Looking for Revenue

The Ministry of Finance may impose a tax on income from bank deposits, Deputy Minister Alexei Moiseev said.

According to Moiseev, the situation where people “in principle do not pay anything on deposits” is quite exceptional in world practice.

“A person with one billion rubles on deposit, and there are such people, and they pretty much do not pay any tax on the income of their deposits. You cannot do this anywhere else.”

Moiseev also noted that the President had proposed cancelling taxes on bond coupons.

Then the bond holders would not have to pay anything on earned income to the state.

Moiseev did, however, acknowledge “…that the Ministry of Finance was unable to figure out how to do it.”

“That is why we are looking at a working version of equalizing conditions through “do everything worse”, that is, nevertheless, to impose taxes on some portion of the deposit,” he said.

The Deputy Minister did take pains to impress on his listeners that the proposal was not in the budget draft law, but that the Ministry was looking at options to increase revenue, and this was one of them.

Of course, Rosbalt reminded its readers that the outcome of this proposal would be a spike in capital flight, with “more affluent investors” moving money into the financial markets abroad.

Asset Stripping Fraud

The article is a translation of a blog post by former deputy chairman of Russia’s Central Bank, Sergei Aleksashenko. In the article Aleskashenko details how the Central Bank is committing asset stripping fraud of Russian banks.

“The scheme is ridiculously simple.

  • The Central Bank turns a blind eye to capital and clients’ deposits being siphoned off from a bank;
  • those same Central Bank passive onlookers then decide that the bank has to be saved (although of 30 bail-outs, not one bank has yet managed to return to full operation);
  • the same people choose which bank will save the bankrupt bank and decide how much money has to be allocated for this noble purpose;
  • then those very same people give the DIA [Deposit Insurance Agency; the equivalent of the US FDIC] a loan for 6-8 years at an interest rate of 0.5% (that’s right – half a percentage point);
  • after that the same people [from the Central Bank], or some of them, visit the DIA where, as members of the Board of Directors, they decide to issue a loan of billions of roubles (at an interest rate of 0.51%) to the banks involved in the bail-out.
  • The bank doing the rescuing then uses the funds it has received to buy a federal loan bond at the current rate of return from the Finance Ministry and receives a guaranteed income;
  • the Finance Ministry meanwhile uses funds from the federal budget for the next 6-8 years to pay the interest on the bond sold to the bail-out banks.
  • At maturity, the bond should pay off all the money received as a loan.”

This scheme, Aleksashenko writes:

“…has already cost over one and a half trillion roubles and, taking into account the interest to be paid, the federal budget is going to have to shell out considerably more than two trillion roubles.”

Now, he concedes,

“To be fair, it should be said that the banks have paid back slightly more than 20% of the one and half trillion roubles disbursed. To this end, some assets have been transferred on to the DIA balance sheet. But their real value is unknown as the DIA site carries no information about the nature of these assets, why the DIA needs them, what it has done – or intends to do – with them.”

He continues:

“There have never been, nor are there still, any clear or transparent criteria for deciding which bank should be bailed out – and which should be left to collapse – and it is only the bureaucrats who are allowed to have anything to do with analysing proposals for bail-outs…. Moreover, after some time it emerged that the rescuers were finding the allocated funds insufficient, so multiple hasty appeals for top-ups were launched at the Central Bank because “what you sent last week was gobbled up straight away” (a quote from Korney Chukovsky’s children’s story Telephone).”

Aleksashenko concludes:

“….This way the federal budget is incurring ever more debt, although we know that there is no longer any money left in it, so any extra unplanned kopecks spent throws the Finance Minister, who is also a DIA board member, into a blind spin of rage. It looks to me as though this endless stream of new decisions about money to be allocated was one of the main reasons for the recent purge of the Central Bank’s supervisory committee.

When I decided to look at the final summary of what the sacked “supervisors” had been up to, force of habit led me first to the usual place on the DIA site in the hope of downloading the usual tables, but I didn’t find any. So the bureaucrats’ cat had a very good idea of whose meat she had been eating and decided to sweep all the information about her dinner under the carpet – to avoid any uncomfortable questions for the officials.

We must disabuse the said officials: we will find the information, we shall be asking questions, and we shall name and shame those who are personally responsible.”


Bloomberg had an article today about the sanctions titled “U.S. Stuck with Nobody Left to Sanction in Russia Over Syria”.

The “analyst”, by the way, is Michael Kofman, from the Wilson Center’s Kennan Institute in Washington.

Kofman told Bloomberg:

“While the president has full sanction authority, there’s nobody left to sanction in Russia besides the janitor in the Kremlin. In terms of expanding any kind of commercial or financial sanctions, we’re basically maxed out.”

The sanctions are not working. There are multiple reasons for this. Firstly, it is still unclear what the end goal of the sanctions is. Is it to prevent further Russian encroachment in Ukraine? Is it to force Russia to leave Crimea? Is it to oust the Russian government, and Putin specifically? We just do not know. It has never been made clear. Equally, it has not been made clear to the Russian government what they have to do to have the sanctions repealed.

Another reason the sanctions are not working is because there is no enforcement of them. I have yet to hear a story about someone’s bank account being frozen because of the sanctions. And the travel ban has been proven to be a joke on multiple occasions. See for example this story published in September about presidential advisor Vladislav Surkov violating his EU travel ban to visit Mt Athos in Greece, or Surkov’s more recent trip to the EU to take part in the Normandy talks.

Thirdly, for all our talk, we do not know who the real decision makers are in the Kremlin. It seems as if the US State Department had a list previously drawn up, and just went with it, without doing any real research.

And finally, we are turning a blind eye to the Russian Regime’s intentions. Western politicians and pundits have bought into this myth that the adventurism displayed by the Regime is to protect the personal wealth and power of the elites. But if that were true, wouldn’t they have retreated from the supposed threat the sanctions have placed on their personal wealth?

There are other options besides individual sanctions. There are also other options besides going “nuclear” and cutting Russia off from SWIFT. But to dismiss the current trajectory as “maxed out” is at the very least disingenuous.

Healthcare Spending

Opposition politician Vladimir Milov is running a series of blog posts on Russia’s recently published 3-year draft budget. His most recent article focuses on proposed health care expenditures.

Milov first condemns the cynicism of the Regime in its exploitation of its newly minted “constitutional majority”.

“Shortly after the elections (to do so earlier was dangerous, for obvious reasons) the Ministry of Finance published a draft three-year budget through 2020.”

There are a lot of horrible things in the draft budget, Milov writes, saying that he will continue to analyze them in future posts. But, he continues, “without exaggeration, the most anti-national and simply criminal plot is the planned radical reduction in healthcare expenditures.”

“Let’s just look at why we have such a high mortality rate in the country. Every year nearly 2 million people in Russia die, and the reasons for two-thirds of the deaths are cardiovascular disease and oncology (cancer).”

Milov includes a pie chart from Rosstat (the State Statistics Office) showing that 48.7% of deaths in 2015 were from cardiovascular disease, while another 15.7% were from cancer.


“Therefore, it would seem that the State from all of its resources should spend the most significant share [of the budget] to reduce the mortality of its citizens from the most life-threatening diseases of Russians. Especially since… we are far behind developed countries [technologically].”

But what does our State do instead, he asks. With a budget of 13 trillion rubles, they cut the programs that would help these people.

“Now these programs will be as low as only a few hundred million rubles a year…”

And meanwhile, the security services and the bureaucracy will get about 50% of the budget.

“This catastrophic cut in funding for these programs in fact can only be interpreted in one way – die, citizens, as you wish. We have the budget deficit, geopolitics, Syria, the fight against the US, and you have your cancer and your heart, and this is your problem, we are not responsible.

In general, the share of spending on health care in the budget will be greatly reduced in the next three years.”

And instead:

“All responsibility for healthcare will be shoved into the regions, whose budgets are in deficit and debt and simply do not have the money for it… and even those [regions] who have money are cutting back on medical expenses, like Sobyanin [the governor of Moscow region].”

The budget anticipates spending 113 billion rubles less on healthcare next year compared to this year, a slight increase in 2018, and another drop in 2019.

“Compare these pitiful numbers to, for example, the cost of the army, although in 2017 they are proposing to reduce [their share] from 4 trillion rubles to 3 trillion, but it is still ten times more than the authorities proposed to spend on health care. Or the 2 trillion [ruble] expenditure on the security services, the police, the National Guard, etc. (“National Security and Law Enforcement”), these costs, by the way, unlike the military, they do not plan to cut.”

Milov concludes:

“At the same time, by all possible international standards, medicine Russia is greatly underfunded – in terms of health care expenditure as a share of GDP, we hang out somewhere in the region of 80-90th place in the world, behind not only developed countries, Ukraine or Moldova, but also even a dozen African countries. You can be sure that a new round of decline in spending on medicine will throw us to the end of the world ranking of health financing, on par with Nigeria, Papua New Guinea, and the Democratic Republic of Congo, where they spend 3-4% of GDP.”

Diamonds & Gold

The Finance Ministry is cutting back purchases of precious metals and gems for Gokhran (Russia’s precious metals and gems repository) this year by 2.5 times, from 12 billion rubles to 5 billion rubles, “Izvestia” reported today.

At the same time, large-scale sales of gold and diamonds are planned to replenish the state treasury.

As of 1 October, the paper reports, the Ministry of Finance had only spent 19.9% (or 2.4 billion rubles) of the 12 billion rubles budgeted for purchasing precious metals and stones.

The Ministry’s press service told “Izvestia” that they only planned to spend about 7 billion rubles in total this year.

In conjunction the Finance Ministry intends to increase sales of precious metals and stones in the next three years. The Ministry plans to sell off about 4.522 billion rubles of the commodities this year, 10.411 billion next year, and another 10.5 billion in 2018-2019. These sales will be used to “provide operational funding for the federal budget deficit”, the Ministry claims.

In 2015-2016, purchases of these assets were doubled, analyst Roman Tkachuk told the paper. He stated that the Ministry is now returning to its pre-crisis patterns:

“Between 2012 and 2014 Gokhran bought mainly diamonds, but in the past few years, most of the funds have been invested in precious metals.”

“The relatively high prices prevailing in the market today will allow the Finance Ministry to profitably sell these assets,” the paper claims, “World prices for precious metals and diamonds have been fairly stable this year.”

“The Ministry’s decision will have a moderately negative impact on the diamond market, experts say.”

Gokhran purchases from state diamond company, “Alrosa” are secret, but according to Tkachuk, they range somewhere between “1 and 10 billion rubles a year” (or only 1-5% of the company’s total revenue).

“But the State Fund has traditionally bought… the most expensive stones, the export of which is prohibited abroad. So the news is marginally negative for the diamond company.”

Another analyst told “Izvestia” that the reduction of state purchases from “Alrosa” could make it easier for the company to sell its product abroad. But, he added, “the sale of state reserves will put additional pressure on world prices, which are already reduced in recent years.”

“At the same time, gold producers are not affected: on the one hand, the market is able to support the demand, on the other – procurement plans are stored in the Bank of Russia,” the paper wrote, quoting the head of the Union of Gold Producers:

“So far we have to more substantially cooperate with our other creditors in the market, especially with Russian banks, as well as more and more active fund development in the Far East and the Baikal region. And the high domestic liquidity of gold, as always, is provided to us by the Central Bank.”

Bad Actor, Bad Institutions

I have been noticing a theme in the Western press (and not only the English language press) with regards to its coverage of Russia. It is one that I have commented on in the past, but it was really brought to the forefront when I saw the cover photo of this week’s Economist.

The implication is that President Vladimir Putin is the problem with Russia, and that the only solution is to oust him. The publications’ articles on the topic were not much better. One about Russian hipsters (yes, they do exist) and the revival of a kind of 1970s dissident culture in the country’s two main metropolises.

Another article explicitly placed the blame for what is happening solely at the feet of Putin and a few cronies.

For years we have been told that building institutions was the answer. That depending on a single actor to reform Russia was a mistake. But now problems that were once labelled “systemic” are the fault of a single bad actor. And removing that individual from power is the answer to all our problems.

Ignored in all of this is that Putin is the product of a bad system. A system that bred him, molded him, installed him in the President’s office, and sustains his grip on power. A system that rules by fiat, has no checks and balances, no respect for the rule of law, no private property rights… A system that is, as I have written here before, essentially still feudal in nature. A system that does not respect its own Constitution. And yet we expect these same people to adhere to international law.

Meanwhile, the billionaire Alexander Lebedev is operating illegally down in Crimea, building a hotel complex, and other tourist attractions. He is now hurt that Ukrainians are bothered by his actions.

He concludes his diatribe by essentially saying “we will all laugh about this over a glass of wine in 20 years”.

Mikhail Khodorkovsky, Alexander Lebedev, and Alexei Navalny (just to name a few) have all said that they would not return Crimea to Ukraine if they were in power. But these are the “liberals” who Western pundits expect to lead Russia when the Putin era ends.

Well, good luck to them.

Capital Outflow

The Russian Regime appears to be very concerned with the potential impact that a further weakening of the ruble would have and have been warning about it. There have been several articles (some of which I have highlighted here already) mostly pointing to the fact that Rosneft’s lack of ready cash could cause major problems for the Russian currency come December.

According to Russia’s Central Bank Russian companies have $21.6 billion in external debt due by the end of the year, and another $15.2 billion due by the end of the first quarter of 2017. This does not include banks or other financial institutions.

As for the banks, Raiffeisenbank analysts predict a further outflow of capital.

“Since the beginning of the year, foreign currency in corporate accounts decreased by $20.5 billion or 14%.”

That is, every 7th dollar has left.

“Foreign exchange reserves of the banking system, the reserves on the accounts in foreign banks – remained at its lowest level in 5 years and reached $20.4 billion, down by 20% from the beginning of the year.”

The columnist Sergei Shelin wrote earlier this week that a drop in the price of oil could hurt the ruble too. But, he says, the main thing is that people panic. There are three things that could happen with the ruble:

“A more or less marked weakening of the ruble in the coming months is quite possible, although not guaranteed.”

The rising price of oil may prevent this, however. But Shelin writes, “I do not believe this is very likely.”

Second, if the ruble is again weakened, he says, “it is unlikely to be on the same scale as two years ago or even one year ago.”

And third, Shelin does not rule out “a powerful devaluation” but for this to happen, there would have to be external shocks, “such as the collapse of the global energy market, or some major adventures on the domestic and external fronts.”


Russia’s Sports Minister Vitaly Mutko has been removed from his post, and given a new role in the Russian government.

BBC’s Richard Conway had reported Mutko’s potential transfer last week:

And Conway’s sources were correct. Yesterday, President Putin named Mutko his 9th Deputy Prime Minister. Mutko’s portfolio will be that of sports, youth, and tourism.

In theory this would give Mutko more power because the more you are responsible for, the more rents you can extract. So rather than just getting kickbacks for sports, he can now take kickbacks for youth and tourism. And he can also give out more favors to more people. And I think that is why the Western media and analysts are reporting this as a promotion. But those of you who have been reading me for awhile know that I don’t view these moves as anything but lateral transfers. Because titles are not usually a true reflection of responsibilities and placement in the hierarchy.

Anton Orekh writes in Ekho Moskvy:

It is possible to simultaneously promote a person and send him to the bench. We can say this, since we are talking about sports. The appointment of Mutko to Deputy Prime Minister formally raises him in the hierarchy, but in fact, it is unclear [if this is the case]. The position may be purely nominal. Only Mutko himself became a living anecdote.

A chief might be good or bad, but should not be funny. Mutko sometimes says sensible things, and puts forward some interesting ideas, but all of this is drowned out by his eccentricities and flows of rambling verbiage.

But the truth is that Mutko had to be sacked after the Olympics, because of what happened at Rio, Orekh continues.

Sport is a showcase of Putin’s rule, because apart from sporting victories, and the bombing of Syria, we have nothing to boast of.

And with the doping scandal, he writes, “it was Mutko who primarily demonstrated a complete inability to accurately respond to the situation. Every time he was late, not by a step, but by a hundred paces. He constantly answered at random, was unable to give at least some explanation. And each new scandal was a surprise for him. He did not even have to come up with the role of scapegoat, because he chose [to take on] this role himself.”

But to sack Mutko would have been to admit that Russia was guilty, and so that option was impossible. But it was equally impossible to allow him to keep his position as Sports Minister.

“However, you could do worse: to merge into one the Ministry of Sport, Tourism and Youth Policy. That is three completely different areas of activity. It is somehow believed that sport is for young people. That tourists do sports. That young people are constantly traveling with dumbbells and skipping ropes. But, thank God, that did not happen.”

Instead it all went under “the duties of the new Deputy Prime Minister. And in this sense, the appointment of Mutko was the correct one.”

And the Sports Minister will be Pavel Kolobkov. Who performed a lot of draft organizational work, and if something in the Ministry was sensible, it was largely thanks to Kolobkov. And foreign “partners”, so to speak, are not allergic to him.”

And if Mutko will leave Kolobkov alone to get on with his work, Orekh concludes, “the current reshuffle can be evaluated as a solid four.”

Foreign Direct Investment

Kommersant reports:

According to the UN Conference on Trade and Development, in 2015 Foreign Direct Investment [FDI] increased by 40% (up to $1.76 trillion) worldwide, and close to the pre-crisis figure of 2007 ($1.9 trillion). Inflows to developed countries increased by 46% (to $962.5 billion), in developing [countries] by 9% (to $764.7 billion).

At the same time, Russia’s share in the global flow of FDI has fallen to its lowest value since 2001 – 0.6%.

As a result, the country has dropped from the top 20 recipients of investment, but remains on the list of the world’s 20 biggest investors ($26.5 billion).

According to research by the consulting firm A.T. Kearney, among the most reliable countries for investments is the US (2.02 of a maximum 3 points), China (1.82 points), and Canada (1.80 points).

In turn, Russia fell into the last rating in 2013 (11th place). More than 50% of respondents… said that the volume of direct investments could increase in the event of the settlement of the conflict in Ukraine, the lifting of sanctions, and easing of geopolitical tensions.

In April 2014, the Polish company LPP SA, which owns the brands Reserved, Cropp, and House, announced the reduction of investments in Russia due to the significant weakening of the ruble. At the beginning of the year, potential investments were estimated at $130 million.

In the first quarter of 2014, Morgan Stanley reduced its investments in Russia by 30% to $27 million. In particular, the US investment bank completely left the retail group X5.

In July 2014, the European Bank for Reconstruction and Development halted new investment in Russia, and in September the US investment group Blackstone left the country.

In September 2015 against the backdrop of falling oil prices,Total SA reported a decrease in investment by 15% to $20 billion in 2016. In January of this year, [state-controlled oil company] Zarubezhneft purchased from the French company 20% of the Kharyaginskoye project.

What is left out of Kommersant’s explanation is one crucial point: FDI is merely a number quantifying how much money is brought into a country from outside. But it does not indicate who is doing the investing. So, for example, a company that is registered in Cyprus which invests money in Russia is counted as FDI, even though Russians are the beneficial owners. This skews the statistics and does not give an accurate assessment of what is really taking place.

Sergei Ivanov

Sergei Ivanov granted his first interview after he was transferred out of the Presidential Administration to Komsomolskaya Pravda.

The English language press will likely focus on KP’s question about the rumor that Ivanov “…would lead a new super-ministry of state security…”.

To which Ivanov answered:

“This is one-hundred percent fake! A ministry of state security is not intended… I can say this confidently.”

He also said that such a move would be a mistake from his point of view.

But I want to talk about a couple of Ivanov’s other statements in the interview, mostly because they confirm what I have said in the past about these moves.

Of course, the first question KP asked Ivanov was about his new position, and whether or not it was a demotion.

Ivanov dismissed any rumors that he was in disgrace or was ill.

“I don’t feel any disgrace. And I am generally optimistic about the fact that now I can finally do specific things that I love [emphasis added -ed.] and have actually worked toward for a long time, but, you know, in fits and starts.”

I have brought this up before when speaking about former Russian Railways Chief Vladimir Yakunin. Many people thought that Yakunin had been ousted from his position due to corruption in the company. But it turned out that Yakunin had been freed to work more closely on a project that was very important to both him and the Regime. And I think that this is also what happened with Ivanov, and Ivanov seems to confirm that in this interview.

Ivanov also stated that he had wanted to leave his post in the Presidential Administration earlier, but that Putin had asked him to wait a bit longer. He squashed rumors that there were problems with his health, but said that he was tired of working nearly every weekend, while insisting that he was not tired.

Ivanov described himself as:

“A pragmatic and enlightened patriot. I am doing what I think is useful and necessary for Russia. No matter the scope of this economy, transport, and communications (I, by the way, still remain chairman of Rostelecom’s Board of Directors). I love culture, am engaged in supporting it, and lead the board of trustees of the Kremlin museums.”

He said that his contact with the President “…is not so intense [as it was before], but it still exists.”

On the subject of corruption, Ivanov cited plans to push through revisions to the criminal code. He also confirmed that the government will continue its “fight” against corrupt “officials, security services, the banking sector, and ordinary crooks”.

KP noted that high-profile arrests were increasing.

Ivanov replied:

“This proves that we are sincerely trying to fight corruption, and there are no untouchables.”

He named the banking sector specifically, saying: “It is necessary to tighten banking supervision, in my opinion.”

KP followed that up by asking if the government intended to continue their anti-corruption course, and Ivanov answered affirmatively.

P.S. Compare this with Ivanov’s interview with the FT in June 2015.