reviewing its contracts with UC Rusal for the delivery of alumina.
- In 2007, Oleg Deripaska said in an interview with the Financial Times, “If the state says we must give up our companies, we will give them up. I do not separate myself from the state. I don’t have any other interests. I am just lucky. You could say that wealth fell to me from the sky.” We don’t know if he believed those words when he said them, but now they could become reality.
- Nationalization appears to be the most likely solution for Rusal’s problems. This week the idea was actively discussed. The first to demand that the company be handed to the state was the leader of the state-controlled unions (Rusal’s factories employ 60,000 workers). Following this, the head of the Russian Union of Industrialists and Entrepreneurs (RSPP), Alexander Shokhin, also took the opportunity to share this view. On Thursday, Vladimir Putin’s press secretary, Dmitry Peskov, said that nationalization is only one of a number of options, but that it is being actively discussed. Normally, Peskov makes less specific statements, so his choice of words is a rather serious signal. Actually, nationalization would not likely relieve the company from sanctions, so the discussions are most likely about protecting jobs with the help of the government budget, and are not about saving the business itself.
- There is a less radical, different plan: the state can begin to buy the aluminum which foreign buyers have refused to purchase. For Rusal this is a serious problem: Rusal exports 80% of its aluminum production, export volumes fell on Thursday as a result of foreign buyers refusing to buy from Rusal. Rusal is presently working “on the warehouse” without reducing production volumes. It is possible that it fears destabilizing the social situation in the regions, as Rusal employs 60,000 employees. But it is unclear what the state will do with all that aluminum.
- Rusal’s predicament is so desperate that investors are buying into the bad news — on Thursday, Rusal shares in Hong Kong jumped up 26%, and the company’s market capitalization rose to $3.4 billion.
The problems faced by Rusal’s second shareholder, Viktor Vekselberg (together with his partner Leonard Blavatnik he owns 26.5% of the company) were at first overshadowed by Oleg Deripaska’s catastrophe. But this week it became clear that Vekselberg’s problems are not limited to the fall in the aluminum company’s share price:
- During a meeting with Prime Minister Dmitry Medvedev, on the topic of aid for those businessmen who fell under sanctions, it became clear: Vekselberg faces freezes of dollar-denominated payments to creditors, the risk of having his European enterprises shut down, and the necessity to reduce his stakes in foreign companies.
- The main problem, The Bell learned, are margin calls on loans of $800 million – $1 billion which Vekselberg took out with Rusal shares are collateral.
- Dmitry Medvedev promised Vekselberg support, but what kind of support is not yet known.
Who is Vekselberg?
Although he is significantly wealthier than Deripaska, and he actively invested in foreign projects, Vekselberg is less well known outside of Russia. What’s important to know about him:
- Vekselberg is rated No. 99 on the global Forbes list and No. 9 on the Russian Forbes list with net worth of $14.4 billion.
- Vekselberg built his business together with his university friend Leonard Blavatnik, whom he met while studying at the Moscow Institute of Transport Engineering. Blavatnik emigrated to the U.S. in 1978 and his net worth is now estimated to be $20.2 billion. In 2013, Vekselberg and Blavatnik made $7 billion each on Russia’s largest ever oil deal — the sale of TNK-BP to state-owned Rosneft.
- Vekselberg’s assets are managed by Renova Group, which has also now fallen under sanctions. In addition to Rusal shares, Renova Group owns major stakes in the electric power industry, utilities, airports and construction companies. Renova also has shares in the Swiss machine building companies Oerlikon and Sulzer, and in the steel group, Schmolz + Bickenbach. Investments in these three companies represent one third of Vekselberg’s net worth. Renova also has an investment fund, Columbus Nova (U.S.) which says that it manages assets of $2 billion.
- Since 2010, Vekselberg has been president of the Skolkovo fund. This is a Russian government project which was to become Russia’s “Silicon Valley”. The fund is primarily responsible for distributing grants to technological projects.
- Last fall, ABC reported that special counsel Robert Mueller was investigating donations to Trump’s election campaign totalling $2 million which were made by Blavatnik, the managing director of Columbus Nova, Andrew Intrater, and a former manager of a Vekselberg company, Simon Kukes.
Why the world should care
It became clear just a few days after the latest round of U.S. sanctions was announced that these would be the most punishing for the Russian economy since 2014. The events that followed only confirmed this. In fact, there were quite a number of follow-on effects — Europeans are complaining that the ban on Rusal’s exports is damaging the supply chain for aluminum in Europe, and global metals prices have been hitting new record highs for two weeks already.
3. Russia is planning a response to U.S. sanctions and to defend itself against new sanctions
Just one week after U.S. sanctions came into effect, Russia’s Duma came up with a potential response. Duma deputies wrote a draft law which includes a long list of a wide range of bans related to the United States. All of these measures could also be used towards other countries which support U.S. sanctions. Russia’s new government will decide which of these steps to take — the law will be passed in the middle of May, one week after Vladimir Putin’s inauguration for a fourth term. Here is the complete list (Rusian), and here are the most odious suggestions:
- A ban on cooperation in the atomic sector, in rocket and engine construction and in aircraft construction. This suggestion surprised Russia’s producer of titanium, VSMPO-AVISMA, which is the main supplier of titanium to both Boeing and Airbus. 30% of the company’s revenue is generated in North America, 25% of the company’s shares are owned by the state. “The United States introduces sanctions against Russia — Russia is banned from exporting aluminum. If Russia introduces sanctions against the U.S. — Russia is banned from exporting titanium”, joked one analyst with an investment bank. After protests from VSMPO-AVISMA, the government promised not to ban titanium exports.
- A ban on imports of medicine from the U.S. (except for those for which the Russian market has no analogues). American medicines make up approximately 10% of the Russian pharmaceutical market, and Russian analogues tend to be of poorer quality. The medicines in question are generally those used to treat potentially fatal diseases — cancer, diabetes, and HIV.
- A ban on the import of alcohol and tobacco, on the purchase of American software, and of technical equipment for government use.
- A ban on Americans working in Russia in consulting, legal and auditing companies.
- And finally, possibly the strangest suggestion — removing from U.S. companies the exclusive rights to trademarks which they hold. This actually means that the government could allow anyone in Russia to produce goods bearing American brand names. This suggestion would lead to multimillion dollar claims in international courts.
What the new government will be like and how far it is willing to go to adopt counter sanctions is not yet clear. But the current government is for now not planning to attack, but rather to defend itself. It is trying to come up with a way to ease the pain of future U.S. sanctions and prepare for the worst. Here are three worst-case scenarios which the Russian authorities fear:
- A ban on buying Russian state debt for Americans and for all foreign investors (under the threat of secondary sanctions);
- Cutting Russia off from the SWIFT international payments system;
- Inclusion of Russian state banks in the SDN sanctions list. Now, Sberbank and VTB already face sanctions, but they freely execute international operations. If they were to be added to this list, it would be impossible for the banks to conduct international financial operations.
Does the government have any real means to defend itself? It seems not. It is only clear that a special bank may be created to work with sovereign debt, as was already done for the defense sector, and if Russia is removed from SWIFT, international payments could be executed via external intermediaries. But these measures are not really potential solutions.
Why the world should care
If someone in the U.S. is worried about the Russian response to the sanctions, he can breathe easy. Of all the suggestions made by the Duma, the only one which would have been painful for American business would have been the ban on titanium sales to Boeing — but Russian business is not ready to give this up. All the other suggestions won’t cause the U.S. to pay much attention.