THE BELL WEEKLY: Government trying to ease pressure on the ruble

The Bell

Hello! This week, our main story is another week of turbulence for the ruble, as the falling national currency can push the government into abandoning one of its key budget principles. We also look at the founder of Yandex rebrand himself as “an Israeli businessman, born in Kazakhstan” and explain why the State Duma is banning foreign firms from conducting market research in Russia.

Falling ruble forces Russia to abandon its own budget principles

The Russian ruble has continued its steep decline, reaching 95 rubles against the dollar and 105 against the euro this week. For Russians, this is more than the usual psychological blow (many are used to using the exchange rate as a barometer for the economy’s fortunes): it is a tangible problem. The falling ruble accelerates inflation, which was already on the rise due to a mix of high budget spending, rising internal demand and a labor shortage. To ease pressure on the ruble, the government has been pushed into abandoning one of its key budget principles: using windfall oil profits for current spending.

  • The ruble has seen a steady decline since December 2022. During that time, it has occasionally hit sudden turbulence, which happened again last week. Over the course of five trading sessions on the Moscow Exchange, the dollar and the euro both increased in value to the tune of five rubles, reaching 95.6 and 105.6 respectively. That’s their highest level since late March 2022, when the Russian market was at the peak of its wartime panic.
  • We talked in more detail about the reasons for the ruble’s slump in this newsletter in early July. The currency’s decline since the end of last year is based on foreign trade conditions: a growth in imports, which collapsed in the early months of the war due to the impact of sanctions and a stabilization of global oil prices. Since then, the foreign trade situation has only gotten worse for the ruble. In mid-July, for the first time since the invasion of Ukraine, the Central Bank recorded a current account shortfall in Russia.
  • But the underlying reason for the ruble’s decline lies in Russia’s own economic policy. Alexander Isakov, Bloomberg’s chief economist for Russia and the CIS, believes that import growth is a symptom rather than the primary ailment. He feels the true reasons lie in the government’s excessively weak budget policy (expenditure growth of 20% year-on-year) and the Central Bank’s monetary policy: In 2015, when the regulator was forced to hike interest rates to 17% in the aftermath of an oil price crash, the decline to 7.5% took four years. However, faced with a similar situation after the wartime shock of 2022, it took just a few months to push rates up to 20%.
  • For Russians, the most unpleasant consequence of the falling ruble is the acceleration of inflation, which was already surging due to rising demand in an overheating economy and a depleted labor market. This week, the official rate of price growth slowed, but only due to seasonal factors in certain categories. The underlying rate of inflation remains high.
  • With the dollar approaching the 100-ruble mark and inflation at 10% SAAS, there were rising expectations that the government would take action to try to calm the situation. On Wednesday, the Vedomosti business daily (usually reliable on these matters) reported that the government would not allow and the conversion of oil-and-gas windfalls into currency for the National Wealth Fund for the rest of the year. This would mean rejecting a budget rule that has been in place throughout the year. The next day, the Finance Ministry explained that there would still be currency purchase. However, multiple indicators suggest that this budgetary rule will effectively cease to apply in 2023.
  • Since the mid-2010s, the budget rule has been the linchpin of Russia's fiscal planning, dictating the formation of reserves from oil windfalls to safeguard the economy from the so-called “Dutch disease.” Prior to the war, oil revenues exceeding $4.20 per barrel of Urals were allocated for currency reserves, as exemplified by the 2022 budget. A novel mechanism was introduced in 2023, capping oil revenue at 8 trillion rubles ($83.9 billion) annually, with excess funds earmarked for foreign currency investments.
  • The overall situation with the Russian budget has not changed: the deficit (projected at 2-2.5% of GDP in 2023) will in any event be partially offset by the National Welfare Fund. The fund currently holds 6.8 trillion rubles ($71 billion) in gold and yuan. By the end of 2024, based on Finance Ministry data, there will be 2.3 trillion rubles ($24 billion) left.

Why the world should care

In itself, the government’s deviation from budget rules is not such a big deal. Indeed, it could be a sign that the government anticipates good revenues in 2023, economists say. However, the fact that Russia’s economic authorities are having to rapidly move the goalposts as the game progresses is a sign that things are spinning out of control.

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Yandex founder labels himself “Israeli businessman,” inflaming Russia’s opposition

Arkady Volozh, the founder of Russian IT giant Yandex, found himself at the center of a mini-scandal after Russian opposition figures saw his new personal promotional website, where he describes himself as “an Israeli businessman, born in Kazakhstan” — and barely mentions Russia, where he lived most of his life and built his business.

  • “Arkady Volozh is a Kazakhstan-born Israeli tech entrepreneur, computer scientist, investor and philanthropist. <...> Since 2015 Volozh has been living in Israel, focusing mostly on developing and exploring new technologies,” reads Volozh’s bio on his new personal website. Volozh was indeed born in Kazakhstan, which at the time was part of the U.S.S.R. His father worked there as a geologist. However, in the early 1980s Volozh moved to Moscow, where he lived for 30 years and built a multibillion-dollar business. However, on his site, Volozh only mentions Russia as the place where he set up his first company, Comptek. Yandex is described as the NASDAQ-listed Yandex N.V., one of Europe’s largest internet companies — with no reference to Russia.
  • Volozh acquired Israeli citizenship in the mid-2010s and primarily lives in Israel. However, until the invasion of Ukraine, he remained the head of the Dutch-registered Yandex N.V., which owns the Russian Yandex. He did not openly condemn Russia for the invasion, and in the spring of 2022 he was placed under EU sanctions as the head of a company that used its status as Russia’s leading search engine to promote state media and Kremlin narratives in its search results while deranking and removing content critical of the Kremlin.
  • Volozh is now trying to distance himself from Russia. He has been in talks over the sale of his stake in Yandex since summer 2022, trying to exchange them for the company’s international assets, but has so far been unable to reach an agreement with a buyer or the Kremlin.
  • Russian opposition voices are angry that Volozh is now behaving as if Russia plays no part in his biography. “‘I took part in the creation of various incarnations of the gulag, but now it’s got nothing to do with me!’,” Mediazona editor-in-chief Sergei Smirnov wrote, comparing Volozh’s actions to disavowing involvement in the creation of the gulag system. “A total lack of conscience.”

Why the world should care

Arkady Volozh is by no means the leading figure behind Russia’s “digital gulag,” nor is he the closest businessman to the authorities (compared with, say, Alisher Usmanov, who is also trying to quietly distance himself from Russia in interviews with Western media). But it won’t be easy to prove that point in the West.

Market research is the latest victim of Russia’s spy obsession

Amid its persistent battles against Western espionage and the driving forces behind sanctions, the State Duma has found a convenient new target — foreign firms engaged in researching Russia's consumer market. The Duma has moved to ban such companies from conducting market research, a sector where international entities have historically played a significant role.

  • According to legislation submitted to the Duma, organizations researching Russia’s consumer market can now only be Russian-registered, or majority-owned (at least 80%) by a Russian-registered company or individual. Its databases and research facilities must be kept on Russian territory and the company is obliged to disregard foreign sanctions.
  • Foreigners can own more than 20% of a Russian company, but only with the express approval of a special parliamentary commission and an agreement not to uphold sanctions. In the event of any violation, the state can nationalize the offending company.
  • Judging from their comments, the bill’s authors, influential deputy Vladimir Gutenev (believed to be a Rostec lobbyist) and Anton Gorelkin (author of the most repressive laws affecting the IT sector), believe that foreign research companies are spies and accomplices of the sanctions regime.
  • None of the three leading international research companies — GfK Group, NielsenIQ and Ipsos — have left Russia, Gorelkin noted. “We don’t know how they are using the information they gather,” wrote the deputy. “I can’t rule out the possibility that they are putting it into analytical reports for foreign governments. It is highly likely that this analysis is used to manipulate and refine illegal sanctions.”

Why the world should care

The expulsion of Western market researchers is another brick in the wall of Russia’s economic isolation. It will enable the authorities to hide more data while preventing businesses from properly understanding the market and planning accordingly.


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