Russia report skepticism

The Bell

Hello! This week we spotlight the Russia report published by the U.K. parliament, and share some thoughts on sources and expertise. We also examine the possibility of the Kremlin greenlighting a Mexico-style financial hedge to protect against oil price falls, and the appointment of a new governor to a city in Russia’s Far East roiled by protests.   

Why the U.K. ‘Russia report’ went unnoticed in Russia  

This was a week of Russia stories in the West. The U.K. parliament published Tuesday a report on Russian interference, then, the following day, the U.S. House of Representatives introduced a draft bill for new Russian sanctions. The latter raised few eyebrows: there was no new rationale, or substance. But the U.K. report, which went almost unnoticed in Russia, made headlines for days in the British press. Why the difference?

  • The media attention in the U.K was understandable: many are less concerned with Russian interference in the 2014 Scottish independence referendum or the 2016 Brexit vote than with the fact that the U.K. authorities seem to not want to stop it. Prime Minister Boris Johnson suppressed the publication of the report for almost a year.

  • A significant part of the document was devoted to the technical aspects of interference, and this was built on anonymous evidence from U.K. intelligence. The same was true for instances of Russians financing U.K. political parties. The Kremlin’s official response to this all was predictable: Russia didn’t interfere in anything.

  • The second part of the report was about Russian money in London. This stated that there are many Russian emigres in the U.K. capital, who are served by a whole network of lawyers, real estate agents and PR specialists, amounting to a cottage industry for lobbying and laundering Russian money and reputations.

  • Only five experts contributed to the report. They included historian Anne Applebaum, founder of Hermitage Capital Bill Browder, and the ex-spy and author of the infamous, and widely-disputed dossier on U.S. President Donald Trump’s ties to Russia, Christopher Steele. All of them are respected experts who have done a lot to ensure that the truth about Russia’s actions sees the light of day. At the same time, it is unlikely they have access to the highest echelons of the Russian elite, nor sources in the secret services. In fact, as the report very accurately states: “the Russian decision-making apparatus is concentrated on Putin and a small group of trusted and secretive advisers.”

  • It also seems relevant to raise an issue of objectivity when it comes to these experts. Particularly in Browder’s case: Browder had his business in Russia taken away by the state, was hit with a $55 million lawsuit and arrested in absentia – not to mention what happened to his colleague, Sergei Magnitsky, who died in prison.

  • It is remarkable that the committee did not call a single person from Russia as a witness, or even someone who maintains a fresh connection to Russia – as we learned from the report, there is no shortage of them in London.

Why the world should care 

We are not confirming or rejecting the report’s conclusions; we are not competent to make such judgments. The Bell certainly cannot be accused of seeking to defend the Russian authorities, and we genuinely want to know about Russia’s illegal activities. But, unfortunately, this report creates the false impression that it’s revealing a big secret — and that simply isn’t the case.


Russia set to copy Mexico’s oil price insurance policy 

During heated negotiations this spring between major oil producers, Mexico held out longest against a coordinated output cut. The reason? The country’s two-decade strategy of oil price hedging means it is largely immune to the effects of an oil price collapse. State-owned oil giant Rosneft has now recommended to President Vladimir Putin that Russia set up a similar scheme.

  • The idea of hedging against a potential oil price fall has never been voiced in Russia — at least not publicly. But this changed very quickly. News agency Interfax cited sources Wednesday that Putin had ordered such a proposal to be looked at after a suggestion from Rosneft. The next day, the Kremlin officially confirmed the news.

  • Both Rosneft and Kremlin economic advisor Maksim Oreshkin have calculated that, if Russia had purchased put options for two consecutive years on the same terms as Mexico, it would have made an extra $120 million in the first half of 2020.

  • But oil sector analysts told The Bell that it wasn’t quite that simple: you need to look at more than two years worth of data to make such predictions, and there is no guarantee oil prices will fall significantly in the coming decade. Moreover, it’s possible that the option price could be more than the profit from exercising the option itself.

  • The only example Russia can follow is that of Mexico. International Monetary Fund analysts who studied Mexico’s program in 2018 concluded that, over 15 years, its options were only executed three times, and the effect was most likely positive. But the benefits were also a result of falls in the cost of raising government debt. This would not be the case for Russia, which has only a tiny external debt.

  • The money for the program would come from Russia’s sovereign fund, the National Wealth Fund, which is currently worth $165.4 billion. This is an odd choice as the fund was created to protect Russia’s currency, its budget, and its economy from dramatic changes in commodity prices.

  • The National Wealth Fund (NWF) is topped up with all the profits made when the oil price is above $42.40 per barrel. Last year, the amount in the NWF passed the threshold at which the government can begin spending it, and there are long-running discussions over how best to do this. The main idea has been to invest money in infrastructure projects in the hope that this will stimulate economic growth.

  • Not everyone is happy with aping Mexico’s example. Central Bank Elvira Nabiullina said Friday that such a scheme would be “very expensive” (Russia exports far more oil than Mexico so it would be on a far bigger scale) and that this outlay is “not the best way to spend the NWF’s money”.

  • The irony of the whole idea is that Rosneft, which made the proposal to Putin, was reportedly responsible for Russia’s decision to abandon its cooperation with OPEC earlier this year that led to tumbling crude prices.

Why the world should care 

You might not be concerned about Russia’s budget, but there is a risk this proposal could destabilize global markets. The value of the recent OPEC+ deal is not so much in the output cuts, but rather fostering predictability and containing speculators. If Russia begins buying options it will almost certainly mean opportunities for insider trading and market manipulation.



Moscow sends new governor to protest-hit Khabarovsk 

Street demonstrations in the Far East city of Khabarovsk over the arrest of local governor Sergei Furgal show no sign of fading away. Moscow this week poured fuel on the fire when it appointed Mikhail Degtyarev, 39, as Furgal’s replacement. Like Furgal, Degtyarev is a member of the right wing populist LDPR party, which provides token opposition while remaining ultimately loyal to the Kremlin.

  • Degtyarev’s 10 years in Russian politics have been marked by a series of pointless, populist initiatives designed to increase his own media profile. For example, he suggested banning U.S. dollars from circulating in Russia, arguing that “they are candy wrappers, not secured by anything and printed by a private organization”. His other initiatives have included: an idea to paint the Kremlin white to contrast with “the moral decay in Western civilization” and for the state to fund consultations for gay men to ‘correct’ their sexual orientation.

  • Degtyarev has been used several times by Kremlin officials to trial balloon controversial ideas: he suggested both online voting, and a huge apartment block renovation programme in Moscow. One theory is that he is being used as a sacrificial figure in Khabarovsk, and is being set-up to lose governor elections in 2021. Any appointee that was seen to have been ‘parachuted in’ by Moscow would be facing similar problems: outsiders are often seen as having little interest in local issues.


    • There is no evidence Degtyarev has ever had ambitions in the Far East. In 2013, he ran to be Moscow mayor, coming in fifth place with 3 percent of the vote (Sergei Sobyanin won 51 percent, and opposition leader Alexey Navaly got 27 percent). He ran again in 2018 and got less than 7 percent (Navalny was banned from running).

    • After almost a week in Khabarovsk, Degtyarev still hasn’t attended a single protest. He said he has not got time to speak to the people “under his window” and alleged that “foreigners” were organizing the demonstrations. His style is very different to that of Furgal, who liked talking to people and solving problems (for example, Furgal tackled unscrupulous developers and arranged for the repair (rus) of a morgue refrigerator).

    Why the world should care 

    The situation in Khabarovsk is highly unusual — there haven’t been any such large opposition demonstrations outside Moscow for at least a decade. It’s still unclear whether the Kremlin will be successful in putting out this fire, or whether it will spread to other Russian cities.

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