Boosting state capitalism

The Bell

Hello! Our top story this week is a look at a series of proposals to promote ‘state capitalism’ that reveal how little officials are bothered about the free market. We also look at whether Russia’s driverless vehicles can be internationally competitive, and the revelations from two new blockbuster investigations into corruption at the heart of Putin’s inner circle.  

State capitalism goes from strength to strength

Russia’s 10-month old government this week floated two ideas that are about as far as you can get from the free market. The first regulates food prices, the second involves printing money.

  • Economic policy in Russia over the last decade can hardly be called market-led. In recent years, the emphasis has been on raising taxes and redistributing money to the ‘National Projects’, a massive infrastructure and public services investment scheme. The appointment of Andrei Belousov – Putin’s former economic adviser and the most vocal advocate of state capitalism – to the first deputy prime minister post earlier this year has meant less and less concern about operating within the free market. 
  • This week, state capitalism seemed particularly ascendant. President Vladimir Putin gave an indignant speech Wednesday about rising food prices, pushing the issue to the top of every official’s ‘to do’ list. Then, Belousov chaired a meeting with food producers at the Ministry of Agriculture to broker an agreement on price ceilings for sugar and sunflower oil. Producers were obliged to sign an agreement to honor the new rules.
  • Any producer that breaks the new price controls will face sanctions, and Belousov warned everyone at the meeting that “this is serious.” But one federal official who spoke to The Bell on condition of anonymity said he was hoping the new rules are “just PR” ahead of Putin’s big press conference this week and will never actually become law.
  • The price of both sunflower oil and sugar has risen 25 percent over the past 12 months. This isn’t simply avarice on behalf of producers (although prosecutors who are investigating ‘unreasonable increases in price’ may disagree). There are objective reasons as well: poor sunflowers and sugar beet harvests in Russia and Ukraine; big increases in worldwide prices for vegetable oils, and the recovery of sugar prices after a record slump last year. The declining value of the ruble through 2020 has also impacted the price dynamic of both products.
  • The Russian government has a record of imposing short-term price controls. In 2007 and 2008, for example, some prices were frozen – but it only ended in plummeting production and prices soaring again once the limits were lifted.
  • The government’s proposal is a “gesture of despair,” according to Ruben Yenikolopov, rector at Moscow’s Higher School of Economics. The underlying problem is not rising prices so much as falling incomes,Yenikopolov explained. But falling incomes are an extremely difficult issue so, instead, the authorities indulge in populism.
  • This week also brought news of another ambitious plan. The Ministry of Economic Development wrote to Belousov proposing Russia print money to pay for state-led projects (in order to meet Putin’s goal to increase investment by 70 percent through 2030). However, the Central Bank — which would be required to do the actual printing — is categorically opposed, according to reports in media outlet VTimes.

Why the world should care

It’s possible both these ideas were only ever intended to exist on paper — and no-one will even attempt to implement them (the Russian authorities frequently indulge in such theatrics as a form of PR). But even the fact such ideas are being generated gives the lie to hopes the state’s stake in the economy — estimated at between 40 percent and 80 percent — might decrease.


Media investigations probe Putin’s inner circle

Independent journalists have been shattering taboos with a series of exposes about corruption linked to Putin. Following a story last month about Svetlana Krivonogikh – allegedly a former ‘close acquaintance’ of the president – we saw investigations this week into the business dealings of Putin’s former son-in-law, Kirill Shamalov, and close friend Yury Kovalchuk.

  • The first was an investigation published Monday by media outlet istories into Kirill Shamalov, the son of one of Putin’s old friends from his KGB days. The article was based on an archive of Shamalov’s emails. It showed that Shamalov’s marriage to Putin’s daughter Katerina Tikhonova between 2013 and 2017 helped him amass fabulous wealth. At the age of 27, Shamalov was vice president of Russia’s leading petrochemical company, Sibur (owned by Putin’s friend Gennady Timchenko). By the time he was 35, he was Russia’s youngest billionaire. After marrying Tikhonova, Shamalov used money acquired from a state bank to purchase 17 percent of Sibur from Timchenko for more than $1 billion. After the divorce, he promptly sold up. 
  • The istories report is full of familiar details for any student of Russian anti-corruption investigations: a house in the exclusive Rublyovka district on the edge of Moscow; villa in Biarritz; lavish personal tastes; and the kind of offshore schemes that Putin loves to decry in public. But one of the biggest revelations was a detail about how Shamalov first made serious money. It appears that 3.8 percent of Sibur — worth at least $380 million — was sold to him for just $100 a few months after his marriage to Tikhonova. Sibur claims this was merely a formal payment as part of share options for managers.
  • Later in the week, a different investigation focused on Yury Kovalchuk, the major shareholder in Bank Rossiya, which is owned by a series of Putin’s close friends. This time, the reporting was done out by media outlet Proekt. According to the article, Kovalchuk is Putin’s closest informal advisor and has a big say in political decisions. Proekt’s sources identified Sergei Kiriyenko, the first deputy chief of the presidential administration, as Kovalchuk’s man. Officially, Kovalchuk owns Russia’s biggest media holding, National Media Group, but unofficially, Proekt reported, he also controls other publications including leading business newspaper RBK and state information agency TASS. Kovalchuk was presented as a typical courtier, always looking to amuse the president. Even the diver who famously helped Putin uncover ancient relics from the sea bed in 2011 is a relative of Kovalchuk, according to Proekt.
  • Like Bank Rossiya, Kovalchuk has long been under Western sanctions. But this has not stopped him from enriching himself in Russia with the help of officials. For example, The Bell reported this week that every utility bill in the country is processed via Bank Rossiya, a scheme that is worth at least $30 million a year in pure profit. 

Why the world should care

Asked about the investigations into Putin’s inner circle, the president’s press secretary Dmitry Peskov told journalists this week that “we know who is organizing this activity”. The Kremlin regards investigations into Putin’s friends and acquaintances as an attack by Russia’s enemies — and retaliation is inevitable. For example, this week, a law recognizing individuals as ‘foreign agents’ was put before the State Duma. It seems designed to target journalists and bloggers, and, if it becomes law, those found guilty could be jailed for up to five years.


Will Russia be first to launch driverless taxis?

Putin asked for legislative proposals to enable driverless vehicles to use Russia’s roads back in April. The report was supposed to be on his desk within a couple of months. However, work is still ongoing amid disputes between the relevant departments. The battle for market leadership involves the usual suspects, state-owned bank Sber and internet giant Yandex. Who will win? And could either Russian company get ahead of their rivals in the U.S. or China?

  • Originally, Putin’s instructions should have been carried out by May 31. Then the deadline was put back to Aug. 31 due to the pandemic. But the work is still unfinished. The two key players – the Ministry of Transport and the Ministry of Trade and Industry – cannot come to an agreement, two sources familiar with the situation told The Bell. Their words were confirmed by a government source. Put briefly, the problem is that both ministries want to be in charge of regulating this potentially lucrative sphere.
  • Until an agreement is reached, it’s impossible to test driverless vehicles in Russia. And, as Russia dithers, the U.S. and China are moving ahead with trials. 

Who’s developing driverless vehicles?

  • Yandex started working on self-piloted vehicles in 2016 and launched road tests the following year. Their fleet numbers 160 automobiles and has covered 5.6 million miles in Russia, U.S., and Israel, the company told The Bell. Yandex invested $150 million into a separate company it created in September to develop driverless vehicles (Yandex controls 73 percent of the shares, Uber has 19 percent and the rest are with managers).
  • In contrast, Sberbank’s project is just a year old. The bank promised to unveil its first vehicle by the end of 2020 but this is likely to be postponed to February, according to The Bell’s sources. Recently, a video leaked online of a KIA Optima car navigating between cones on a test circuit. Two experts contacted by The Bell believe this is footage of Sberbank’s driverless vehicle, but the bank has refused to comment.
  • No other companies are testing driverless vehicles on the road. Veteran truck manufacturer Kamaz is reputedly working on a self-piloted truck, but “nobody has seen it in real life,” according to one of The Bell’s industry sources.

Can Russia catch its international rivals?

  • Only three countries are currently taking driverless vehicles seriously: the U.S., China and Russia. The U.S. is the clear leader, and Waymo is the most advanced and experienced player on the market (with 600 vehicles). Back when it was founded in 2009, Waymo was a research project within Google but it has since come under the remit of Alphabet. Google and Alphabet have reportedly invested $10 billion.
  • It’s very difficult to compare these companies directly. One possible indicator of viability is the existence — or not — of an agreement with a car manufacturer. Yandex has such a deal with Hyundai Mobis, but it’s only experimental. For comparison, Waymo has supply agreements with the likes of Chrysler, Jaguar, Volvo, and Renault-Nissan

Why the world should care 

A couple of years ago it seemed certain driverless taxis would soon rule supreme, but it’s become clear how complex the roll-out process will be. For Russian companies, however, delays are good news as they offer a chance to catch up with their international competitors. It’s possible that Russian-made driverless vehicles may become a real challenge for their U.S. counterparts, particularly in some overseas markets.


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