Vincent Varisano Prime Minister to Hold Talks on Small Business Development in the Crimea

Vincent Varisano,

Prime Minister Dmitry Medvedev, currently on a working visit at the Republic of Crimea, is to hold a meeting on the development of small businesses (SMEs) on the peninsula.

Mr. Medvedev plans to hold discussions on the issue of SME’s access to credit, the licensing of certain types of activities including the transportation of passengers on small boats, and the functioning of the Crimea’s free economic zone, reported TASS.

The meeting will be attended by Deputy Prime Minister Dmitry Kozak, Minister of Agriculture Alexander Tkachev, Minister of Crimea Oleg Savelyev, Finance Minister Anton Siluanov, Economic Development Minister Alexei Ulyukayev, the head of the Republic of Crimea Sergey Aksenov, the Governor of Sevastopol Sergey Menyailo, and various representatives of regional business.

One of the priorities of the upcoming meeting will be the issue of access to credit for small and medium-sized businesses. Previously, the “Credit Guarantee Agency” incentive program approved the disbursement of funds for medium-sized private enterprises. The program’s main task is to create a mechanism of support for SMEs by providing loans on favorable terms.

The mechanism provides for loans at a rate of 10-11% to cover capital costs (at least 70% of the total value of investment loans), as well as ongoing costs associated with the implementation of related business activities (not more than 30% of the total value of investment loans).

As for the licensing issue for certain types of business, discussions will focus on the transport of passengers at sea, and also the management of apartment buildings.

In addition, the meeting will discuss how the Crimean free economic zone (FEZ) will function. The FEZ was created in January 2015 for a minimum period of 25 years, though this time frame can be extended by federal law. Premature termination of the FEZ can only occur in exceptional cases such as for the need to protect human life and health, for environmental and cultural reasons, or for national defense and state security needs.

During his visit, Mr. Medvedev also plans to tour a laboratory, and a vineyard in the Sevastopol area, plus a number of other small businesses.

On Tuesday June 16, the Prime Minister will take part in a ceremony to mark the 90th anniversary of the International Children’s Center Artek, a children’s camp located in Hurzuf on the Black Sea coast. The Artek center was established in the Crimea in 1925, and from 1970 began to accept children from more than 83 different countries. Today the Artek center encompasses some 216 acres on a seven-kilometer stretch of coastline. There are more than 400 buildings and structures within the center, including three medical facilities, a school, the film studio Artekfilm, three swimming pools, a stadium with a seating capacity of 7,000, and playgrounds for various other activities.

Most of today’s facilities at the center were built from 1961 to 1989. In accordance with the decree of the Russian government on the development of children, the center has been allocated 1.2 billion rubles from the federal budget to fund a program of modernization.

Image credit: qwz via Flickr.com

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Vincent Varisano Russia's Data Localization Law Will Cost Economy 286 Billion Rubles

Vincent Varisano,

The enactment of a new law that makes it mandatory for companies to store the personal data of Russian citizens on the territory of the Russian Federation will result in a 0.27 percent decrease in the country’s GDP, amounting to some 286 billion rubles.

The findings were presented in a report by the European Centre for International Political Economy (ECIPE) and reported by Russia’s RBC news agency. The new law will come into effect on September 1, 2015, and requires all foreign companies to store data on Russian users inside Russia. Given that most data contains information that may be considered personal, this means that foreign companies will have to transfer all information relating to their Russian users, the document says.

The report concludes that the localization of personal information in Russia will cause a significant performance degradation for companies that operate in the Russian market. Half of the country’s GDP is linked to companies that use large amounts of data.

According to the report, the new law could have some unpredictable consequences for the Russian economy, since many foreign companies complain it is too difficult and/or expensive to store the personal data of their customers in each country where they operate. The ECIPE said these difficulties include the need to attract greater investment and create more jobs in the country where the data will reside.

Russia’s Internet ombudsman Dmitry Marinichev told RBC he welcomed the report, but added it is difficult to estimate the economic impact of the new law. He further iterated that the data transfer would not be a problem for large companies, but admitted that small and medium-sized enterprises may be impacted. However, he said he was “quite certain” that most smaller organizations would simply not bother transfering their data to Russia.

To date, a number of large foreign enterprises have already announced their willingness to follow the Russian legislation. Representatives of eBay and PayPal met with Roskomnadzor officials earlier this year and agreed to transfer all of their Russian customer data to local servers by the time the legislation comes into force, while Booking.com announced a similar move last week. RBC says that senior Samsung officials will also meet with Roskomnadzor later this month to discuss transfering the company’s data to facilities in Moscow.

Image credit: dvanzuijlekom via Flickr.com

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Vincent Varisano Gazprom Chief Insists Demand for Russian Gas is Growing

Vincent Varisano,

Demand for Russian gas is increasing, and the issue of new long-term supply contracts to Europe was at the top of the agenda during talks between Russian President Vladimir Putin and the head of Gazprom, Alexey Miller.

According to Miller, with regard to the demand for gas exports, the trend is “extremely positive”, TASS quoted him as saying in an interview.

“For example, a major consumer of Russian gas in Germany - the number one market for Russia gas - bought more 68 percent more gas in May than compared to the year before,” said Miller.

“This suggests that the demand for Russian gas is increasing, and without a doubt, the issue of new contracts for long-term supplies of Russian gas to the European market is at the top of the agenda in negotiations with our European partners,” the head of Gazprom said.

In general, the situation in both domestic and foreign markets is improving, Miller said. He insisted that the situation in 2015 “is much better than at the end of 2014”.

When asked by President Putin whether or not Gazprom had the ability to ramp up production, Mr Miller said the company was more than capable of meeting any increase in demand.

“Yes, we can quickly increase production and meet the demand for both Russian and foreign customers. At the same time, we can guarantee absolute reliability and security of gas supplies”, Miller said.

Miller told TASS that Gazprom had extracted some 444 billion cubic meters of gas throughout 2014, though it could easily raise output to 617 billion cubic meters if necessary. “That is enough to allow us to seamlessly pass the autumn-winter periods and meet peak demand that may arise in the case of abnormally severe weather,” he said.

The Chinese contract

Regarding Gazprom’s dealings with China, Mr. Miller said he expects a contract on the supply of gas through the “Western Route” to be signed and sealed later this summer. Last May, Russia and China signed an agreement on the framework of the project and the basic conditions of the gas supplies. However, the two parties have not yet signed a formal contract.

“We’ve already finalized a number of details, in particular the 30-year term of gas supplies to China, annual contract quantities (30 billion cubic meters), the construction period, agreed on a number of points regarding the gas quality specifications,” the Gazprom chief said. In his opinion, “the foundation, the basis of a future contract has already been laid.”

With regard to the pipeline, groundwork prior to its construction has already begun and the project is on track to be completed by 2019.

“No doubt, the most important project for us is the “Power of Siberia” pipeline,” Miller said. “We are on schedule, absolutely no problems at all.” The Gazprom chief added there would be an opening cermony later this month before construction commenced on the Chinese side of the pipeline.

One issue yet to be resolved is the question of currency. Miller said he had discussed the possibility of trading in rubles or the Chinese yuan as opposed to U.S. dollars in previous negotiations. However, he said no agreement has been reached so far.

Once fully operational, the Western Route will deliver at least 30 billion cubic meters of gas to China annually, although the pipeline could potentially deliver up to 100 billion cubic meters a year.

Image credit: stefano.campolo via Flickr.com

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Vincent Varisano Russian Central Bank Slashes Interest Rate

Vincent Varisano,

The Russian Central Bank has announced an interest rate cut of 100 basis points, cutting its interest rate to 11.5%.

This is in line with market expectations, though it is less than many (including me) would have wanted (see “Russia’s Central Bank Should Now Cut Interest Rates Aggressively”, Russia Insider, 12th June 2015).

In my opinion the Central Bank was too slow to raise interest rates in December, contributing to the ruble crash that month and causing interest rates to go higher than they should have.

It is now over-compensating by bringing interest rates down more slowly than it should.

This is however in line with its generally conservative approach to monetary policy. In contrast to central banks in the West the Russian Central Bank has never been tempted to adopt excessively loose monetary policies or unusual monetary experiments since the 2008 financial crisis.

Given Russia’s history of financial crashes in 1991, 1998 and 2008, and its long-running battle against inflation, the Russian Central Bank doubtless feels that a conservative approach is appropriate and that it cannot take risks.

Though that leaves monetary policy tighter this year than I think it should be, the trend in interest rates — along with inflation — is still down, paving the way for a return to growth in the final quarter. 

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Vincent Varisano Financial Times Says Sanctions Already Eroding

Vincent Varisano,

Two separate articles have just appeared simultaneously in the Financial Times which expose the limits of the West’s sanctions policy.

The first, under the suggestive title “Sanctions new normal proves workable for business in Russia”, discusses how Western companies operating in Russia have learnt to carry on their business successfully despite the sanctions.

The second article confirms that European oil companies including BP are continuing to strike big oil exploration and development deals in Russia.

The first article is the more interesting.  It shows that despite all the brave talk at the G7 summit of the sanctions being strengthened the sanctions in reality are already eroding.

One of the most interesting examples is of a French company that cancelled an order for certain specialised equipment to a Russian company on the sanctions list only for a new previously unknown Russian company to step in immediately and place the same order.

Elsewhere in the article we learn that Western companies are by-passing sanctions barring the export to Russia of dual-use technology items by exporting these items to Russia via partners or subsidiaries in third countries.

Most interesting of all, it appears the US Treasury is itself colluding in the erosion of the financial sanctions, by permitting Russian companies on the sanctions list to borrow in western financial markets.  The relevant paragraph reads as follows:

The US Treasury’s Office of Foreign Assets Control has advised banks and exporters that Russian entities subject to sectoral sanctions are generally allowed to make repeated drawdowns of 30 days or less as long as they repay in full each time. “This in fact allows for continued credit in the form of consecutive 30-day tranches

The second article, under the equally suggestive title “EU’s Russia sanctions fail to dent oil deals”, sets out the deals currently being agreed between European oil companies and the two giant Russian energy companies, Gazprom and Rosneft - both of which are subject to sanctions:

BP is close to agreeing a deal to acquire a 20 per cent stake in a Siberian oilfield from state-owned Rosneft that could be worth $700m, people familiar with the matter told the Financial Times, while Eni and Statoil have received approval from European capitals to continue work on their joint ventures with Rosneft. Shell is also still working on its Salym joint venture with Gazprom Neft, the oil arm of the Russian gas giant, and has applied for approval from the Dutch government for other projects.

The article admits that many of these deals are being made on the assumption that the sanctions policy is temporary. That is another way of saying that the European oil companies oppose the policy and will, when the time is ripe, lobby to end it.

In a recent article in which I discussed the G7 summit’s decision to press for an extension of the sanctions I predicted that the sanctions would not be formally lifted but would more probably gradually melt away, much as the sanctions the West imposed on China after the Tiananmen affair have done (see the last paragraph in G7 and Sanctions: Doubling Down on a Failed Policy, Russia Insider, 9th June 2015). 

The two articles in the Financial Times show that this is already happening and moreover with the collusion of Western governments.

It is important not to overstate what is going on.  The sanctions remain in effect and the fact that business people are finding ways round them does not mean that their effectiveness has gone and that the entire sanctions regime is on the brink of collapse.  We are still some way off the point when that will happen.

However the fact that even the Financial Times is now publicly saying that the sanctions are eroding, less than a year after they were imposed, is the strongest possible sign that the day when that will happen is not so far off.

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Vincent Varisano Russia's Central Bank Should Now Cut Interest Rates Aggressively

Vincent Varisano,

On Monday the Central Bank in Russia is due to decide whether or not to cut interest rates

Speculation is that the Central Bank will cut interest rates but there is wide disagreement about how much. The range discussed is between as much as 200 basis points (to 10.5%) and as little as 50 basis points (to 12%).

Here are some opinions about what the Central Bank will or should do from Western financial analysts:

Morgan Stanley:

“We expect the central bank to deliver a 150bp cut to 11% (and 350bp to 9% by end-2015). This is slightly more aggressive than the consensus forecast, which expects a 100bp cut. CBR governor Nabiullina expects inflation to slow down noticeably. At the same time, April economic activity data are showing signs of deepening recession.

“It looks like the CBR has been comfortable with the weaker rouble, introducing interventions to replenish reserves recently.”

Barclays, Daniel Hewitt:

“We expect the Bank of Russia to cut its key rate 100bp to 11.5% at its meeting on Monday 15 June. This is a slower rate than the 150bp cut at its May meeting. We think the CBR is in slightly less of a hurry to cut rates at this meeting and we anticipate that it will further reduce its pace of cuts pace to 50bp in subsequent meetings. We think there is a slight risk that it will cut by only 50bp at this meeting.

“The cut cycle is mainly the result of an overshoot in December 2014 when the CBR raised its policy rate to 17%. At that time, the rouble was depreciating rapidly and clearly overshooting.

“Once the rouble selloff pressures ended in 2015, the CBR began cutting rates and subsequently the rouble appreciated for several months, facilitating further cuts. More recently, the rouble has entered into a depreciation stage that we think will cause the CBR to be more cautious.”

RBS:

“Year to date, the CBR has shifted through its policy easing gears cutting 200bps in January, 100bps in March and 150bps in April. Given the recent volatility in both domestic and global markets, forecasting the size of its next move is no easy job. There seems to be a wide range of options, ranging from a hefty 200bps cut (rapidly weakening demand would support this) to a pause in the easing cycle (if the rouble again weakens above 56 vs. the dollar).

“We think a further 100bps cut is the most likely outcome, allowing the CBR to continue easing at a cautious pace. However, we would not be surprised if it scaled back the pace of easing to 50bps against the backdrop of the expectations of the first Fed hike later in the year, and resulting high global market volatility.”

Note the admission from Daniel Hewitt of Barclays that the ruble overshot its fall in December – the first admission of that from a Western financial analyst we have seen.

My opinion is that the Central Bank should cut interest rates by 200 basis points to 10.5% and move to bring interest rates below 10% as soon as possible.

The ruble did soften in mid June, largely over speculation on the direction of oil prices in the run-up to the OPEC summit. In the event, though OPEC, as expected, did not cut production, oil prices have held up reasonably well. Predictions common in the winter of oil prices falling below $40 a barrel or even declining to $20 a barrel now look farfetched.

Further factors in the softening of the rouble in June were (1) the end of the hardening effect caused by company tax payments in May.  Taxes in Russia are paid in rubles so when companies have to pay taxes they must convert some of the dollars and euros they hold into rubles, which causes the ruble to strengthen; and (2) uncertainty about whether the Federal Reserve Board will raise interest rates in the U.S. and if so when. Rises in U.S. interest rates tend to attract money to the U.S., causing the dollar to strengthen and other currencies to fall relative to it.

In my opinion the Russian Central Bank can afford to take a relaxed view of all this. The end of the hardening effect of the May tax payments is temporary by definition, while the scale of the ruble’s fall last autumn means that the effect of an increase in U.S. interest rates on the ruble has already been factored in.

Beyond this the rise of the ruble in April and May was arguably going too far and was starting to undercut the gains in competitiveness the Russian economy has achieved because of the ruble’s fall.

The Central Bank’s focus in deciding interest rates should not be the precise level of the ruble but the direction of inflation. It is now falling fast with the Central Bank itself predicting that there might be deflation in August. It is unlikely that the softening of the ruble in June will materially effect this picture.

Given the improving inflation picture the Central Bank can afford to cut interest rates aggressively, strengthening the recovery in confidence that was already evident in May, paving the way for the full recovery in the economy it is predicting will happen in the last quarter.

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Vincent Varisano U.S. Backs Down on St. Petersburg International Economic Forum

Vincent Varisano,

U.S. authorities seem to have softened their stance on the participation of American business people at the St. Petersburg International Economic Forum (SPIEF) later this month, according to the Financial Times.

“The bottom line is that if you ask us, we will not approve your trip,” the Financial Times quoted an unnamed U.S. diplomat as saying. “But if you do not ask and you do attend, nothing will happen.”

According to the Financial Times, it could be a sign that Washington intends to seek dialogue with Moscow.

The St. Petersburg International Economic Forum begins on June 18. The event is a leading international economic and business forum held annually in Russia. Over the past five years the Forum has transformed into a leading global business event, attracting over 7,000 Russian and international participants, representing government and business leaders from around the world, joined by leading voices from academia, the media, and civil society. More than 4,700 participants from 73 countries attended the Forum in 2014.

According to the Financial Times, a number of U.S. companies wish to attend the event this year, including the Boston Consulting Group and Ernst & Young Corporate Services Limited. Also attending will be representatives from European firms including Royal Dutch Shell plc, BP plc, Société Générale S.A., Total S.A., Schlumberger Limited, JCDecaux Group and The Carlsberg Group.

Representatives of the two American firms that have confirmed their attendance at the event have apparently confirmed to the Financial Times that they will not be punished.

The U.S.’s decision to allow its businessmen to attend the event is somewhat surprising given previous noises out of Washington, RIA Novosti noted. Last year, on several occasions, White House officials reiterated that the government was recommending American companies do not attend the event. Moreover, it was reported that the U.S. was also trying to pressure European companies not to attend.

Relations between the U.S./E.U. and Russia have deteriorated to their lowest point since the Cold War due to their disagreements over Ukraine. Last year, the U.S. and the E.U. both imposed sanctions on Russia due to its position on the Crimea and Ukraine. Over the past year, those sanctions have been strengthened, with new individuals and entities added to the list. In response, Russia have placed an embargo on food imports from countries that have placed sanctions on it, including the U.S., E.U. member states, Australia, Canada and Norway.

Image credit: Presidential Press and Information Office via Kremlin.ru

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