Hello! This week we cover a winter heating crisis and Russia’s dilapidated municipal infrastructure. We also summarize The Bell’s investigation into Russia’s “lottery king” snapping up cut-price Western assets and look at the arrest of a pro-war anti-Putin activist.
Kremlin steps in as local heating systems collapse
Even by Russian standards, it’s a particularly bleak midwinter, with unusually low temperatures sending the mercury below -30°C in places. Across many Russian regions, creaking utility networks have seen central heating systems fail, leaving tens of thousands of people without heating or hot water supply to their homes. Seeing that local authorities cannot cope with the problems, the Kremlin has started intervening directly.
- The first pipeline breakdowns and power cuts started in late December, hitting Kaliningrad, St. Petersburg and Chelyabinsk. In January, the issue spread further. Parts of the Moscow region were left without heating, as were the Yaroslavl and Leningrad regions, and the cities of Ryazan and Voronezh.
- The worst situation was in Klimovsk, just 50 kilometers from Moscow. On the night of Jan. 3-4, a fractured pipe triggered an emergency shutdown from the boiler house of the Klimovsk Specialized Ammunition Plant to the city’s heating grid. (It’s not unusual for towns across the former Soviet Union to get their heating from a military enterprise that otherwise has no connection to public service companies or heating providers.) As a result of the shutdown, 176 residential buildings with more than 20,000 inhabitants were left without heat. Residents were simply urged to wrap up warm and forced to use cold water at home, while outside the temperature dropped below -20°C. By Jan. 10, some 30 buildings were still without heat.
- Klimovsk’s problems attracted Vladimir Putin’s attention. He ordered Andrei Vorobyov, governor of the Moscow region, to nationalize the boiler station. Since two of the owners live abroad, the local authorities have every right to take charge in an emergency situation, Vorobyov said, justifying the decision.
- The collapse of heating and water systems is due to overwhelming wear-and-tear on Russia’s municipal infrastructure. In many parts of the country, old steel pipes installed in the 1960-80s are still in use. They were originally set to last just 25 years. Across the country, 44.2% of utility infrastructure has already passed its life expectancy and the rate of modernization and replacements is slowing every year, according to figures from the state statistics agency Rosstat. Around an extra 3% of the heating, water and sanitation network is defined as being in an “emergency” state on an annual basis, but no more than 1-2% of the network is being updated, according to official figures. This leads to an average of 6,600 outages per month across the country.
- It would cost 2.2 trillion rubles ($194 billion) to completely renew Russia’s local housing and communal infrastructure, the authorities say. In 2023, just 30 billion rubles ($2.6 billion) was spent from the state budget on the problem. Moscow’s budget shortfall caused by the war in Ukraine and resulting Western sanctions is further restricting the funds that can be invested into local infrastructure, the government has indicated. Nevertheless, Putin said that last year 337 billion rubles ($30 billion) “from all sources” was spent on maintaining Russia’s municipal utility network.
- If that is the sum of money that was allocated, there are questions over how wisely it was used. Klimovsk is a good example of the problem. The ammunition factory which provides heating for half the city is a restricted facility, meaning officials could not conduct any preparation of the boilers for the winter months, and knew nothing of the problem for a full day after it occurred.
- Ownership of the plant is also complicated. One of the co-owners, Jorge Portilla-Sumin, has been convicted of murder. In the early 2000s he gained control of the factory by dubious means and since 2021 has been under investigation for fraud and money laundering. Portilla-Sumin was born in Moscow, but holds Mexican citizenship through his father. In the early 1980s he became an ally of notorious “thief-in-law” Valerian Kuchuloria (known as Pisso), and used his father’s diplomatic immunity to help smuggle antiques. In 1984 the father left the family. A year later Jorge killed him. He was sentenced to 14 years in jail but was helped by Pisso’s patronage. He served his sentence in Georgia where he was schooled by other notorious gang figures. His new friends helped him secure an early release and in 1992 he was freed and went to the United States. He began representing the interests of the newly-independent Georgian authorities and started purchasing arms for various customers, including those fighting in several “hot spots” around the world.
Why the world should care:
Taking companies under what it calls “manual control” — de facto direct intervention from Moscow — has been a Kremlin go-to move in recent years. It is one that is growing in the run-up to the presidential election in March. Underlying problems, such as decaying infrastructure, cannot be fixed overnight. And instead of a big picture solution, the Kremlin understands that it is possible to simply nationalize problematic facilities, especially where there are links to the criminal underworld, and be seen as doing something. Right now, we can only guess at the full extent of “manual control” the Kremlin is willing to exert.
The Bell is now listed as “a foreign agent” in Russia: our website is blocked, we can no longer raise money through advertising, and our business model is in ruins. Journalists in Russia face greater risks than ever before. Repressive new laws threaten up to 15 years in jail for objective reporting.
However, we are not about to give up. This newsletter is our newest project. It presents an in-depth analysis of the Russian economy, which has survived the first year of the war but is becoming ever more secretive. We will try and shed some light on what’s going on. Each edition will tackle a part of the big question: how long can the Russian economy endure under sanctions and when will the Kremlin run out of money for its war?
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Russia’s “lottery king” buying up Western assets
The departure of Western firms from Russia has created a new cadre of Russian business elite, as previously little-known figures snap up lucrative assets at cut price assets. The Bell investigated the case of one such figure, Armen Sarkisyan, who has bought a string of Western companies over the last two years, with support from figures inside government.
- Armen Sarkisyan is known as Russia’s “lottery king” due to his ownership of the state lottery operator. But despite having a role that could be high-profile, the mogul has an extremely low public presence. He has never given an interview or statement to the media and there are hardly any official photos of him. Before getting involved with Russia’s gambling industry he worked for Vneshprombank in the 2000s, a scandal-ridden lender that collapsed in 2016 and whose owners were charged with massive fraud for what prosecutors say was essentially the theft of customer assets.
- Sarkisyan has family connections to the bank’s owners, and, perhaps more influentially, is the son-in-law of a former Moscow deputy mayor, Iosif Ordzhonikidze, a powerful official who oversaw the fledgling gambling industry, which had deep roots to the Russian mafia, in the capital during the 1990s.
- Those connections helped Sarkisyan get his start and gave him a network he could call on when the unprecedented fire-sale of Western companies began.
- Since February 2022, Sarkisyan’s S8 capital group has moved to buy-up a host of mid-tier Western assets at discount prices. His purchases of American lift maker Otis and Finland’s Kone have made him a major player in the Russian elevator industry, and he has also become the second largest tyre manufacturer in the country after buying the Russian assets of Continental and Bridgestone, which both left the market. All the deals were struck at discount prices and funded by loans taken out at state banks.
- Alongside Sarkisyan’s historic connections to influential figures in Moscow, he also appears to have the backing of real estate financier Dom.RF’s head Vitaly Mutko, Russia’s former sports minister and deputy prime minister. Sources told the Bell that Sarkisyan and Mutko have struck a plan to gain control of three-quarters of the Russian elevator market, with Mutko planning a multi-billion rouble investment program to modernize Russia’s lifts and install domestic-made infrastructure across Dom.RF projects.
- Sarkisyan’s jump into the tyre market also aligns with the moves of another of his long-standing connections, car dealership owner Alexander Varshavsky, who has bought the Russian assets of Volkswagen and Hyundai, in a move that could make him Russia’s second-largest auto maker, if he can restart production.
Why the world should care
The rise of Sarkisyan, with backing from well-placed sources inside government and industry, shows how the exodus of Western companies is creating a new cadre of business elite inside Russia. It is not just oligarchs and Putin’s closest friends who are getting rich off the forced sale of profitable companies at steep discounts.
You can read the full investigation here.
Pro-war opposition activist arrested on terrorism charges
Russian authorities arrested left-wing politician and opposition activist Sergey Udaltsov last week, with prosecutors accusing him of promoting terrorism. Udaltsov had made posts in support of other left-wing figures who are under investigation for creating a terrorist organization. Udaltsov’s arrest is the latest example of how Moscow’s judicial system and law enforcement agencies, which once targeted only “liberals” and opponents of the war, are increasingly turning their attention to inconvenient supporters of the military campaign.
- Udaltsov is a career activist. He first became involved in politics in the 1990s and ran for election to the lower chamber of Russia’s parliament as a candidate for a group called “Stalin Bloc – For the USSR.” Their manifesto included a pledge to rebuild the Soviet Union and nationalize Russia’s banks. Udaltsov was not elected and the party won just 0.63% in the 1999 vote.
- In the early 2000s, Udaltsov was one of the initiators of the first all-Russian leftist anti-capitalism march, sought election to the Moscow city council and took part in several other protests. In 2008, when many fringe groups combined to form the “Left Front,” Udaltsov was part of its council and coordinated its organizing department.
- His popularity peaked in the early 2010s when he regularly staged protests in Moscow. He was seen at all the big rallies, starting in 2011 when thousands took to the streets to protest the results of that year’s parliamentary election (for more about this, see here). In 2012, he was charged with planning to incite mass riots and was sentenced to 4.5 years in jail two years later.
- After his release, Udaltsov supported Russia’s annexation of Crimea but insisted that he remained a “harsh critic” of Putin. Last year, he spoke in support of the war in Ukraine and said that he “needed to stand with his country at such a turning point.” However, the activist still criticized the Russian authorities, and Putin personally, for the conduct of the war in Ukraine.
- Udaltsov is not the only supporter of the war who is currently behind bars. Last summer, a court ordered Igor Girkin (known by his pseudonym Strelkov) – a former Donetsk separatist leader in 2014 who famously said: “I pulled the trigger on this war” — to be held in custody on “extremism” charges. In recent years, Strelkov was an active pro-war blogger and harsh critic of the Russian defense ministry for not prosecuting the war more aggressively and effectively. From his prison cell in Moscow, Strelkov said he planned to run against Putin in this year’s presidential election.
Why the world should care:
In 2024, simply supporting the war is no longer sufficient protection against arrest in Russia. While Strelkov spent many months criticizing the authorities from within the pro-war lobby, it remains unclear what Udaltsov did to upset the Kremlin enough to throw him behind bars again.