Central Bank Scheme

In February of last year I started to list the banks that had been shut down (retroactive from 1 January 2016) by Russia’s Central Bank. The idea was to see if they could beat their own record from 2015. Last week the final bank was closed for the year and when tallied the Central Bank did indeed beat their own record from 2015: 97 banks shut their doors in 2016 as compared to the 93 closed by the Central Bank in 2015. To put that in perspective, 32 Russian banks lost their licences in 2013, and 86 in 2014.

In December 2015, Sberbank’s German Gref predicted that 10% of Russian banks would have their licences pulled in 2016. That would have been approximately 70. The Central Bank exceeded that.

Gref said that he supported the revoking of licenses from banks that are involved in “anything other than banking activities,” Interfax reported.

In May this year the Russian news agency Rosbalt reported:

The Central Bank is selling this process as an anti-corruption campaign to clean up the banking sector. There are too many banks, the narrative goes. Thus it is necessary to close the weaker players, many of whom are using their clients’ money to make bad loans to themselves and their cronies, and moving the money offshore. See, for example, billionaire Alexander Lebedev’s version of events here.

Former deputy chairman of Russia’s Central Bank Sergei Aleksashenko wrote in October that the scheme:

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

It does not appear that this process will end anytime soon. In July of 2015, VTB’s Andrei Kostin “…predicted that 500 Russian banks will be shut down over the next 5 years…”

“There are too many banks in Russia now — about 800 institutions. In five years, this number may be reduced by 500, but we could achieve a steady level even with 100 banks,” Kostin said in an interview with the German newspaper Die Welt, according to Interfax.

Advertisements

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.

Banking Fraud

The arrest last week of the deputy head of the Ministry of Internal Affairs’ Committee for Economic Security and Combating Corruption has again brought attention to the massive amount of fraud taking place in Russia’s banking sector. Dmitry Zakharchenko was arrested, according to The Moscow Times,after uncovering the money [approximately $120 million in cash] in his car, study and sister’s apartment”.

Authorities say that the money belonged to NOTA bank, whose licence was stripped by Russia’s Central Bank last November.

Russian billionaire (and self-proclaimed anti-corruption activist) Alexander Lebedev has been out in front on the issue of the authorities aiding and abetting banking fraud, even before the recent scandal involving Zakharchenko.

Lebedev writes in Komsomolskaya Pravda today :

In general we have had in the past ten years massive banking fraud, the largest in the country’s economy. The main beneficiaries are the bankers themselves and their top managers. And those like Colonel Zakharchenko are their support staff.

He continues:

Approximately $100 billion has been stolen from our banking system in the past decade. Of this, about $20 billion is accounted for from about a dozen bankers: Sergei Pugachev [currently residing in France] from “Mezhprombank”, Andrei Borodin [currently residing in the UK] from the “Bank of Moscow”, Anatoly Motylyev from “Globex” & “Russian Credit”, and others…. They feel comfortable right now abroad. Then there are the smaller cases, where they stole not $2-3 billion from the same bank, but a hundred million. These were, of course, organized groups, many of whom have plundered more than one bank.

Take, for example, Mr Motylyev. First, in the previous crisis, from his bank “Globex” several billion disappeared. And then he has crashed six banks and five pension funds. This is at least several hundred million dollars.

Lebedev then turns on the Western system that he says aids and abets this fraud:

And here is the most interesting part. Where is all the money that was taken? What is hidden somewhere “cleaned” is only a small fraction. The whole infrastructure for receiving these billions is in the West. To move the money yourself is too large and complex an operation. There are nominee directors, there are lawyers, there are special companies that draw up the documents. There are agents who place the money in the funds and banks. And people stuck to it, various merchants of real estate, airplanes, yachts. We are talking about several tens of thousands of people who are fed with all of these machinations. And around the world, not only from Russia, the machinery pumps out a trillion dollars a year.

No, they are not hiding the money in London. The capital of the UK is a place where you can hire good lawyers and get political asylum, declaring yourself a fighter against the Russian regime. All of the money is held via offshore jurisdictions – from the Marshall Islands, to the Seychelles and the US states of Nevada and Delaware. And finally the money is parked in “safe havens”. In New Zealand Trusts and Liechtenstein foundations. On top of all of this sit Anglo-American lawyers, the best in the world.

And don’t tell me that the Russians are the most corrupt. Nothing of the sort! All our banker-fraudsters were trained by Western experts, auditors and lawyers. And they all got their share. Believe me, the commission received by western launderers and the hosting infrastructure, legal and banking, is not less than that of Colonel Zakharchenko, but much more.

The State needs to focus on getting this money back, he concludes.

Do you know what a hundred billion dollars means for the Russian economy? This is more than the National Welfare Fund! None of our export industry can be compared to that money. Because they still have costs – oil must still be obtained, weapons produced… If even half of that stolen money will be returned, Russia will have a lot of money. And this must be one of the priorities of state policy.

Not content to just comment on the problem, Lebedev announced on Twitter this afternoon:

“We are planning a conference on the complicity of auditors Ernst & Young, KPMG, PWC and Deloitte in stealing 6.5 trillion from the Russian banking system.”

He continued:

On average these “auditors” – Ernst & Young, KPMG, PWC, and Deloitte – have earned $50 billion in the past ten years.

Sanctions

Another article in Vedomosti arguing that sanctions (and counter-sanctions) are not having the desired impact on Russia’s policy toward Ukraine.*

Western sanctions and Russian countermeasures are negatively impacting the economy, but not achieving political changes.  Rate hikes on both sides turns new losses and increases mutual distrust.  Yesterday, US President Barack Obama extended sanctions against Russia for one year (the first sanctions were introduced in March 2014).  The plan of the initiators of the US and European sanctions were to force Russia to abandon Crimea and then to stop supporting the rebels in the Donbas.

Russia rejected imported food by entering into anti-sanctions.  They broke up inflation, without providing any import substitution, but Russian authorities were able to shift the responsibility for the price hikes on the treacherous actions of the West.  Food inflation, according to Rosstat (the Russian Bureau of Statistics), from January 2014 to January 2015 was 23.3%.  The cost of fruit rose by 40%, vegetable by 37%, fish by 24.7%, meat by 23.7%.  By March prices compared to January increased by another 6%.

Western sanctions have imposed on the old problems of the Russian economy and falling oil prices have led to serious negative consequences.  The ruble was devalued over the course of the year of sanctions by 41.3% against the dollar and 27.7% against the euro.  Capital flight from Russia in 2014 set a record of $152 billion.  The Ministry of Economic Development in February predicted in 2015 a decline in GDP of 3%, capital outflows of $115 billion, and inflation of 15.8%.

But the Kremlin has demonstrated to its citizens that sanctions have no impact on its policies.  In February VTsIOM [a state-funded polling agency], 57% of respondents noted the negative impact of sanctions (in August 2014 – it was just 15%).  The proportion of those who saw their influence on their families’ lives has grown from 5% to 45%.  The most popular answer to the question, what is the West’s goal, is “economic crisis”.  The decline in living standards is unlikely to affect political attitudes and weaken support for the authorities, said Alexei Levinson of “Levada Center” [an independent polling agency].  According to Levada, 69% of respondents believe that Russia should continue its current policy, regardless of the reaction of the West….

The current sanctions policy stimulates the growth of anti-Western sentiment in Russia and strengthens the current government, but also the softening of the West’s position will be seen by the Kremlin as a victory.  For Moscow, the continuation of the current line is beneficial from the domestic standpoint, but is fraught with the deepening economic problems and the growing technological gap between advanced countries.  Who will dare to take the first step back, and to abandon the current zero-sum game, is unclear.

 

Though it may not seem like it, the Putin regime is still trying to play the middle ground on the sanctions.  However, in doing so they have made nobody happy.  A certain sector of the elite are not happy with the rate hikes and the sanctions, while another sector of the elite feel that Putin has not reacted harshly enough in countering them.

Sergei Markov (who is still getting invited to the US Embassy in Moscow and to speak to CNN) posted a note on his Facebook page yesterday insisting that Putin’s weak response to the sanctions had encouraged the US to extend the ones already in place.  Instead of import bans, Markov suggested violating copyright law.

The sanctions need to be answered asymmetrically, not in the economy where we are weak, this is stupid.

 

It is unclear what will happen next, and if the Russian government will retaliate for the extension of the sanctions, but clearly the sanctions currently in place are not working, as the Vedomosti article points out.

*This story was brought to my attention by Alexander Lebedev.

 

 

 

 

 

 

Khodorkovsky & Nemtsov

It took approximately one day for Ilya Ponomarev’s prediction about Mikhail Khodorkovsky to come at least partially true.  In an article published in Izvestia today, Alexander Prokhanov wrote an article pointing the finger at Khodorkovsky for Nemtsov’s murder.

Now Prokhanov is not exactly the Kremlin, but this could certainly be the first shot across the bow in a campaign to discredit Khodorkovsky and his colleagues.

This could play out a couple of ways.  First, a concerted information campaign against Khodorkovsky and his associates could begin, and the Kremlin will try them in the court of public opinion.

Or alternatively, as I stated earlier, Platon Lebedev is still not allowed to leave Russia, and the authorities could arrest him on suspicion of involvement in the murder of Boris Nemtsov.

 

 

 

P.S. It is worth noting that the person who shared the Prokhanov article on my timeline was Alexander Lebedev with the cryptic comment: “this is also a must read”.

How To Solve Russia’s Economic Troubles

Alexander Lebedev has a long blog post on his newspaper’s website today on Russia’s economic crisis, offering his own analysis for why Russia is currently struggling. He focuses only slightly on Ukraine, and the impact sanctions have had, but he mainly emphasizes the failings of the Putin government, calling it “an era of missed opportunities”. He also alleges that $3 trillion was wasted on welfare subsidies, prestige projects like the Sochi Olympics, and corruption. Money that he says could have been used to modernize infrastructure, and to create “a post-industrial knowledge economy”. Instead, he says, they focused only on the export of raw materials.

He then moves on to the Government’s current “anti-crisis program”.

“It especially does not hide that it intends… to act in the same manner and with the same tools as the global financial crisis of 2008-2009. Firstly, to fill in the holes in the banks’ balance sheets and ‘strategic enterprises’ with money, relying on the fact that the world economy will grow, increase oil consumption, and cause the price of ‘black gold’ [oil/gas] to rise.”

But, Lebedev alleges, this plan is ‘fundamentally wrong and dangerous’. And for Russia to ‘borrow money to cover a budget deficit in the current environment would be very problematic’.

This, he says, is all reminiscent of the late 1980s and early 1990s, which led to the collapse of the Soviet Union (Lebedev, of course, has to bring up Putin’s quote calling this the greatest geopolitical catastrophe of the 20th century).

But Lebedev has a 4-pronged plan that he says ‘can be implemented immediately’.

First, end corruption (‘as banal as this sounds’). At stake is ‘the preservation of the state’.  To do this, Lebedev proposes ‘a new power structure’ like Singapore established in 1960 – ‘The Corrupt Practices Investigation Bureau’ [note: the bureau was established earlier (in 1952), but moved under the jurisdiction of Singapore’s Prime Minister, Lee Kuan Yew, in 1960.].

Second, restore order to the financial sphere. Lebedev launches into a description of a common banking scam in Russia, where bank owners use front companies to embezzle money, then close the banks ‘under the pretext of “adverse market conditions’, and the Deposit Insurance Agency is then required to pay off depositors. To stop this practice, Lebedev proposes increasing the amount of minimum authorized capital required to open a bank. He also proposes taking advantage of international cooperation to prosecute those criminals who have fled abroad.

Third, the complete deregulation of businesses working in the ‘real sector’. “This will not only increase the profitability (and hence the possibility of further investment and business development), but also significantly reduce the bureaucracy that has become a self-replicating monster in today’s Russia.” In addition, Lebedev suggests exempting small and medium-sized businesses from all taxes until the end of the recession.

Lastly, Lebedev says, “now is the perfect time for the state to realize its greatest and most valuable asset – land.”

“The state controls a huge land reserve, which includes farmland and land reserved for state needs. A significant part of these areas are not being used. If you take at least one-fifth of those lands, to transfer them into individual housing and bring them to market – the price will fall, and even a low-income family would be able to buy a plot of land. Millions of people would be able to take advantage of this opportunity… and in times of crisis and ruble devaluation, land is still the best object for investment.

Since the sale would be massive, the state, even at a junk price, would get trillions of rubles. This money could then be used to create… roads, sewage, electricity, gas… Since they are mostly controlled by the same state, the money will come back in the form of revenue. By becoming landowners, citizens would begin to build houses, stimulating the construction industry, attracting small businesses for finishing off and landscaping, buying furniture, appliances, etc. Thus, there will be a powerful multiplying effect that can reach up to 3% of GDP.”

His 4 proposals will ‘dramatically change the development agenda of the country’, Lebedev claims, the only thing required for all of his proposals is the political will to act on them.