Welcome to our column, Russia Update, where we will be closely following day-to-day developments in Russia, including the Russian government’s foreign and domestic policies.
The previous issue is here, and see also our Russia This Week story The Kremlin’s Policy-Making on Ukraine is ‘A Mess’ and special features ‘Managed Spring’: How Moscow Parted Easily with the ‘Novorossiya’ Leaders, Putin ‘The Imperialist’ A Runner-Up For Time’s ‘Person of the Year’ and It’s Not Just Oil and Sanctions Killing Russia’s Economy, It’s Putin.
Russians headed to big stores last night to buy up electronics, appliances and food as the ruble continues to rapidly lose value.
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UPDATES BELOW
Gazeta.ru reports a source that Russian oligarch Vladimir Yevtushenkov has been freed from house arrest, although his company Sistema says they have no information about his release. But RIA Novosti has also reported that Yevtushenkov’s lawyer Vladimir Kozin says that his client has been removed from house arrest under a pledge to appear to investigators, although the criminal case is still pending.
Gazeta.ru says the release of the man, whose arrest started the ruble’s plunge and loss of confidence in Putin’s regime by oligarchs, is like the pardon of Mikhail Khodorkovsky, former Yukos owner.
But the difference is that Khodorkovsky was pardoned totally, and the case is still pending against Yevtushenkov.
(Note: The Interpreter is a project of the Institute for Modern Russia which is funded by Pavel Khodorkovsky, Mikhail Khodorkovsky’s son.)
The release of Yevtushenkov is seen as a bid by Putin on the eve of his year-end speech tomorrow, December 18, to signal more liberal treatment for the beleaguered business community, which has taken a beating with the more than 10-point drop in the ruble this week — and also a gesture to the West as it contemplates further sanctions.
Gazeta.ru spoke to Nikolai Petrov, a professor at the Higher School of Economics (translation by The Interpreter):
“Now the position of the Kremlin is very difficult, the sanctions of the West have begun to have a real and strong influence on the life of the country. And Russia’s image in the eyes of the West is not improving. The release of Yevtushenko could in fact enable this. It would be a demonstration that the declared liberal slogans are supported by real decisions.”
The price of Putin’s “liberal gestures” have also gone down, if Yevtushenkov isn’t completely freed, however. Perhaps that’s why the news of his release hasn’t moved the stock very far yet today:
Yevtushenkov was arrested in September for making a purchase of Bashkortostan’s oil company Bashneft back in 2009 which was considered legal at the time and encouraged. That’s why business people look to the case to see how serious Putin is about ending the arbitrariness of state and business relations, where even oligarchs close to the Kremlin who have stayed out of politics can find themselves stripped of their assets.
Yevtushenkov was believed by some to be involved in financing “Novorossiya,” the Russian-backed separatist movement in southeastern Ukraine, because he is in a company with Konstantin Malofeyev, an Orthodox activist who has admitted sponsoring separatist organizations in the Crimea.
Yevtushenkov’s supposed release from house arrest was declared once before, on September 18, then turned out to be premature; some said the false story was only to drive up the share price of Sistema. If so, the gambit didn’t work at the time, as the price only went up from 21.85 to 22.95 by the 19th of September. Today, after the fresh news of Yevtushenkov’s release, the stock is slightly up at 6.61, after taking a huge tumble in recent months.
RIA Novosti reported that Vladislav Grib, member of the Civic Chamber, said Yevtushenkov’s release “was not an accidental measure in the context of our economic upheavals”:
“I think that the market will react positively to this news. This is a good signal, that major businessmen will be treated properly, not as crooks and criminals. Perhaps, there is a violation of the law there, but the court will decide it,” Grib added, noting that it was important to preserve trust between the state and business which will affect the investment climate.
In another year-end surprise that is seen as possibly related to increase investor confidence, Russia’s Justice Ministry has announced that it will comply with the yesterday’s decision of the European Court of Human Rights (ECHR) in the Yukos case, Moscow Times reported.
Russia’s Justice Minister has announced that Moscow will
abide by a “baseless” ruling by the European Court of Human Rights
to pay damages to shareholders of defunct oil giant Yukos, despite
the Kremlin’s disagreement with the decision.“The decision has been made by the judges. We are forced
to accept it. We consider [the ruling] baseless, but there’s nothing
to be done about that,” Alexander Konovalov was cited by RIA Novosti as
saying Wednesday.
On Tuesday, the European court had rejected Russia’s appeal
against the ruling, ordering that Russian authorities must pay 1.86
billion euros in damages to the shareholders in accordance with
the decision first made in July.
The Permanent Court of Arbitration in The Hague also ruled last summer
that Russia must pay $50 billion to shareholders in compensation for the
lost assets, a separate ruling that Russia has appealed.
But there is some uncertainty about Moscow’s actual payment of the damages, as the compensation procedure is intricate. Under the terms of the original court decision, Russia must work out a compensation plan with the Committee of Ministers of the Council of Europe by June 16, 2015, using the list of Yukos shareholders at the time of the company’s liquidation, which would then not include Khodorkovsky, who had transferred his rights to Leonid Nezvlin. Deputy Russian Justice Minister Georgy Matyushkin said this could take years, as there are 50,000 shareholders.
There is also the political backdrop of the fact that Russia’s membership in the Parliamentary Assembly of the Council of Europe (PACE) was suspended in April 2014 over Putin’s forcible annexation of the Crimea, and Russia has threatened to withdraw from the Council of Europe itself. The ECHR adjudicates cases from Council of Europe members.
Justice Minister Konovalov told reporters that implementation of the decision is through “the good will of the member country of the Council of Europe.”
“Life will show to what degree this decision will be fulfilled by the RF,” he said.
Deputy Minister Matyushkin said on the eve of the rejected appeal:
“We consider it unprecedented that for the first time compensation is being awarded to persons who didn’t even take part in the trial — the shareholders of the company — and no demands were declared, but the court has awarded a compensation in their favor.”
He added that the ECHR had ignored the interests of creditors, which was unfair — an indication that he would not be motivated to fulfill the decision speedily.
Vadim Klyuvgant, the lawyer for the former Yukos directors, told Kommersant he thought it was possible Russia would not pay the compensation. He pointed out that Russia has already ignored the decisions of the EUCR to vacate the 17-billion ruble civil suit against Khodorkovsky and his business partner Platon Lebedev. “If this will become a systematic violation, Russia’s isolation will grow,” he said.
Last year before the Sochi Olympics, President Vladimir Putin pardoned Mikhail Khodorkovsky, former Yukos owner, who has been living in exile in Zurich since his release because he does not have assurances that he could travel to and from Russia freely.
He has been active in opposition to Putin abroad and through supporters in Russia. Recently a meeting in St. Petersburg in which he participated by Skype was interrupted when authorities turned off the electricity and turned on loud music to drown his speech even when a back-up generator was found. Today, a similar meeting has proceeded in Chelyabinsk without incident.
Khodorkovsky has given frequent interviews to Western and independent Russia media, expressing his criticism of Putin and his belief that the ruble disaster has been largely the fault of the decision to enable Putin’s crony Igor Sechin of Rosneft to benefit from 625 billion rubles’ worth of bond sales to Russian banks ($10.8 billion) which he, like other opposition figures believes would be converted into dollars through subsidiaries.
Note: The Interpreter is a project of the Institute for Modern Russia which is funded by Pavel Khodorkovsky, the son of Mikhail Khodorkovsky.
— Catherine A. Fitzpatrick
Anders Aslund writes that the only way out for Russia is to “act to get sanctions lifted or the economy will struggle.” Aslund advances the argument that Western sanctions passed after MH17 was shot down eventually caught up with Russia, leading to the fall of the ruble. Aslund also writes that as long as sanctions are in place it will be hard for Russia to ever recover from this economic crisis:
Without international funding, Russian companies — private or state-owned — are unable to refinance and have to repay all foreign debt due. The small scale of Russia’s foreign debt relative to its gross domestic product is of no relevance. Only the ratio of the foreign debt relative to liquid international reserves and the current account balance matters. That leaves Russia with liquid international reserves of $202bn against a total foreign indebtedness of $600bn at the end of 2014, after a net capital outflow of $125bn this year. In each of 2015 and 2016, Russia has net external debt payments equal to $100bn after subtracting its current account surplus. In other words Russia’s liquid reserves would be finished after two years.
Officially, the international reserves of the Central Bank of Russia (CBR) are $416bn, but not all of it is liquid. Gold reserves represent $45bn. The official reserves include the two sovereign wealth funds, the National Wealth Fund ($82bn) and the Reserve Fund ($89bn), which are held by the finance ministry and spoken for.
This is the role of sanctions — it’s going to be harder for Russia’s economy to recover from the hole it’s in.
But as we pointed out yesterday, sanctions are not the primary reason the Russian economy collapsed in the first place. The reality is that if oil prices did not fall, and if Putin had not spooked investors with many of his policies, sanctions may never have significantly impacted the Russian economy.
Investors buy and sell, invest and divest, for psychological reasons as much as anything else. The data does not support the argument that investors pulled their money out of Russia due to sanctions. War does have a psychological impact, however, and so did Putin placing Vladimir Yevtushenkov, head of Sistema holding company, under house arrest. Is it a coincidence, then, that the Kremlin announced today that Yevtushenkov has been released?
Now that they have pulled their money, however, sanctions are just one of the many reasons why investors will not be eager to put their money in Russia.
Despite Monday’s massive interest rate hike, from 10.5% to 17%, and despite Yevtushenkov’s release, the ruble has still not reached the level it started out at this week. On Monday morning the ruble was 58.12 to the US dollar, and right now it has stabilized at 60.41 per dollar. Clearly these two announcements have had a big impact, but they have not fixed the problem.
They also aren’t the only reasons the ruble has stabilized. Foreign markets have repeatedly halted trade in the ruble due to its instability, and Russian banks have periodically frozen loan-giving for “technical” reasons over the last 24 hours.
— James Miller
Yesterday December 16 was the first of the eight days of the Jewish holiday Hanukkah or the Festival of Lights, and President Vladimir Putin took the occasion today December 17 to meet with Rabbi Berl Lazar, the chief rabbi of Russia, and Aleksandr Borodoy, the president of the Russian Federation of Jewish Communities, kremlin.ru reported.
Putin wished his guests and the whole Jewish community a happy holiday and said he had met with them to discuss “current issues.”
Lazar said Hanukkah symbolized the triumph of believers over unbelievers, and recalled “the Hellenic kingdom” which “wanted to destroy everything important for us: that is religion, moral values” – a reference to the Maccabees, a rebel Jewish army that took control of Judea, at that time a province of the Seleucid empire, and thus reduced the influence of Hellenism. Lazar said to Putin (translation by The Interpreter):
“Today, unfortunately, in various countries we see how people try once again to destroy everything that is sacred for us: these are family values, religious values. And we are very grateful to you personally for what you are doing for religion, your respect to values, to the most important subjects of our religion.
I think that in fact the days of Hanukkah are for us a time when we can celebrate what is important for us, openly. That a menorah is lit in the central squares of Russia on Hanukkah is a real miracle.
An enormous thank you to you for everything that you are doing. We will try to do everything that depends on us to be useful.”
Putin responded:
“Our people are both multi-ethnic and mufti-confessional. And every part of our great people has its features, its own unique culture and its faith. But at the same time at the foundation always lays what unites us — that is what what we have just spoken about. This makes us both a monolithic people and united, capable of resolving many tasks which face us.”
A menorah was lit along with the word “Hanukkah” in Russia on Revolution Square last night in Moscow, several bloggers reported on Instagram.
Attacks on Jews in Russia have declined in recent years, with ultranationalists more focused on Caucasians and Central Asians, who have made up most of those injured or killed in hate crimes. But antisemitism has increased along with economic hardships, as it has historically.
An antisemitic tweet today from the Twitter account of opposition leader Alexey Navalny, often criticized for his tilt toward Russian nationalists, was a stark example, and got a swift response from Western journalists as well as Russians:
Translation: what kind of jokes?
Translation: @juliaioffe @navalny well on the whole, it’s dubious humor, yes.
Translation: First toast for the Holocaust, Alexey Anatolyevich?
Translation: @juliaioffe @MiriamElder @navalny @albants That’s the lowest.
Some people speculated that it was not Navalny personally making the comment, because he has his staff run this account — formally, he is barred from Internet use under the terms of his house arrest.
Translation: Yegor, re-log!
The operators of the account have ignored the criticism for hours, and the tweet remains — along with many from Russians who didn’t think there was anything wrong with it.
— Catherine A. Fitzpatrick
Meduza, a new independent Russian news site run in Latvia by Russian editors and journalists dismissed from Lenta.ru has a Vox-style explainer, “Who is Hit Hardest by the Devaluation“? The Interpreter has made a summary.
The ruble has lost 80% of its value since June 30, and started its sharpest downward plunge this week. While it rallied slightly today, the Central Bank forecasts a 11.5% rise in prices by April 2015. Real wages are reduced by 3.9%. Everyone will feel the crisis but some will feel it most of all:
1. People living below the poverty line.
According to Rosstat, the stage statistics agency, in the third quarter of 2014, 15.7 million Russians or 11% of the population received less than 8,086 rubles a month — which is now worth only $125 dollars. Half their wages go to food, and the other to purchases and services. Vice Premier Olga Golodets warned that there will be more poor people in Russia, especially young families with children.
2. People who need foreign medicines and medical treatment.
More than half of medicine in Russia is imported, and now will be higher in price; in late November prices had already risen 11.8% according to Rossat. Those who urgently need operations abroad are in trouble as charities will find it harder than ever to raise funds. Yekaterina Chistyakova, head of the Podari Zhizn’ (Give Life) fund said costs of imported medicine and bone marrow have risen steeply.
3. People who live abroad, but receive their salary or pension or rent in rubles.
If in January, 10,000 rubles would bring in 222 euros, today, it fetches only 130 euro.
4. People who pay loans in foreign currency, but got them in rubles.
Some people have taken on long-term loans in foreign currency because interest rates were less and risks higher. Now their debts have almost doubled and continue to grow.
5. People who are paid in rubles, but pay for apartments or offices in foreign currency.
Some landlords have tied the cost of their rents to the dollar or euro. With the weakening of the ruble, their tenants will have to pay more. According to calculations from roem.ru, Yandex has lost more than half a billion rubles on the rent of its Moscow office with the cost of the dollar going up 10 or more rubles.
6. People who earn money in Russia and send money to their families abroad.
Labor migrants who earn rubles and change their wages to the currency of their homelands are losing heavily now, especially those from Azerbaijan, Tajikistan and Turkmenistan. In two weeks, they’ve lost at least a quarter of their money.
We could add that a chief characteristic of the “fourth wave” of Russian emigration to the West (as distinct from the previous waves after the revolution, World War II, and in the 1970s-1990s) is that many people travel back and forth more frequently with more freedom of movement than in the Soviet era. Many often plan to return even if they live abroad for a time. They are earning money that they hope to rely on even if there is unemployment in Russia, and helping family members.
— Catherine A. Fitzpatrick
In a move that is seen as an attempt to boost confidence in business as the ruble fails to rally from its deep plunge, Russian authorities have freed Vladimir Yevtushenkov, head of Sistema, from house arrest, TASS reported.
“Today investigators added a decision to change the measures of restraint for Vladimir Yevtushenkov. He has made a pledge to appear to the investigator, said TASS, according to a source.
Yevtushenkov was arrested on charges of fraud and embezzlement in
November and Bashneft, an oil company he had bought at a reduced price
from Bashkortostan, was confiscated from him and nationalized.
TASS: Head of AFK Sistema Vladimir Yevtushenov released from house arrest.
Yevtushenko’s house arrest was a key factor which triggered the tumble of the ruble.
While TASS is believed to be authoritative when it comes to law-enforcement news, the story has not been confirmed by other sources.
— Catherine A. Fitzpatrick
Robbers in Moscow stole 700,000 rubles worth of iPhones today from three messengers who delivered the phones, LifeNews reported.
Some unidentified men in a rented apartment in Parusny Lane ordered a batch of the latest iPhone6 models and a few iPads, valued between $10,000 to $11,000 (depending on what time of day it was), then tied up the couriers and escaped in a car from the delivery service. Police are searching Moscow for the car.
The messengers were from the Video Shopper delivery service and are now being questioned by detectives.
The heist was a sign of increasing desperation as the rate of the ruble to the dollar and euro continues to fall, despite a slight rally today.
The crisis appears to be hitting even Russia’s propaganda industry.
LifeNews is rumored to be laying off as much as 50% of their staff, according to several sources of TJournal, but the story has not been confirmed.
TJournal said that the decision to make the dismissals was made about two weeks ago, but the names of those to be terminated were announced only today, December 16.
The lay-offs were said to be dictated by NewsMedia’s difficult financial position, which has even led to a cancellation of the New Year’s office party, sources say. The office of the general director of NewsMedia had no comment, according to TJournal.
Andrei Mikheyev, head of the creative department of LifeNews, said on his Facebook page on December 12 that he would have to work without days off in 2015, and had recently been very worried “that I will work either 3/3 or 7/7” days of the week.
The Twitter feed of @AramAshotich of Aram Gabrelyanov, CEO of News Media, which owns LifeNews, has been uncharacteristically quiet in the last few days,with nothing about the lay-offs.
His last few tweets say that Ikea was raising its prices so it was a great opportunity for domestic furniture maker, and a retweet saying people should buy Russian, as the ruble was weakening, and the government should “back off business, nullify taxes and let it breathe” (December 15). He also tweeted that hardy perennial of Russian propaganda to distract the masses, the organ theft story (December 16).
— Catherine A. Fitzpatrick
The popular LiveJournal blogger Ilya Varlamov has published photos he has gathered from Russian social media users and reports of a “Black Tuesday” that began yesterday December 16 and continues this morning December 17 — people rushing to buy electronics, appliances and food in stores that are staying open round-the-clock.
Varlamov says that Russia seems to be “turning into a world-wide shopping center” and that many of the buyers are foreigners — likely from nearby republics.
With their rubles losing value fast, people want to sink them into things like computers or fur coats or refrigerators that they can either re-sell or keep for long-term use.
Photo by kampiler: M.video store on Mira Avenue in Moscow at midnight
Photo by roman_dveri
Photo by sidnancy
Photo by alexandrosevich: “9 pm. The end of the line can’t be seen here. The line twists to the right and continues between the rows.”
Photo by olga_lifestyle “I can’t believe I spent 5 hours in line in Ikea.”
Photo by daniaradostina: “1:00 am. People are dumping their cash.”
Photo by smailik_n “At #mvideo, something incredible. If not dollars, then #electronics, #crisis.
Photo by tanya_roock: “Crisis you say? Line for fur coats.”
People have also been stocking up on staples like macaroni:
And some shelves with staples are emptying:
Photo by ashan: “#kashashortage #panic Either people have gone mad or they are hoarding it…”
These pictures can be somewhat misleading because they describe what is happening in a few big stores like Ikea or M.video, Russia’s largest consumer electronics chain that are raising their prices because they already do business worldwide in dollars or euros. The pictures are also mainly from Moscow and other big cities. The crowds portrayed are wealthier, middle- or upper-class Russians who can afford to make a spontaneous purchase of large appliances or electronics like computers or iPhones.
For a lot of Russians, the ruble crisis hasn’t hit them yet in this way because they don’t think in terms of dollar prices — although many Russians will keep dollars and euros from historical memory of their value or to make a special purchase. Russians in the provinces have already been dealing with rising prices for months.
We are not yet seeing lines for many blocks as we did in the 1990s or the Soviet era, for basic food and necessities.
Russians have weathered crises like this before and fall back to barter systems, kitchen gardens, and the black market to survive. As Gazeta.ru put it:
We’ll drink powdered milk, we’ll exchange ham for soy sausage, we’ll start calling not on smart phones made by Samsung or Apple but no-name Chinese phones. To be sure, we’ll keep riding in foreign-made cars — assembled in Russia.
Gazeta.ru talked to a number of experts and people in import businesses:
“Not a single business even worth a little in Russia can get by without imported raw materials, parts, or electronics,” sais Aleksandr Suslin, head of fiscal policy for the Economic Expert Group. Farmers agree with him.
“Approximately 40% of the milk in Russia is imported,” admits Andrei Danilenko, chairman of the board of Soyuzmoloko, a milk concern. After the weakening of the ruble, some deliverers of milk and milk products will go broke, Danilenko figures.
They can survive, if the importers turn to deliveries of cheaper forms of the product, not whole milk, but prepared from dry milk or only half, with the rest oils. According to Danilenko, consumers have begun to change the structure of their diet back in October: they take milk products that are cheaper.
Gazeta.ru reported earlier this week that since August, prices have gone up 5% or more on many products, with cheese going up 10.6% and eggs 16.4%. As we reported earlier, kasha is now 76.1% higher in cost than the beginning of the year.
Various regions of the country are starting to feel the ruble crunch. In Kazan, bread is 4.95-5.6% higher this week; vegetables 4.9%-6.8% more expensive, and eggs 13.2%. Fish is as much as 18.1% higher in Kirov Region, for example, and in Ingushetia, a ban has been placed on sale of potatoes bought wholesale from other regions.
— Catherine A. Fitzpatrick