Marshall Horn - Russia, China Expand Win-Win Cooperation to Agriculture

Marshall Horn,

This article originally appeared at New Eastern Outlook

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The Chinese government officials in recent years are very fond of talking about “win-win” developments in business and politics.

Now a genuine win-win development is emerging for both China and Russia in Siberia near the borders of Mongolia and China in the region known since 2008 as Zabaikalsky krai or region.

The region has a very sparse population of just over 1 million Russians on a land area of some 432,000 square kilometers. It also holds some of the richest, most fertile farmland in the world.

China for its part is hurt by increasing desertification, water problems and other pressures on its food production security.

China also has population and money to invest in worthwhile projects, something the more remote regions of the Russian Federation have had serious deficits of during the Cold War and especially since the destructive Yeltsin years.

Now the government of Zabaikalsky Krai has signed a 49-year lease agreement with China’s Zoje Resources Investment together with its daughter company Huae Sinban to lease 115,000 hectares or just under 300,000 acres of Russian farmland to China.

The Chinese company will invest more than 24 billion rubles for development of agricultural sector in the region, to produce agricultural products for Russian and Chinese markets. Plans are to grow fodder, grain and oilseeds as well as to develop poultry, meat and dairy products production in Russia’s Baikal region.

The project will be divided into two stages. If the first stage is successfully completed by 2018, the Chinese company will be given a lease on a second parcel of land bringing the total to 200,000 hectares. For Russia and the region it will be a win. The lands where the project will start have not been farmed for almost 30 years and to make the land suitable again for farming will require the labor of as many as 3,000 hands. Also significant is that the Chinese company had to compete for the land deal with several other Chinese companies as well as companies from South Korea, New Zealand and even from the United States.

Wang Haiyun, senior advisor at the Chinese Institute for International Strategic Studies, called the deal an example of the developing trust between the two countries, according to an article from the Chinese newspaper Huanqiu Shibao. He noted that the fact that Russian authorities agreed to lease such an immense territory for 49 years to a Chinese company proves Moscow has no ideological prejudice towards Beijing.

China-Russia Agriculture Fund

The latest land lease deal in Zabaikalsky krai follows other positive developments in agriculture cooperation between Russia and China. This past May Russia’s state Direct Investment Fund head, Kirill Dmitriev, announced that RDIF, the Russia-China Investment Fund and the government of China’s Heilongjiang province have agreed on the creation of a special investment fund for agriculture projects.

The fund will total some $2 billion and be funded by primarily money of institutional Chinese investors, including those with significant experience in investment in the agricultural sector, Dmitriev added. He said that the agreement on the creation of a joint investment bank will help attract Chinese capital to Russia and make it easier for Russian companies to enter China’s markets. China’s Heilongjiang Province is to the east of Zabaikalsky krai.

Silk roads to golden goals

The China-Zabaikalsky krai agriculture agreement is merely the initial step of what will become a major infrastructure and industrial development of the now-remote underdeveloped Siberian region. Zabaikalsky krai is one of the richest regions in all Russia. Russia’s largest known deposit of copper at Udokanskoye in the region has resources of 20 million tons.

On June 3 at the Sochi SP1520 annual international railways forum, Russian Railways president Vladimir Yakunin announced that the Russian Copper Company, a joint venture by Russian Railways Public Company, UMMC, and Vnesheconombank, had applied for development of the Udokanskoye copper deposit, confirming that Russia is thinking very strategically about its development in the region.

In addition the region is rich in gold, molybdenum, tin, lead, zinc and coal. Its crops are today wheat, barley and oats. The region is amply blessed with fresh water and flowing rivers.

At the same time Beijing has announced it is creating a huge $16 billion fund to develop gold mines along the rail route linking Russia and China and Central Asia. One major obstacle to date to exploitation of Russia’s vast agriculture and mineral riches has been availability of modern infrastructure to bring the products to market. Contrary to Harvard University or George Soros “shock therapy” free market theories, markets are not “free.”

At the September, 2014 meeting of the Shanghai Cooperation Organization in Dushanbe, at the request of the Mongolian president, China’s Xi, Russia’s Putin and Mongolia’s Tsakhiagiin Elbegdorj agreed to integrate Beijing’s Silk Road Economic Belt initiative with Russia’s transcontinental rail plan and Mongolia’s Prairie Road program, to jointly build a China-Mongolia-Russia economic corridor.

That could turn Mongolia into a “transit corridor” linking the Chinese and Russian economies. Mongolia is larger than Japan, France and Spain together. The three are discussing issues of traffic interconnectivity, how to facilitate cargo clearance and transportation, and the feasibility of building a transnational power grid.

Eurasian Economic Birth

The potential of the recent economic cooperation agreements between the two great Eurasian nations, Russia and China, is without question the most promising economic development in the world today. As US sanctions forced Russia to turn increasingly to its eastern neighbor, China, US military provocations against China in the East China Sea and elsewhere forced China to completely rethink its own strategic orientation. Developing their land connections in a vast economic space is emerging as the result. As the ancient Chinese saying goes, every crisis contains new opportunities if viewed so.

Beijing has discussed building various Eurasian rail ties for several years but in the past eighteen months since the beginning of the Presidency of Xi Jinping it has assumed highest priority, especially the construction of the New Silk Road Economic Belt. President XI has made that Silk Road project the cornerstone of his presidential term.

In the meeting of Xi on May 8 in Moscow with Russian President Putin, the two presidents signed a joint declaration “on cooperation in coordinating development of EEU and the Silk Road Economic Belt,” with both declaring their goal to coordinate the two projects in order to build a “common economic space” in Eurasia, including a Free Trade Agreement between the EEU and China. 

Chinese Foreign Minister Wang Yi recently stated that the trade turnover between China and Russia is likely to reach $100 billion in 2015. The future prospects, with construction of the network of high-speed railways, is staggering.

Markets, all markets, are manmade, products of deliberate or not so deliberate decisions of individuals and usually of governments. The creation of what could become a multi-trillion dollar economic space spanning the vast Eurasian land is moving forward in a beautiful way. The China-Russia agriculture land leasing is a sign that Russia is opening a new qualitative phase in these developments.

In the world of mathematics win-win is referred to as a “non-zero sum game” in which there is typically a matrix of multiple payouts for all participants. That seems to be emerging across the vast Eurasian expanse far faster than anyone could have imagined even two years ago.

via Marshall Horn, CFTC Russia, China Expand Win-Win Cooperation to Agriculture

Marshall Horn - Russia's Rotten State Banks Are Its Achilles' Heel

Marshall Horn,

Good insight and critique of Russian banking sector by BNE’s Ben Aris, though we have to take issue with his claim that financial empires created by the likes of JP Morgan and Rockefeller “epitomise no-holds-barred capitalism”. 

Actually the financial industry in the US is intimately tied up with the government and is a frequent recipient of government favors - most visibly in the 2008 bailout of the corporate financial sector that cost US taxpayers $700 billion - a figure which would be unthinkable in Russia.

This article originally appeared at Business New Europe

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Banks epitomise capitalism, but not in Russia. The financial industrial empires of men like JP Morgan, Rockefeller, Rothschild and Harriman are intimately tied up with creating the vibrant no-holds-barred capitalism in the US. In Russia the top five banks are all state-owned and their power comes largely from one man – Russian President Vladimir Putin.

The Russian economy is in recession and most of the important state-owned banks are under sanctions imposed by the US and Europe. Never particularly well run, the current environment means the tide has gone out for Putin’s “state capitalism“ system and it is apparent that several of these banks were not wearing swimming trunks. As the first quarter reporting season comes to an end, all Russia’s large state-owned banks admitted they are struggling.

Russia’s state-owned banks (SOBs) have the veneer of real banks. They have the posh offices and an army of men in nice suits. They have trading desks and tight security. But unlike their peers in the West, they also have access to free government money and have to take calls from ministers with a pet project to fund. Thanks to state support none of these banks is likely to go bust, and the implicit state guarantee that they all enjoy (an explicit guarantee in Sberbank’s case) gives them a real competitive advantage in the form of a lower cost of borrowing.

But state-directed lending also means they will never be particularly efficient or profitable either, especially in leaner times. It is notable that the bulk of the RUB1 trillion (€16bn) the government has allocated to helping out struggling banks has gone to SOBs and all of it is tied to supporting specific “import substitution” sectors.

Chink in the armour

Russia’s banking system has long been considered the weakness in the state capitalism system that Putin has been busy building. The generally underdeveloped nature of Russian banks is precisely why Western sanctions targeted them.

Four of Russia’s largest banks (Sberbank, VTB, Gazprombank and Rosselkhozbank, also known as the Russian Agricultural Bank) have been on the US Treasury department’s “sectoral sanctions” list for the better part of a year. Officially, the sanctions prohibit “transacting in, providing financing for, or otherwise dealing in” either equity or any debt with a maturity longer than 90 days. Essentially, they cut off Russian banks from the Western financial system, which previously acted as a major source of cheap, long-term funding. Now that all of the 2014 full-year financial reports have been published, we have a chance to survey the damage absorbed by the Russian financial sector. The results aren’t pretty.

While Sberbank managed to remain profitable in 2014, VTB’s profit for the year was negligible and Gazprombank and Rosselkhozbank actually fell into loss. But headline figures do not adequately describe just how bad the situation has gotten – something that can be gleaned from the performance of the shares in the two listed state banks, Sberbank and VTB.

The shares of both banks have been hammered by the selloff that accompanied Russia’s litany of woes in recent years. Of the two, the fall in VTB’s shares has been the more dramatic, with its share price down by 61% from the high they hit in 2011, when Russia’s economy was sailing along and the banking sector booming. Sberbank’s shares are down 32% from the high they posted in 2011.

Charity case

VTB Bank takes the biscuit as the worst offender. It reported a 56% decline in profits in the first quarter year on year that led to a loss of $370mn, after spending massively on charitable projects. That follows on from a terrible 2014 when the bank’s return on equity – a key measure of profitability – fell to 0.1% from 11.8% in 2013. The bank reported a profit of a mere RUB800m ($13mn) for the whole of 2014 – lunch money.

Russia’s second biggest lender, VTB spent a massive RUB15.5bn ($300mn) on charities while booking losses of RUB5.1bn, according to the business daily Vedomosti. The bank’s balance sheet is in such a mess that it has asked the state for a RUB300bn ($5.6bn) bailout – the first state bank to formally ask for help – which is a third of the RUB1 trillion that the government has put aside to help struggling sector.

Accounting is never particularly transparent to outsiders, but looking at banks’ financial statements can be especially tricky. Banks are strongly impacted by many factors (such as relative changes in the value of foreign currencies) that don’t really give much insight into their “true” profitability. But ultimately, a bank’s fundamental business model depends on taking money from depositors and loaning that money out at a higher interest rate.

The graph below shows net income for the four largest state banks that has been adjusted to remove the distortive impact of foreign exchange translations. Additionally, a one-time book gain in VTB’s 2014 income statement (RUB99bn from a loan from the deposit insurance authority) has been removed. As should be clear, outside of Sberbank, 2014 was basically a disaster for the other three banks.

VTB spent wildly throughout the worst of last December’s crisis, with the bulk of the expenditures on good works being booked in the fourth quarter of 2014. In something of an understatement, VTB CEO Andrei Kostin called the period “one of the most difficult” in the bank’s history.

The bank does not disclose who the lucky recipients of its largesse were, but the database of state tenders shows about a third of the spending went on a sponsorship package for football club Dynamo Moscow, which VTB owns, and it is due to spend another RUB4.5bn on the club this year, Vedomosti reported. Another RUB750mn is due to be spent on sponsoring the hockey club Dynamo Moscow, as well as smaller sums on other sports sponsorship deals.

That leaves another RUB10bn of VTB charitable spending unaccounted for, and it is exactly this opaqueness that makes letting state-owned banks rule the roost so dangerous and has earned VTB the title of “Russia worst bank” in some circles.

Retail resilience

The picture at Sberbank, which reported its first-quarter figures only a few days after VTB, is considerably better, even if its results still weren’t that great. Profits in the first quarter were down by 19% year on year, which wasn’t bad given the battering the Russian economy received in December and was a lot better than analysts had been expecting.

“The difference between the two banks is enormous,” says one senior investment bank research officer, who didn’t want to be named. “Sberbank has its own problems, but its commitment to corporate governance and transparency is reflected in the way it is run and makes all the difference.”

As Russia’s biggest retail bank, Sberbank’s core business of loaning people money and charging them interest remained profitable and significant. After accounting for provisions, Sberbank’s net interest income went from RUB727bn (€11.7bn) in 2013 to RUB658bn in 2014, a less than 10% decrease (in comparison, VTB’s net interest income after provisions fell by a whopping 57%).

Provisioning for pain

Still, falling profitability at the state banks is to be expected in the broader context of the crisis that is squeezing the entire financial system. A slowdown in growth and investment, compounded by a currency crisis, has predictably led to a serious deterioration in the loan portfolios of the entire Russian banking sector.

Adjusted for revaluation, the sector’s corporate lending growth slowed to 6.4% year on year in April from 7.6% in March, but retail lending – which drove the explosive growth in banking sector assets for years – has completely collapsed. The Central Bank of Russia (CBR) tightened regulations at the start of 2014 to head off an obvious consumer credit bubble that was starting to form. The growth in retail lending contracted again in April, falling to 3.2% from 5.8% in March. What that means in practical terms is the number of loans issued in Russia in the first quarter fell by more than half (58%) compared with the same period in 2014, according to Russia’s United Credit Bureau.

However, the decline in loan portfolios has not been uniform across the Russian financial sector. The graph below shows the provisions that banks had to record as a percentage of the net interest income their received in 2013 and 2014. A “provision” is a technical accounting term that basically means the amount that a bank expects it will eventually be unable to collect. So if a bank receives $100 in interest income but its provision is $50, it basically means that the bank thinks that it won’t be able to collect on $50 of other loans on which it is eventually due payment. It’s an effective proxy for loan portfolio strength. Sberbank was by far the best performer by a substantial margin, while Rosseklhozbank, which finances Russia’s farms, was the worst.

As bne IntelliNews has reported, Russia’s agricultural sector is struggling as farmers find themselves in a vice between falling grain prices and the rising cost of things like fertilisers. This is putting Rosseklhozbank under even more pressure than its peers. “The Rosseklhozbank loan book is rotten to its core,” says one agricultural fund manager, adding that the due diligence the bank makes on loans is not particularly rigorous.

Comparing Sberbank’s and VTB’s respective provisions: VTB’s provisions wiped out 72% of the interest income it received in 2014, while for Sberbank the equivalent figure was only 35%.

At first glance, then, Sberbank’s loan portfolio held up much better than VTB’s. But digging a little deeper into the weeds and even Sberbank’s numbers look a bit iffy too. The bank reports three tiers of assets with Level 1 the best and Level 3 the most risky and illiquid – things like buildings or artworks for which there is no obvious market. The problem is how to assess the value of these questionable loans and assets for the accounts, which are, by definition, “not based on observable market data”.

At the end of 2014, Sberbank had RUB25,200bn of all three tiers of assets, of which it disclosed fair values for RUB18,196bn. Of that, RUB16,791bn (or 92%) were Level 3. In other words, the management were free to basically make up any value it liked for two-thirds of its total assets.

Sberbank’s liabilities tell a broadly similar (if slightly less extreme) tale. Of the RUB21,660bn of liabilities for which the bank disclosed fair values, fully RUB13,540bn (or 62%) were Level 3. The bank’s liabilities, then, were a bit more liquid and predictable than its assets, but there was still a high degree of uncertainty about their value. Exactly the same story is repeated at the other three state banks; directed lending and funding of government-backed projects means all the banks, but especially Rosseklhozbank, have made loans on Level 3 assets that have some value on paper but little in the real world.

None of this is illegal or even particularly unusual to Russia. But what it does mean is that the opacity and subjective nature of the state bank’s accounts is an excellent way of sneaking very nasty surprises into the banks’ books. That is the certain route to a banking crisis during the next shock. If you wanted to write a novel on how to blow up an emerging market’s financial sector, then this is probably the best mechanism you could choose for the plot.

Not much security

In addition to their core business of taking in money and lending it out, modern banks also routinely engage in the proprietary buying, selling and trading of various kinds of securities with their spare cash. As you might expect given the turbulence in Russia’s stock and currency markets, 2014 was not terribly kind to this line of business and all Russia’s state banks (even the generally well-run and conservative Sberbank) saw a sharp deterioration in the profitability of their investments.

Both Sberbank and VTB have investment banking divisions, but while other banks lost more money on an absolute basis, VTB Capital’s relative performance stands out as being particularly bad.

VTB’s investment banking arm was set up in the crisis year of 2008 and has sold itself as Russia’s leading investment bank. Indeed, it does lead the tables for things like M&A transactions, bond issues and IPOs, but thanks to this emphasis, no other bank saw a more dramatic swing from year to year. At this scale the question doesn’t turn on particular investments or individual decisions: it’s not as if someone at VTB Capital made a bad stock pick or bought a particularly ill-advised corporate bond. Rather, it was a broad-based deterioration across the bank’s entire portfolio.

What now?

With the banks in such a terrible state, the question is what happens now? The CBR’s emergency hike in interest rates to 17.5% in December made the cost of capital unaffordable to potential borrowers and while the central bank has reduced the rate several times since then into the low teens, it is still very expensive. Bank’s lending business, their main form of income, has collapsed as a result.

So far, the CBR has stepped in to provide funding and seen its share of liabilities rise to 11% of the banking sector’s total (in 2008 at the peak of the crisis the CBR accounted for only 3% of total funding). And the lucky few that have access to the state-directed loans are enjoying subsidised loans well below market rates. But the CBR can’t keep this up forever.

The Russian economy has been surprisingly robust in the face of Western sanctions and the ruble’s collapse, and it could even return to growth by the start of next year, so there is light at the end of the tunnel. If there is a “snap-back”, then many loans that were previously impaired could, once again, look profitable. On the other hand, if the outlook for the Russian economy remains bleak, then the situation in the financial sector could spin further out of control.

In the meantime, the non-performing loans (NPLs) ratio is rising in both the corporate and retail banking segments: corporate NPLs surged 50 basis points (bp) month on month in April to 5.4%, the highest level since 2010, while retail NPLs rose at the steady pace set in the last year of 20bp on month to 7.1%. However, neither of these results is at the level where they threaten the stability of the banking sector.

The banking sector’s losses are also manageable: the banks reported RUB23bn ($435mn) of net losses in April, but this is tiny compared with total assets of RUB74 trillion rubles ($1.5 trillion) at the beginning of April.

Out of all the results, the really crucial number to watch is the capital adequacy ratio (CAR) of the banking sector – the share of cash that banks hold back to pay out to depositors on demand. Cut off from wholesale funding, Russian banks are being forced to dip into their own capital to make loans and the CAR has fallen steadily from the low 20s to touch a low of 12% in December-January. However, the CBR has been doing its job and the recapitalization of the sector had lifted the CAR back up to around 13% by May. “Overall, it seems that the situation will normalize, in a fashion similar to that seen in 2009,” reckons Alfa bank’s chief economist, Natalia Orlova. “However, some banks will struggle with funding that is beyond their means, particularly those that offered longer-term deposits during the winter months at the rate peak.”

 

via Marshall Horn, CFTC Russia's Rotten State Banks Are Its Achilles' Heel

Marshall Horn - European Stocks Down on Decisive Day for Greece

Marshall Horn,

As the world watches to see if Greece will come through in paying the IMF a critical loan payment, European stocks were slightly lower this morning.  

According to market news, yesterday was a negative day worldwide owing somewhat to Greek Prime Minister Alexis Tsipras’ announcement a referendum would be held on Sunday on whether to accept the tough bailout terms the IMF and other banks have suggested. The IMF, the European Central Bank, and some EU members are poised to collect roughly €1.6 billion euros from the Greeks today, but insiders in the dealings express severe doubts these monies will be repaid any time soon.

The Euro Stoxx 50 index showed mixed feelings on the news. This index, which combines the shares of top companies in Germany, France and other eurozone sectors, dropped almost 1% on the news. In London the FTSE 100 index slipped 0.8 percent, after a 2 percent decline a day before. As for the bond market, investors dumped peripheral eurozone dept from Italy, Spain, and from Portugal. Today’s bond yields also fell slightly in Germany, with a slight uptake in the aforementioned peripherals.

On Sunday, Capital controls announced that Greek banks and markets are to remain closed, with Athens’ finance Ministry announcing roughly 1,000 bank branch openings by tomorrow. The Standard & Poor’s 500 index suggested stocks on Wall Street would open slightly higher, but the S&P 500 fell 2.1 percent on Monday. Also, the euro fell 0.6 percent against the dollar, to $1.1166, well within its recent trading range.

In Asia markets rebounded, especially in  China, where key indexes gained more than 100 percent over the past year. Rising some 5.5% on the composite, the Shanghai index gained after having fallen some 3 percent on Monday. The Tokyo benchmark Nikkei 225 stock average rose 0.6 percent.

 

via Marshall Horn, CFTC European Stocks Down on Decisive Day for Greece

Marshall Horn - Western Financial Sanctions Won't Break Russia

Marshall Horn,

This article originally appeared in The Moscow Times

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To many observers, financial sanctions have been the most effective of the so-called “sectoral” sanctions adopted last summer in response to Russia’s annexation of Crimea and subsequent involvement in the war in Ukraine.

Whereas sanctions imposed on the defense industry have caused relatively minor disruption to date, and the ban on technologies used for tight oil extraction will only really affect Russian oil production many years down the line, the limitations on Russian firms’ access to finance have exerted an immediate impact.

First, financial sanctions resulted in the effective closure of Western capital markets to a large number of Russian corporations, and not just those directly targeted by sanctions. This “sudden stop” of capital inflows has contributed to the steady decline in investment in the Russian economy that accelerated in the final quarter of 2014 and continued into this year.

Second, because Russian firms were unable to refinance existing debt, they were also forced to repay their debts on schedule.

As a result, Russia’s total external debt fell from about $728 billion in January 2014 to $597 billion at the end of 2014.

This sharp reduction of more than $130 billion in the stock of external debt was due to a combination of repayments (primarily to Western banks) and a reduction in the dollar value of ruble-denominated debt.

Read more in The Moscow Times

via Marshall Horn, CFTC Western Financial Sanctions Won't Break Russia

Marshall Horn - What Russia Offered Greece

Marshall Horn,

In the article about how Greek Prime Minister Alexis Tsipras’s  dealings with Moscow are putting at risk Greece’s traditionally friendly ties to Russia, I said that the gas pipeline proposal the Russians have floated is intended to help Greece, not achieve some grand Russian pipeline strategy. In this article I will explain why.

It is first necessary to say something about Russia’s gas export policies.

Western paranoia about Moscow’s supposed “pipeline politics” has distorted understanding of Russian gas policy to a quite extraordinary degree, even amongst commentators who are generally favourable to Russia.  

There is no evidence Moscow thinks of its gas exports in terms of “pipeline politics”.  Moscow hardly ever entertains the grand geopolitical strategies Westerners routinely attribute to it and this is a case in point. There is no evidence Moscow thinks of gas exports in geopolitical terms or sees them as offering Moscow a political advantage, and Moscow has always denied it.  

If Moscow ever entertained such farfetched notions then the experience of Ukraine and of the collapse in Moscow’s relations with the EU will have disabused it.

The Russians see gas export as simply business. They have never cut off gas to countries because they are in political conflict with them.  

They continued to supply Georgia with gas throughout the 2008 South Ossetia war. They supply gas to the Baltic States and have never threatened to turn it off despite the many political conflicts Russia has with those statea. On the occasions when the Russians have cut off gas to Ukraine (in 2006, 2009 and 2014) it was not because of political conflicts but because Ukraine didn’t pay. Since Ukraine is now paying - if only in dribs and drabs - the Russians are now supplying it with gas, much to the surprise (and annoyance) of some people.

If notions of Russia using gas exports as a political tool are put aside, then the falsity of much of the debate around this issue becomes obvious.

There is no evidence that the Russians have ever attempted to prevent Europe from diversifying its gas imports. They have never obstructed European projects to import gas from the Caspian or Algeria or Qatar or the US. If none of these projects has succeeded up to now it is not because the Russians have acted to prevent them. It is because they do not provide the needed gas.

It is therefore a mistake to think of the various Russian pipeline projects like North Stream and South Stream and Turk Stream as pursuing some sort of geopolitical agenda, intended to “lock in” Europe into buying Russian gas, the better to control or influence Europe’s policies. The Russians are practical enough to know that is impossible.

The reason for these pipeline projects is because the Russians have learnt that Ukraine - the key transit state most of the existing pipelines cross - cannot be trusted. In 2006 and 2009 the Ukrainians stole Russian gas intended for other customers. In 2014 Ukraine threatened to do the same thing again.

Understandably enough the Russians have decided to end Ukraine’s role as a transit state. The pipeline projects Russia has been pursuing are intended to circumvent it and have no other purpose. Though they are expensive they are necessary to guarantee that Russian gas reaches its intended customers. They therefore - contrary to what some say - make obvious commercial sense.

The North Stream project to Germany and northern Europe has been built and is now being extended.

The South Stream project was cancelled because the EU insisted that it be made subject to the EU’s Third Energy Package.  

I have previously explained in detail why that was completely unacceptable to the Russians and why that led them to cancel the whole project (see The Real Reason Russia Cancelled South Stream, Russia Insider, 4th December 2014).

In place of South Stream the Russians announced plans to build a pipeline to Turkey. That project - now called “Turk Stream” - is going ahead.

The Russian decision to build Turk Stream in place of South Stream was made because Turkey is a major customer of Russian gas which is not a member of the EU and which does not therefore require compliance with the EU’s Third Energy Package.

Turk Stream’s ultimate destination is a giant gas hub Turkey is building near Edirne in European Turkey. This hub is expected to receive gas both from Turk Stream and from a separate non-Russian pipeline from the Caspian, known as the Trans Anatolian pipeline.

At the time that Turk Stream was announced the Russians had no plans to extend Turk Stream beyond this hub.  

Since the EU insists that any pipeline on EU territory must comply with the Third Energy Package, the Russians said they would not build any more pipelines on EU territory.  As Turkey’s European neighbours, Bulgaria and Greece, are members of the EU, that meant the Russians were ruling out building any pipelines across their territories.

What the Russians said was that if the Europeans wanted to tap into the gas that would be stored at the hub then they would have to build the pipeline themselves. 

That was the Russian position until Syriza was elected.

In March 2015 Tsipras went to Moscow and the question of how to help him then came up.

It is a fallacy that Putin can simply click his fingers and give Greece money. Any money Russia gives Greece must come from some source. These are (1) the Russian state budget (2) the National Welfare Fund or (3) as commercial payment for a project. 

Russia’s budget has been approved by the Russian parliament and makes no provision of money for Greece. For that to change the budget would have to be amended, which would require the approval of the Russian parliament.  That would be controversial at a time when the budget is in deficit.

Providing money from the National Welfare Fund is equally problematic. The National Welfare Fund is only supposed to invest funds in AAA credit rated securities. Greece, which is bankrupt, doesn’t have such a rating.

In December 2013 the Russians overrode this provision to make a loan of $3 billion to Ukraine out of the National Welfare Fund. Ukraine at that time did not have a AAA credit rating. The Russians have regretted the decision ever since. It is inconceivable the Russians would be prepared to do the same thing again.

That leaves commercial payment for a project as the one remaining option, and that is what the Russians proposed. 

Though it reverses what the Russians decided when they cancelled South Stream last autumn, what they proposed to Tsipras in March and April was the building of a pipeline across Greece taking gas from the hub.  This would have come with a $5 billion prepayment paid out of Gazprom’s financial reserves.  Greece could have used that payment to pay this month’s instalments to the IMF.

That solution would obviously not have sufficed to help Greece overcome its problems. However it would have provided Greece with a breathing space. It seems that the Russians proposed that Greece use this breathing space to join the BRICS Bank.  It could then have negotiated with the BRICS Bank for a loan.

Behind the BRICS Bank stands China with its practically unlimited reserves. A loan from the BRICS Bank - with the knowledge that China, however discreetly, was now involved - would have changed the dynamic of the situation and might by itself have stopped the bank run that has been underway in one form or another in Greece since December.

It goes without saying that the proposal that Greece join the BRICS Bank - which the Russians have made publicly - could only have been made with China’s agreement.

That in essence appears to have been the offer the Russians made to the Greeks.

It is far from certain it would have succeeded. There would have been risks in it for both sides. 

The Russians would have gambled that Greece, unlike Bulgaria, would defy the EU and would press ahead with the pipeline project despite it not being compliant with the Third Energy Package. If this gamble failed and the Greeks, like the Bulgarians, reversed themselves then the Russians would have given Greece $5 billion with nothing to show for it.

It says much for the goodwill the Russians have for Greece that they were prepared to take this risk, which meant reversing the decision they took last autumn to abandon pipeline construction on EU territory.

The Greeks for their part would have gambled that knowledge that Russia and China were involved would force the IMF and EU to restructure Greece’s debt.  Without such a restructuring a default is at some point inevitable since the debt at 180% of GDP is obviously unsustainable.  

The IMF and EU might have agreed to such a restructuring rather than permit a default that would have pushed Greece further into Russia’s and China’s embrace. However there is no guarantee of this. It is equally possible that the IMF and EU would have been so incensed by Greece’s turn to Russia and China that they would have continued to refuse a restructuring. In that case there would at some point be a default whilst Greece in the meantime would have burnt its bridges with the EU.

Though accepting the Russian offer would have been a gamble, it is not obvious as I write this that accepting it would have left Greece in a worse position than the one it is in anyway. Reports today suggest that the IMF and EU are continuing to take a very hard line and are refusing a restructuring even though the Russian offer has been essentially rejected.

The problem is that whilst one part of the Greek government based around the energy ministry seems to have embraced the Russian offer, the other part, based around the finance and foreign ministries, seems determined to reject it. Tsipras seems unable to make his mind up between the two.

The Russian offer is probably still on the table if it is embraced wholeheartedly. As of now that does not seem likely. At the moment it looks like the Greeks will only likely embrace it in the event of a Grexit.  Whether at that point the offer is still there remains to be seen.

via Marshall Horn, CFTC What Russia Offered Greece

Marshall Horn - Playing Russia and Europe off Against Each Other Is Losing Greece Friends

Marshall Horn,

The great British historian AJP Taylor once said in my presence that Western politicians tend to think of Russia as a tap they can turn on and off whenever they like.

By that he meant by that Western politicians expect Russia’s help when they need it, but never feel under any obligation to give anything back in return.

Taylor was speaking about the diplomacy that led to the Second World War.  However it is starting to look as if the same is true of Greece’s Prime Minister, Alexis Tsipras.

Tsipras was elected on a contradictory promise of ending austerity and keeping Greece in the eurozone.  

He seems to have trusted in his own powers of persuasion - and the economic logic of his case - to achieve this remarkable feat.  I am told by people in Greece who are in a position to know that he had - and has - no Plan B.

Tsipras’s faith in his success seems to have been based on a belief that European demands for austerity were a bluff and that Greece is too important to the euro project and in geopolitical terms for its expulsion from the eurozone to be considered.

This presumably is what lies behind the extraordinary game Tsipras has been playing with Moscow.

In January, immediately following his election, in a move that caused anxious buzzing in European capitals and which must have provoked interest in Moscow, Tsipras met with the Russian ambassador before any others.  

His government then made known its concerns about the way in which the extension of EU sanctions against Russian individuals and companies was railroaded through later that month.  

He then announced he was going to go to Moscow to meet Putin, and he duly did so in March.

As I have discussed previously (see Grexit Looks Inevitable. But Greece Will Need Moscow’s Help, Russia Insider, 27th April 2015) this visit led to expectations of financial deals and of a major gas pipeline agreement.  Gazprom’s chief Alexei Miller went to Athens in April to negotiate it.

In the event nothing happened.  Though I am told a deal that came with a $5 billion prepayment was ready for signature on 23rd April 2015, it went unsigned and Miller left Athens empty handed. 

Here I should say that the gas pipeline offer the Russians made to Tsipras in April was intended to help Greece.  It was not part of an elaborate play by the Russians in pursuit of some great gas pipeline strategy.  As this is a complex point, I will discuss it in more detail in another article.

The Russians must have been annoyed to be stood up in this way, but characteristically they said nothing.

What followed must have annoyed them even more.

At the time of his trip to Moscow in March Tsipras led everyone to think he would attend the 9th May Victory Parade in Moscow.  

This would have been an important symbolic act.  Tsipras would have broken with the rest of the EU, which was boycotting the event.  

Such a step would have been very popular in Greece.  Attitudes to Russia in Greece are very positive.  Most Greeks think of Russia as the fellow Orthodox country that liberated Greece from the Ottomans.  Most Greeks - unlike many Europeans and Americans - are also fully aware of Russia’s immense contribution to the defeat of fascism in the Second World War.  

Last but not least, many Greeks have family connections with Russia.  Many were born there or have lived there.  Those Greeks with such connections to Russia tend to view Russia very positively.

Without any clear explanation Tsipras then reversed himself and failed to go - something that provoked much more public criticism of him in Greece than it did in Russia.

Over the last 7 days the same pattern has repeated itself.

On Thursday Tsipras went to the St. Petersburg International Economic Forum - making him the only Western leader to do so.  

There he met Putin again.  

This time a gas deal of sorts was signed.  The details however are vague and it looks less generous than the deal the Russians offered in March and April.  It did not come with the offer of a $5 billion pre-payment that came with the offer made in April.

Meanwhile, at the same time as Tsipras was flying to St. Petersburg, Tsipras’s representative in Brussels was agreeing to an extension of EU sanctions against Russia (see EU Extends Sanctions Against Russia, Russia Insider, 18th June 2015 ). Tsipras himself tamely agreed to this at the European Council meeting on Monday.

At the same European Council meeting Tsipras capitulated in principle to all the demands the Europeans and the IMF made of him.  Reversing what he promised at the time of his election, he agreed to an extension of austerity in return for more bailout money. 

He has since found, in the classic scenario of someone being blackmailed, that his concessions were not enough, and have simply led to the blackmailer raising his demands.

The result is that not surprisingly Tsipras now looks like someone who has cut deals with the Russians he is not going to be able to honour (see A New Problem for Athens: How to ‘Unpivot’ From Russia After Capitulating to the EU, Russia Insider, 24th June 2015).  

The Russians had almost certainly figured that out for themselves before Tsipras went to St. Petersburg, which is why the deal they offered Tsipras in St. Petersburg was less generous than the one they offered him in April. 

This is poor diplomacy by any standard.  

If Tsipras’s policy is to play the Russians and the Europeans off against each other, then it is a bad policy.  

It has not panicked the Europeans into making concessions.  It has made them angry, causing them to increase their demands even more.

As for the Russians, they must be getting increasingly fed up with someone who repeatedly takes them to the Church door - and then at the last moment runs away.

If Tsipras was not prepared to see through his moves to Moscow, then he should not have made them.  

He would have been better off in that case going to Washington instead of Moscow. There is also much sympathy for Greece in Washington, and the US, unlike Russia, can put actual pressure on the IMF and EU to cut Greece some slack.

Instead, by making moves to Moscow that he repeatedly fails to see through, Tsipras has lost possible friends in Europe and the US, whilst putting Greece’s traditionally friendly relations with Russia in jeopardy.

Anyone who knows Russia knows the friendly feelings Russians have for Greece.  

If a Grexit happens  - which is very possible despite Tsipras’s latest concessions - Greece will need Russia’s help (see again Grexit Looks Inevitable. But Greece Will Need Moscow’s Help, Russia Insider, 27th April 2015).  

Hopefully what looks like a frankly manipulative policy will not have soured Russian attitudes by then.

 

 

 

 

 

 

via Marshall Horn, CFTC Playing Russia and Europe off Against Each Other Is Losing Greece Friends

Marshall Horn - Are European Companies Ignoring EU's Russia Sanctions?

Marshall Horn,

This article originally appeared at Forbes

---

It’s been nearly a year since sectoral sanctions were slapped on Russia for its involvement in helping create a frozen conflict in Eastern Ukraine. European and American companies banned financing of Russian energy firms, and banks. They banned any joint venture deals with Russian oil and gas companies that involved exploration and production, or the selling of technologies used in E&P. But if a string of memorandum of understandings signed during last week’s St. Petersburg International Forum puts anything in the spotlight this week it is this: some very powerful entities in the E.U. have had it with sanctions.

For example, Gazprom, Shell, E.ON and Austria’s OMV Group signed a memorandum last Thursday for a joint venture deal involving a new pipeline that will hopefully one day have the capacity to ship 55 billion cubic meters to European each year. That is bigger than the existing Nord Stream pipeline that takes Russian gas westward.

“Extra gas transmission facilities along the shortest route connecting gas fields in Russia’s north to European markets will provide for higher security and reliability of supplies under new contracts,” Gazprom CEO Alexey Miller said in a statement last week.

Gazprom shares have outperformed the Market Vectors Russia (RSX) exchange traded fund over the last five days, up 3.66% in dollar terms. The market is being reminded just how important this company is to keeping air conditions firing and baseboards heated throughout Europe.

On one hand, European energy companies are getting ready for the end of Western sanctions, which are  not expected to end until next January. On the other hand, lawyers at these firms are working overtime to make sure they’re successful at  loopholing the E.U.

Ben van Beurden, CEO of Shell, said Gazprom will remain an important part of Europe’s energy matrix for some time to come. “Natural gas will remain an integral part of the European energy mix, that’s why such new projects are important to satisfy the demand for energy carriers, especially with an account of the declining domestic gas production in Europe,” he said.

Shell and Gazprom also signed an Agreement of Strategic Cooperation last week. The document provides for developing the strategic partnership between Gazprom and Shell across all segments of the gas industry, from upstream to downstream, including a possible asset swap.

Absent from the St. Petersburg Forum were any announced deals with American oil and gas.  ExxonMobil has been cut out of its $700 million joint venture with Rosneft in the Kara Sea because of Washington’s sanctions against the company. Meanwhile, its European rivals are muscling in on one of the cheapest places in the world to drill for hydrocarbons.

The St. Petersburg International Forum, which concluded in the northwestern Russian city on June 20, is a testament to how Russia remains a one trick pony. The deal making is all Gazprom and Rosneft. It’s as if Russia’s private sector, including investor favorites like pay processing firm Qiwi and Russian supermarket player Magnit, does not exist.

Gazprom also inked a sanction breaking 300 million euro loan from UniCredit Austria, state media reported on Sunday.

Last July, the E.U. banned its companies to sign any new financing deals with Russia.In September, the E.U. placed even more restrictions on Russia’s access to E.U. capital markets. The sanctions state that individuals and corporations from the E.U. are banned from providing loans to five major Russian state-owned banks, including Sberbank and VTB Bank, and the three state owned energy companies, of which Gazprom tops the list.

The September sanctions, which went into effect on the 12th of that month, said that companies could no longer provide services related to the issuing of financial instruments, including broker relationships.

In addition, certain services necessary for deep water oil exploration and production, arctic oil exploration or production and shale oil projects in Russia were also banned.

via Marshall Horn, CFTC Are European Companies Ignoring EU's Russia Sanctions?

Marshall Horn - Legendary Investor Jim Rogers: 'Russia has Changed, Russia is Rising, I’m Investing' (Audio)

Marshall Horn,

June 19 (Sputnik) - Despite the Western efforts to discourage investors from participating in the St. Petersburg Economic Forum, the affair is in full swing. Jim Rogers, legendary investor and chairman of Beeland Interests, is in attendance, and he told Radio Sputnik that the Russian economy may be the most promising market for fellow investors.

“Well, it’s gonna change the world,” Rogers says when asked about the role of the BRICS Bank. “You know, the world has been dominated by IMF, World Bank, and other American-controlled institutions, and that’s never good, that only one players in charge of everything. So now we’re going to have competition…

“This will be very good for the world,” he adds.

Speaking with Radio Sputnik, Rogers notes how the United States economic actions are driving other together, in particular Russia and China. In the long-term, that new economic alliance can only hurt the US, as it continues to impose unfair sanctions.

“I suspect even Japan, eventually, will be closer and closer to Russia, just because they need to. That’s where the transportation will be, that’s where the natural resources are,” he says. “Go east, don’t go west.”

“Putin is trying to encourage people to invest in the stock market. The more of that, the better.”

Part of Russia’s strength comes from its natural resources, and not only in oil and natural gas, but also in even more essential resources, like water and timber.

“You do have a lot of water [in Russia], which also means you have the potential for agriculture, which means you have the potential for many many industries which are going to be important in the future.”

Rogers also expresses his support for the Trans-Pacific Partnership deal, saying he supports all open and free trade agreements.

“Any opening of trade and opening up and freeing of trade is good for everybody.”

He did, however, express misgivings about the way the Obama administration has gone about promoting the TPP deal.

“Unfortunately, for some reason, the Trans-Pacific Partnership, they won’t tell us what’s in it. America’s supposed to be this open and transparent democracy, and here they are passing a bill where they won’t even tell the people who are voting for it what’s in it.

“Which is peculiar and worrisome to me as an American citizen…” he adds.

When asked specifically about what investments to watch for in the future, Rogers offered sage advice.

“I was bearish on Russia for forty-seven years, and the last couple of years Russia has changed, so I’m changing,” he said.

“If you can invest in change, and you buy it at a good price, you’re probably going to make a lot of money.”

 

via Marshall Horn, CFTC Legendary Investor Jim Rogers: 'Russia has Changed, Russia is Rising, I’m Investing' (Audio)

Marshall Horn - St. Petersburg Economic Forum - "Russia's Davos" Opens

Marshall Horn,

This article originally appeared at Business New Europe

---

The St. Petersburg International Economic Forum (SPIEF), dubbed the “Davos of Russia”, kicked off on June 18 to a reasonably heavyweight turnout from the business world despite global tensions over Ukraine. With thousands of delegates from 144 countries, this is one of the biggest events yet, but the agenda holds only one question of real note: does the Russian leadership have a plan to fix the economy?

The short answer is “no”, boiling down to the fact that President Vladimir Putin is preoccupied with his geopolitical showdown with the West, which is largely manifested by events in Ukraine and the vast industrial power and wealth being pumped into building up Russia’s military might.

Economic reform and the people will have to wait until Putin is satisfied this programme is complete. Given that the current military strategy calls for 70% of military equipment to be modernised by 2018, it could be at least another three years before a new comprehensive military programme is launched.

The forum opened with a panel discussion that included Sberbank CEO German Gref, First Deputy Prime Minister Igor Shuvalov and former finance minister and outspoken pro-liberal economic reformer Alexei Kudrin. While the whole event has been themed, “Time to Act: Shared Paths to Stability and Growth”, action and plans are almost certainly going to be entirely missing from this year’s jamboree.

In a sign of what is very likely to come, the opening panel fell at the first fence, when the moderator asked: Are you satisfied with level of political and media competition in Russia?” “No,” Gref and Kudrin replied in unison.

There was no followup as there can be none to this statement. As US banker and Russia investment doyen Bernie Sucher pointed out in an early morning interview with Bloomberg, everything stops with the elite clustered around Putin, who control all economic, bureaucratic, administrative and commercial power in Russia with no checks and balances.

“Political risk trumps economic risk and it all comes down to what is going on in Putin’s head,” Sucher said. “No one can know that.”

Showing at the ball

The need for a large-scale economic reform programme is obvious to everyone and SPIEF has been used in the past to launch some big ideas. In 2008, then president and now prime minister Dmitry Medvedev used the forum to re-launch a large scale privatisation drive that spluttered and stalled six months later in the wake of the 2008 global meltdown. That year, SPIEF was full of businessmen and CEOs and buzzed with optimism as Russia still rode on the crest of a sustained economic boom. Meltdowns notwithstanding, things could only get better as the Kremlin was launching deep and badly needed reforms while it was still ahead of the game.

This year, many of the delegates have come because they have to. It is like attending a ball in Elizabethan England. You go not for the dancing, but because you position at court depends on being seen by the queen.

Still, the mood is lighter than last year’s SPIEF, which was marred by the US State Department’s bullying of US and even European CEOs to stay away. Privately, European bosses and diplomats were outraged after the US government threatened their US assets with trouble in an effort to work a boycott of Putin’s highest profile international forum.

It partially worked. Most CEOs cancelled, but almost all of those companies with significant business in Russia sent their deputies and the Kremlin was understanding. A few like German engineering company Siemens defied the pressure and sent their CEO any way – a stand for which the company will almost certainly be rewarded with lucrative contracts.

This year, the same CEOs will be expected to show up if only to show their face. The forum may be under a cloud and reform may lie in the future, but Russia remains a rich country and the state is pumping billions of dollars into areas like infrastructure to buoy the flagging economy, so there is still a lot of money to be made at SPIEF.

Going East

Russia’s shift to the East was on prominent display in the agenda and the European CEOs that do make the trip will feel less at home than in the past, as the Chinese delegation is large and obvious. The event will offer SCO (Shanghai Cooperation Organisation) and BRICS (Brazil, Russia, India, China, South Africa) business forums, a B20 regional consultation forum, while the Russia-China intergovernmental commission will be devoted to investment cooperation.

Momentum in the latter area has been building fast. In May last year, as Western outrage over Ukraine was transforming into economic retaliation against Russia, Moscow and Beijing signed a 30-year, $400bn gas supply contract to supply 38bn cubic metres of natural gas annually from 2018.

In September, Gazprom launched the construction of the Power of Siberia pipeline to China, due to be operational by 2019, and valued in total with its supporting liquefaction facilities at some $55bn. And during his May visit to Moscow, Chinese President Xi Jinping together with Putin oversaw the signing of 32 contracts involving high-speed rail and other infrastructure loans. More importantly than the cluster of deals worth some $6bn, the Chinese leader sat beside Putin at the May 9 WWII Victory Day parade boycotted by Western leaders, in a firm sign of their countries’ growing alliance.

A major coup at this year’s SPIEF could also come from the Greek delegation, which says it hopes to sign off on a new pipeline deal that extends the mooted Turkish Stream gas pipeline into an EU country. If, or when, this is inked, it will defy Brussels’ attempts to block Russia’s gas diplomacy.

So while a vision for Russia’s future will be missing at SPIEF, there are plenty of deals to be done. In this sense, Russia has gone backwards from the 2008 forum, when it was an emerging European powerhouse developing a rational economy for the long-term. Today, SPIEF has more of a bazaar mentality, where deals are done and money made in the here and now, as the future is uncertain and the nights are dark.

 

via Marshall Horn, CFTC St. Petersburg Economic Forum - "Russia's Davos" Opens

Marshall Horn - What Sanctions? Gazprom to Build Two New Gas Pipelines to Germany

Marshall Horn,

Russia’s oil and gas giant Gazprom is eager to increase deliveries to  Asia, but that hasn’t stopped it from inking new deals with Germany. Sputnik reports:

Russian energy giant Gazprom announced Thursday that it was intending to construct two a double pipeline from Russia to Germany through the Baltic Sea with E.ON, Shell and OMV.

“The memorandum demonstrates the intention of the sides to implement the project of construction of two strings of the pipeline from the coast of Russia through the Baltic Sea to the coast of Germany. The capacity of the new pipeline will be 55 billion cubic meters annually,” Gazprom said in a statement.

This is just another indicator that western oil majors are against cutting ties with Russia. And yet, Europe continues to cling to its self-destructive sanctions. 

via Marshall Horn, CFTC What Sanctions? Gazprom to Build Two New Gas Pipelines to Germany

Marshall Horn - Germany's Tengelmann to Open Budget Grocery Stores in Russia

Marshall Horn,

Tengelmann’s discount grocery chain Plus stores will operate in a limited-range discount format, offering 2,200 items each of which 70 percent will be food.

Russian newspaper Vedomosti reports the low-price retailer will open stores across the Moscow, Tula and Nizhny Novgorod regions, as well as in the cities of Kaluga, Tver and Murom. The plan is to expand the chain to 150 locations in Russia within the next seven years.

Russia’s budget grocers have seen a significant rise in profits. Main budget store, Magnit, saw first-quarter profits rise 36 percent year-on-year, while rival Lenta recorded a 37.7 percent jump in the same period.

Tengelmann first entered the Russian market in 2004 with its DIY-store OBI.

Tengelmann Group was founded in 1867, and belongs to the family of 82-year-old German businessman Erivan Houba, whose fortune is estimated at $3.1 billion in 2015, according to Forbes (577 place in the global ranking).

The turnover of the group which operates in 17 European countries amounted to 7.82 billion euros in 2013.

In addition to the OBI stores Tengelmann operates networks of KiK clothing stores, grocery supermarkets Kaiser’s, as well as a number of online retailers such as plus.de. At the end of 2013 Tengelmann’s had 4,151 store, 3,245 of them in Germany.

via Marshall Horn, CFTC Germany's Tengelmann to Open Budget Grocery Stores in Russia

Marshall Horn - Gazprom Ready to Supply Gas to China, Japan and India

Marshall Horn,

Vice Chairman of the Board of Gazprom, Alexander Medvedev, said that his company was eager to shift to markets in the Asia-Pacific region during a press conference on June 16. RBTH reports: 

Gazprom’s resource base is sufficient to meet Chinese gas demand, which is estimated to be around 100 billion cubic meters annually, Medvedev said at the press conference, according to Vedomosti. “That’s a conservative forecast,” he stressed.

Gazprom expects to sign the documents on the price of gas supplies to China via the Western Route, by which it plans to supply 30 billion cubic meters per year. Gazprom and CNPC signed an agreement on the supply via this route in May 2015. A year earlier, a 30-year contract was signed on gas supplies to China via the Eastern Line, through the Power of Siberia pipeline.

Medvedev said Asia’s third largest economy was also of great interest to the company. “We consider India as very promising,” Medvedev said. He added that Gazprom contracted volumes of LNG for deliveries to India, and the company sees great potential in this direction. 

Earlier this month, Russian Energy Minister Alexander Novak spoke about the possibility of implementing a project to build a pipeline to supply gas to India.

According to Medvedev, Gazprom expects Japan to be one of the target markets for liquefied natural gas (LNG) supplies, RIA Novosti reports. 

Gazprom is building today two plants in the Russian Far East, which geographically simplify the supply of LNG to the Asia-Pacific region (Vladivostok LNG and the third phase of the Sakhalin-2 plant), and considers the prospects for increasing exports to Japan.

Asia is certainly a promising market — and most likely far less litigious than Russia’s “European partners.” 

via Marshall Horn, CFTC Gazprom Ready to Supply Gas to China, Japan and India

Marshall Horn - Russia Calls Ukraine's Bluff on $3 Billion Loan

Marshall Horn,

It appears that Russia, by challenging Ukraine to make clear its intentions about the $3 billion debt it owes Russia, has successfully called Ukraine’s bluff.

Ukrainian finance minister Jaresko is now reported to have admitted Ukraine’s liability to pay this debt. Although Jaresko did not say that Ukraine now admits this debt is public debt as opposed to private debt and will not default on it, that is the logic of what she is saying.

Jaresko has admitted that Ukraine is trying to get Russia to agree to restructuring this debt.  Her precise words were:

”We acknowledge this loan of $3 billion as well as any other European obligations. I don’t hide our intentions to restructure this loan. I’m doing everything I can.”

The logic of these words is that Ukraine does not intend to default on this debt. There would be no sense in seeking an agreed restructuring if it did. By equating this debt with Ukraine’s European debt, Jaresko appears to be admitting that it is public debt, like the European debt.

While we cannot know for sure, the likelihood is that following the storm whipped up by Poroshenko’s comment that Russia’s loan to Ukraine was a “bribe”, the IMF in confidential discussions warned Ukraine that it would not support Ukraine if it defaulted on this loan (as to why the IMF might do this, see our discussion in “Poroshenko Calls Russia’s $3 Billion Loan A ‘Bribe’”, Russia Insider, 16th June 2015).

One thing that suggests that what caused Ukraine to back down was a warning from the IMF is the complete failure of the Western media to report Poroshenko’s comment or the Russian reaction to it.

If the IMF intended to support Ukraine’s decision to default on the Russian loan, then past experience suggests there would have been strategically placed leaks in the Western media saying as much, together with editorials in the Western press backing the IMF and Ukraine for the stand they were taking.  

That after all is what happened prior to Ukraine’s decision to threaten to default on payment of the debts it owes to its private creditors.  See for example this editorial in the Financial Times (“Ukraine’s creditors must share the country’s pain”), published just before the IMF’s backing for Ukraine’s plan for a debt moratorium was made public.

Though the Russians look like they have won this round, this is hardly the end of the story.  

Payment of the debt to Russia is going to be deeply unpopular and controversial with the Maidan movement. Some of Ukraine’s Western backers are also going to be unhappy. Some of them are already making clear their anger at the limited help (as they see it) that Ukraine is getting.

As the weeks and months go by, and as Ukraine’s economic crisis gets worse, it is a virtual certainty that this issue will be revisited.

 

 

 

 

 

 

 

 

via Marshall Horn, CFTC Russia Calls Ukraine's Bluff on $3 Billion Loan

Marshall Horn - Russia's Economics Minister Slams Central Bank

Marshall Horn,

I recently expressed my opinion that the Central Bank should be cutting interest rates more aggressively than it is (see “Russia’s Central Bank Should Now Cut Interest Rates Aggressively”, Russia Insider, 12th June 2015).

I am far from alone in that view.  Others who know much more about the Russian economy than me — Elliott Auckland, Jon Hellevig, Eric Kraus — are of the same view.

Their number has now been joined by the most powerful voice of all – Aleksey Ulyukaev, Russia’s Economics Minister.  He presumably knows the state of the Russian economy better than almost anyone.  He too thinks the Central Bank should be cutting interest rates more aggressively than it is.

Moreover he has made his opinion public in a statement reported by TASS. I attach the TASS report below.

The irony is that Ulyukaev was for many years the deputy head of the Central Bank where he was seen as a monetarist hardliner. He was widely expected to be appointed chair of the Central Bank in 2013 when Ignatiev, its previous chair, retired. However, in a surprise move Putin picked Nabiullina to chair the Central Bank and appointed Ulyukaev Economics Minister instead.

In the light of Ulyukaev’s recent comments some people must be wondering whether Putin made the right choice.  

Back in December 2014, as the ruble was crashing, it was Ulyukaev who stepped forward to calm the markets after Nabiullina gave a television interview whose fatalistic tone undoubtedly added to the panic.

In fairness to Nabiullina she has been busy over the last few days explaining the Central Bank’s policy.   

Some of the things she says make sense. Others rather less so.

She has been busy warning Russian companies against excessive borrowing in international financial markets.  

She has also made clear the Central Bank’s intention to tighten credit growth even more, which seems extraordinary given that the economy is suffering from a recession caused in large part by falling demand.

A possible explanation is that the Central Bank is using the recession to bear down on inflation even more.

The Central Bank for several years has made it known that its intention is to squeeze inflation down to a for Russia unprecedented annual level of 4%. It is beginning to look as if the Central Bank is using the recession to achieve that target.  

That may sound heartless but it is the sort of thing Central Bankers sometimes have to do. It is what Paul Volcker did when he chaired the U.S. Federal Reserve in the 1980s. 

Volcker’s tough interest rate policies (the so-called “Volcker Shock”) undoubtedly deepened the recession the U.S. suffered in the early 1980s. However they are now generally credited with squeezing inflation out of the U.S. economy, curing the US economy’s persistent high inflation problem of the 1970s. One of the reasons for the financial crisis in the U.S. in 2008 was because after Volcker’s resignation in 1987 the U.S. Federal Reserve, instead of protecting financial stability by raising interest rates periodically, threw caution to the winds and intervened continuously to prevent recessions by keeping interest rates excessively low, sacrificing financial stability for economic growth.

The Russian Central Bank’s single-minded focus on inflation is not anti-inflation fetishism.  

Russia needs to increase rates of long-term investment in its economy especially in high technology and manufacturing. High inflation works against such investment. It encourages instead short-term thinking because it causes the value of long-term financing and profits to diminish over time. Russia suffers too much from short-term thinking and lowering inflation is essential to cure this problem.

Having said this, it remains my view that the Central Bank is taking this too far and Ulyukaev (hardly a monetarist softie) clearly thinks the same.  

The Central Bank’s tough interest rate policy in the midst of a recession is not just bringing inflation down. It is actually causing deflation this summer.  

That is too much. A steadier policy that looks forward at the direction inflation is taking, rather than backwards at the direction it took at the start of the year, is what the situation calls for.

The difference between Nabiullina and Ulyukaev is that Nabiullina comes across as more of an academic economist than Ulyukaev.  

Central banking requires a grasp of economics, but it requires something more, which Ulyukaev has but which Nabiullina for the moment does not.

What that is was best summed up by the man who was arguably the twentieth century’s most famous — or notorious — central banker: Hjalmar Schacht, the man who headed the Reichsbank for most of the interwar period.

“…..the arithmetical nature of finance seems to inspire the mathematically-minded, and their efforts always tend in the same direction, towards the creation of an automatically functioning solution operating according to fixed mathematical rules.  But the currency problem is not a problem which can be solved according to fixed rules.  If it were, then perhaps a capable professor of mathematics would be the best financier after all.  Monetary policy is not an exact science but an art.  As such it is a sphere which will always remain mysterious to the man who is not capable of mastering that art, while appearing simplicity itself to the man who is.”

(Hjalmar Schacht, Account Settled, George Weidenfeld & Nicholson, London 1948)

On the evidence so far Ulyukaev has mastered this art, while Nabiullina has not yet. Successful central banking needs someone with their finger on the pulse of the country’s commercial life. For the moment Nabiullina doesn’t have it.

—————————————

From TASS

Russian minister stands for more aggressive key rate lowering

Economy June 15, 16:20 UTC+3 

The Russian Central Bank has lowered the key rate to 11.5% from 12.5%

YALTA, June 15. /TASS/. The decision of the Central Bank to lower the key rate is a moderate step in the right direction but moves should be more aggressive, Russian Minister of Economic Development Alexey Ulyukayev said on Monday.

“This is a step in the right direction but one should be more aggressive. 100 basis points are a very small step, a step in proper direction but very limited, I would say. Steps need to be more aggressive,” the minister said.

Ulyukayev did not identify any limits for optimal lowering of the key rate. “I will not indicate figures but I reiterate, it [key rate lowering] might be more aggressive,” the minister said.

The Board of Directors of the Bank of Russia decided today to lower the key rate to 11.5% from 12.5% as of June 16.

Key rate changes

The Russian Central Bank can raise the key rate to prevent a collapse of the market and to even-out exchange fluctuations. With a low rate, banks can borrow rubles from the Central Bank, buy currency and with the ruble depreciation cover costs of paying interest on the loan. With an higher rate such speculative operations become more risky. At the same time, if the rate grows, the loan cost for businesses and households also increases - there may be difficulties with the refinancing of already issued loans. This may lead to a slowdown in economic growth.

Until 2013, the refinancing rate was the main discount rate. It was first set in 1992 at 20% per annum, in 1993-1996 it reached the level of 210%, then fluctuated between 20%-50%, and after the peak in May 27 - June 4, 1998 (150%) decreased gradually. The minimum refinancing rate level was set on June 1, 2010 and remained in force until February 28, 2011 - 7.75%. The current refinancing rate of 8.25% was set on September 14, 2012, although by the beginning of the 2010’s it was used only as a tool for calculating fines, penalties, and a benchmark for the minimum amount of interest on ruble deposits of the population, and loans to banks were issued using other instruments, especially repo transactions.

 

 

via Marshall Horn, CFTC Russia's Economics Minister Slams Central Bank

Marshall Horn - Gazprom Voted Russia's Most Desirable Employer

Marshall Horn,

Gazprom has been voted as the most attractive employer in Russia by students and young professionals for the second year in succession in a survey conducted by the local research firm Universum.

More than 19,000 young people across Russia were quizzed in the survey, RBC reports. About 16,000 respondents were full-time students, with an additional 3,000 identifying themselves as young professionals. Participants were asked which company best embodied their dreams of a long, stable and successful career.

A majority of respondents named Gazprom, the world’s largest natural gas supplier, of which the Russian government currently holds a majority stake. However, there was a notable difference of opinion according to the region in which respondents lived – some 37.6 percent of those living in St. Petersburg chose Gazprom, compared to just 28.2 percent of Moscow-based respondents. Moreover, 41.8 percent of those based outside of the two major metropolises voted for the gas supplier.

Rosneft, the state-owned oil company, was voted as the second-most desirable employer, followed by Google in third place and BMW Group in fourth.

As far as employer attributes were concerned, respondents rated job stability as their biggest priority, followed by expectations of professional training and development, higher earnings potential, and the financial stability of the company.

Gazprom was previously voted Russia’s most desirable employer in 2014, the first year in which Universum conducted its study.

Image credit: antjeverena via Flickr.com

via Marshall Horn, CFTC Gazprom Voted Russia's Most Desirable Employer

Marshall Horn - Meet the Startups Hoping to Energize the Russian Tech Sector

Marshall Horn,

This article originally appeared at IT PRO

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Russia is planning to give a boost to tech start-ups in the country, with an accelerator program designed to provide funding and other assistance to select young companies in the science and IT sectors. 

The annual Startup Village event was held this week at the Skolkovo Innovation Centre, with some of Russia’s best tech start-ups on show.

Skolkovo focuses on five key areas, with associated start-ups grouped into ‘clusters’. Along with a standard IT cluster, there are also divisions for and nuclear power, as well as biomedical and aerospace technologies.

A notable lack of products were present at the event, especially when compared to other events are often awash with connected home devices. While there were a few smart lightbulbs on display, most Skolkovo startups are focussed on B2B.

What sectors were on show at Startup Village?

As the most prominent and readily-accessible field, Skolkovo’s IT cluster is naturally the most popular with over 100 companies tackling the IT challenges that face modern businesses, from information security to cloud integration.

Some of the less traditional sectors are also receiving attention, however. One of the aerospace startups, Dauria Satellite Technologies, recently received 60 million rubles in funding from the state-owned Vnesheconombank’s investment division (VEB).

The company produces small-scale satellites that can be deployed for imaging and optical remote sensing. It is hoped that this subsidiary of Russia’s first private space firm will help re-establish Russia as a space-race player alongside Virgin Galactic and Elon Musk’s SpaceX.

VEB chairman Andrei Morozov was complimentary of the Skolkovo ecosystem, saying the project’s assistance will allow DST “to enter one of the most promising and fastest-growing segments of the global commercial cosmonautics”.

Telecoms startups were also prominent, with companies offering fibre broadband technologies for ISPs. This is one of Skolkovo’s key areas, with last year’s event prompting a government commitment to bring fibre broadband to around 13,600 Russian towns.

was another very popular field, unsurprising given Russia’s historically strong industrial base. Many of the startups highlighted their industrial use-cases over other more consumer-friendly applications.

Drones, connected cars and 3D printing: interesting start-ups from the event

One particular example is Le Talo Robotics. This small company offers drones as a service, and while similar ventures might emphasise its applications for event photography or surveillance, Le Talo highlights its use for agriculture and construction.

Its drone service autonomously flies over a pre-defined area taking photos. From there, a analyses them based on the client’s needs, building things such as 3D terrain models and crop yield predictions.

Another company that operates somewhat outside the norm is Mobiliuz, a connected car company. But rather than leveraging the Internet of Things to provide an end-user benefit, its product is instead aimed at business vehicles.

While not radically different from its neighbours in the consumer space, Mobiliuz finds a niche by providing enhanced visibility across corporate fleets. Vehicles can be tracked, their condition assessed, and the method of driving analysed, allowing business leaders to identify the biggest risks and weak points in their operation.

3D printing is now a common and unremarkable sight at any tech convention. Skolkovo, on the other hand, has 3D printing with a difference. Far from 3D printing anything so pedestrian as plastic, metal or even fabric, the team at 3D Bioprinting Solutions organs.

In March of this year, the company unveiled its first transplant-ready 3D printed organ – a thyroid gland, later transplanted into a mouse. At the time of writing, the mouse is still alive. This is very encouraging news for those on the transplant list, as the group’s next project is scheduled to be a transplantable kidney.

The startups on show at Skolkovo highlight the diversity and talent present in the Russian tech sector. If the project meets its construction time and budget projections, these companies could provide the boost needed to put the country on a par with the giants of Silicon Valley and the East London Tech City.

 

via Marshall Horn, CFTC Meet the Startups Hoping to Energize the Russian Tech Sector

Marshall Horn - Kalashnikov Says Business is Booming, Despite U.S. Sanctions

Marshall Horn,

Kalashnikov Concern, the small arms manufacturer most famous for the AK-47 assault rifle, has said it’s benefited from Western sanctions by finding other markets to replace lost sales to the U.S.

Alexey Krivoruchko, Director General of Kalashnikov Concern, told RIA Novosti that although the company took an initial hit from the U.S.-backed sanctions, it’s since managed to turn things around and is now far better off than before.

“[Anti-Russia] sanctions have had an impact on us but we actually gained more good from it,” Krivoruchko said. “We have found other markets and are selling our products at better prices… The concern has managed to completely substitute sales previously targeted at the US market.”

Anti-Russian sanctions were imposed by Washington last year, affecting many of the country’s defense, banking and energy companies. The sanctions were introduced as a response to Russia’s perceived role in the Ukrainian armed conflict.

But while the U.S. was an important market for Kalashnikov, the concern has made up for the lost sales in record time by targeting markets in Africa, the Middle East, South-East Asia and Latin America, Krivoruchko said. Those markets now account for almost 80 percent of the company’s sales, he added.

Krivoruchko’s comments come just a day after the Kalashnikov Concern announced it was to buy controlling stakes in two Russian defense industry suppliers – Allmulticam, a supplier of tactical clothing and military equipment to the Russian special forces, and The Special Protection Equipment Center, a Nizhny Novgorad-based manufacturer of protective clothing that supplies the Federal Security Service and the Ministry of Emergency Situations, among other customers.

Following those acquisitions, the company said it was planning to launch a Kalashnikov-branded line of tactical clothing and special equipment it would target at the special forces of Russia and other CIS countries.

Kalashnikov Concern was created in 2013 following a merger between the Izhevsk Machinebuilding Plant and the Izhevsk Mechanical Plant. It henceforth became the largest small arms manufacturer in Russia.

The new company has exported arms to more than 27 countries since the merger, including the United States, the United Kingdom, Germany, Norway, Italy, Canada, Kazakhstan and Thailand. Prior to the sanctions, Kalashnikov sold around 200,000 guns to the U.S. each year, Krivoruchko said.

Source: RIA Novosti via Sputnik News

Image credit: brian.ch via Flickr.com

via Marshall Horn, CFTC Kalashnikov Says Business is Booming, Despite U.S. Sanctions