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1. Vladimir Putin hints at sponsoring mercenaries abroad and the “troll factory”; The Bell learned what Prigozhin is now up to

Evgeny Prigozhin’s next battleground will be Sudan

What happened

In an televised interview with Austria’s ORF, Vladimir Putin spoke for the first time about how he views restaurateur Evegeny Prigozhin’s international activities, as a sponsor of Russian mercenaries in Syria and having been accused by the U.S. of election meddling with the aid of the “troll factory”. Putin compared Prigozhin to billionaire George Soros, unequivocally hinting that both individuals hide under the disguise of private players while acting in their countries’ interests on the international stage.

  • Prior to this interview, when Putin was asked about Prigozhin, he always gave the same answer — he is a restaurateur and private businessman, and has no relationship with the state. But this time, Austrian journalist Armin Wolf was insistent, and the president could not restrain himself, and offered this rather slim concept. Given what we know about Putin’s world view, it is most likely that Putin was honest in his reply this time.

Quote:

“There is such a personality in the United State – Mr Soros, who interferes in all affairs around the world. I often hear from my American friends that ‘America as a state has nothing to do with [his activities]’. There are rumours circulating now that Mr Soros is planning to make the Euro highly volatile. Experts are already discussing this. Ask the State Department why he is doing this. The State Department will say that it has nothing to do with them – rather it is Mr Soros’ private affair. With us, it is Mr Prigozhin’s private affair.” — Vladimir Putin, according to Kremlin’s official website.

  • There is really nothing left to add to what Putin said. It is known that the president’s world view contains some elements of conspiracy theory. He does not believe in the transparency of Western democracies, and he believes that real politics are carried out by players behind-the-scenes. By directly hinting in a conversation with a Western journalist that Prigozhin is one of these behind-the-scenes players, Putin affirms that the practice of interfering in international affairs via intermediaries continues.
  • We don’t know if the “troll factory” received any instructions vis a vis the midterm elections coming up in the U.S. But this week, The Bell learned exclusive details about the next place where Evgeny Prigozhin will conduct his “private activities”. It is yet another failed state, Sudan, which since gaining its independence in 1956, has been in an almost constant state of civil war. The Bell learned that after Vladimir Putin met with Sudan’s president, Omar al-Bashir in November 2017, PMC Wagner mercenaries, who are reportedly sponsored by Prigozhin, were sent to the African country and are already training the local army. At the same time, companies related to Prigozhin received concessions to develop Sudan’s gold deposits. A similar scheme for Prigozhin’s related companies was used in Syria: there Prigozhin’s companies plan to access one quarter of all oil and gas produced from those fields which are won back and protected by the mercenary army.
  • The president of Sudan, Omar al-Bashir, has been indicted by the International Criminal Court (ICC) for allegedly directing a campaign of mass killing against civilians in Darfur. In his meeting with Putin, Sudan’s president said that his country needs protection from aggressive U.S. actions, and there was a discussion about the possibility of opening a Russian military base in Sudan. In his external politics, Putin is a child of the Soviet Union, which never missed an opportunity to take advantage of a conflict between a leader of a third world country and the U.S. The difference, however, is that the USSR had the goal of building socialist regimes, which Moscow was prepared to sponsor. Putin is more pragmatic — with the help of middle men like Prigozhin, he sees these conflicts as an opportunity to make a profit and gain access to Africa’s natural resources.

Why the world should care

Now it is clear without a doubt: if you want to understand where Vladimir Putin’s interests lie, you only need to look at what Evgeny Prigozhin is up to — he is the same kind of behind-the-scenes agent of Russian influence like Putin believes George Soros to be for the U.S.

2. Putin’s new term creates big challenges for his trusted economist, Elvira Nabiullina, who provides for the financial stability of the regime.

What happened

The head of Russia’s central bank and one of the government’s most influential economists, Elvira Nabiullina, was in the background during the “change of leadership” after Vladimir Putin’s election victory, although at the end of last year, she was seriously considered to be a potential candidate for prime minister. At the end of this week, Nabiullina was again the center of attention, as she gave two long, planned interviews — one to the Russian newspaper Vedomosti and one to Reuters. During Putin’s new term, Nabiullina will face new challenges — the increases in taxes and in trillions of budget spending promised by Putin could raise inflation, which the Central Bank was able to drive down to a record low 2%.

  • Elvira Nabiullina, like many of her colleagues in the government and among Russia’s business elite, graduated from the economics faculty of Moscow State University, where she, reportedly, was the youngest student to be admitted to the Communist Party. She then made the long journey to rise from an ordinary economist working for the government to minister of the economy and head of the central bank. Now, Nabiullina has a special position within the system of Russian power. She is one of the most professional economists in the country with a reputation as a “straight A student”, and she is famous for sticking to her principles and for her integrity. She is one of just a few people in the government who has direct access to Vladimir Putin and she has his trust. For Russian leaders, who have a tendency towards populist expenditures and mega-projects, it is critically important for the Russian government to have influential, clear-headed economists. Without them, there would be a great risk of the country going down the Venezuelan path of hyperinflation and distress.
  • One of Nabiullina’s main responsibilities as head of the central bank was to clean up Russia’s banking sector, which was mired in shady operations. In five years, she stripped 360 of 900 Russian banks of their banking licenses. Nabiullina’s influence was seen last year when Russia’s 15th largest bank, Yugra, had its license taken away. Nabiullina was able to close the bank down despite influential government officials lobbying on behalf of the bank — rumour has it that the case was decided after she met personally with Vladimir Putin. After this, Nabiullina carried out the largest financial rehabilitation in Russia’s history, as she withdrew the licenses of three major privately owned banks: Otkritie, B&N Bank, and Promsvyazbank. These three banks held a whopping 6.5% of the total assets of the Russian banking system. The banks were related to each other via mutual obligations, which really resembled a bubble, and now the majority of these banks’ shareholders have left Russia, and Russia may still bring felony charges against them — we wrote about this in detail here.
  • Nabiullina, however, believes her greatest achievement to be Russia’s lowest ever inflation rate in the country’s history. The 2017 inflation rate amounted to only 2.5%, a rate unseen in Russia in the past 30 years. However, this achievement will come under threat during Vladimir Putin’s new term. Over the next six years, the government plans to invest an additional $130 billion in infrastructure, health care and education — this will certainly have an impact on inflation. In order to finance these investments, the government plans to raise VAT fom 18% to 20%. This decision will automatically drive inflation up two percentage points; Nabiullina admitted this herself in an interview. She now she says that a comfortable inflation level would be 4%. The first signs of rising prices have already been spotted — gasoline prices rose in May by 5.6%. The question of fuel prices was one of the most pointed during Vladimir Putin’s direct line Q&A session this Thursday — the president was forced to reassure the public and promise that the government will take action.

Why the world should care

The work carried out by professional economists like Nabiullina, who are loyal to their values as economists, is the foundation for the economic stability of Putin’s regime. Looking back at the lessons learned from the USSR, which fell apart due to illiterate economic policy, Putin is smart to keep people like Nabiullina and former finance minister, Alexey Kudrin, close to him. He gives them challenging tasks and in times of conflict he supports them over the “siloviki”, but to a certain limit.

3. The closing of Russians’ bank accounts in Cyprus puts an end to the long history of capital flight to the West.

What happened

This week, Russian money located outside of Russia suffered a symbolic blow — Cyprus began to freeze the bank accounts of Russians with unclear sources of income. This Mediterranean island is for Russia not just one of the most popular jurisdictions for sending money abroad: for decades, Cyprus was the primary location for storing Russian money outside of Russia. The global financial authorities’ struggle with offshores and the U.S. Treasury Department’s search for Russian money in the West don’t leave Russians with many options: the will have to bring their money home.

  • Russians with bank accounts in Cyprus-based banks began to have trouble after an OFAC delegation visited the country at the beginning of May. OFAC is the sanctions division of the U.S. Treasury Department. According to lawyers, OFAC demanded that Cyprus get rid of questionable clients from Russia under the threat of secondary sanctions. After this, on June 1, commercial banks in Cyprus received a circular from the central bank of Cyprus with instructions to close the accounts of offshore companies. Accounts are frozen until the owner is able to produce a package of documents with comprehensive information about the company — most importantly, about the beneficial owners and the origin of the funds. This makes the offshore status of the companies rather senseless.
  • Historically, Cyprus was Russia’s primary offshore jurisdiction. The country was also a tax haven for Russian businessmen, who, with the aid of a Cyprus jurisdiction, were able to hide the real owners of companies and protect their money from Russian gangsters and authorities. Russian business was so closely tied to Cyprus that until 2015, the island was always among the top 3 countries for foreign investment in Russia; most often it was even ranked in first place. In 2005, 17.2% of all foreign investment into Russia was made by Cyprus-based companies; in 2014, the figure was 34.3%. Russia’s contribution to investing in Cyprus’ economy was overwhelming — according to Russia’s Ministry of Foreign Affairs, Russia was responsible for 80% of the foreign investment in Cyprus. During the crisis in Cyprus in 2013, Russian investors, saving their own deposits, bought the island’s largest bank, the Bank of Cyprus. The bank’s largest shareholder is still billionaire Viktor Vekselberg, who in April was named in the U.S. sanctions list.
  • Now, this idyll has come to an end — Russian money will have to leave Cyprus. The Bell spoke with lawyers who advise only those who actually live on the island and have businesses on the island to remain in the jurisdiction. Actually, the lawyers say the same thing about all other European countries; OFAC’s hunt for questionable Russian money continues, and there is little chance to legalize funds in Europe now. Lawyers are advising their clients to return their money to Russia, and take advantage of Putin’s promise of capital amnesty (we wrote about that here). After repatriating funds, it might be possible to try once again to bring the “cleaned” money to Europe. The most important thing is to manage to do this before, in one way or another, the money can be grabbed by the “siloviki”, who have been closely watching all the money which is returning to Russia. Authorities can always find a way to place new charges of fraud on the owners of amnesty capital.
  • The forced flight of Russian money from Europe pleases Vladimir Putin so much that he can’t hide his satisfaction, as he has been trying for a long time to bring capital back to the motherland. “I warned that the situation which we face today might be possible. And in warning about this possibility, I recommended that our business owners bring their money home, to Russia,” Putin said on Thursday during the nationally televised Direct Line Q&A with Russians, in response to a question about the UK’s refusal to issue a visa to billionaire Roman Abramovich.

Why the world should care

Some Russians will try anything to leave their money abroad, but the global fight against offshores and the work of OFAC won’t leave any loopholes. Russian money in the West will decrease significantly in the near future. This is bad news for the bankers at Deutsche Bank and their colleagues. But, in a few years, there will be far fewer questions about the legality of whatever Russian money manages to stay in Europe.

4. Russia is preparing to host the FIFA World Cup, on which it has spent $11 billion.

What happened

In one week, the FIFA World Cup will begin in Russia – the event is the second global sporting event to be held under Vladimir Putin after the 2014 Winter Olympics in Sochi. According to the government, the World Cup should lead to more investments and improve Russia’s image on the world stage. However, whether that will actually happen in practice remains to be seen.

  • Preparing to host the championship cost Russia quite a bit, but it didn’t become an unprecedentedly expensive mega-project: Moody’s estimates that the country spent $11 billion on preparations between 2013-2018. This is roughly the same as the amount which was spent by Brazil to prepare for the 2014 World Cup. South Africa, which hosted the championship in 2010, spent significantly less: only $6 billion. These expenditures pale in comparison to the approximately $24 billion which was spent in preparation for the 2014 Winter Olympics in Sochi.
  • Deputy Prime Minister Arkady Dvorkovich is responsible for the World Cup (he is, by the way, not a member of the new government). He assured that the event has already “driven economic growth”, and that the total effect of the championship over the next five years will be RUB 150-200 billion annually (up to $2.4 billion). But Moody’s believes that the championship will only have a limited impact on the Russian economy – and it will be short-term in nature: Russia’s economy and land mass are so large that the championship is just a drop of water in the sea. In the long run, according to Moody’s, the largest beneficiaries will be airports and construction companies, and in the short term — the tourism industry. It wouldn’t be wise to expect a lot from the sporting infrastructure which was built for the World Cup. The stadiums are unlikely to be in demand: for most of the regions where games will be played, tourism and the hotel industry will not become an important part of the local economy. Moody’s drew exactly this conclusion when it estimated the impact of the 2014 World Cup on Brazil: within the next 10 years, the additional impact on GDP will be only 0.4%. The reason is the same as for Russia: Brazil itself and its economy are too big for the championship to have a significant effect. Perhaps the most important piece of good news for Russians is that the World Cup should make the rouble stronger, according to estimates (Russian) made by Nordea Bank analysts. The host country’s currency usually becomes on average 2% stronger during each World Cup.
  • For fans, hosting the World Cup is the celebration in itself, which, with only a few exceptions, usually happens only once in a lifetime. But all host city residents have to deal with inconveniences — and these inconveniences will be huge: if something is banned in Russia, it isn’t done on a small scale. For example, those people who live or work near a stadium or official fan zone will need a special pass to reach their homes or offices. There are also extreme examples: in Samara, they closed all kindergartens for the entire month in the championship zone. No-fly zones will be introduced around several stadiums; for example, in Kazan, drones will be banned from flying within a 110 km radius of the stadium. But that’s not all: passengers are already being actively searched at train stations and airports, and limitations have been placed on alcohol sales within a 2 km radius of the stadiums. Moscow State University students have also suffered, and they are protesting against turning part of their campus into a fan zone: three students are facing jail time over graffiti drawn in protest on World Cup advertisements.
  • The main political intrigue and a matter of prestige for Vladimir Putin is the question of which foreign leaders will come to cheer for their teams. For example, the refusal of UK government leaders to come to Russia to cheer for the England team was the first anti-Russian measure announced after the poisoning of Sergey Skripal in the UK. Dmitry Peskov, press secretary for Russia’s president, didn’t name names, but he promised (Russian) that several high-ranking guests will attend the World Cup. For now, no leader of a European country has confirmed that he or she will attend the World Cup, but this might of course change. For example, French president Emmanuel Macron said he would come if his team makes it into the final. Nevertheless, Saudi Prince Mohammed Bin Salman will definitely come to Russia, as well as the ever-present distinguished international guest of any major event in Moscow — Moldova’s pro-Russian president, Igor Dodon.

Why the world should care

The Winter Olympics in Sochi were a watershed for modern Russian history — for several months ahead of the games, Russian authorities refrained from taking steps which might have stirred up a conflict with the West and ruined the celebrations; only several days after the Olympics finished, Russian troops occupied Crimea. Vladimir Putin clearly doesn’t have the same kind of personal connection to the World Cup as he did to the Olympics, and relations with the West are hopelessly ruined. But if the Russian government has plans to escalate its conflict with the West, it is likely that they will wait until after the championship ends on July 15 to do so — we can expect things will remain calm until then.

Anastasia Stognei, The Bell

This newsletter is made with the support of the Investigative Reporting Program at UC Berkeley.