Why is the Russian economy growing despite Western sanctions?

Hello! This week we kick-off with an explainer on Russia’s impressive economic performance in 2018 (sanctions notwithstanding) and whether the growth data could been doctored. Then we have stories on Durov’s very optimistic valuation for his new cryptocurrency project, how a propaganda chief fared when he went on a popular YouTube show, billionaire Mikhail Fridman’s investment in Spanish retail and a smoke and mirrors game with journalists being played by Yevgeny Prigozhin, ‘Putin’s chef’ and alleged troll factory founder.

Vladimir Putin demonstrates suspiciously positive statistics at the yearly address to the Federal Assembly./ Photo credit: TASS

Why is the Russian economy growing despite Western sanctions?

What happened

This week it was announced that Russia’s economy grew (Rus) 2.3 percent last year, compared to 1.6 percent growth in 2017. This shockingly positive data was published by Rosstat (the statistics agency under the Economy Ministry) and, if the figures are to be believed (and some economists think they have been manipulated), GDP is now growing at its fastest rate since 2012 (when GDP grew 3.7 percent). In nominal terms, GDP in 2018 reached 104 trillion roubles ($1.6 trillion). And all of this amid sanctions and geopolitical tension.

Drivers of economic growth

While some think the figures are unreliable, there is no doubt Russia’s economy is growing (the question is how much). The positive result for 2018 was driven by:

• Explosive growth of retail lending. The largest sectoral growth (6.3 percent) was reported by financial and insurance companies: 2018 was the year of a retail lending boom. Mortgage lending expanded 25%. One reason for this is the Central Bank’s monetary policy, which has meant interest rates on loans have been at their lowest levels in Russia’s recent history. The second is more worrying: Russians’ real incomes fell for the fifth year in a row in 2018, but they are not reducing their spending and are turning to banks for money to bridge the gap. While the risks are minimal at the moment, this could, in the future, lead to a dangerous bubble. In response, at the end of last year, the Central Bank began tightening the terms for retail lending.
• World Cup. The soccer World Cup, the major international event to be held in Russia last year, made a not insignificant contribution to growth (0.4 percent of GDP). The championship helped the hotel and restaurant sector grow by 6.1 percent, making it the second best performing sector of the entire economy.
• Expensive oil and ruble devaluation. It’s important not to forget that Russia was lucky in 2018: prices for its main export, oil, rose on average by a third, from $54 per barrel in 2017 to $70 per barrel in 2018. The ruble, on the other hand, lost 20% of its value, which allowed Russia’s exporters to post record ruble profits. Meanwhile, sanctions against Iran led to increased sales as Russia took Iran’s share of the global oil market.

Dubious statistics

The problem with all this is that economists can’t convincingly explain where the 2.3 percent figure came from, and why it has been repeatedly revised upwards. At the beginning of January, the Economy Ministry didn’t have any doubts about its prognosis of 1.8 percent growth for 2018. However, at the end of January, Minister Maksim Oreshkin raised this to 2 percent and then, at the beginning of February, Rosstat announced the figure was actually 2.3 percent.

One of the official explanations for these changes was a dramatic alteration of recorded growth in the construction sector: it was revised upwards from 0.5 percent to 5.3 percent. Most experts did not buy the technical explanation for this given by the Economy Ministry.

Amid the criticism, Oreshkin was driven to enter into a public argument on Facebook with a well known economist, Kirill Tremasov, who used to be responsible for forecasting inside the Ministry. Tremasov called the new data “trash” and accused Rosstat of duplicity. But Oreshkin’s defense was weak and the argument quickly turned into a discussion about why Tremasov was fired in the first place, which didn’t lead to an increase in public confidence in the statistics.

Why the world should care

The fact that Russia’s economy is growing, even just a little bit, should be a wake up call for Western officials: it is yet another sign that sanctions aren’t working. But whatever the West does going forward, this is not a new, upward trajectory. Growth in 2018 was an economic ‘bump’ buoyed by trends that are unlikely to be sustained this year, according to Bank of America Merrill Lynch’s chief economist in Russia, Vladimir Osakovsky.

Pavel Durov’s blockhain startup valued at $29.5 billion

The Bell has learned that Pavel Durov’s cryptocurrency project was forecasting its blockchain platform TON would be worth $29.5 billion by the end of 2019.

What happened

The Bell saw one of TON’s most recent notes to investors, which gives a target price for Gram (TON’s tokens) at the end of 2019 of $5.90 (the first issue of Gram will be at $0.10 per token). If this is achieved, the entire platform will worth $29.5 billion. In the note, a report written by Russian cryptocurrency investment bank HASH was cited as the source of the figure.

• TON is the blockchain platform tied to Telegram, the messenger service with 200 million users. Durov is creating a cryptocurrency payment system based on Telegram, which he has said will compete with Visa and Mastercard.
• In 2018, Telegram raised $1.7 billion for TON in a closed ICO. Investors included famous Silicon Valley funds such as Kleiner Perkins, Benchmark and Sequoia, as well as Russian billionaires like Roman Abramovich.
• Under the terms of TON’s ICO, if the project is not launched by October 2019, Durov must give investors their money back. The deadline for launching a test version of TON was February, but it may be pushed back to March.

A $29 billion valuation is extremely ambitious: it would make a non-existent blockchain platform almost three times as valuable as Uber’s main rival, Lyft ($11.5 billion). If it had been included in the November rating of the world’s most expensive unicorns at the $29 billion valuation, TON would have been ranked fifth, between AirBnb ($29.3 billion) and SpaceX ($21.5 billion).

Why the world should care

The cryptocurrency market is placing its last hopes in the success of TON. But the project is also a serious test for Durov, the most global of all Russia’s tech entrepreneurs.  

Russia’s leading TV propagandist is trying to win over the YouTube generation

What happened

Dmitry Kiselyov, Russia’s domestic TV propagandist-in-chief who has suggested “burning the hearts of gays” (Rus) and “turning the U.S. into radioactive ash”, was a guest on one of Russia’s most popular YouTube shows, vDud, hosted by 32-year-old journalist Yuri Dud. Millions of people watched the clash and heated discussions about who won are still going on.

• Outside of Russia, the chief editor of Russia Today (RT), Margarita Simonyan, is known as the face of Russian propaganda. But domestic audiences are far more familiar with Kiselyov, who runs RT (Kiselyov is Simonyan’s boss) and hosts a prime time analytical show, The News of the Week, every Sunday on one of the country’s most popular national television networks.
• Kiselyov dodged the difficult questions. When Dud asked the 64-year old about the size of his pension (in the context of unpopular pension reforms that Kiselyov has praised), Kiselyov said: “My mom taught me that gentlemen never talk about money” and then told Dud to “drop your pants and show your little dick.”  
• There is nothing surprising about Kiselyov appearing on a show popular among young people. He has been trying for years to reach beyond his own viewers, who are generally nearer to him in age. Before New Year, in the midst of a surge of interest in Russian rap and bans of concerts, Kiselyov recorded his own rap track and is currently preparing to host a rap festival on a nudist beach in Crimea.

The Bell has selected some of the best quotes from the two-hour long discussion:

On Putin: “Putin built our government. He gave people hope, his decisions improved the quality of life in Russia and made life… safer. He is a real father. Psychologists say that a father’s primary role in the family is to provide security. He is, probably, the best leader Russia has had in many centuries.”

Оn the USSR: “The Soviet Union was a dead-end for development and the evolution of mankind. When we emerged [from the USSR] on one hand we had big technical achievements under our belts, but, on the other, we had very negative social experiences of dependency and an inability to live in a market economy.”

On Venezuela: “The Western world is not showing the demonstrations in support of Maduro… There are problems, but they can’t be fixed by a coup. It’s not appropriate to talk about how bad things are in Venezuela in the current situation.”

On patriotism: “Without patriotism we would be even worse off. We would not have a state. And the absence of a state is the absence of culture and values. We would turn into the Kurds. Without patriotism, we will lose Russia. We only talk a little bit about patriotism. In the U.S. there is an American flag flying on every home – we don’t have that.”  

On rising food prices: “Something or another got 5 percent more expensive, something got cheaper. Rising prices are not a big problem for most people. We shouldn’t be deceiving people: prices are not soaring.”

(Fact check: in the first week of 2019, prices rose by 0.5 percent, 2.5 times faster than the same period the previous year. And people are clearly worried)

Why the world should care

The skillful work of cynical propagandists like Kiselyov is the basis of Vladimir Putin’s “teflon” approval rating, which doesn’t react at all to U.S. sanctions.

A Russian billionaire wants to distance himself from Putin & build a European business empire

What happened

Billionaire Mikhail Fridman, who was one of a group who made $14 billion on a 2013 oil deal, is buying up European assets. Fridman has already set-up one of Europe’s largest independent oil companies but now he wants to repeat that success in retail, with a controlling stake in Spain’s second largest food retailer. He also wants the world to know that he is not a confidant of Putin.

• Two years ago, Fridman bought 29% of Spanish grocery store chain Dia. The company has significant problems and is now worth one twentieth of what it was four years ago (€150 million vs. €5 billion), while Fridman has been in conflict with the board of directors. This sort of situation is very familiar to anyone familiar with Alfa Group’s business practices in Russia: the company was famous for buying distressed assets mired in corporate conflicts at very low prices. Fridman is now looking to take full control of Dia.
• Fridman, who founded Alfa Group and Letter One, is not your typical Russian billionaire. He was one of the Russian oligarchs who made his fortune in the 1990s, but he did not participate in the notorious loans for shares scheme when oligarchs received major state-owned assets at bargain prices (something he is now proud of).
• Some Western media outlets believe Fridman will be a victim of another round of U.S. sanctions. One of the reasons for this is that Fridman was named in 2017 as a close advisor to Putin by Christopher Steele in his controversial dossier on Trump. And this argument is given credence by the most successful deal of Fridman’s career: in 2013, Alfa sold its stake in oil company TNK-BP to state-owned oil giant Rosneft for $14 billion. In reality, however, there is no reason to think Fridman is close to Putin. And Fridman is desperately trying to prove this: he fails to show up to Putin’s meetings with business leaders and recently gave a critical speech at a closed door session of the Atlantic Council.
• Fridman can’t afford to be hit with sanctions. Since 2014, he and his partners have been buying oil and gas assets in Europe and Latin America and, with some help from former BP CEO John Browne, they have become the owners of Wintershall DEA, one of the largest independent oil and gas producers in Europe.

 Why the world should care

Fridman is the only major Russian billionaire actively acquiring major assets in the West and U.S. sanctions would destroy his attempts to become an international businessman.

Troll factory ‘sponsor’ Yevgeny Prigozhin is trolling journalists

What happened

For a little over a week, anyone interested in getting answers from the secretive sponsor of Russia’s troll factory and mercenary army in Syria and Africa, can do just that. After The Bell published an investigation into the history of Yevgeny Prigozhin’s private army, the press service of Concord, which belongs to Prigozhin, actually began responding to  journalists (previously it had been almost impossible to reach). It even went so far as to create a special page on VKontakte, Russia’s largest social media network.

• Answers have been colorful, including both justifications and insults. For example, Prigozhin replied (Rus) to one of The Bell’s questions with the following: “I don’t read your little newspaper ‘the little bell’. It is one of the shit foreign media publications, so you can go f**k yourselves.” And in response to an earlier question from Reuters about mercenary casualties in Syria, the reply was: “How can we be sure that your questions are not being asked to stir up anti-Russian hysteria in the world?”
• However, Concord’s PR strategy is not just about insulting journalists. At the end of last week, Russia’s most popular conspiracy theory Telegram channel, Nezygar (which has 215,000 subscribers) posted obviously fake photos of Prigozhin ‘meeting’ with opposition politician Alexey Navalny. Prigozhin’s press service later confirmed (Rus)  that the meeting took place, explaining that Navalny asked for political support in exchange for stopping his investigations into Concord — but Prigozhin refused. Of course, no one seriously believes that the meeting took place, but pro-Kremlin social media accounts and some media outlets gave a lot of exposure to the story.
• The peculiar way in which Concord has chosen to interact with the media is likely designed to exclude the possibility of legal action, according to one journalist who has written extensively about Prigozhin. Answers from Concord come from an email account registered to a free email service and are published on social media. While Concord has — by phone — confirmed the email is genuine, it remains difficult to formally link it to the company.

Why the world should care

If you have questions for Prigozhin (like, for example, Special Counsel Robert Mueller does), we suggest just writing to the email address of his unofficial ‘press service’. You’ll almost certainly get a reply, but it might not be of any use whatsoever.

Anastasia Stognei

Peter Mironenko contributed to this newsletter. Translation by Tanja Maier, editing by Howard Amos.

This newsletter is supported by the Investigative Reporting Program at UC Berkeley