Lambert & Warnig

I wrote here in February 2016 about Matthias Warnig and his involvement in a UK registered company called Lambert Energy Advisory. Though it garnered little attention at the time, I thought it was worth keeping track of. I went back to check up on the situation at Lambert recently and to see if anything had changed, and was surprised to see that Novaya Gazeta had also been interested in the subject. I won’t go into all the details of how I found this information initially, but Novaya came into it from a different angle than I did last year.

First some background on Lambert Energy Advisory and its activities. One of the board members is Onursal Soyer. According to his biography:

“LEA [Lambert Energy Advisory] is a leading advisory firm to the global oil and gas industry and, since its inception, has been involved in more than $60 billion worth of transactions for major companies such as Statoil, Petronas, BP and Wintershall. Some recent transactions, on which Lambert Energy Advisory was a core Advisor, included acting for BP on its $28 billion deal in Russia (whereby BP became a c. 20% shareholder in Rosneft), acting for Statoil on four large divestments of North Sea assets to Centrica, Wintershall and OMV worth over $7 billion and acting for Wintershall on its UK and Norwegian divestments. LEA has been actively involved in the Middle East oil and gas sector and has advised on several deals mainly in the Kurdistan Region of Iraq. LEA was also advisor in major infrastructure deals in NW Europe, including assets like Dragon LNG regasification terminal in the UK, the Norwegian offshore gas transmission network, Gassled, and the Central Area Transmission System (UK’s largest offshore gas transmission pipeline).

Now to Novaya Gazeta‘s interest in the firm. The article begin by discussing Warnig’s background (which as I’ve said before, I think most people are familiar with). How much is fact, and how much is myth, I’m not entirely sure. What we do know is that Warnig was definitely Stasi (Novaya shares the documents proving it), and that he worked at Dresdner Bank in the 1990s. The official story is that Warnig met Putin while doing business in St Petersburg. Rumor also has it that Warnig aided the Putin family after Lyudmila Putina had a car accident in 1993 and needed medical help. There’s also the story that Warnig and Putin met in East Germany, but I suspect this is more myth than reality and the confusion comes from the similarities between the names Dresden and Dresdner.

Novaya’s concern is over possible improprieties related to Lambert’s firm advising BP on the deal it made with Rosneft in 2012. Under that deal BP took “…$16.7bn in cash and a 12.5% stake in Rosneft in return for its 50% stake in the TNK-BP venture.”

Warnig became the co-owner of the British consulting company Lambert Energy Advisory in 2008 – this is not only a classic British office on the 4th floor of an old brick building on Hill Street in the central London area of Mayfair just 300 meters from Hyde Park, but it also has famous founders and managers. The company was founded by Lord Rockley, an aristocrat who was an advisor to Her Majesty’s government in privatizing the state-owned British Telecom (the £4 billion deal involving 2.3 million private shareholders was completed in 1984).

In the mid-1990s, Lord Rockley was chairman of the British investment bank Kleinwort Benson, and his business partner, co-founder of Lambert Energy, Philip Stephen Owen Lambert, also worked there. [Rockley] died at the end of 2011. The main owner of the consulting company Lambert Energy is now Philip Lambert and his family.

Novaya continues:

Excessive publicity and even a website [for the company] are not needed. the consultations are strictly confidential, and the composition of shareholders guarantees their popularity – among them the former head of the Ministry of Energy of Norway Tore Sandvold, and a former British diplomat, former special advisor to the oil and energy gas giant BP Sir Jeremy Greenstock. He is also chairman of Lambert Energy.

How the British aristocrats met Warnig, and why he became a co-owner of their company, neither the representative of Warnig, nor Lambert Energy answered. But given that Dresdner Bank, where Warnig worked, bought Kleinwort, where Lambert and Lord Rockley worked in 1995 (for $1.6 billion) they could have had points of contact and occasions to meet.

Novaya asked Lambert about Warnig’s involvement with his firm, and got the following response:

Philip Lambert replied only that since 2008, Warnig was “an exemplary, proven, and long-term shareholder of Lambert Energy”… and invited them to visit the office on occasion.

Warnig owns 12% in consulting Lambert Energy through his Swiss firm Interatis AG. This was also confirmed by a representative of Warnig…

Concerning any improprieties, Novaya writes:

[Lambert] and BP do not want to answer questions about why Lambert Energy was chosen as a consultant, and whether Matthias Warnig, a member of the board of directors of the state-controlled Rosneft, was involved. They also do not answer the question of whether or not Warnig did anything during the period of these consultations.

But they continue:

It’s not just about his acquaintance with high-ranking Russian officials, but also about business. If one of Warnig’s Swiss firms – Interatis AG owned 12% of the BP consultant [i.e. Lambert] in the deal with Rosneft, then another company – Interatis Engineering in 2014 participated in a joint pharmaceutical project with the Moscow company, Artpol Holding, [belonging to] Sergei Shmatko. “Artpol” and Interatis held 10% of the producers of anti-tumor drugs… The total revenue of these pharmaceutical companies exceeded 1.2 billion rubles over a 5 year period. Prior to this, Shmatko was Minister of Energy during the conflict between BP and the Russian shareholders [ed. Alfa, Access, Renova]. And if Deputy Prime Minister Shuvalov opposed the deal between BP and Rosneft, Minister Shmatko in 2011 publicly announced that it would be implemented.

The board of directors of Rosneft approved the deal with BP in November 2012, and by 2013 it was completed.

Others were not so willing to answer Novaya’s questions:

The representatives of Warnig, BP, Lambert Energy, and Rosneft do not answer detailed questions, whether there was a conflict of interest in this story and how much a member of the board of directors of Rosneft, Warnig, earned because the company advised BP with his participation.

A spokesman for Warnig told Novaya Gazeta that “his participation in the affairs of Lambert Energy is limited solely to his role as a minority shareholder” and that “he does not have any managerial or supervisory position in the company,” and that his “financial benefit consists solely in receiving dividends, which are set by the decision of the general meeting of shareholders of Lambert Energy.”

This is technically a true statement. Warnig has never been a member of the board at Lambert’s firm. And it is unclear who is acting in his interests on the board given the fact that he is the second largest shareholder after the Lamberts. Warnig is likely receiving some dividends, according to Lambert’s own accounting, but it’s unclear exactly how much. For example, last year Lambert paid out £1,596,975 in dividends. Of that, £1,402,138 went to the company’s board of directors. The majority went to Philip Lambert as the largest shareholder. It seems likely that Warnig got at least a portion of the remaining £194,837.

“Mr Warnig attaches paramount importance to good faith conduct of business in accordance with the standards of corporate governance and prevention of conflict of interests. This also applies to his minority participation in Lambert Energy,” assures Warnig’s representative.

And:

“We observe strict standards of confidentiality with regard to our clients and our business, and we have neither the will nor the opportunity to discuss your detailed questions,” said Philip Lambert… emphasizing the rigidity of the company’s standards and control procedures.

BP replied:

“The work that Lambert Energy performed for us is confidential, and we cannot comment on it,” a BP spokesman told Novaya Gazeta without answering questions about Warnig’s role in the deal with Rosneft.

And, of course, there was no response from Rosneft.

Experts find it difficult to assess what could be the fee for consulting the framework of such a transaction.

“It can be very expensive… The uniqueness of the composition of consultants and potential to influence the situation usually directly affects the amount,” Paragon Advice Group partner Alexander Zakharov shares his opinion.

According to Lambert’s accounting, the firm had a turnover of £12,413,790 in 2012, and a turnover of £11,904,880 in 2013. How much of that was from the consulting done for BP and how much was from other work is not laid out.

At the time of the transaction, Rosneft approved a policy on combating corruption: the company had to collect and verify the information, in particular, about the possible conflict of interests.

“The board of directors of Rosneft has agreed to a deal with BP in 2012. Warnig – a member of the board of directors of Rosneft and a person with great connections, was simultaneously a shareholder of the BP consultant firm. And then took up business with a man who at the time of the deal was the Russian Minister of Energy. All this could form a conflict of interest.” The general director of Transparency International Russia Anton Pominov shares his opinion.

Bankers vs Russia’s Central Bank

Alfa Bank has suspended its membership in the Association of Russian Banks, Realnoe Vremya reported last week.

The reason?

“The bank categorically disagrees with the text of the Association’s 2017 annual report.”

“The style of the report, accusing the Central Bank of cynicism, favoritism, working in the “military operations” mode, the deliberate reduction of the number of banks… undermining the stability of the banking system, as well as the suppression of competition, contradicts the spirit of constructive interaction and cooperation, which has developed between the regulatory authority in the face of the Bank of Russia and the healthy part of the national banking system.”

The report accuses the Central Bank of prioritizing “inflation targeting” over “GDP growth, employment, and the living standards of [Russian] citizens”.

As a result of the CBR’s actions, trust in the banking sector is deteriorating, the report also alleges.

Capital Flight

“…many large and even medium-sized organizations and wealthy citizens are concluding that it is necessary to keep large amounts of money abroad and obviously not in Russian currency.”

And:

“…most market participants note a delicately veiled favoritism towards a number of banks.

This, in turn, leads to a loss of confidence of all other market participants.

Seeing the growing requirements for the capital of banks, many companies also refuse to cooperate with those banks that do not have access to public [State] resources.”

The report continues by noting that:

In the end, the non-material damage in the form of erosion of confidence in financial institutions, and state policy are more important than the direct loss of money.

The report then offers alternatives to the easy out of revoking banking licences:

A top-down change in working strategy, changes in management, rehabilitation or sale of the bank to interested investors are complex alternatives to revoking the licence of a problematic bank. They are difficult measures. But they are needed to make the financial system of Russia not only stable but credible.

For instance, Italy has banks that are over 200 years old. In the 19th to 21st centuries, many of them went through obligatory change of owners and administration, rehabilitation, consolidations, and other procedures initiated by financial authorities. At the same time, they preserved their licences and continued working with clients.”

Too Big to Fail?

Meanwhile, S&P Global Ratings has also criticized Russia’s Central Bank for its actions regarding TatFondBank (Tatarstan’s second largest bank).

“First of all, we believe that the criteria used by the Bank of Russia in making a decision on financial recovery or revoking of the licence of troubled financial institutions have not been sufficiently transparent. We are not sure that the problem will be solved even after the introduction of a new rehabilitation mechanism. A recent example: the decision of the Bank of Russia to revoke the licence of TatFondBank was made, despite the high, by our estimation, significance of this financial institution for the banking sector of the Republic of Tatarstan.”

S&P also noted that:

“…Tatfondbank’s rehabilitation would require 100-200 billion rubles, and Deposit Insurance Agency granted loans of a comparable or bigger size within the financial rehabilitation of Bank of Moscow (294,8 billion rubles) and Mosoblbank (168,7 billion rubles).”

Alfa Bank

Alfa Bank is Russia’s largest private commercial bank, so it is no surprise that they sided with Nabiullina’s policies, Realnoye Vremya concludes.

“Emotions are emotions, but as business people in the West say, “Money loves silence. Big money loves grave silence”.

Alfa’s statement read in part:

“The bank supports the efforts of the regulator to clean up the banking system. To ensure a competitive environment, it is important not to allow unjustified differences in the regulation of private financial intermediaries and organizations with State participation.

Alfa Bank considers the proposals of the Central Bank of the Russian Federation on the proportional regulation of credit institutions to be justified. This is about the implementation of international approaches that extend the requirements of the Basel standards to large, internationally operating banks [like Alfa], and reduce regulatory pressure on small credit institutions. The practical task is to clarify the final legislative formulations and take into account the real commercial interests of all banking groups. This must be done in a calm and balanced dialogue, without loud slogans, accusations and labels. Thus, the Russian banking system must prove its maturity and readiness for change.”

Casinos

The Georgian government is pinning its hopes mainly on tourism to boost its economy. Last autumn, the Prime Minister stated that the country hopes to host eight million tourists a year by 2020. And they are well on their way to achieving that goal. More than six million tourists visited Georgia last year. The government even planned an advertising campaign surrounding the visit of 2016’s six millionth tourist.

According to the World Bank:

“Tourism is one of the fastest growing economic sectors in Georgia – total contributions accounting for 23.5% of Gross Domestic Product (GDP) and 20.1% of total direct and indirect employment in 2015. The sector also currently provides as much as 36.4% of total export earnings.”

One draw is the casino scene. Georgia is well placed to take advantage of the gambling market. Most tourists come to Georgia from the neighboring countries of Russia, Azerbaijan, and Turkey. All three have strict anti-gambling laws. Azerbaijan and Turkey have banned casinos altogether, while Russia only allows them to operate in strategic locations, targeting tourists themselves. In 2009 Russia banned casinos in all but 4 enclaves: Kaliningrad, Krasnodar, Altai in eastern Siberia, and the Far East. But at the time, little infrastructure had been built.

More recently, Sochi has been added to the list. The hopes that Russia had placed in making the 2014 Olympic site of Sochi a tourist mecca for winter sports enthusiasts have not panned out. The government has instead turned to casinos to make up for the disappointing returns on their infrastructure investment. The first casino was officially opened on 5 January 2017.

In Georgia, meanwhile, the casino industry has been growing, as the government has tried to make the market attractive to investors, offering incentives like a flat tax, no income tax, and no tax on payouts. Earlier this month, the third annual Georgia Gaming Congress took place in Tbilisi, bringing together representatives from the government and various players in the gambling industry.

And it seems to be paying off.

In 2011, gambling contributed to government coffers the [Georgian currency] lari-equivalent of just about $7.3 million.”

Just two years later, according to a 2014 report by Transparency International Georgia,

“…the turnover of gambling and other gaming companies totalled approximately GEL [Georgian Lari] 1.213 billion while duties collected from permits were over GEL 105.2 million, making up to 1.4% of the 2013 state budget revenues.”

Trasparency also found:

“As of 1 October 2014, there are 94 gambling or gaming companies operating in Georgia. This list includes 32 large companies. Most companies are operating in Tbilisi, followed by Batumi and Kutaisi.”

The owner of stakes in several of the casinos in Georgia appears to be Davit Yakobashvili. Yakobashvili has been involved in the casino business since the 1990s, opening one of the first casinos in Moscow (shut down by Putin’s 2009 order).

In an interview [Rus] last year, Yakobashvili stated he saw no problem ethically with having interests in casinos.

“There are people who need an adrenaline rush… and they find it at the casino. By the way, I myself don’t play, I’ve never liked it, but I don’t blame anyone either.”

Georgia

I have been taking a break from Russian politics and have recently been looking at the situation here in Georgia instead. As I’ve moved over into more open-source intel over the past couple of years, I’ve found that eventually everything connects and Georgia is no exception to that maxim. There is no escaping Russia, and all the more so if you are their neighbor. I am hoping to turn this into a small series about some things that have been happening here.

I have some ideas about what I want to focus on, but if you have questions of your own about the situation here, please ask in the comments section, and I will try to find out what I can.

Rosneft Distraction

I got another notification in my Google Alerts yesterday about the Rosneft “privatization” scheme. According to the Russian press, the money for the purchase of the 19.5% stake in Rosneft came from Russian bank VTB:

But this just raises more questions, as Russia’s former deputy Finance Minister Sergei Aleksashenko points out.

First, Aleksashenko points out, despite the Russian government’s claims to the contrary, the money from the “sale” did not reach the federal budget last year. Of course, we already knew this based on both the statements of Glencore and Qatar, and on the filings I shared in my last post on this subject.

But a government official lying about something in Russia is nothing new, and you can’t fire them for it. So there cannot be “any political continuation of this story”.

Then there is still confusion about how the money is supposed to be transferred to the federal budget. Technically, the money should be paid to Rosneftegas, then paid to the budget as a dividend on profits earned from the sale. But that would not equal the full 692 billion roubles. And it would not show up on the books until this year or even next year.

But nobody in Russia cares about any of this, Aleksashenko says. Rosneftegas won’t be audited, and won’t be investigated. And these are all just “technical details” anyway. The main question that nobody seems to be able to answer is “who is the real buyer of the 19.5% stake in Rosneft?”

“The official version of a parity partnership of Glencore and QIA (Qatar investment fund) does not maintain the minimum checks on plausibility. Indeed if the partnership is created on the principle of 50/50, then why do the financial contributions of the participants differ by an order? The Qatar foundation paid 2.5 billion euros, and Glencore only 300 million [euros]?”

And then there is the question of why Glencore got a contract for gas deliveries, and Qatar didn’t. “Where is the equality there?” Aleksashenko asks.

Note: this is not entirely true. As I wrote last week, the deal on the gas deliveries was with QHG Trading LLP (which is equally split between a QIA subsidiary and Glencore Energy UK).

“Continuing on. We still do not know who Intesa’s partner is and who lent the buyer [Qatar] 2.5 billion euros.”

Then Aleksashenko casts doubt on the ability of the “borrowers” [Qatar & Glencore] to repay the loan. He also notes that the terms of the loan from Intesa are still a mystery.

But this is also not quite true. The paperwork for the three loans (possibly only two?) has been uploaded on the website of Companies House in the UK, but I am having difficulty making any sense of them. The numbers don’t match what we were told, and the participants are still murky. Who is QHG Cayman, for example. And Intesa is still listed as the lender.

Even so, Aleksashenko writes, if the “borrowers” (QHG Investment & QHG Holding) cannot repay the loans, then the “lender” (technically still Intesa) will own the shares.

“And that, it seems, is the essence of the transaction.”

He then reminds his readers that the initial proposal was for Rosneft to “buy” its own shares from Rosneftegas and then sell the same shares to an outside buyer at some later date. But this idea was allegedly rejected by Russian President Vladimir Putin.

But, Alexsashenko continues, that it seems likely that Sechin’s original plan was implemented, but “with modifications”. And he alleges that VTB’s role here was to distract from this fact.

Depleting Russia’s Reserves

The Ministry of Finance posted a long explanation at the beginning of the week on the state of Russia’s two reserve funds. I was planning on breaking it down, but Vladimir Milov has done my work for me. Some key points:

In the Reserve Fund as of 1 January [2017], there were only 0.97 trillion rubles, [that is] more than a trillion rubles were spent [in December alone];

It is unclear, Milov continues, what happened to the money supposedly received from the “privatization” of Rosneft [see my previous blog post on this].

In the SWF [Sovereign Welfare Fund] remains 2.8 trillion rubles that are “liquid” (© Siluanov).

And finally, Milov writes, the budget deficit for 2017 is slated to be 2.75 trillion rubles.

If everything continues in the current trajectory, by the end of this year the two funds will be depleted.

“Anyone who tells you that this supposedly “does not matter because the government is selling the currency to the Central Bank, while maintaining the same volume of gold reserves” is dissembling or does not understand the essence of the matter, because to finance the budget deficit with the gold reserves is useless.”

And once the reserves are empty, then “the fiscal deficit can only be financed by borrowing (and in this respect, the removal of the sanctions acquires a decisive role), or the Central Bank has to loan money to the government…”

Or the third option the government could take is budget cuts.

For reference – even at today’s frozen budget expenditures:

  • real pensions declined by 3.5% for 11 months of 2016;
  • the indexation of wages in education and health care for 11 months in 2016 were 4.2% and 6%, respectively (Rosstat).

By reducing budget spending you can imagine what will happen.

Rosneft Mysteries

Yesterday Reuters had a headline that caught my eye: “Rosneft signs 5-year oil supply deal with QHG Trading”.

Of course, I had questions. So I went digging. It turned out that this was the deal that had been agreed to last month with Glencore as part of Rosneft’s “privatization” scheme. But more than that, filings with Companies House in the UK revealed that Glencore had set up a complex structure just prior to the deal’s announcement in early December.

This is perhaps not so strange if you had read Glencore’s statement from early December about the proposed partnership with the Qatar Investment Authority.

In the press release, Glencore stated that they had put together a “limited liability structure fully ring-fenced and non-recourse to Glencore…”

So what does the structure look like?

On 5 December 2016 Glencore registered three LLPs (Limited Liability Partnerships) in the UK. They are as follows:

QHG Investment is split equally between QHG Holding & Qatar registered Qatar Holding LLC (a subsidiary of Qatar Investment Authority). The structure had initially been divided between Glencore UK Limited and Glencore Energy UK Limited. QHG Holding replaced Glencore UK on 28 December, and Qatar Holding did not sign on until 30 December, replacing Glencore Energy UK.

QHG Holding is split between Glencore Energy UK, Qatar Holding LLC, and an entity called QHG Cayman Ltd. (more about this later). Again the pattern repeats, and Qatar did not sign on until 30 December, this time replacing Glencore UK.

And finally, QHG Trading is split equally between Glencore Energy UK and Qatar Holding LLC. And Qatar again replaces Glencore UK on 30 December.

Now here is where it gets interesting. On 3 January 2017, three charges are registered. QHG Investment registers two “fixed charges” from “Intesa Sanpaolo S.P.A., London Branch”.

 Unfortunately there is no paperwork to show exactly what the deals entail, but according to Companies House, one of the charges:

  • Contains fixed charge.
  • Contains floating charge.
  • Floating charge covers all the property or undertaking of the company.
  • Contains negative pledge.

And the other charge:

  • Contains fixed charge.
  • Contains negative pledge.

QHG Holding also registers a “fixed charge” from “Intesa Sanpaolo S.P.A., London Branch” on 3 January 2017:

  • Contains fixed charge.
  • Contains negative pledge.

A quick look at “Intesa Sanpaolo S.P.A., London Branch” shows no such charges, but that doesn’t necessarily mean anything. But it does raise more questions about where exactly the money for the transaction came from, and where it went, or if it even existed at all. Meanwhile, Reuters reported on 3 January that Intesa said they were underwriting “a loan for up to 5.2 billion euros ($5.4 billion)…”.

According to the Russian business daily RBC, Rosneft was supposed to conclude the privatization deal by 15 December 2016.

“On the same day, Rosneftegas transferred funds from the transaction to the federal budget. However, Glencore only confirmed the completion of the settlements on 3 January 2017 [the same date as the charges mentioned above, -ed.] and Rosneftegas on 4 January. In [its] January report the state holding company reported “the end of all corporate and technical procedures of closing and settlement”, associated with the transaction. Rosneftegas specified that it came to… more than 50 documents and agreements signed in “more than five” jurisdictions.”

RBC also reported that QHG Investment LLP holds a 100% stake in QHG Shares PTE which was registered in Singapore on 8 December 2016. The authorized capital of QHG Shares PTE is divided into 201 ordinary shares & totals €10,243 billion. QHG Shares PTE holds the 19.5% stake of Rosneft that Russia “privatized”.

And another mystery remains: who is the beneficial owner of QHG Caymen Ltd.?  RBC couldn’t find it, and neither can I.

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.”

Default is Impossible

At Vladimir Putin’s annual press conference in December, the President “…said that according to the rules of the government and the Ministry of Finance that a region’s debt should not be more than 50% of its own revenue. At present, five Russian regions have already crossed this threshold. Is the situation serious?”

Rosbalt talked to Professor Natalia Zubarevich from the Independent Institute of Social Policy about the situation.

“Putin said nothing new. The situation in the regions is not worse in comparison with the previous year, they did not increase debt. Between January and early October 2016, it even declined slightly. But in different parts of the country it is a different story, so that the total numbers never reflect the situation in each region.”

Additionally, she continues, “two-thirds of the regions in 2015 had a budget deficit… larger than half of their own revenues. That is, income less the money that they get from the federal government.”

Zubarevich rejects the idea that the regions can default because they are “not a company.”

There are other options, however.

“If they are low cost loans, and many are, then, firstly, it is virtually free money – with a one percent annual rate. Secondly, they can roll over [the loan]. During the preparation of the Sochi Olympics and during the preparation of the Universiade in Kazan, Krasnodar Krai and Tatarstan had their loan extended by 20 years.”

But how can the regions escape this? Rosbalt asks.

“Wait and see. Never say “never” — this is Russia.”

Rosbalt then asks about Federation Council Speaker Valentina Matviyenko’s recent suggestion that the Kremlin resume its amalgamation program in Russia’s regions.* Matvieynko has made such comments before. See for example this statement from 2013:

Speaking in Kazan on Wednesday, Matviyenko said that the current number of federal subjects—83—is “too large” and that the differences in economic and social terms among them are too great. Consequently, some of them should be combined together by referendum, although she refused to say which ones (www.kommersant.ru/doc-y/2126614).

Zubarevich answers Rosbalt’s question:

“They think it is easier. Connect fat with lean, you get average. It seems to me that this is a very simplistic view of the problems in the regions.”

She also seems to think that it is unlikely that Matviyenko’s suggestion will be heeded because it will create “turbulence. The elites do not want it. We would have to dramatically change management. And the population also does not want this, people are accustomed to their regions.”

* If you are interested in reading more on the Kremlin’s amalgamation plans Paul Goble has written extensively on this subject over the past several years.

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.