While the Russian state media relished Vladimir Putin’s photo-ops at the opening of the Crimea bridge, other developments were less hyped but more consequential to the country this week. First, Dmitry Medvedev’s Cabinet was approved, with most positions filled with the same people. Second, the Duma steamrolled the passage of the counter-sanctions bill to target not just the U.S. but also Russian citizens. Third, the recent oil prices fluctuations revealed a weaker correlation with the ruble exchange rate.

 

Former finance minister Alexei Kudrin to head Russia's Audit Chamber. Photo: Vladimir Andreyev, URA.RU | TASS.

 

  1. The Kudrin Factor

The breakdown: this week Vladimir Putin confirmed the composition of the new government proposed by the new/old prime minister Dmitry Medvedev. The Cabinet will now have 22 ministers and ten deputy prime ministers. 

  • The overall government structure will remain the same, with a noticeable change to take place in the Ministry of Education and Science (which will be split into two—the Ministry of Education and the Ministry of Science and Higher Education) and the Ministry of Communications and Mass Media (which will be reformed as the Ministry of Digital Development, Communications and Mass Media).
  • Other key shiftsKonstantin Chuychenko, former presidential aide and head of the Control Directorate will replace Sergei Prikhodko as the chief of the Government Staff.
  • Tatyana Golikova, head of the Audit Chamber, is to become the Minister of Health, Education and Social Policy.
  • Dmitry Kozak is to remain Deputy Prime Minister, but now responsible for industry and energy. Vitaly Mutko, former Minister of Sports, Tourism and Youth Policy, is to become Vice Premier for Construction. [RBC]
  • Despite speculations of a new appointment within the government, Alexei Kudrin, whom Putin asked to create a six-year economic plan, is to head the Audit Chamber.

What it means:

  • Sergey Aleksashenko, Brookings Institution: There will be no breakthrough with this government, but a new stabilization. It will use limited resources to minimize risks.
    • The two strongest figures in the new Cabinet are Anton Siluanov (who is competent but relies dogmatically on fiscal discipline) and Tatiana Golikova (who proved her efficiency as head of the Audit Chamber and was brought in to lead crucial healthcare and pension reforms). [Republic]
  • Andrei Perstev, journalist: Putin prefers appointing close friends to high positions, experimenting with technocrats only on the regional level. [Carnegie.ru]
  • Alexander Baunov, Carnegie Moscow Center: Putin’s “May executive orders” are largely based on Kudrin’s six-year economic plan, while ignoring political reform. Why did Kudrin agree to a post outside the government? Because he likely believes that Russia’s experiment of building its own market, independent of the capitalist West, will either succeed or transform in the course of its implementation. [Carnegie.ru]
  • Philip Sterkin: There’s no room in Putin’s political system for Kudrin, despite being the former’s faithful ally.Though Kudrin has vied for political reform (without criticizing Putin, of course), Putin’s overwhelming electoral victory shows that the president has no reason to change his political system. [Vedomosti]
  • Kirill Rogov, political scientist: the “2024 problem” for Putin is still wide open. In essence, he has three scenarios: 1) “Central Asian” (waiving the constitutional restriction), 2) “Yeltsinist” (appointing a successor) and 3) “Chinese” (changing the Constitution to expand the Duma’s powers, which is to be controlled by one party). Given Medvedev’s reappointment, there might also be a “palliative” scenario”—a combination of the last two. [Carnegie.ru]

 

  1. Counter-Sanctions Strike Back

The story: On May 15, the State Duma approved the revised counter-sanctions bill that would terminate cooperation with U.S. nuclear, missile and aircraft companies and implement various trade embargos. But progress on a second sanctions-related bill has been postponed after garnering a public backlash.

  • The latter bill would criminalize Russians and Russian businesses that comply with the recently expanded Western sanctions, as well as “transferring information” that leads to the imposition of sanctions. Compliance could lead to incarceration (for up to four years) or fines (of about $1,000).
  • If implemented, this bill would require Russian companies to terminate or suspend cooperation with international companies affiliated with the sanctions, which threatens international banks and companies operating in Russia.
  • But it would also harm Russian business, which is why the Presidential Administration was first against the adoption of the bill. (However, Sberbank and VTB will not be punished for refusing to operate in Crimea.) [Kommersant]

Dig deeper:

  • The bill punishes Russians for pointing out Russia’s own pain points. This reaction to the Western sanctions and the new counter-sanctions bill signal a gradual renunciation of responsibility by the state, whose main motive is to distribute state aid to oligarchs, introduce new taxes and limit the right to information for Russian citizens. [Republic]
  • Sergei Glandin, Moscow State University: The bill responds to a specific situation, but is unlikely to work in practice. The deputies in the Duma are thinking in geopolitical terms, but they cannot match Western sanctions because of the restrictive size of Russia’s GDP. [RBC]
  • Elena Lukyanova, constitutional lawyerThe bill is absurd and unlawful. It is a way for the state to react to the U.S. sanctions. The bill itself is of poor quality, the definitions are vague and elastic, which means it can be applied to anyone. But it is likely to specifically target people like Vladimir Kara-Murza, who helped to pass the Magnitsky Act. [MBK media]
  • Vladimir Kara-Murza, politicianThe bill is a return to Stalin’s penal code. The drafters of this bill see the Western sanctions as “anti-Russian,” when they are actually against Putin and his government. Following their logic, the bill is “pro-Russian,” when it actually harms Russian citizens and business. [MBK media]

 

  1. Ruble vs. Oil

The gist: Oil prices are reaching a new high. On May 17, for the first time since November 2014, Brent crude was selling for $80 per barrel [RBC], with Bank of America predicting prices could spike to $100 per barrel in 2019. The increase has had a relatively small positive impact on the U.S. dollar/ruble exchange rate.

What’s the deal?

  • Oil prices are rising against the backdrop of two major developments: the U.S. withdrawal from the Iran nuclear deal and the imposing of new sanctions (although not expected earlier than November 5), and the rising oil demand as recently reported by OPEC.
  • Despite the dependence of the Russian currency on the global oil prices, the current spike had a limited effect due to interventions from the Finance Ministry, which has recently increased its purchases of foreign currencies. [Kommersant]

So what does it mean?

  • Sergei Khestanov, macroeconomic advisor to Otkritie Broker: the share of oil and gas sector revenue in the Russian federal budget is traditionally high—officially about 30 percent, but in reality, accounting for other factors, about 60 percent. This explains the high correlation between oil prices and the ruble exchange rate.  
  • However, this correlation has recently become much weaker for two key reasons—sanctions (primarily the 2018 round) and fiscal policy by the Central Bank and the Finance Ministry. The latter is the result of the Russian government’s goal to decrease the budget deficit and keep fulfilling state obligations for the sake of “social stability” in the face of stagnation and inflation. Additionally, the government sees the increase in foreign reserves as a financial cushion in case of a sudden destabilization. [Republic]
  • Alexander Losev, CEO at Sputnik Asset Management: The changing world order observed today marks the beginning of a new round in the fight among all leading powers for control over energy resources, which will cause an array of “cold” and “hot” conflicts. A war in the Middle East is likely to be the first such conflict.
  • For Russia, the main goal should be not just a military and political presence in a certain region, but prompt development of its own economy. Otherwise, its attempts to counter the Western powers are doomed to fail. [Russian Forbes]

 

Other stories that mattered this week (in Russian):

  • Crony Capitalism”: Boris Grozovsky dissects Putin’s economic policies since the early 2000s to explain a paradox: why in his first decade in power did these policies promise business growth, while in his second everything he does damages the economy? [New Times]
  • Leonid Volkov: “There is a burned field, and there it’s just us”: Alexei Navalny’s campaign manager talks about political success, moral responsibility and the conflicts within his team and beyond. [Novaya Gazeta]
  • How to respond to sanctions correctly and incorrectly”: Economist Yevsey Gurvichexplains why sanctions are viable despite their ineffectiveness. [Vedomosti]

 

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