The rouble is falling with new sanctions looming, and the government wants to nationalize the profits of private companies

The Bell

1. The rouble is falling with new sanctions looming, and the government wants to nationalize the profits of private companies

Currency exchange rates in Moscow, August 10. Photo credit: Moskva Agency

What happened

New U.S. sanctions have not yet been approved, but they have already caused a panic on the Russian financial markets. After the news of a potential ban on U.S. dollar payments for major Russian banks, and new sanctions in response to the poisonings in Salisbury, investors have started selling off Russian assets, and the rouble fell to a new two-year low. By the end of the week, the Russian government demonstrated how it plans to find money to fund its pre-election promises with limited access to external financing  — Putin’s economic advisor suggested siphoning the profits  of those natural resource companies not yet hit with sanctions.

  • The fall of the Russian equities market was caused by two pieces of news. The first — the publication of the full text of the proposed sanctions legislation, bill S.3336 put forward by Senators Lindsey Graham and Bob Menendez, which includes, as was feared, a proposed ban on U.S. dollar operations for Russian state-owned banks (in other words, all of the the country’s largest banks). If this ban were to be included in the final version of the bill (most Russian experts still do not believe that it will be), all Russian banks would have to use intermediaries for foreign currency settlements, just like Iranian banks were forced to do when they were under sanctions. On Friday, Prime Minister Dmitry Medvedev compared this step to a declaration of war and promised a similar response. In reality, Russia doesn’t have much to respond with — we wrote about possible means of retaliation here.
  • The second piece of news is the threat of new sanctions, which Russia would face over the poisonings in Salisbury, UK with the Novichok nerve agent. These sanctions will be directed towards Russia in two rounds: the first, on 22 August, is unlikely to be meaningful, but the second round, on 22 December, might include the U.S. halting almost all trade with Russia and a ban on Aeroflot, Russia’s largest airline, making direct flights to the United States. The most unpleasant part of this news for the Russian market is its lack of clarity, as the market must now wait in limbo until the end of December. Russia hopes that Donald Trump might intervene — all decisions regarding sanctions in response to the use of chemical weapons are made personally by the president. But, there is also the understanding that any pro-Russian step which Trump might take could carry huge political risk for him.
  • As a result, the rouble fell 8% against the dollar over three days. The rouble didn’t fall this quickly since the devaluation in 2014, and the Russian currency hasn’t been this cheap since 2016. The fall has stopped, for now, but in the event of new bad news, it could continue its fall, analysts believe.
  • Sanctions will also be problematic for the Russian government. If the bill proposed by  Graham and Menendez were to be approved in its current form, western investors would no longer be able to buy new issues of Russian government bonds. Russia would lose its ability to borrow abroad, and it would be more difficult to sell the bonds in Russia without foreign investors (they held almost 30% of Russian government bonds at the beginning of this summer). But, the government already came up with a new way of finding money to fund Vladimir Putin’s  pre-election promises. Yesterday, the media learned that Putin’s economic advisor, Andrey Belousov, suggested siphoning RUB 500 billion for the budget from the 2017 profits of privately held metals and chemicals companies. This is equal to one-third of the total EBITDA generated by companies in these sectors. They made good profits last year on the back of higher commodities prices (metal prices, for example, rose by 20.8%) last year, Belousov explained in his letter to Putin. The president replied on the resolution “agreed”. Business is worried — taking profits after the fact, without prior discussion and warning is difficult to imagine even in Russia’s state controlled economy. Shareholders of blue chip companies like Norilsk Nickel (it is supposed to donate almost $2 bilion) were surely surprised on Thursday when they read that the company might have to part with 90% of its 2017 net profit.

Why the world should care

The proposal to requisition the profits of private companies shows which direction the Russian government will head in as it becomes more isolated internationally and is hit with new sanctions. Before, the government was not prepared to use such openly anti-market measures. For western investors active in the Russian market, all the news of the past week can be taken as a signal of a new level of risk. After all, Russian treasury bonds, Sberbank shares (which have been hit hard by sanctions) and the shares of commodity producing blue chip companies (which are being hit by their own government) are some of the last things that foreign investors still own in Russia.

2. Russia’s “Apple”: despite sanctions, Rosneft has become Russia’s most valuable company

What happened

While the western media discussed Apple’s long awaited record of reaching a market capitalization of $1 trillion, a new leader appeared in the Russian equities market. Rosneft has become, for the first time in two years, Russia’s most valuable company. In addition to rising oil prices, the company was helped by U.S. sanctions and CEO Igor Sechin, who unexpectedly announced a $2 billion share buyback plan.

  • Rosneft became (Russian) Russia’s most valuable company on August 7, with a market capitalization of RUB 4.5 trillion ($68 billion). In roubles, this was the all-time highest valuation for Russia’s largest oil company, but in U.S. dollars, the company’s is today valued at significantly less than its value at IPO in 2006 ($79.8 billion).
  • Rosneft was able to achieve first place for a variety of reasons. First, of course, rising oil prices, but other Russian oil companies saw their valuations grow far less quickly over the past four months. Second, the former Russian market leader, Sberbank, lends to all major Russian companies and is suffering from each round of U.S. sanctions — since the beginning of the year, Sberbank shares have fallen by 26%. But the main reason is Rosneft CEO Igor Sechin’s sudden change of tactic.
  • At the beginning of May 2018, Rosneft, which in the past never had the habit of spending money to support its share price, announced its first ever share buyback program, with plans to buy back $2 billion of Rosneft shares from the open market (the company’s shares began to rise a month prior to the announcement). At the same time, the company introduced a surprisingly “friendly” strategy for minority shareholders, and for the first time promised to restrain from its favorite habit — a strategy of aggressive expansion fueled by a heavy debt burden and large capital expenditures. Will the company really worry about its share price for long? Not necessarily. One possible explanation for Rosneft’s change of behavior is its responsibility vis a vis one of its key shareholders, Qatar’s sovereign fund, QIA. In 2016, the fund participated in the privatization of 19.5% of Rosneft to the tune of $10.7 billion, and planned this year to sell most of its stake to China’s CEFC. However, the buyer ran out of money, and the Qataris, instead of selling at a nice profit, had to spend another $3.7 billion to buy the stake from their privatization partner, Glencore.

Why the world should care

It’s symbolic that Rosneft overtook Sberbank to claim the top spot. Despite its large size, status as a state bank and its long, Soviet past, Sberbank is now, thanks to its CEO, German Gref, one of Russia’s most technologically advanced and efficient companies. The same can’t be said for Rosneft. This change of leadership in the stock market reveals a lot about the present state of the Russian economy.

3. Dmitry Medvedev is missing the opportunity to boost his own rating on the anniversary of his victorious war

What happened

This week, Prime Minister Dmitry Medvedev, who spent the whole summer as a virtual punching bag for Russians opposed to planned pension reforms, was able to reminisce on the good old times for the first time in a long while. On August 8, Russia celebrated the 10th anniversary of the “little victorious war” it fought with neighboring Georgia over the unrecognized republics of Abkhazia and South Ossetia. In 2008, this war was Medvedev’s moment to shine, as he was then formally president with Vladimir Putin serving as his prime minister.

  • For Medvedev, the Georgian war was the highlight of his presidency. It was, possibly, the only episode in his career when he as able to show himself to be a real head of state. Medvedev loves to stress that he himself, without consulting with Vladimir Putin, made the decision to begin military operations and led them. On the anniversary of the war, Medvedev gave a long interview, his first in a quite some time, to the newspaper Kommersant, and he only talked about this recollections of the 2008 war. Just as in past discussions about the war, in the interview, Medvedev stresses the independence of his actions during the conflict, although he admits that he did discuss with Putin the decision to recognize the independence of Abkhazia and South Ossetia.
  • If the Kremlin were to have such a goal, the anniversary would be easy to use to support Medvedev’s approval rating, which has been hit hard by the pension reform plan. According to the latest poll conducted by loyal sociologists, only 6.9% of Russians trust Medvedev (36.7% trust Putin), and only 30% approve of his work (in Putin’s case it is 63.3%, and this is a record low for him). But apparently the Kremlin did not have this goal. On the anniversary date, the main state television channels led with ten minute pieces (Russian) on the theme, but Medvedev didn’t appear in a single one, and they didn’t even mention that he gave the order to begin Russia’s military operation.
  • Medvedev’s rating could use a little cushion in the coming months. This week, Russia’s central election commission approved applications from the “legal opposition” for a national referendum on the proposed increase to the pension age. The last time that Russia had a national referendum was in 1993. The approval of the application still doesn’t mean that the referendum will actually take place — the procedure for gathering signatures is unbelievably complicated and without the support of the government it doesn’t have a chance of succeeding. But, this does mean that the government is leaving the window open for the possibility of turning its back on this unpopular reform. “If the government wants to find a way to cleverly backtrack from this topic, admitting to popular discontent, then, of course, the referendum might take place,” — said political operator, Andrey Kolyadin, who is familiar to the Kremlin.

Why the world should care

Dmitry Medvedev confirmed that he remembers his presidency well and values those rare moments when he was really in Russia’s driving seat. Despite his low approval rating and miserable reputation among his colleagues in power, Medvedev remains the country’s second in command. Many believe that Medvedev could still become its first, and he would then remember those who worked against him.

4. A refugee from the Soviet Union, an email from Apple and a $1 billion company: the full interview with the Russian co-founder of Evernote

What happened

In July we shared the best quotes from The Bell founder Liza Osetinskaya’s interview интервью with Phil Libin — the son of immigrants from the USSR who in 2007, together with one of the pioneers of the Russian internet, Stepan Pachikov, founded Evernote. Today, Libin is trying to build a new business in Silicon Valley focused on artificial intelligence.

We are now publishing the full interview with Phil Lisin in English: how one email from Apple turned Evernote into a $1 billion company, and how another Russian expat, Yury Milner, led a revolution in Silicon Valley, as well as how to build a business along the principles of Netflix and HBO.

Peter Mironenko

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

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