Surprise: They agreed to continue. Everything will go according to plan. Keep an eye on it. The dollar is still trusted .
February 16, 2022
Surprise: They agreed to continue
German Chancellor Olaf Scholz’ visit to Moscow ended expectedly: The result of his talks with Vladimir Putin was that they outlined their positions and agreed to continue their communication.
Judging by their joint press conference, the “pragmatic” nature of the relationship between the two countries—i.e., the priority of economic ties over ideological and value differences—suited both leaders. Therefore, they almost did not contradict each other but pretended that what their dialogue partner said did not merit discussion.
The German chancellor did not respond to Putin’s traditional reasoning that “what is happening in Donbas today is genocide.” Likewise, Putin did not respond to the mention of the International Organization Memorial, whose activities have been banned by a Russian court, and Alexei Navalny, whose trial began that day.
The only issue the two politicians disagreed about publicly was their treatment of 1999 when NATO forces conducted a joint military operation against Yugoslavia. The Russian President called it a full-scale war launched by the alliance; the German Chancellor is convinced that “the situation in Yugoslavia was somewhat different. There was a danger and a threat of genocide there, and it had to be prevented.”
Everything will go according to plan. Of which there is none
As I said before, what is going on in relations between Russia and the West is Vladimir Putin’s personal “project,” and probably no one has a complete idea of what his goal is and what the future sequence of steps on Russia’s part will be. Today, the Russian President indirectly confirmed my hypothesis when he was asked about Russia’s next steps at a press conference after the conclusion of the Russian-German talks.
“As to how Russia will act next. According to the plan. And what will it consist of? From the real situation on the ground. Who can answer how the real situation will unfold? So far, no one.”
From this answer, I understood that the Kremlin has no detailed plan of action and that much of the decision will be made on an impromptu basis.
The trial of Alexei Navalny
On Tuesday, Alexei Navalny’s first trial was held at the prison colony where he is captive. A few key points:
One of Navalny’s lawyers, Vladimir Voronin, was not allowed to participate.
Journalists from the Cold Project analyzed 4 million criminal cases that have been heard in Moscow’s courts over the past 10 years. None of the other 8.7 million hearings took place outside Moscow.
Journalists were allowed to cover the process. Media representatives were not allowed into the session hall, but a video broadcast was arranged for them in the neighboring hall.
The prosecutor’s office fleshed out the charges, which were unknown before. In August 2019, the Investigative Committee talked about the theft of 1 billion rubles ($13.2 million), by the end-2020 the amount was reduced to 356 million rubles. The prosecutor in his speech mentioned the amount of 2.7 million rubles ($36,000) and said that the victims of the case were four people who had transferred this sum in total to Navalny. After that, they stated that Navalny misled them about his political plans.
Alexei’s wife, Yulia, was allowed into the courtroom and was able to talk to Alexei. The next court session will be held in a week, on February 21. The judge allowed a meeting between Yulia and Alexei Navalny.
A logical outcome
Swiss commodities trader Glencore, which took an active part in Russneft’s creation, has sold its stake in the oil company.
Russneft is Russia’s ninth oil company by production volume: 6.68 million tons (1.12% of the country’s oil production). It is the only oil company in Russia that was not created due to privatization; it was built through numerous purchases of small independent companies. Along the way, the company’s main shareholder, Mikhail Gutseriev, had a conflict with the Kremlin, involving criminal prosecution, huge fines from the tax service, and selling the company to Oleg Deripaska on the eve of the 2008 crisis and repurchasing it for $1.
In June 2021, Gutseriev was put on the EU sanction list for “relations with the government of the Republic of Belarus and his friendship with President Alexander Lukashenko. After that, Gutseriev decided to resign from the Board of Directors of Russneft, of which he was chairman, and transfer his stake in the company to his brother. That was also the trigger for Glencore, which decided to withdraw from the problematic partnership.
Glencore acted as Gutseriev’s financial partner in establishing the company, providing him with loans. In 2015, when the debt burden began to hamper business development, Glencore converted its loans into shares in Russneft, obtaining 46% in the company, and then successively reduced its stake. Thus the sale of Russneft’s remaining shares was a logical conclusion to a long-term project and should not be associated with the political events of recent weeks.
Keep an eye on it
On February 10, Russia and Belarus began significant maneuvers for “Union Resoluteness—2022.” The exercise in Belarus, to which Russia has moved some units and subunits of the Eastern Military District with regular weapons, will continue until February 20.
The day after Ukraine and Belarus agreed on visits of their military attachés to the exercise areas, foreign observers and journalists from the countries whose embassies operate in Belarus received similar permission to visit the final stage of the exercises of Russia and Belarus. During this time, “a brigade of marines together with formations and military units of the armed forces of the Republic of Belarus, supported by operational-tactical and army aviation, will practice the tasks of defensive combat and maneuvers to other directions,” said Igor Konashenkov, spokesman for the Russian Defense Ministry, adding that these actions will be accompanied by live fire.
Unattractive market
In October 1989, the Soviet Union established the International Moscow Bank, the first commercial bank in the capital of which non-residents owned most of the shares. With the beginning of Russian reforms, the emergence of banks controlled by non-residents (henceforth referred to as “non-resident banks”) was no surprise to anyone. By 2005 their number increased to 42 and by the beginning of 2008 to 86. The crisis of 2008 hit the Russian banking system. The Russian economy during the crisis showed its instability and dependence on the situation in the oil market and the inflow of foreign loans. Banks bore the brunt of the losses during the crisis. The Russian government assisted state-controlled banks and did not support non-resident banks. In turn, many of their parent banks also found themselves in a difficult financial situation and began to wind down their international expansion programs.
Nonetheless, the total number of Russian non-resident banks continued to grow until 2013. (At that time, the share of non-residents in the capital of the Russian banking system reached 28.5%.)
The recovery of the Russian economy after the crisis of the rapid growth of world oil prices, which by early 2013 were steadily exceeding $100/barrel, created comfortable conditions for the work of banks. However, it became obvious that non-resident banks gradually began to lose the competition to state banks, whose influence in the economy was snowballing.
The annexation of Crimea and the imposition of Western financial sanctions against Russia led to a reassessment of risks by foreign investors. Many began to leave Russia, not wanting to take political risks. Foreign banks were no exception, and the reduction in the number of non-resident banks and the share of non-residents in the banking system’s capital became irreversible.
By the end of 2016, the number of non-resident banks decreased to 98; by the end of 2018 - 80. At the end of 2021, their number was 65, and the aggregate share of non-residents in the capital of the Russian banking system fell to 10.73%.
Even those non-resident banks that continue to do business in Russia realize their growth opportunities are minimal. On the one hand, the share and the number of state banks have grown dramatically in recent years. The Russian government and the Bank of Russia provide them with access to capital and regulatory relief, allowing state banks to gain competitive advantages. On the other hand, the flow of foreign direct investment into Russia has stopped, and consequently, the flow of new customers for non-resident banks has stopped.
Apart from the fact that non-resident banks were one of the channels for the inflow of external financing for the Russian economy, they promoted modern technologies and standards of banking activity in the Russian market. The departure of non-resident banks from Russia is yet another indicator of the growing self-isolation of the Russian economy, leading to its degradation.
The first digital ruble transactions
The Bank of Russia has announced that it has tested a digital ruble platform with the participation of three state-owned banks.
VTB, Promsvyazbank, and Gazprombank connected to the new platform, and customers of the first two banks conducted transactions among themselves using mobile applications. According to the First Deputy Chairman of the Bank of Russia, Olga Skorobogatova, testing will continue in different scenarios during the year. “The first stage will test the issue of digital rubles, opening digital wallets to banks and citizens, as well as transfers between citizens. At the second stage, it is planned to test transactions for payment for goods and services in trade and service enterprises, payments for public services, implementation of smart contracts, as well as interaction with the Federal Treasury.” Later, the Bank of Russia is expected to introduce the possibility of using the digital ruble in places with no internet and provide access to digital ruble transactions for non-resident clients.
From my point of view, as long as the availability of a digital wallet, controlled by the Bank of Russia, is not mandatory for citizens and companies, the digital ruble and transactions with it will not differ from traditional banking transactions in any way. Therefore, the new instrument will become a competitor of existing payment systems, including the Rapid Payments System and the Mir payment card, owned and operated by the Bank of Russia. The moment a digital wallet becomes mandatory (and possibly the only form of a bank account), the state will have complete control over bank transactions and will be able to freeze instantly any assets of citizens and companies.