New Sanctions

Frankly, I’m skeptical about the impact these sanctions are having. There was an article in Kommersant today saying that there are workarounds on most “dual-use” items that have been sanctioned. This means that certain tech items that are used for more than one purpose (say both military and civilian) can be said to be civilian on the import/export forms, even though they are destined for a military purpose. In addition, most Western companies just ignore the ban anyway, because they need the customers.

“There are no problems with any of our existing projects – all of the contracted equipment is being delivered… Workarounds are not necessary.”

— Source close to Rosneft

Today’s new sanctions came directly on the heels of Russia’s veto of a tribunal to investigate the downing of commercial flight MH17 last July in Ukraine.

So what and who are in the new sanctions?

An associate of Putin crony, Gennady Timchenko, was also sanctioned:

Along with several companies that appear to be connected to Timchenko as well:

The son of Russian oligarch, and long-time Putin crony, Arkady Rotenberg was also listed:

There is also a lengthy list of companies under the heading of “sectoral sanctions”. These companies all fall into two categories: either they are associated with Rosneft, or with Vnesheconombank (VEB).

Entities include names like the “Development Corporation of the North Caucasus”, and the “Russian Direct Investment Fund”, both of which are financed by Vnesheconombank.

Rosneft’s list include subsidiaries of Rosneft, and different refineries.

Meanwhile, Rosneft just inked two deals with Western companies. First a deal with Exxon-Mobil to work on an exploration project in Mozambique. Then a second deal was announced with a company called Skyland Petroleum for a joint venture based on “Taas-Yuryakh Neftegazodobycha”. In a statement posted on Skyland’s website from June, the deal was discussed at the St Petersburg International Economic Forum (often referred to as Russia’s answer to Davos) in June. It includes the option for Skyland to buy up to 29% of Taas-Yuryakh Neftegazodobycha, “and creating joint venture for development of Srednebotuobinskoye oil and gas condensate field.”

The statement continues:

“Development of Srednebotuobinskoye field – one of the largest fields in Eastern Siberia – will allow to create infrastructure for further exploration and production in the region.”

Tucked in the bottom of the statement is a note that BP also inked a deal with Rosneft at SPIEF for a 20% portion of Taas-Yuryakh Neftegazodobycha.

So on the one hand, Rosneft and Vnesheconombank have been hobbled by the sanctions, but deals are still being made, and workarounds are still possible.


Kokh on the Russian Political Scene

Alfred Kokh’s long post on Facebook today about recent developments in Russian politics:

“Well, then. The economic sanctions haven not been lifted. And when they will be revoked is unknown. Moreover, six more countries joined them. Russia’s access to [both] the capital and the advanced technology markets is closed.

Sanctions against individuals will deepen, it is now obvious. See, for example, the statement by [British Prime Minister David] Cameron about offshore companies owning property in London, or the failure of [Duma Speaker Sergei] Naryshkin to get a Schengen visa to visit Finland… Slowly but surely they are choosing to offshore their accounts, and wives, and kids…

Turkey actually blocked construction of the “Turkish Stream.” The Chinese have not given the final price of gas for the “Power of Siberia” project. The West is set to lift the embargo on Iranian oil, and in the past month, the price [of oil] has fallen by 20%.

The court in London is on the verge of a verdict that Litvinenko was killed by Lugovoi and Kovtun on orders from the Kremlin. With all the ensuing consequences. In particular, the list of names for issuing the killers and their masterminds. Public and official.

After the Russian veto in the Security Council over the downing of MH17, the UN General Assembly is likely to vote to create a tribunal that will have an international mandate. The consequences are predictable, too.

This is all in addition to the economic crisis, a decline in GDP, double-digit inflation, the most brutal budget crisis, and the collapse of the pension system. Plus the undeclared war in Ukraine that should not be spoken of aloud. Meanwhile the war has passed through the heart of tens of millions of Russian citizens who are connected with Ukraine in one way or another.

Then add in the political assassinations, harassment of the real opposition, flagrant violations of citizens’ fundamental voting rights, fabrication of criminal cases, the transition to extra-judicial executions by Kadyrov’s death squads.

And all this against the backdrop of wild propaganda, hysteria, bragging, the arrogant faith in our success, and the stories that we have no rivals…. Meanwhile, the per capita GDP of Kazakhstan is already higher than Russia.

And the rosette on this cake: the authorities believe that with all this, we should piously believe that the situation in the country is stable as never before, and we are the vanguard of humanity and its moral leader.

If this is not a madhouse, then what is? Then this morning, Putin coyly asked a Swiss journalist, “Do you think I’m crazy?” The polite Swiss kept silent. And this was right: psychiatrists are advised not to discuss unpleasant things with their patients – an attack could happen…

Russia’s Reserves

Opposition politician and leader of the party “Democratic Choice” Vladimir Milov had a long interview published today in He covered various topics in the Russian political and economic scene, but given the recent volatility in the ruble, I’d like to focus on what Milov had to say about the Russian economy, and where it is headed.

The interviewer asked:

After a temporary lull, the Russian economy is once again beginning to storm. Oil prices are fluctuating, and along with them the ruble. What is happening in the day to day lives of the Russian people?

Milov replied:

The ruble periodically swings back and forth, but it is not the leading indicator. The basic statistics are very bad and deteriorating from month to month: the closing of workplaces, falling investment, the [falling] income of the populace, and [decreasing] purchasing power. During the 1998 default, we also had a strong drop in income, but it was short-lived, and v-shaped. Then we quickly rebounded, and [the economy] began to grow. In addition, before the 1998 default, most people’s savings were in foreign currency. [And so] they were not impacted.

Now it is precisely the opposite: savings have been greatly depreciated due to the devaluation and inflation [note: inflation now sits at 15,3%]. Although officials claim that we have passed through the worst of the crisis. But this is a lie and does not correspond to reality. The situation is getting worse…

Milov goes on to explain that “there is no strategic exit. It is not clear how we are going to stop its [the ruble’s] decline and return to growth. Previously at least there was a mass influx of loans from the West, but now nobody is giving anything.”

Even if the sanctions are removed, he says, “the credit blockade will be long”.

This is because now Russia is seen as a “political risk”. Even those who are not on the sanctions list are still seen as a risky venture.

“All our major businesses are in one way or another connected to the state”, Milov explains. And if Russia continues along its path, and again “escalates hostilities” in Ukraine, “then everybody is well aware that the sanctions lists can be greatly expanded.” So nobody wants to loan money to Russian businesses “just in case”.

Everybody understands that while the current administration in power, nobody knows where Russia will invade tomorrow. And even now there is something of a lull, but we are talking about long-term loans and projects. This is very risky, because of Russia’s unpredictability, you can simply lose money. For us, this credit blockade is much more painful than sanctions.

And so international banks are choosing not to loan money or invest in Russian projects.

Milov also mentions Russia’s reserves in passing, noting that they currently sit at $360 billion. And that Putin is comfortable with this, even though “this is two times less than what Russia had during the 2008 crisis.”

However, Milov fails to note (though he has mentioned this before) that the amount of $360 billion is not entirely honest. Approximately $150 billion of that actually belongs to the Finance Ministry, and has essentially already been spent on projects. Another $48 billion (or so) is in gold and so is not ‘liquid’. This leaves the Central Bank with approximately $162 billion in reserves. Less than half of what they claim to have.

The Russian Central Bank posted the following statement today on its website:

On 28 July 2015, the Bank of Russia suspended operations to replenish international reserves due to increased volatility in the domestic FX market.

Previously, they had claimed that they were buying up to $200 million a day to replenish the foreign reserves.

Sergei Markov goes to Crimea

I’ve been following Russian ‘analyst’ Sergei Markov on Facebook for over one year now. I was first inspired to do so by journalist Robert Coalson. Markov was very vocally pro-Kremlin throughout the Euromaidan protests, so initially, the idea was to save the posts for history. Particularly since Facebook does not seem to allow you to see all the posts.

I wouldn’t say the tone of the entries has changed so much since the beginning. But they’ve remained militant, while the Russian regime has sometimes appeared to waffle on certain points. What Markov’s statements reflect is a certain point of view of a particular sector of Russian society. At times he has criticized Putin for not being strong enough in dealing with the government in Kyiv (which Markov consistently refers to as a ‘junta’ who came to power by means of a ‘coup’).

At the same time, Markov has appeared on several English language news shows, including Amanpour. Frankly, it’s not clear who he is representing. He was an MP, though he no longer is. He is presented as a “Putin ally” on Amanpour, as you can see below.

I’ve called for Markov to not be allowed on shows like Amanpour because I think it does not add anything to the conversation, and in fact only distracts from the crimes of the Russian regime.

At the same time, I believe it is important for people to understand the point of view of people like Markov, something that I don’t think is presented properly by shows like Amanpour’s.

So I’ve continued to follow Markov, and share his thoughts on Twitter.

Markov was in Crimea this past week at a summer camp for what he said were “200 people from all across Russia”.

Campers at Donuzlav
Camp Attendees at Donuzlav in Crimea. The banner reads: “For Russia! For Victory!”

Markov then posted a portion of a speech he gave to the camp attendees. In the speech, he called Donuzlav (which used to be a Ukrainian military base) “an historic site”. Markov then recounted a story of a group of “pro-Russian activists” who prevented NATO from landing on the site during exercises with the Ukrainian military. This was the beginning of Russia’s return to Crimea, Markov continued.

I was skeptical of this claim, so I went looking. This video was what I found (buried deep in Google search):

If you can bear the nearly 10 minutes, you’ll see that it didn’t quite end how Markov says it did.

Fennovoima Update

The Fennovoima scandal has gotten bigger with reported connections to “Bulgaria’s energy mafia”. According to  Österbottens Tidning, a deputy member of Fennovoima’s board, Djurica Tankosic, has ties to Bogomil Manchev from Risk Engineering.

The two were revealed to be connected in 2011 in a report by Wikileaks:

In 1998, Manchev and Risk [Engineering] formed a business partnership with Parsons, specifically its regional director in Europe, Djurica Tankosic, an American citizen…. The relationship between Manchev [from Risk Engineering] and Tankosic is reportedly very close; the address for Parsons E & C Bulgaria is the same as Risk Engineering. It is this relationship that Manchev is likely referring to when, according to XXXXXXXXXXXX, he tells people that he is working for the United States–which, of course, has no basis in fact.

Djurica Tankosic is still listed on Fennovoima’s website as a deputy member of the board, and President of Global Nuclear of Worley Parsons.

Österbottens Tidning’s report continues:

Manchev is suspected, among other things, of forging environmental reports. Tankosic – who represents the Worley Parson consultancy – is suspected of the same in connection to the Belen plant.

On 24 June, Worley Parsons released the following statement:

WorleyParsons’ joint venture company in Russia, InterRAO-WorleyParsons, has signed a contract with Rosatom’s Finnish subsidiary, RAOS Project Oy, for the provision of consultancy services during the process of obtaining a construction licence for Fennovoima Hanhikivi-1greenfield project.

Fennovoima calls itself “Finland’s third nuclear power company”. 66% of the company is owned by Finland’s Voimaosakeyhtiö SF.

Voimaosakeyhtiö SF says that it “…operates like a co-operative. All shareholders will get the electricity generated by Fennovoima’s future nuclear power plant at cost price in proportion to their ownership.”

The other 34% of Fennovoima is owned by a subsidiary of Russia’s state-owned nuclear provider Rostom. The subsidiary was set up specifically to carry out the project in Finland. Rosatom is currently headed by former Russian Prime Minister, Sergei Kiriyenko.

Rosatom’s website has had no comment on the project since the statement released after the paperwork was submitted on the day of the 30 June deadline.

Voimaosakeyhtiö SF posted what looks like a joint statement with Mitgrit (believed to be connected to Russia’s Inteko) essentially refusing to comment on Migrit’s ownership structure, but insisting that it had complied with Finland’s request for clarification.

Meanwhile, the Russian taxpayers are losing out too. In January of this year, it was reported that Russia’s government approved the payment of $2.3 billion from the sovereign wealth fund to Rosatom for the project at Hanhikivi-1 in Finland.

Who is Migrit Solarna?

This past Thursday an article by Reuters indicated a project to build a nuclear reactor in Finland had been halted by the Finnish government over concerns about the ownership structure of Migrit Solarna, the proposed builder of the reactor.

Migrit Solarna is registered in Croatia as shown below:

Magrit Solarna registration in Croatia
Migrit Solarna registration in Croatia

Migrit Solarna is a subsidiary of Migrit Energija, which is also registered at the same address in Zagreb, Croatia.

Migrit’s website now shows the following message:

Magrit Statement
IMPORTANT! Migrit Solar Energy Ltd. does not have its offices in Europe, (for now) and are familiar with the fact that someone is using our name. All our correspondence is via our official website!

There are several other companies registered at the address in Zagreb that Migrit is using including a company calling itself an “Internation Accounting Service“. In addition, a company called Titan Energija is also registered at the same address and appears to be connected to Migrit.

According to a statement released by Greenpeace earlier this month, the deal is “a hoax, and a front for Russian capital.”

A Finnish publication also put out a report [in Finnish] attempting to prove that the members of Migrit were connected to the Russian company Inteco using social media and public records.

Migrit-Inteko Connections

The Slovakian filings for Tetroner Consulting can be found here.

Inteco was founded by Yelena Baturina in 1991 and made most of its money off of real estate deals in Moscow. Many considered it to be a conflict of interest as Baturina’s husband, Yuri Luzhkov, was the mayor of Moscow at the time.

When Luzhkov was forced out of office and then Russia in 2011, Inteco met with legal problems, and as a result is now owned by Mikhail Shishkhanov, who holds a 95% stake in the company, according to Kommersant. The other 5% is held by a subsidiary of Russian state-owned bank, Sberbank. Shishkhanov is co-owner of B&N Bank along with his uncle, the oligarch Mikhail Gutseriev, who fled Russia for London in 2007 following a series of events that included allegations of tax evasion and the murder of his son.

Since his return to Russia in 2010, Gutseriev has been buying up companies around Moscow, including real estate and radio stations. Earlier this year, RBC alleged that Inteco was to be an “investor” in the construction of a new complex of buildings for Lomonosov Moscow State University, a 110 billion ruble project. Gutseriev is a member of the Board of Trustees at the University, which was established in 2013. under the chairmanship of President Putin.

The Helsinki Times reported earlier this month that “the sole founder of Migrit Energija” is “Mikhail Zhukov, Moscow resident and vice president of Inteco.”

In addition, Russia’s state-owned nuclear corporation, Rosatom purchased 34% of Fennovoima in March 2014.

Finland says the decision on Migrit’s role is up to their Minister of Economy.

But after the statement from Finland’s government, Migrit responded on their website with a press release denying wrongdoing, and saying:

One of the most important facts that we want to highlight, and which indicates a clear desire of the Finnish partners for us to participate in the project, is that yesterday (16.07.2015.) we were given a new proposal by the representative of the company VSF, Mr. Antti Koskelainen with the altered offer to possibly participate in the entire project now with 6 percent of total share.

The original deal had been a 9 percent stake. Either way, the project would still be Russian at both ends. And in these times, that should be concerning, and taken into consideration by the Finnish government.

Is Russia Broke?

We’ve been having a conversation on Twitter recently about Russia’s reported reserves. Russia’s Central Bank is required to report the amounts it has in foreign exchange reserves on a weekly basis. But the amounts look odd to me, and I’m skeptical. To be honest, I’m not sure they have very much left at all. Here is why:

In January, Russia’s Finance Minister, Anton Siluanov, said that they were going to start using one of the Finance Ministry’s funds to buy rubles.

“We are selling a part of our foreign-currency reserves. We’ll get rubles and place them in deposits for banks, giving liquidity to the economy.”

In May, the Finance Ministry reportedly began buying more foreign currency after the Central Bank resumed “daily purchases of foreign currency… for the first time since June [2014] to replenish reserves”.

However, when you look at the actually amounts reported by the Central Bank on a monthly basis, the amounts are not growing. And in fact, the International Reserves have fallen by approximately $24 billion since the end of 2014.

The Finance Ministry should also not be adding anything to their funds because crude is still below $70 a barrel.

In addition, Siluanov has said that the Reserve Fund will fall to $38.28 billion by the end of this year. The Finance Ministry’s website claims [in Russian] that there is currently $76.83 billion in the Reserve Fund.

As near as I can make out, there is $6.254 billion in the National Wealth Fund (with another ~850 billion in rubles). [Note: if I’m reading this incorrectly, please let me know].

Recall that according to Vladimir Milov, this money should not be included when discussing Russia’s “reserves” because it is not the Central Bank’s to spend.

Meanwhile, the Central Bank is systematically shutting down banks, and plans more closures in the near future:

As a result, the Deposit Insurance Agency is looking for an infusion of cash:

Something that was sharply criticized by the Economic Development Minister, Ulyukayev:

It also appears that oligarchs are bailing out the CBR by buying up assets. Vladimir Potanin, for example, recently purchased palladium from the Bank (note that the Bank does not reveal how much palladium it holds).

In March economic prophet Slava Rabinovich predicted a crash no later than May or June.

If I am right and Russia’s Central Bank is lying about how much it holds in reserves, the decision is now a political one rather than financial.

In the interim, the Central Bank will have to limp along, depending on the oligarchs (who are nothing more than glorified state bankers) to bail them out, and utilizing creative accounting practices to conceal the fact that Russia is broke.