Review & Forecast

Many Russians are writing reviews of the past year and speculating about what the next year holds. Ivan Preobrazhansky writes:

“Western democracies have rebelled against their elites, but in the East authoritarian regimes have only been strengthened. The main event of 2016, of course, is now considered to be “Brexit”.”

The elite have retained power, he continues, but “…they must now perform “the will of the people”.”

And the same thing happened in the United States. It does not appear that Trump and his staff expected to win. But Americans “tired of the dictates of tolerance, decided otherwise…”

Trump’s foreign policy plans are still mostly a mystery but Preobrazhansky repeats the belief that seems to be held by many in the Russian commentariat: that Trump will not end the sanctions imposed by the US government.

“Moreover, there is no reason to assume that the new president will start his activities with the recognition of Crimea’s accession to Russia.”

Preobrazhansky also believes it unlikely that Trump will overturn the majority of Obama’s own executive orders. “In particular, the ban on the production of hydrocarbons in the Arctic.”

Expectations of Trump are likely over-hyped by both his supporters and his opponents, he alleges. “But this will become clear only in the coming year.”

Meanwhile, on the other side of the world, last year Russia “… was one of the most talked about and influential (at least in words) of the countries in the world. It became clear to Western leaders that they would not succeed in solving the Syrian crisis without the participation of Vladimir Putin.”

Preobrazhansky reminds his readers how at the beginning of 2016, Russia and Turkey could not have been farther apart, as a result of the Russian military aircraft which was shot down by Turkey over a contested area in Syria. “It seemed that the states were on the verge of war.”

But the tense situation suddenly turned for the better after the alleged coup against Turkey’s President Erdogan in July, “…which led to the transformation of the authoritarian regime of Erdogan to [one that is] openly dictatorial, and Moscow is surprising perhaps the closest partner of Ankara. As a result, together with Iran they have divided Syria  into zones of influence, ignoring the US.”

And then, of course, there was the decision by the Obama administration to invoke new sanctions on Russia for the hacking of the DNC. This has only reinforced the stereotype that the Kremlin can “intervene in the internal affairs of any country in the world and influence it according to its own interests…”

So now “the whole world is infected with a virus of general mistrust. Voters do not trust the national ruling elites – and a vivid example of this is not even the Trump victory, but the presidential elections in Austria, where, because of differences in the counting of the votes had to carry out a second round [of voting].”

And even the elites do not trust one another. Europe no longer trusts the US (and even more so after Trump’s election).

“China is on the verge of a military conflict with several of its neighbors, including Japan, and has shown a willingness to take Russia under its wing. And Russia itself has lost the confidence of its only ally – Belarus, given Lukashenko’s [recent] refusal to attend the summit of the Eurasian Economic Union.”

There are only two ways out of this impasse, Preobrazhansky concludes. Either slowly attempt to rebuild confidence in the current system, a process that will take years, or try to chart a new path and “…create a new system of international relations. However, history shows that, as a rule, a radical redivision of the world order needs a great war.”

Nationalization Victim

“Gazprom may lose its biggest asset in Turkey,” Kommersant reported today.

“Turkish authorities in early December de facto nationalized Akfel Holding – the largest private gas importer in the country on suspicion of having links with the Gulen organization – in which Gazprom and Gazprombank have shares.”

The article continues:

“…[Gazprom’s] attempts to establish a dialogue with the Turkish authorities have so far failed…”

Gazprom is in a bind because they need to stay in the Erdogan regime’s good graces if they want the Turkish Stream project to be implemented. Meanwhile, the price discount for private importers which Gazprom reached with Turkey in April, will be defunct starting in January. “As a result, a new gas dispute with Turkey seems almost inevitable,” Kommersant informs its readers.

Gazprom holds a minority stake in Akfel Holding (the parent company of Akfel Gas). In early 2015, Turkey’s Daily Sabah reported that Gazprom was looking to acquire a majority stake in Akfel Gaz, but that deal never got approval from the Turkish authorities.

Turkey granted licences to four companies in 2012 to import six billion cubic meters of Russian gas between them. Kommersant writes that 55% of Gazprom’s supplies to Turkey go through Akfel. And that Akfel accounts for 20% of all Russian gas deliveries to Turkey.

According to an article in Hurriyet from April of this year:

“Turkish companies import 10 billion cubic meters of gas from Gazprom annually, in line with a 2013 contract. Russia is Turkey’s largest gas supplier with annual sales of 28-30 billion cubic meters worth around $6.5 billion. Turkey imports 60 percent of its gas and 35 percent of its oil from Russia.”

Turkey has nationalized nearly 1200 companies since July, accusing them of financing Gulen, according to Kommersant. Akfel Holding’s board of directors has already been replaced. One of the founders of the company has been arrested, the other has fled Turkey. But according to Kommersant’s sources, the two no longer hold a controlling stake in the company anyway.

Gazprom’s Alexei Miller met with Turkey’s Prime Minister shortly after the takeover of the company, but apparently could not get a straight answer about what was happening.

In nationalizing Akfel, Turkey has made “the bundle of Turkish gas problems” [i.e. import pricing, Turkish Stream, etc.] “permanently interconnected and politicized…”. Because on all the issues, the same people will be at the negotiating table, Kommersant concludes.

Russia’s “Liberals” & the Crimea Question

Alexander Sytin writes on Facebook about Russia’s so-called “liberal” opposition and why they cannot and will not garner support among the population on their current trajectory.

For more than a year now, he begins, the Russian “liberals” have been discussing two questions:

“What will happen to Russia after Putin?” and “What should be done about the future fate of Crimea in this context?”

This latter question has become something of a political litmus test. Sytin compares it to the period of the Bolshevik revolution when the question was “are you for the Reds or the Whites?”

He says that he has no political ambitions and has no desire to place himself in any “political camp”. Most terms like “liberalism”, “democracy”, “communism”, and “fascism” are nothing more than “empty labels which have lost all meaning in our post-modern era…”

Nevertheless, Sytin continues, “I think that sovereignty and, therefore, the territorial integrity of Ukraine, has been recognized by the international community since the proclamation of its independence, [so] it should be fully restored.”

And whatever decision is made should be made locally and “…not by the unilateral will of the Kremlin.”

The only significant position is that of the Western governments who “are not inclined to accept the results of the “referendum” nor the accession of Crimea to Russia. Everything else is just words… demagoguery: “annexation,” “reunification”, “the restoration of historical justice”, all of these statements speak only of the position of the speaker – no more!”

And as for the first question, Sytin says, it is “…similar to the debates [between] the Westerners and Slavophiles during the reign of Nicholas I, [and] there is absolutely no sense [in it].”

“The liberal discourse today in Russia is not a question of change in Russia, [but rather] the integration of “leaders of liberalism” into the existing power structure, with Putin or not is a secondary question. They want to inherit / participate / privatize the system of government which was created in the last decade and a half.”

And they are not interested in a Russia “without its imperial component”. All they are interested in is a seat on the board of “Russia Inc.”

The reason Russians do not go out to protest is not because they are committed to the current group of elites, or even to the annexation of Crimea. In fact, nobody really cares about Crimea now except a few “frostbitten patriots”, and Kremlin propagandists. But people don’t take to the streets because they see no difference between what they currently have and what the so-called “liberal” opposition is offering them.

“This is implicitly felt by those representatives of the liberal party, who speak of the absence among them of a “moral authority”.”

And when Khodorkovsky is interviewed, he is always asked about Crimea.

“And he cannot answer this question, because it has no answer to the main eternal Russian question: who will be the successor, as well as what will be possible with this successor…”

The Kremlin really shot itself in the foot by incarcerating Khodorkovsky rather than letting him either go abroad like Gusinsky and Berezovsky, and let him reside there with them in relative obscurity. Or Sytin jokingly says that the Kremlin should have given Khodorkovsky a position in the government, and then blamed him for the economic crisis. But everybody still wants to talk about Crimea.

“Real democratic liberal opposition to the current Russian regime does not exist and I do not see any prerequisites for its appearance.”

It is possible to train the future leaders, but who would teach them? Mikhail Khodorkovsky and Alexei Kudrin? Then the Regime can rest easy because “with or without Putin it will exist forever.”

“What will the outcome of this whole situation be? There are two options, as Inozemtsev explains, either a more or less long period of decay followed by decomposition and the almost inevitable end of… [those currently in power] or defeat in a cold / hybrid / hot war (desired by the Kremlin). Therefore the only question that can replace the question of what will happen to Russia after Putin is: as a result of any sociopolitical, economic and temporary perturbations will the present regime give way to the new? In other words, what is the mechanism for the transfer of power from the current ruling elite to the new?”

And what should be done about Crimea? Sytin leaves that in the hands of the Ukrainians. They should take their case to international court and have it decided “at the highest level.”

“Claim that the sanctions regime cannot be reviewed every six months, but it will remain the same and subject to change only in being made stricter, as long as the territorial integrity of Ukraine is not fully restored.”

It also needs to be emphasized “…that the sanctions are not the result of the failure of some sort of the Minsk agreements, but a response to the aggressive policy of the Kremlin, posing a threat not only to Ukraine but also to the entire world order. Moscow says that the problem of Crimea is settled and closed? And exactly the same attitude should be in relation to the sanctions – the question of which is settled and closed.”

He concludes:

“I was asked to submit recommendations for a future mythical President of Russia about what to do about Crimea. The answer is simple: convene an international conference under which to issue the relevant procedural forms to return Crimea to Ukraine.”

After three months out from under the thumb of Russian domestic policy, the lives of peoples living in Crimea will improve, and nobody in Russia will even remember what happened.

As for Ukraine, they must do their part too. By ensuring some autonomy for the peninsula, and lustration (but not reprisals) will be necessary for the leaders of the “Crimean Spring”.

“At the same time, especially at first, it will be necessary to carefully monitor to ensure the path to power in the peninsula is firmly closed to Russian nationalist radicals.”

 

Russians on the Trump Presidency

There were two main takeaways from the Russian reaction to the future Trump presidency. First, as Stanislav Kucher wrote:

“…the victory is not Trump’s, but Americans’. Their values, their constitution, their way of life.”

Many in the opposition saw what happened as a model of a “real democracy” where the outcome of an election is unknown beforehand, and one that they could aspire to in the future.

The second takeaway was that the Kremlin may not actually like what a Trump presidency has in store for them.

Anti-corruption activist, Alexei Navalny, posted a video on YouTube explaining what he thought of the results and what would happen:

First, Navalny says, oil and gas prices will decline under Trump.

Second, Trump has changed his tune on Putin since the bombing of Aleppo, and become more critical.

Third, Trump will spend more money on the military, which will force Russia to keep spending more and more money on theirs. Another arms race.

About the actual outcome, Navalny stated:

“I am indifferent. This is America’s choice. These are their own problems or… successes.”

He is, he says, simply pointing out that despite popular opinion, Putin and Trump are so far from each other on basic policies that they won’t “become best friends and start hugging and kissing right away”.

putin-trump-graffiti
Street Graffiti in Vilnius, Lithuania [story]
In reality, Navalny continues:

“America is like a huge overloaded oil tanker, which even it wanted to stop right now, it will keep moving in the same direction for quite some time. A lot of effort and time is required to actually make it turn.”

He points out that the 1974 Jackson-Vanik sanctions were not repealed by Congress until 2012, more than 20 years after the end of the Cold War.

Professor Grigory Volosov agreed:

“When you are a presidential candidate, you have to express a lot of categorical judgements, but when you become president, you find yourself in a system of contractual relations that bind your country with other countries. Reviewing these relationships is simply impossible, they can only be adjusted in the direction of which has been said before.”

Political scientist Gleb Pavlovsky stated that the US:

“…will not will not give gifts to Moscow, and it is absolutely ridiculous to expect the Republican Congress to abandon its own resolutions, as required by our “plutonium” law. Of course, it will not. But it is possible to achieve the easing of sanctions. This should be discussed, and not the dreams of running the world.”

Opposition politician Dmitry Gudkov wrote that any changes to Russia’s current situation – economic and political – would be due to “internal shocks” rather than external ones.

“And our government will provide them [the shocks] themselves in the near future — for example, in the next presidential elections [scheduled for early 2018], where the contrast between Democracy and “democracy” will be obvious.”

Counter Sanctions

Last week, Russia’s Deputy Foreign Minister Sergei Ryabkov told the State Duma that Russia was developing a “series of measures” for an “asymmetrical response” if Washington imposed more sanctions.

However, the deputy FM gave no details on what the “asymmetrical response” would entail.

So Rosbalt went to the experts and asked what they thought the Kremlin would do.

HSE Professor Nikolai Petrov told the paper:

“We have already seen such options. It is most likely going to withdraw from the agreements that we signed… with the US. In addition to the agreement on weapons-grade plutonium, [which] has been suspended, there is also the agreement on medium and short-range missiles (the INF [Intermediate-Range Nuclear Forces Treaty]), and so forth.

This logic has continued ever since the “Magnitsky List”…. To cause moral damage to the enemy, we are ready to make some decisions, knowing that they do not necessarily prove beneficial to us but often the reverse and will be quite painful.”

Petrov also noted that several “agreements with US in the field of strategic arms limitation” were set to expire, and suggested that they would not be renewed.

“At the same time, the expert believes that what we are seeing today as a certain toughening of Moscow’s position, is in fact a kind of “pre-sale preparation”.

He predicted that before the end of the year, “the Kremlin will make some move to improve relations with the West…” and have the sanctions regime removed. But from a position of strength, “so that it will not look like a sign of weakness, but… another victory.”

Vice President at the Center for Political Technology Alexei Makarkin disagreed with Petrov, saying:

“…the agreement on the limitation of strategic weapons will be treated carefully because to dismantle the system of strategic stability is still scary.”

In Makarkin’s view, “the Russian government may impose certain restrictions on foreign investors.”

“If in the 1990s investment attractiveness was considered a priority, now on the contrary, the investor is considered to be a kind of threat, like a man who can find out all of our secret plans in this area, or as someone who is too dependent on the West, on its own government.”

Moscow Carnegie Center’s Alexei Malashenko thought that Russia’s options were limited.

“According to him, the economic measures Russia [has imposed] against the US would have totally insignificant consequences, given the small volume of trade between the two countries. Restrictions on entry of some officials from the US to Russia have been introduced, and to no avail…”

Pulling out of the “treaty on limiting strategic arms would only benefit the military -industrial complexes of the two countries,” Malashenko added.

If that were to happen, it would set off “a new arms race”, which Russia would lose “because the Americans are first in the world in terms of GDP, and we are twelfth.” So our sanctions “cannot harm America, no matter how hard we try,” he concluded.

Sanctions

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.

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.

$70 billion

Vladimir Milov tweeted today:

The total debt of our oil and gas companies (Rosneft, Novatek, Transneft, Gazprom) to the Chinese: a shocking $70 billion

He linked to his blog, where he wrote:

…$45 billion belongs only to Rosneft, however it is not the only one who owes the Chinese. Together, our four major oil companies – Rosneft, Gazprom, Transneft, and Novatek – already owe the Chinese 4.4 trillion rubles, or more than $70 billion at current exchange rates.

For comparison, Milov noted, the debt of the four largest Russian oil and gas companies to the Chinese is “almost three times higher than the IMF loans [to Russia] in the 1990s”.

He then breaks down the debts owed by each company:

Rosneft

  • The company owes the China Development Bank $15 billion, and a further $30 billion in advance oil supplies [to CNPC, I believe – ed]. That is, as Bloomberg wrote back in January:

Prepayment contracts, where producers get cash up front in return for a promise to repay with physical oil in the future, provide the Russian state-controlled company with alternative financing while guaranteeing flows of often discounted crude to customers.

Novatek

  • 42 billion rubles to the Chinese Silk Road Fund.
  • Its subsidiary “Yamal LNG” recently took loans from China Development Bank and China Exim Bank for 9.3 billion euros and 9.8 billion yuan, respectively. Their total debt to the Chinese is 756 billion rubles at the current rate.

Transneft

  • 557 billion rubles to China Development Bank at the current rate.

Gazprom

  • The company owes the least of the four companies, but still owes 242 billion rubles to the Bank of China Ltd London Branch, and China Construction Bank.

Is $70 billion debt to China a lot or a little? Milov asks rhetorically.

In the last 10-15 years Russia got trillions of dollars in revenue from the ultra high oil and gas prices, but in the end our oil and gas companies found themselves in debt to China, which in fact is the largest importer of oil and gas.

He continues:

In general, it turned out, because our companies have spent too much money on the absorption of foreign assets and accumulated debts for which it was necessary to pay off loans from the Chinese, and also because our authorities have started a war against Ukraine, for which Russia is now under financial sanctions, and besides the Chinese, nobody wants to loan Russia money.

To understand the scale:

  • $70 billion of debt to the Chinese by the oil and gas companies is more than the annual net profit of the four companies (the four received a total of 1.4 trillion rubles of net profit in 2015, while the Chinese are owed 4.4 trillion). That is, four of our largest oil and gas companies need to work more than 3 years without profit, not invest, not pay dividends, and so on in order to repay their debts.
  • $70 billion of debt to the Chinese oil and gas companies is a fifth (20%) of all foreign loans to Russian corporations ($350 billion according to Russia’s Central Bank).

Milov concludes:

And that is not the end of the story, as these companies are in talks with Chinese banks on all new loans.

I note that if world oil prices do not return for a long time to high values (and apparently they will not return), then at some point the problem of the impact of oil debt to China will become very acute.

Standoff

The Russian Regime is ratcheting up on both its rhetoric and actions in the last few weeks leading up to the US presidential election. The Moscow Times reports:

Russian state television has lashed out at the United States in a blistering campaign against Washington policy in Syria and eastern Europe.

Foreign Minister Sergei Lavrov began the anti-American tirade on “Sunday Time” (Voskresnoe Vremya) on Channel One, accusing the United States of threatening Russia’s national security.

Flagship news program Vesti Nedeli continued the theme, announcing that “relations between Russia and the United States have taken a long-expected turn for the worse.”

Meanwhile, Mikhail Gorbachev came out today to entreat both sides to start talking again about nuclear disarmament.

There has been a collapse of mutual trust [between Russia and the United States.] I believe that we need to resume talks across the agenda, and on the nuclear issue above all,” he said.

Essentially, Gorbachev is playing “good cop” to the Kremlin’s “bad cop”.

Gorbachev’s plea brought to mind Ivan Preobrazhansky’s appeal last week to stabilize the situation.

The statements of Russian diplomats are increasingly similar to analogous statements of their Iranian colleagues. Recall, only recently, before most of the US sanctions against Iran were cancelled, the US was regularly called “the empire of Satan”.

There are, however, abstract conciliatory statements. They are clearly not addressed to the current US administration in the White House, but can be actualized after the new president comes to power. Moscow will not be difficult if you want to give it a gift.

Whoever comes to power – Donald Trump or Hillary Clinton, either of them will be quite easy against the backdrop of the current almost complete cessation of cooperation with Moscow to demonstrate excellent diplomatic skills, achieving normalization of relations. Moreover completely without concessions by the US.

He concludes:

However, the freezing of relations between Russia and the West is increasing at an acculturated pace. And then, in order to “warm up” literally the last few days of curtailed contacts and to restore confidence, it will take more than one year, or even a decade – as we saw with the historical experience of the USSR.

Let’s work together, guys, or else… Or else we will get World War Three, apparently.