Hello! This is Alexandra Prokopenko with your weekly guide to the Russian economy — brought to you by The Bell. This week we look at the Kremlin’s decision to nationalize the assets of several companies owned by foreign states (in a way that benefits Putin’s ally Igor Sechin) and a proposal to give Russian tycoons a way out of Western sanctions.
An eye for an eye: why Russia nationalized Fortum and Uniper’s energy assets
More than 14 months after launching the invasion of Ukraine, the Kremlin has begun to nationalize the assets of foreign companies. A presidential decree published Tuesday bestowing the new powers said they were in response to the nationalization of Russian assets abroad. The first targets were Finland’s Fortum and Germany’s Uniper, two of the biggest investors in Russia’s power industry. The Kremlin’s actions show that the war of sanctions between Russia and the West is moving to a new level.
The decree complements anti-sanctions legislation the authorities have been introducing since 2018. Like previous laws, it is a framework that allows ample scope for creativeness: a list of target companies will be drawn up by the government and can be expanded. However, a big difference is that this decree allows the Kremlin to go after assets owned by foreign states, not just private individuals. It appears Russia believes this is a symmetrical response to having its own assets frozen.
President Vladimir Putin picked out two companies whose assets will be placed under the management of the Federal Property Management Agency. These were the electricity assets of Finnish company Fortum (53.03% owned by the Finnish government) and 83.73% of Unipro JSC, which operates five power plants and is owned by Germany’s Uniper (nationalized by the German authorities in 2022).
“This decree is a response to the aggressive acts of unfriendly nations, which are aiming to create a regulatory framework for the actual seizure of Russian assets abroad,” said presidential press spokesman Dmitry Peskov. If any frozen assets are seized, Russia will follow the principle of “an eye for an eye,” Dmitry Medvedev warned.
Which Russian assets have been frozen by the EU?
State-owned gas giant Gazprom was one of the first Russian companies to be targeted in the European Union — in particular, Gazprom Germania, which operated 14% of gas networks and 28% of gas storage in Germany, was put under external management. In September, Germany also transferred state-owned Rosneft's 54.17% stake in an oil refinery in Schwedt to the control of a German federal agency, along with minority stakes in two other refineries.
Rosneft made a legal challenge, but last month a court in Leipzig took the side of the German authorities. The ruling noted that Rosneft’s assets had not been nationalized, but that external management was essential to ensure their smooth operation. On April 20, the German parliament amended a law on energy security to allow the sale of a controlling stake in the Schwedt refinery without the process of nationalization.
When war broke out, Finland’s Fortum (which at the time owned Uniper and its Russian businesses) announced the immediate sale of its assets in Russia. There were reportedly a large number of potential buyers, including Gazprom’s electric power subsidiary and state-owned Inter RAO (whose board of directors is chaired by Rosneft boss Igor Sechin).
Before the war, Fortum estimated the value of its Russian assets at €5.5 billion, but wrote off €2.1 billion of that in the first quarter of last year. In reality, newspaper Kommersant’s sources reckoned Fortum’s Russian assets were worth about a fifth of their pre-war value. In its annual report released earlier this year, Fortum admitted it may be difficult to sell its Russian business — or that those assets could be expropriated.
Uniper claimed the company had already decided to sell a controlling stake in Unipro in 2021. After the invasion of Ukraine, Uniper, like other Western firms, decided to suspend investments in its Russian subsidiary and renewed talks to sell. A contract was agreed but a government commission did not approve the deal, RBC reported this month.
Who will take charge of the assets?
The transfer of Fortum and Unipro’s assets to the Federal Property Management Agency is a technicality. Deputy Finance Minister Alexei Moiseyev said Thursday that, in reality, they will be given to Russian companies that have had assets frozen in the West.
The day after Putin’s decree was published, the board of Fortum’s Russian business fired Alexander Chuvayev, who has been in charge since 2009, on the orders of the Federal Property Management Agency. He was replaced by Vyacheslav Kozhevnikov, ex-deputy chief power engineer at Rosneft’s Bashneft-Dobycha. On the same day, Vasily Nikonov took over at Unipro, having previously held a top job at Rosneft.
A prominent Russian energy analyst, Sergry Pikin of the Energy Development Fund confidently predicted Sechin’s Inter RAO would ultimately take charge of Fortum and Uniprо.
What happens next?
It’s entirely possible that these tit-for-tat expropriations between Russia and the West will end now. Major Russian state companies have no more major assets in the EU.
However, for Western companies wanting to protect themselves against future Russian attempts to seize privately-held assets, there are few good options. Leaving is difficult: under new rules, firms from “unfriendly” countries can only sell assets for half their market value and must pay an additional 10% to the Russian state.
Many of the transactions that saw Western companies exit Russia over the last year were for nominal sums: for example, Renault-Nissan sold to its management for one ruble; AvtoVAZ and DIY chain OBI sold for one euro; and the “Vkusno – i Tochno" fast food chain cost Alexander Govor 1 million rubles when he acquired it from McDonalds. Most of these deals were concluded far below market rates and several may never be completed due to legal issues, according to a recent report by AK&M (which we wrote about here).
Why the world should care
It’s likely that Putin’s decree ignored private companies so as not to jeopardize the assets of private Russian companies abroad. That means there is little reason to fear the nationalization of foreign banks, for example. But it’s too early to relax. The Kremlin last year refrained from direct nationalization of foreign-owned assets for two reasons. Firstly, it would have been a negative signal to investors from Asia and the Middle East, upon whom Russia is now counting. Secondly, many technocrats were still pinning their hopes on a return to business as usual. The decision to “nationalize” assets is a new step in the sanctions war — and it looks like the Kremlin is willing to escalate further.
Been good? No more sanctions for you
The Yermak-McFaul Group (experts advising on sanctions against Russia) have proposed a way to lift sanctions against officials and oligarchs for “proper behavior.” For ordinary Russians applying for European visas, they suggest a special fee to help “rebuild Ukraine.”
“Clear guidance on how to be removed from the sanctions list should be an important aspect of sanctions strategy. It shows that there is a way out, subject to certain criteria, and would encourage these individuals to cooperate with the authorities that imposed sanctions,” suggested the group.
While there was no indication of what these criteria might be, it is likely that they would include support for the territorial integrity of Ukraine within its 1991 borders, public condemnation of Russian aggression and compensation payments to invasion victims.
At present, there is almost no way for Russian businessmen to escape sanctions. They can go to court, but they have little chance of success. Leaks and private conversations suggest that businessmen would be happy to use a formal mechanism to get off the sanctions lists if one existed. Judicious use could even drive a wedge between the Russian elite.
In general, over a year after the war began, Russian businessmen are either trying to free themselves and their assets from sanctions by staying as far from Russia as possible — or they are keeping their heads down and adopting a wait-and-see attitude in the hope that things might “somehow” improve (you can read more about this dynamic here).
Xi Jinping spoke with Zelensky
For the first time since the Russian invasion of Ukraine, Chinese leader Xi Jinping spoke with Ukrainian President Volodymyr Zelensky. In their conversation, Xi reportedly emphasized that negotiations are the only solution to the fighting. After his conversation with Xi, Zelensky appointed a new ambassador to China, Pavel Ryabikin, who previously worked as Ukraine’s Strategic Industries Minister.
Rosstat conceals data on oil production
Russia’s State Statistics Service (Rosstat) has ceased publishing data on oil production. Previously, the agency released monthly data on production with and without gas condensate — but these figures do not feature in the latest edition. In a continuing trend toward secrecy, the Economic Development Ministry decided to exclude a whole range of data from its macro-forecast for 2023-26 (including predictions for oil production).
- The Central Bank kept its key rate at 7.5% on Friday — the fifth time it has taken such a decision since September. Inflation is low, but the risks of increases are growing. Economic activity is growing faster than the Central Bank’s February forecast. This reflects both expansion in domestic demand and the ongoing transformation of the Russian economy.
- Presidential aide Maxim Oreshkin predicted that Russia’s economy will grow up to 2% this year. That’s the most optimistic of current predictions. However, it does not seem plausible. It would require an accelerated recovery: at the end of last year, the economy grew 0.5% quarter-on-quarter, while Oreshkin’s predictions would need this figure to rise as high as 1%, according to Alexander Isakov of Bloomberg Economics.
- Inflation for the week from April 18-24 accelerated to 0.1%, according to Economic Development Ministry data. Annual inflation slowed and was running at 2.55% on April 24.
- Industrial production in Russia in March increased 1.2% in annual terms, Rosstat reported (overall, it fell 0.9% in the first quarter). Military expenditure was driving last month’s increase. Amid falling resource extraction, the manufacturing sector grew 6.3% last month. As in previous months the top performing industries were linked to defense: finished metal products, including weapons and ammo (+30.3%), computers, electronics and optical lenses (+22.5%) and “other vehicles” that includes tanks and military aircraft (+13.1%).
What to watch in the week ahead
- Rosstat’s report on the socio-economic situation from Jan-March 2023 (May 3)
- The Finance Ministry publishes foreign currency sales plans
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The author of this newsletter is one of Russia’s leading writers on this topic: independent economic analyst Alexandra Prokopenko. Alexandra worked as an advisor at Russia’s Central Bank and Moscow’s Higher School of Economics from 2017 to 2022 — and before that she was an economic journalist for Vedomosti, then Russia’s leading business newspaper. Today, Alexandra is a non-resident scholar at the Carnegie Endowment for International Peace and a visiting fellow a the Center for Order and Governance in Eastern Europe, Russia, and Central Asia at the German Council on Foreign Relations. She holds an MA in Sociology from the University of Manchester.