Pavel Durov tangles with US regulators

The Bell

Hello! This week we examine the travails of Russian internet whizz kid Pavel Durov’s new cryptocurrency, Gram, which has been blocked by the U.S. regulator. We also look at Russia’s conflicting messages on climate change; the top officials summoned to testify at a $12 billion case against Russia in Paris; what Russia stands to gain in Syria; who was behind a rumor about the death of troll factory founder Yevgeny Prigozhin; and Putin’s gaffe-filled state visit to Saudi Arabia.    

Investors nervous as Durov faces cryptocurrency showdown

The U.S. Securities and Exchange Commission last Friday blocked the launch of Russian billionaire Pavel Durov’s new cryptocurrency, Gram, which had been planned for October 31. Messaging service Telegram, on which Gram will operate, is now preparing for a lengthy battle with the SEC and investors have a choice: wait until the conflict is resolved or get back 77 percent of their money. For now at least, it seems, appetite for risk remains strong, though some are showing signs of wanting to sell. 

What is happening. Preparations for a lengthy legal battle began this week after the SEC won a temporary court ban on the sale of Gram. 

  • Telegram asked the court to lift the ban in exchange for a promise to delay Gram’s launch until the end of April. Until then, the company would talk with the SEC. Yesterday, the SEC asked the court not to lift the ban.  
  • At the same time, Telegram requested investors to let them push back the launch date. If most participants in the first two ICO rounds vote against a delay, the company has promised to return 77 percent of what they invested. But a decision must be made by October 23: the next day, Telegram representatives meet with the SEC. 
  • A court in the Southern District of New York has scheduled the case’s first hearing for February 18. 

What investors think. The Bell spoke with three investors in Telegram’s ICO and people close to them, as well as with specialists in the Gram derivatives market. All of them were optimistic, but told The Bell of at least two attempts to sell large holdings of Gram at the price paid during the ICO. 

  • According to investors who spoke with The Bell, no one intends to ask for their money back — or to sell Gram at a loss. The events of the past week show Telegram has a strategy. Gram’s price is difficult to predict, but many believe the market price remains roughly the same as was forecast: between $2 and $4.
  • One source who spoke with The Bell pointed to Gram futures, which, after a sudden jump on the day of the SEC announcement, have since returned to their previous level. Now, for example, Gram futures on Bitforex are trading at $3.24, which is slightly higher than the day of the SEC announcement, and 2.5 times higher than the second ICO round price. 
  • The Bell heard from sources about two attempts to sell major holdings of Gram at the second ICO round price ($1.33), in other words, to break even. One of these was prepared to sell just under a million Gram at $1.33, but hasn’t yet found a buyer, according to a colleague. The second instance is a prepared deal worth $4 million, explained an investor familiar with the transaction.
  • Investors are forbidden from selling Gram before its launch so buyers risk having their tokens annulled if they do so. But sellers are finding ways to bypass these restrictions: for example, Japanese exchange Liquid is selling Gram via escrow accounts from which the seller cannot collect his money until the buyer has received his tokens. And Russian investment company Aton suggests buying the shares of companies who have invested in Gram. Derivatives for Durov’s cryptocurrency are currently trading (Rus) on several crypto-exchanges. 

Why the world should care. The results of Durov’s legal battle with the SEC could set a precedent for all disagreements between the regulator and cryptocurrency issuers. In 2018, the commission sent warnings to 80 companies planning ICOs. Like new cryptocurrency projects, any of these could find themselves being blocked. 


A new Green Party and toothless climate change legislation

In under 24 hours this week, it emerged the Kremlin was discussing the creation of a Green Party and that new climate change legislation had been drastically watered down. While contradictory, this shouldn’t come as a surprise: the environment is a political football in Russia and there is widespread skepticism about the risks of climate change.  .

  • Media outlet RBC reported (Rus) on Wednesday that the Kremlin is discussing throwing its support behind a new Green Party. One reason behind this is the uncertainty over the fate of the ruling party, United Russia, which has seen its popularity decline in recent months. But it is also explained by environmental protests that have swept Russia in recent years, most notably over huge landfill sites. While these local campaigns have not resulted in direct confrontation with the Kremlin, demonstrators are bitterly critical of the authorities and there is an obvious risk of further politicization. It appears the Kremlin thinks a Green Party could defuse some of these tensions, and function as a vehicle to control any environmental movement.
  • While officials in the Kremlin were engaged in political puppetry, the government was busy making changes to climate change legislation designed to follow on from Russia’s announcement last month that it was ratifying the Paris climate accords. Kommersant newspaper reported (Rus) Thursday that the latest draft had seen significant changes, including the scrapping of fines for exceeding limits on greenhouse gas emissions. This was a result of objections from several ministries and lobbying from big business, according to Kommersant, which quoted the head of the Center for Ecological Investment Mikhail Yulkin as saying it looked clear that “for all practical purposes, they [the government] are not going to do anything.” However toothless, the new laws are expected to be passed later this year.  

Wildfire in Siberia, Tatiana Bulyonkova/Flickr

  • Climate change scepticism is common in Russia, one of the world’s biggest producers of fossil fuels, and a survey last year showed only 14 percent of Russians were “very worried” about climate change, the lowest level in Europe. Putin has repeatedly suggested global warming may not be the result of human activity and, earlier this month, he revealed he did not share a “general enthusiasm” for environmental activist Greta Thunberg.
  • However ambivalent people are, there is little doubt the effects of climate change are already being felt in Russia. Average temperatures have increased 2.5 times faster than the rest of the world, according to a 2014 study (Rus) by the state weather agency, and further rises are likely to bring more forest fires, droughts and flooding. One of the biggest problems of global warming is melting permafrost in the Arctic that officials estimate already costs the Russian economy up to $2.3 billion a year.

Why the world should care. Russia is the world’s fourth biggest emitter of greenhouse gases so any Kremlin decision about climate change will have global repercussions. But while some of the rhetoric has shifted, there is still a lack of political will to push through any significant legislative changes.  


Top officials invited to Paris to testify in $12 bln case against Russia

Audit Chamber head Aleksei Kudrin, chairman of Gazprom’s board of directors Viktor Zubkov and investment banker Oksana Reinhardt have been invited to testify in a case filed by former billionaire Sergei Pugachev, once a member of President Vladimir Putin’s inner circle, against the Russian Federation in Paris. The legal battle began when ex-senator Pugachev, who left Russian in 2011, demanded $12 billion from Russia for allegedly expropriating his assets. The lengthy proceedings have finally reached the decisive phase. 

  • The hearing will take place between 12 and 17 November. Kudrin, Zubkov and Reinhardt have been asked to testify in person; and they may be cross-examined by the judge, as well as both the prosecution and the defense, according to two sources who spoke with The Bell. Pugachev and those invited to testify either declined to comment or didn’t respond to The Bell’s requests for comment. 
  • Kudrin and Zubkov have been asked to testify in relation to plans from the early 2000s to build an elite hotel on Red Square. Companies close to Pugachev signed $300 worth of contracts with a firm created specially for the project and, in return, Pugachev was supposed to get a stake in the finished complex. Instead, in 2007, construction was frozen, and ownership of the site transferred to the Federal Security Service. Pugachev successfully sued the Ministry of Finance for $26.2 million in 2011, but this did not cover all of his losses. 

Sergei Pugachev and Vladimir Putin

  • It seems likely that Reinhardt has been invited to talk about Mezhprombank, which was founded by Pugachev but lost its license in 2010 (when Pugachev no longer owned the bank). Reinhardt, who was an executive at Japanese bank Nomura at the time, has once before provided written legal testimony — in 2012 — relating to Pugachev and Mezhprombank’s loss of its banking license, and she might have a lot of interesting things to say, one source told The Bell. 
  • Kudrin, Zubkov and Reinhardt received invitations rather than a formal summons, so they will not face any sanction should they chose not to comply. But if they are no-shows this could also influence the court’s decision, according to a lawyer at a European law firm who spoke with The Bell. 
  • Lawsuits have flown between Russia and Pugachev for almost a decade, and have led to legal battles in several different countries. In the Hague, Pugachev is accusing Russia of expropriating four groups of assets that used to belong to him: shipbuilding companies, Yenisei Industrial Company, the Red Square development project, and land near Moscow. A criminal case has been filed in Russia against Pugachev in which he is accused of embezzlement. Finally, Russia’s Deposit Insurance Agency is using a London court to helpy it locate and seize Pugachev’s global assets. One former top executive from the Deposit Insurance Agency, who has a long-standing disagreement with Pugachev, was the subject of The Bell’s recent investigation into the FSB and money-laundering. 

Why the world should care. The story of Pugachev is one of the most significant corporate conflicts in recent Russian history. While lawsuits heard abroad like this often shed fascinating light on how business is really done in Russia, unfortunately this will not be the case with Pugachev as the Russian Federation’s defense team has succeeded in ensuring proceedings take place behind closed doors. Any information that does emerge, however, will be worth watching. 


Is Russia benefitting from the US withdrawal from Syria? 

This week’s most important international story was a new turn of events in the Syrian conflict. First, the U.S. announced the withdrawal of its troops from northern Syria, then Turkey began a military incursion, igniting fierce battles with Kurdish forces. House Speaker Nancy Pelosi criticized President Donald Trump over the move, alleging it gave Russia “a long-awaited foothold in the Middle East”. 

What Russia can expect. Russia is in a win-win situation: it officially supports the Syrian regime, while also maintaining good relations with Turkey and has the opportunity to score political points by playing the role of peacekeeper. 

  • Damascus’ position is strengthening. Russia’s goal is to expand the territory controlled by Damascus as far as possible. Last Sunday, the Kurds and the Syrian government reached an agreement to jointly fight against Turkish forces. Normally these two sides are enemies, with the Kurds receiving U.S. support, and Russia backing the Syrian government. But after the U.S. announced its pullout, the Kurds and the Syrian regime found themselves to be “situational allies”. The creation of a Syrian Kurdistan would be a boost for Moscow, which always insisted the Kurds must reach an agreement with Damascus as the only legitimate government in the country. 
  • Nothing changes with Turkey. No one has stopped Moscow from maintaining friendly relations with Turkey, and this policy is linked personally to Putin. “Turkey and Russia have already drawn red lines on the map of Syria,” according (Rus) to expert Kyrill Zharov. President Recep Tayyip Erdogan is due to visit Moscow next week.     
  • Moscow might go on the offensive. In exchange for tacitly permitting the Turkish operation, Russia could receive a green light to attack the “last bastion” of opposition fighters and Al-Qaeda supporters in the Syrian province of Idlib, Bloomberg reported

Syria right before the conflict. Source: The Carter Center

Why the world should care. Events in Syria will continue to unfold rapidly, and in this fast-moving and fluid situation Russia holds more and more of the cards. 



How to butcher the Russian national anthem. Putin made his first state visit to Saudi Arabia for 12 years this week and his hosts did their best to make him feel welcome. On the drive from the airport, his limousine was accompanied by both a procession of cars painted to look like Russian traffic police vehicles. Then, a local orchestra attempted Russia’s national anthem, but what came out was almost unrecognizable as music. At the gift-giving, Putin presented his Saudi counterpart with a gyrfalcon that promptly fouled the Saudi palace floor. None of these hiccups, however, spoilt the occasion — the two countries signed a series of cooperation agreements.

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Who began a rumour about Prigozhin’s death? A rumour flooded the internet last weekend that Yevgeny Prigozhin, alleged founder of the St. Petersburg ‘troll factory’ and mercenary company Wagner, had been killed in an airplane crash in the Democratic Republic of Congo. On Monday, sources cited by state-owned news agency RIA Novosti denied the news and, the following day, Prigozhin’s company Concord followed suit. So where did the story come from? The Bell has established that the rumor began on messenger app Telegram. It was first posted by a channel called House of Cards: Russia, which distributes the content of a media outlet linked to Prigozhin. The news was later reposted by other Telegram channels before being reported in the mainstream media. If someone from Prigozhin’s circle was indeed behind this prank, it would not be the first time: earlier this year, Concord was suspected of planting an elaborate fake story in the media to discredit opposition leader Aleksei Navalny. 

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