The new government will have to rescue the economy with the help of liberal economists

Economists Alexey Kudrin and German Gref might not receive official roles in the new government, but the new government will certainly have to listen to them.

1. The new government will have to rescue the economy with the help of liberal economists

What happened

Russia will be on holiday for all of next week, just as it is every year, for the “May holidays” (six of the first nine days of May are public holidays/weekends). After the holidays are over, the country will already have a new government, which, according to sources who spoke with The Bell, Vladimir Putin will announce on his inauguration day on May 7. The main topic of conversation during this last work week before the holidays was, of course, the composition of the new government. Putin always makes decisions at the very last minute, but it is possible already now to draw a few conclusions about his plans:

• A chance for reforms. According to multiple government and Kremlin sources, directly following his return to his “new old” job, Putin will sign an order for Russia’s development program for the next six years. The program almost entirely matches that developed by the think tank of the former minister of finance, Alexey Kudrin. Kudrin is considered to be the only liberal economist who Putin trusts. When he was a minister, Kudrin had the reputation of fighting to the end for each penny of the budget. This time, his program outlines a record — $160 billion in total — increase in spending on education, health care and infrastructure. In order to finance this spending, Kudrin suggests to almost halve defense spending — from 4.4% to 2.8% of the budget, to cut spending on security, and to reduce the number of government bureaucrats by one third. This will likely still not be enough; the new government is expected as a matter of first course to discuss increasing taxes.
• The prime minister and the reformers. The main candidate for the role of prime minister has not changed, it is still Dmitry Medvedev. But this week’s news confirms that if Medvedev will lead the government, he will have to work closely with Kudrin, despite the fact that both officials strongly dislike each other. Medvedev began (Russian) his last week as head of the current cabinet with a meeting with Kudrin, during which they discussed the proposed reform of the government which could lead to a reduction in the number of ministers and of their functions.
• Advisors from the 2000s. It is telling that the head of Sberbank, German Gref, also took part in the meeting. In 2000, he developed an economic program for Putin’s first two terms, and he then worked for seven years in tandem with Kudrin in the government as minister of the economy. These years were record years for Russia in terms of the speed of economic growth (on average the economy grew by 7% annually). The main driver of growth, of course, was the high price of crude oil, but under Kudrin and Gref the government at least created a reserve fund which allowed Russia to muddle through the 2008 crisis without major problems. A coincidence or not, but at the beginning of this year, the reserve fund ran out of money — by this time, Vladimir Putin remembered his old advisors.
• Who is leaving. It’s not clear if Kudrin will take on an official role within the government. So far, it seems unlikely: on Monday we learned that the superviser of the reforms, in a deputy prime minister role in the new cabinet, could be the president’s economic advisor, Andrey Belousov. Belousov might replace one of the longest surviving members of the government, Igor Shuvalov, who has been responsible for the economy within the cabinet for a decade. At the end of March, we wrote that many high ranking government officials are trying to ask for permission to leave the government. Shuvalov was one of these, and this week sources from several publications said (Russian) that he was successful. After his resignation, Shuvalov, who was often criticized for his close ties to Russian billionaires, might join the private sector. This might possibly help him to better account for his luxurious London apartment, which is estimated to be worth £11.4 million.

Why the world should care

Attracting liberal economist former ministers to join the government of course doesn’t mean that there has been a revolution in Russian politics, and it is unlikely that this alone would lead to making peace with the West. But, it can be interpreted as a sign that the Kremlin understands that the Russian economy, feeling the weight of sanctions, needs to be saved, and this means that new foreign policy adventures will at least be constraining factors.

2. The Russian authorities’ war with Telegram turns into a battle with Google and Amazon

What happened

The Russian authorities’ war with Telegram is very publicly turning into a global stand-off with the entire internet. Rumors of a ban of major western services in Russia are no longer interpreted as a joke or anti-utopian rhetoric. This week, the authorities, as they continued their botched attempts to cut off access to Telegram, only succeeded in cutting access to Gmail, Google Drive and other Google services for a major portion of Russia’s internet users.

• On Sunday, Russians began to experience problems accessing Google, YouTube, Gmail and other Google services. Suspicion immediately fell on Russia’s media regulator, Roskomnadzor. Since Roskomnadzor announced its ban of Telegram on April 16, other internet resources in Russia have continuously experienced outages (we wrote about this in detail last week). On Monday, the authorities admitted that in their fight with Telegram, they blocked 5% of Google.com’s IP addresses and up to 20% of Google Drive’s and GoogleDocs’ IP addresses (Telegram uses Google and Amazon hosting services to bypass the ban). Roughly 400 Russian companies could not (Russian) access Google, which they were using to store data and work with clients. One company estimated the total collateral damage to be $1 billion.
• The exact number of Russian users of Gmail and Google Drive is not known, but 63% of Russian internet users watch YouTube, and 42% use Google’s search engine. Google.ru and Google.com have a total combined audience in Russia of 37 million people.
• The benefactor of all this was Google’s largest Russian competitor, the Yandex search engine. On Monday, the peak of Google services’ inaccessibility, Google’s share of the Russian internet fell to its lowest indicator for the entire month of April. Analysts from Morgan Stanley’s Russian office warned their clients that this situation might lead to a migration of some users from Google to Yandex (Morgan Stanley analysts also wrote that they do not expect a total ban of Google in Russia). In fact, overnight from Thursday to Friday, Yandex itself saw its IP addresses blocked for two hours, along with the IP addresses of Russia’s most popular social network, VKontakte, Facebook and Twitter. After two hours the block was lifted; authorities described the event as a technical mistake.
• By blocking Google and Amazon IP addresses, Russian authorities are trying to simultaneously enter into negotiations with both companies while officially demanding their help in executing the Telegram ban. Amazon, which does not have a Russian business, simply refused to speak with Roskomnadzor. Google is “in talks”, according to officials, but in reality this won’t lead to anything. “Amazon, Google, and a number of other companies are refusing to follow Russian legislation. Roskomnadzor has taken countermeasures against those major global IT giants which Telegram is using to hide behind,” the deputy head of Roskomnadzor said in a statement on Wednesday.

Why the world should care

A week ago, we asked the question — will the Russian authorities and security services (who are of course the real authors of the attack on Telegram) take steps to ban large, popular western internet services in Russia and important western internet resources for businesses? One part of the answer is clear: the state is not afraid of creating serious problems for internet users. We will see next week how far they are really prepared to go.

3. Billionaire Deripaska lost almost everything under sanctions, but now has new hope

What happened

Oleg Deripaska’s battle with U.S. sanctions would make for a good thriller. Just one week ago, it appeared that the billionaire, who was once worth $28 billion, was doomed, and that his company, UC Rusal would at best be nationalized. Yet, the new week gave Deripaska new hope. The U.S. lightened its sanctions against Rusal, and the billionaire now plans to maintain his control over the company. The Russian government would be pleased with this scenario — no one wants to have to spend money to save Rusal.

• The hope that Rusal could be saved appeared for the same reason that the company became the biggest victim of the sanctions — due to the company’s global reach and how deeply integrated it is in the international industrial economy. European countries asked for (paywall) a reduction of sanctions against Rusal, and on Monday, the U.S. agreed for Rusal counterparties to work with the company without the threat of sanctions until the end of October. The U.S. also announced separately that if Oleg Deripaska were to sell the company, all sanctions against Rusal might be lifted.
• The U.S. Treasury Department’s decision only temporarily solves some of the company’s problems. The directive forbidding financial operations with Rusal was not changed and takes effect on May 7 — for a company with net debt of $7.6 billion this is a huge problem. However, after the first victory, those in Moscow began to believe that Germany and France can convince the U.S. to give Rusal complete access to the European market. If this were to happen, the company would be able to continue production and generate cash flows, and the government would help solve the problem of the company’s debts. After the U.S. Treasury Department’s decision was announced, Reuters and Bloomberg reported that Deripaska plans to maintain control over the company.
• Such a scenario would also make the Russian government happy. Sources told The Bell that the state would like to avoid nationalizing the company and would only do this in the event that Rusal’s 60,000 employees were on the verge of losing their jobs. The government has not just financial reasons for this point of view — here we should believe Deripaska’s acquaintance, who told Reuters that the Kremlin does not like the scenario under which the U.S. dictates who should own Russian companies.
• An alternative to nationalization could have been the sale of the company to a consortium of Russian businessmen and the international commodities trader Glencore, which owns 8.75% of Rusal, considers a member of the Russian Forbes list who spoke with The Bell. But this option has too many complexities — for example, Deripaska would be unlikely to want to give away his company for free, but any potential buyer who would pay for the stake would immediately be at risk himself of coming under sanctions.

Why the world should care

Lightening of sanctions against Rusal was the first conciliatory move by the U.S. in terms of sanctions against Russian since 2014. Of course, this step doesn’t mean a change in relations with Russia. The Russian government’s optimism, and more importantly, that of Deripaska, look for the moment a bit premature and lead us to conclude that the Kremlin remembered its favorite theory that business pragmatism always triumphs over politics in the West. But if the government and Deripaska are really able to find a scenario under which the businessman can maintain his control over the company, then even sceptics will start to believe in the ability of Russian businesses to survive under sanctions.

4. A fintech start-up from Russia is conquering the world and receives a $1.7 billion valuation

What happened

This week’s heroes in Russia’s tech sector are Nikolay Storonsky and Vlad Yatsenko — founders of the London-based fintech start-up, Revolut, which allows users to open and operate a bank account in any bank in any country from any place in the world, to exchange currencies at market rates, and to transfer money to any account without paying a commission. On Thursday, Revolut announced a second round of funding raising $250 million. The company is now valued at $1.7 billion. The Bell’s founder, Liza Osetinskaya, spoke with Nikolay Storonsky for our video project “Russkiye Norm!” (“Russians are OK!”) and we translated a few highlights.

• Abour Revolut: “We are offering an App that allows you to open an account in any bank in the world…the bank account comes with services which are either free of charge, or ten times cheaper than those offered by the bank, for example: money transfers are free of charge, currency exchange and payments are also free, credit is offered at 50% less than bank rates, insurance is also offered at a 50% discount to other companies.”
• How the business was born: “I spoke with banks, with processing systems, and everyone told me it was impossible. Then someone advised I speak with a top consultant. I called him, we set up a meeting. I warned him on the phone about what I wanted to create. He said, “it’s impossible.” And hung up. I called him back. “Ok, how about I pay you for two or three days, you come to our office, and tell us how payment systems work, so that I can understand the full picture.” He came, we spent two days together, and I wrote everything down. Then, for the next two weeks, my team and I thought about it. We figured out how to make it happen. I called him and asked, “will it work like that?”. He replied, with surprise, “it might work”. And we began to do it.”
• About the banking system in 10-15 years: “I think there will be several global players [who will be doing] exactly the same thing that we are doing, in other words, an application with bank accounts with all potential financial products offered via the application, such as: insurance, credit, mortgages, cryptocurrencies, trading”.
• Why he lives in London: “Your world view is definitely wider than that of someone who lives in only one country. Living in London, your world view grows even wider because the city is made up of 40-50% immigrants…when you talk to people, you understand cultural differences, you understand where people are right and where they get confused, and you have a simple and clear understanding of the world.”
• About Russia’s brain drain: “I don’t see that there is [in Russia] competition for talent. Talented people are leaving Russia. How many are returning, I don’t know, but I think it’s fewer.”

Why the world should care

Russian entrepreneurs are able to solve problems which top consultants in London think have no solutions. However, unfortunately for us, they almost always do this from abroad. After the Russian government’s pointless attacks on the internet which we have witnessed over these past few weeks, talented Russians will think even more about looking for opportunities in the West. We hope investors won’t miss the founders of the next Revolut.

Peter Mironenko, The Bell

This newsletter is made with the support of the Investigative Reporting Program at UC Berkeley.