The World Cup just might open the door for Russia to make a deal with the West

The Bell

1. The World Cup just might open the door for Russia to make a deal with the West

Australian fans at a World Cup match in Samara, Russia. Credit: Mikhail Tereshchenko/TASS

What happened

You couldn’t imagine a better first week of the FIFA 2018 World Cup for the host country. Russia’s national team is playing better than anyone ever expected, and has qualified for the playoff stage for the first time in history. Moscow is coping perfectly with its role as the main host city of the largest sporting event in the world, and the city has unexpectedly transformed into an atmosphere of global celebration. Skeptical U.S. journalists write ecstatic articles. For the Kremlin, this is, so far, a total success — the best chance in the last four years to try to break through international isolation. The international situation is set for this now, and indirect indications suggest that Moscow might be preparing steps to meet the West somewhere in the middle.

  • Of course, simply hosting a soccer championship, no matter how great it is, doesn’t provide Russia with any arguments for its negotiations with the West. But, it is an excellent excuse to communicate in the context of an atmosphere of goodwill with the leaders of European countries. Both Emmanuel Macron and Angela Merkel (provided that Germany, which sensationally lost its first match to Mexico, makes it to the playoff stage) are expected to fly to Moscow to watch their teams’ matches. Negotiations between Vladimir Putin and the factual ruler of Saudi Arabia, Crown Prince Mohammed bin Salman, have already shown that soccer can lead to mutual understanding. Both countries agreed to coordinate their actions in the oil market, and at the OPEC summit this week, Russia and Saudi Arabia announced, for the first time, a united front against all other members of the organization.
  • Vladimir Putin knows this is a lucrative moment. After his inauguration and after having made personnel changes in the government and in the presidential administration (it was not a coincidence that they were completed by the 13th of June, on the eve of the start of the World Cup), Putin began an unprecedented flury of diplomatic activity. In just three weeks in June, he held 20 meetings with leaders of foreign governments, not including the General Secretary of the UN and the head of the Council of Europe. In this process, Putin was able to agree to a meeting with Donald Trump in July; next week, John Bolton, Trump’s National Security Advisor, will arrive in Moscow to prepare for this meeting.
  • Of course, Moscow’s main goal is to get the West to remove its sanctions against Russia. It is difficult to imagine that this will happen in the near future, but the U.S. conflict with Europe and China as a result of Donald Trump’s initiation of a trade war increases the chances that sanctions might be lifted. But in order to take at least the first step towards this goal, Russia has to show something convincing with regard to the issue of settlement in Ukraine. It was because of the conflict in the Donbass that most international sanctions were placed on Russia. One week ago, Angela Merkel mentioned progress in finding solutions to the Ukraine situation as a condition for Russia’s return to the G7.
  • Vladimir Putin understands this, and it seems, he is preparing something. During the past two weeks, he spoke twice (1,2) by telephone with Ukrainian president, Petro Poroshenko. He immediately discussed the last conversation, on June 21, with the leadership of Russia’s Security Council — the body which makes all important foreign policy decisions. Just before the World Cup began, the Kremlin clearly made some key decisions regarding its policy on Ukraine — at first, almost official information appeared (Russian) about the resignation of Vladislav Surkov, the main negotiator on Ukraine, but in the end, he was given a role on the new administration. One can only guess what Putin might offer — but a logical first step would be to release Ukrainian film director Oleg Sentsov from the Russian prison where he has been on a hunger strike for more than a month and is being held on absurd terrorism charges.

Why the world should care

It is difficult to imagine a better opportunity for Russia to offer the West a peace initiative. But if Russia makes the first move and doesn’t receive anything in return, this might only furher aggravate the conflict.

2. The arrest of a famous Silicon Valley investor casts a shadow over Russian investments in the U.S.

What happened

The manager of one of Russia’s largest funds in Silicon Valley, Mikhail Chuchkevich of Bright Capital, was arrested (Russian) in Russia and accused of stealing RUB 1.3 billion ($22.7 million) from the state-owned venture fund, RVC. The arrest is attributed to a change in RVC’s leadership, and lawyers are already warning other investors who have worked with the state fund about potential problems.

  • The victim, Russian Venture Company, is a remnant of the wealthy Russian 2000s. The 100% state owned company was created to promote the emergence of venture capital investing in Russia. RVC manages 27 funds totalling RUB 37 billion ($600 million).
  • Mikhail Chuchkevich is a veteran Russian investor in American tech companies. At the end of the 2000s, he worked as an advisor to ex-reformer Anatoly Chubais in the state-owned company, Rosnano, and in 2010, he founded Bright Capital, an investment fund which TechCrunch named in the fall of 2017 to be one of the most active Russian funds in Silicon Valley. Then, Chuchkevich organized California governor Arnold Schwarzenegger’s famous visit to Russia. In Moscow, Schwarzenegger met with Dmitry Medvedev along with the heads of 23 American investment funds. In the U.S., Bright Capital was the first Russian fund to partner (Russian) with leading Silicon Valley venture funds — Sequoia Capital and Kleiner Perkins.
  • According to Russian investigators, Chuchkevich was able to withdraw and steal Russian state money through one of the American companies which Bright Capital and RVC invested in together with Sequoia Capital and TPG — a producer of solar batteries, Alion Energy. Chuchkevich and his accomplice, a top manager of RVC, supposedly transferred $22.7 million from the account of the state fund to Alion Energy’s account, then cashed and appropriated it.
  • An acquaintance of the arrested investor and another top manager of a different Russian fund, attribute the felony charges to the change in RVC’s leadership which took place in December 2016. Lawyers of one of the accused called other funds which had joint projects with RVC, and warned them about possible problems, according to a source The Bell spoke with from one venture fund.
  • For those who are familiar with the U.S. system of financial control, the idea that you could steal money through an American company, particularly one with two major venture capital funds as investors, sounds doubtful. Of course, even in the U.S., financial fraud and scams are possible. But even if the picture painted by Russian investigators matches reality, one can only have sympathy for the arrested investors. The chance of an acquittal in a Russian court is only 0.2% according to statistics, and even serving a small sentence in Russia can become a death sentence. Just last week, former banker Andzhey Malchevsky died in prison while serving a four year sentence for stealing RUB 68 billion ($1.7 billion according to the exchange rate at the time) from deposits in Mosoblbank which he owned at the time. The cause of death was meningitis which the former banker caught in the barracks where he was held together with 350 other prisoners in a space with a maximum capacity of 200.

Why the world should care

When you deal with money from Russian state funds, you have to be careful not just because of sanctions — the work of new managers of state companies or the ministers responsible for these companies in Russia often begins with felony charges against the previous managers.

3. Europe’s largest retailer changed its mind about leaving Russia and bought a stake in the local market leader

What happened

Russia’s retail market has not really grown since 2014, but the owners of Europe’s largest chain electronics retailer, Media Markt, decided that the Russian market has potential. Instead of leaving Russia, as they had planned to do, they decided to swap (Russian) the Russian subsidiary of Media Markt plus almost $300 million in cash for a 15% stake in Russia’s largest electronics retailer, M.Video.

  • The owner of Media Markt, Germany’s Ceconomy Group, announced on Tuesday its purchase of a 15% stake in Russia’s M.Video from its controlling shareholder, billionaire Mikhail Gutseriev (net worth $4.4 billion, according to Forbes). Gutseriev bought almost all Russian chains selling electronics over the past several years, and now his M.Video has 29% market share in Russia with revenues of $5.2 billion.
  • Media Markt entered the Russian market in 2006 — during the era of booming oil-driven growth of the Russian economy. But the chain’s Russian business didn’t do well. The market’s rapid growth came to a halt during the 2008-2009 crisis, and after Crimea was annexed in 2014, real incomes in Russia began to fall, and the retail market no longer looked attractive — its growth slowed by a third.

  • Over the past five years, Media Markt has suffered net losses of RUB 13 billion ($200 million) in Russia. The company already planned to close its Russian business, but the deal with M.Video makes a 180 degree turn. A source close to Ceconomy told Reuters that the company normally has a goal of acquiring total control over a business, and the purchase of a 15% stake in M.Video could be just the first step. In its announcement of the transaction, the company writes that it expects the Russian market to grow, and the primary driver of this growth will be online shopping.

Why the world should care

In the context of sanctions and four years of falling real incomes in Russia, a strategic foreign investor putting $300 million cash into the Russian retail market looks like a miracle. But its calculation might prove to be right. After the Russian crisis in 1998, those foreign companies which took a risk and stayed in Russia were able to cash in on the next market boom. At the moment, catalysts for rapid growth of the Russian economy are not visible, but retail might be an exception. The share of online shipping in Russia in 2017 was only 3.3% (in the U.S. the figure is 9%), and its unavoidable growth in the future may carry the entire market along with it.

4. The state has launched a campaign against one of the best independent universities for the humanities

What happened

Vladimir Putin announced that education would be one of his key priorities during his fourth term, but this hasn’t stopped the state from attacking the best independent universities. On Thursday, the Russian education regulator withdrew the government’s accreditation of The Moscow School of Social and Economic Sciences — a small university which has a reputation as one of the best in the country and issues its graduates British diplomas. Potential reasons for this could include the diplomatic conflict with the UK and the FSB’s dissatisfaction with overly liberal universities.

  • The university, which has the difficult abbreviation MVSHSEN, is usually referred as “Shaninka” — the name of its founder, British sociologist, Teodor Shanin. He was born in 1930 in independent Poland, but after Soviet occupation in 1939, his father was arrested, and Shanin and his mother were sent to a camp in Siberia. After the war, the family was able to return to Poland, from which 18-year old Teodor went to Palestine. There, he fought in the 1948 war for Israel’s independence, and then became a sociologist and left for the UK, where he taught for many years at the University of Manchester. During Perestroika, Shanin, together with the help of Gorbachev’s advisors, organized for Soviet sociologists to be educated in the UK. In 1995, he founded his own school in Moscow — a small, elite university offering the study of humanitarian subjects and management to 300 students with high quality of teaching and diplomas from his own University of Manchester for graduates. Now, Shaninka leads (Russian) the all-Russian rating of salaries of graduates and is ranked second place (Russian) in the rating of the most expensive Full MBA programs in Russia.
  • Officially, Shaninka lost its accreditation due to a formality — the regulator assessed that its programs (including, for example, “The History of the Suit” or “Shoes of the XVIII-XX Centuries”) do not meet government standards. Unofficially, sources told The Bell of the diplomatic conflict with London (Russian authorities have already banned the British Council from working in Russia, which is also engaged in cultural and educational projects) and raised scrutiny of Shaninka on the part of the FSB. They “find the school to be too independent and too often in contact with foreign universities; a ‘real hotbed of liberalism’”, one source told The Bell.
  • For now, the consequences for the university will be limited to not being able to issue state-sanctioned diplomas — which is not really a big problem for a school which issues British diplomas. But this is how the government began its attack on another independent university, also known for the high quality of education and its liberalism — the European University in St. Petersburg. There, it ended with a total ban on educating students, and one of Russia’s best universities ceased to exist as an educational institution.

Why the world should care

For now, power in Russia is built in such a way that global universities need not fear competition from Russian universities. Vladimir Putin certainly genuinely wants to improve education in Russia, as the state pours $13 billion annually into this area. But the simple truth is that a good university education is impossible without dreaded liberalism, which appears to be a paradox too challenging for the Russian system to overcome.

Peter Mironenko, The Bell

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

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