Russia braces for oil shock

The Bell

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And on with the news… this week our top story is a brief round-up of Friday’s breaking story on the collapse of Russia’s agreement with OPEC. We also look at popular Russian banker Oleg Tinkov, who is facing extradition to the U.S. and has revealed he has leukemia, the rising number of confirmed coronavirus cases (and draconian attempts to contain the infection), why the new government is not as efficient as you thought, and what led to oil giant Rosneft being given a leading role in a state-funded genetics program.

Russia readies for shock as OPEC+ unravels, oil price plunges

The world entered a new oil price reality late Friday after Russia failed to agree on production cuts with oil cartel OPEC. By the end of the day, the value of a barrel of oil had dropped almost 10 percent, to $45.3. This will have significant consequences for oil exporters and the Russian currency – but state-owned oil giant Rosneft may benefit. 

Russia is not a part of OPEC, but a broader group known as OPEC+ that was created four years ago. In 2016, its members agreed on production cuts and, this year, Saudi Arabia wanted even more in response to the falling demand fueled by the coronavirus outbreak. 

It all ended in acrimony. After negotiations in Vienna on Friday, Russian Energy Minister Alexander Novak announced that Russia would cease cooperation with OPEC after April 1. Earlier in the day, Reuters quoted an OPEC source who said “the deal is dead”. 

Russia’s decision means an increase in supply at a time of falling demand — likely leading to a collapse in price. There is no clear explanation for Russia’s position. “I’m in a state of light shock,” the co-owner of oil giant LUKoil Leonid Fedun told The Bell on Friday. Admittedly, some economists believe the end of OPEC+ was just a matter of time — either way, the cartel members would eventually start putting their own interests before the collective. 

But there may be another explanation. The head of Rosneft, political heavyweight Igor Sechin, has long argued that Russia should not work with OPEC to support prices. Production costs for Rosneft are lower than many of their international rivals, and Sechin has previously said that high oil prices help the U.S. energy industry increase its market share.  According to a source close to the leadership of Rosneft, Sechin indeed suggested to President Vladimir Putin that Russia should punish the U.S. by leaving OPEC+. 

Oil is Russia’s main export, and an oil price shock traditionally leads to a rapidly weakening ruble. Most analysts predict that the collapse of OPEC+ and pressure on demand means the oil price will drop below $40 a barrel. Some said it could even go under $20 a barrel. 

The exact effects on the ruble are harder to foresee. Initially, the ruble is likely to be safe from oil price fluctuations because of the government’s ‘budget rule’ under which all profits from energy exports with oil above $42.6 a barrel are used to buy foreign currency. This means that, in terms of the ruble, it’s as if a barrel of oil always costs $42.6. 

The flip side of the budget rule is that ruble volatility will almost certainly increase sharply when oil drops below $42.6. The Russian currency fell 1 percent against the greenback on Friday to the point where one dollar was worth 68.3 rubles. Economist Andrei Movchan told The Bell that the dollar may cost between 70 and 72 rubles in the very near future. 

Why the world should care 

Russia’s inexplicable decision to leave OPEC+ raises many questions about how the government and the Central Bank will be able to deliver Putin’s social spending pledges and increase GDP growth. It also creates a problem for the Central Bank, which will not be able to calm the market by raising rates like in 2014 — this would lead to economic stagnation. 

Top banker Tinkov faces U.S. extradition, battles leukemia

Oleg Tinkov, the founder of one of Russia’s largest banks, has been arrested in London on the request of U.S. authorities seeking his extradition on tax evasion charges. Tinkov paid the largest bail in U.K. history, £20 million ($26 million) to avoid pre-trial detention, and now has to wait for his hearing. After much speculation, his predicament was eventually confirmed in a statement Monday. Four days later the banker announced he was suffering from leukemia, causing shares in Tinkoff Bank to plummet. Why is this upsetting Russians?

What happened? After arriving in London last month, Tinkov (the 47th richest person in Russia, according to Forbes magazine) was the subject of an arrest order issued by Westminster Magistrates’ Court. The U.S. is demanding his extradition because Tinkov was a U.S. citizen until 2013. Russia doesn’t extradite its own citizens, so if he’d stayed in Russia he couldn’t have been touched — but it’s possible the U.K. will hand him over.

In apparently unconnected news, Tinkov revealed Friday he was diagnosed with acute leukemia in October and has undergone several rounds of chemotherapy. Shares in TCS Group (the holding company that owns Tinkoff Bank) had begun to recover since news of the extradition case, but collapsed on news of Tinkov’s illness. Since Monday, TCS stock has dropped 19.8 percent on the London Stock Exchange, and by 23 percent in Moscow.

What are the accusations? When giving up U.S. citizenship, you are obliged to pay a tax on your assets, similar to what you would pay if the assets were sold at market value. The U.S. authorities believe Tinkov deliberately under-estimated the value of his assets and annual income (putting them at about a third of their true market value), for which he faces up to 6 years in prison. There will be an extradition hearing in London in April, and the decision can be appealed. Extraditions cases have been known to drag on for months, even years.

Who is Tinkov? Famous for his eccentricity as well as being a self-made man, Tinkov is also known for being provocative. He has said that “God gave me the talent of being able to make money” and — probably as a joke — suggested President Vladimir Putin be “named emperor”. Although he has spoken out against corruption, Tinkov has argued it would be worse without Putin. In the 1990s, he traded frozen pelmeni and beer, before going into banking. Tinkov was never close to Putin, and says his bank never received phone calls from the Kremlin.

How is the bank viewed in Russia? Tinkoff Bank operates entirely online and is particularly popular among young people. Today, the bank has over 8 million clients despite not having a single retail outlet. In its early years, it didn’t have a great reputation, but it grew rapidly and many of the online innovations rolled out by state-owned banking giant Sberbank looked curiously like they had just been copied from Tinkoff Bank. And Tinkoff Bank has stayed ahead of the competition: for example, its app for private stock market investors almost single handedly created a retail boom on the Moscow Exchange. In 2019, new account openings at Tinkoff Bank grew 213 percent.

Why the world should care

The news of Tinkov’s arrest, and his illness, are worrying for shareholders and clients. In the eyes of investors, a key driver for the bank’s success is its charismatic founder. Nothing less than the future of one of Russia’s leading fintech companies is at stake.

Russia ups preparations as 10th case of coronavirus confirmed

Russia registered its 10th case of coronavirus this week despite the implementation of new measures to contain the spread of the disease. In particular, efforts to impose isolation on those returning from infected countries have been stepped up, with some reports that police in Moscow are using face recognition technology to identify rule-breakers.

  • Six new cases of coronavirus in Russia were identified Friday, of which five were in Moscow, and one in the city of Nizhny Novgorod, 250 miles to the east. Before this week, there had been just four confirmed cases — one in Moscow, one in St. Petersburg, and two in Siberia.
  • A major casualty of the outbreak was the St. Petersburg Economic Forum. Deputy Prime Minister Andrei Belousov said Thursday that the set-piece annual event for investors and world leaders would not be taking place this year because of the risk that coronavirus posed to attendees.
  • Moscow Mayor Sergei Sobyanin has been ahead of the game in imposing new restrictions. He issued a decree (Rus) Thursday placing Moscow on “high alert” over the outbreak. The following day, the authorities clarified that citizens from 11 countries (China, South Korea, Iran, Italy, France, Germany, Spain, Switzerland, United Kingdom, U.S. and Norway) arriving in Moscow are obliged to go into self-isolation for 14 days. Sobyanin has also ordered that anyone arriving in Moscow from a country with coronavirus must give their contact details to the authorities, and that employers are obliged to monitor the temperature of staff at work.
  • According to officials, the six most recent infections in Russia have all been linked to Italians, or those returning from Italy, where a major coronavirus outbreak is underway. In St. Petersburg, 700 students were placed in quarantine Thursday because of possible contact with an infected Italian student at the university.
  • In Moscow, there have been reports of more sinister restrictions. A young man who self-isolated after returning from Italy told (Rus) news outlet Mediazona on Thursday that police officers turned up at his apartment to fine him when face recognition cameras recorded him taking out the trash.

Why the world should care

There has been much speculation about why coronavirus cases in Russia have been so few compared to other large countries. Whether this is down to luck, the quick closure of land border with China or a failure to identify cases, it looks unlikely to last much longer.

Staffing problems belie talk of Mishustin’s efficiency

Last week, Bloomberg praised Prime Minister Mikhail Mishustin’s efficiency, in particular his decision to schedule government meetings for 9am, an unconscionably early hour for most Muscovites. But The Bell has learnt that there is a flipside to Mishustin’s efficiency: 6 weeks after his appointment, there are many vacancies in the government staff, the large body of state employees that ensures the smooth running of the government machine.

  • The government staff operates below the radar, but has over 1,000 employees and is said to be the government’s circulation system. Among its important tasks, it facilitates interaction between government bodies and prepares documents for the prime minister and his deputies. It took Putin a week to put together his government staff when he was made prime minister; it took Medvedev under a month.
  • Since Mishustin became prime minister, many members of the government staff have been awaiting reappointment, continuing to do the same job and receive the same salary. A work schedule has also not yet been announced, six sources told The Bell. Most of this is just a case of ticking the correct bureaucratic boxes, but for those trying to interact with the government it’s unclear who is responsible for what, according to the head of one large transportation company who spoke with The Bell.
  • The problems may be the result of a misunderstanding between Mishustin’s incoming team and those already working in the government staff. “When Mishustin turned up, it became clear that some people were no longer operating professionally. They were working 3-4 hours a day and saw the new team as enemies and the demand to come to work in the morning as unreasonable. They basically went on a work-to-rule strike,” said a source close to the government staff.
  • Another reason for the delay is that new appointees have needed time to “familiarize themselves with everything”, another source suggested.

Why the world should care

The work of the government is not limited to cabinet ministers taking part in roundtables for the TV cameras — it’s a huge, bureaucratic machine. And the quality of decision making depends, in part, on how effectively the government’s work is organized.

Oil giant Rosneft moves into genetics and road-building

For state-owned Rosneft, the title of Russia’s biggest oil company is clearly not enough. This week, we learnt that the energy giant will take part in genetic research and a big road-building project. The logic for these decisions isn’t obvious, but Russia’s push to develop genetic technologies is known to be important for both Putin, and his daughter.

  • Rosneft will work with the government to bolster Russia’s expertise in genetics, according to a government decree (Rus) published Monday. As part of this, the oil company will set-up a new genetic research center, propose changes to the regulatory framework; and help reduce the “critical dependency of Russian science and industry on foreign biological and genetic databases.”
  • This is all part of a $1.9 billion program for genetic research through 2027 that was signed off by Putin in 2018 and involves several members of the president’s inner circle. Last year, Bloomberg reported that endocrinologist Maria Vorontsova (widely believed to be Putin’s daughter though the relationship has never been officially confirmed) took part in key meetings with geneticists and health officials in her capacity as a member of the council established by Putin to oversee the program. “She’s personally interested in genetics,” one source familiar with the matter told The Bell at the time. Another member of the council is the head of Moscow’s famous Kurchatov Institute, Mikhail Kovalchuk — both Mikhail Kovalchuk and his brother, Yuri, are close friends of Putin.
  • If involvement in genetics may be a way to please those in the Kremlin, the advantages of Rosneft’s apparent foray into road-building appear to be commercial. Holding company Region, reportedly close to Rosneft, will be involved in the construction of a section of a giant ring road worth 87 billion rubles ($1.3 billion) around Moscow, according to an article (Rus) published Wednesday in business daily Vedomosti. Rosneft has repeatedly denied media reports it controls Region.

Why the world should care

Rosneft is not the only large state-owned company diversify. Banking giant Sberbank has ambitions in cyber-security and online retail; its state-owned competitor, VTB, is building a grain business; and defense conglomerate Rostec is developing 5G and AI projects. When you have the contacts and the money, why not use them?

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