Russia in the 21st Century [Superthread]

[Edward Campbell]

Part 3 of 3

‘My Friends Get Everything’

To grasp how Bank Rossiya’s holdings extend around the globe - and how island tax havens and other tools of global finance may serve to obscure their true breadth - one place to visit is 13A Karpathou Street in Nicosia. This is the registered address of Med Media Network Limited, a company listed in a corporate flow chart connecting Bank Rossiya to a company called Video International.

In a peculiarity of the Russian marketplace, broadcasters do not sell advertising time directly. They act through middlemen like Video International, which buy airtime wholesale, then sell to those who wish to advertise.

Med Media is a major shareholder, holding a 20 percent stake. Except that Med Media’s address in Cyprus is hardly a corporate headquarters at all. It is a simple concrete home with a large ficus shading a small garden. The owner, Agathi Zinonos, has never heard of Med Media or any of the other companies registered there.

She regularly receives legal documents in the mail from Russia, Bulgaria, Romania and other countries.

“Every day, there is a whole packet coming,” she said, noting that the documents are addressed to her son, who recently moved out. “Whatever comes, I take to him, because it is a lot of companies.”

Attempting to unwind Video International’s convoluted corporate structure requires going back to 2011. That is when Bank Rossiya and a couple of partners purchased the company, according to an interview given by Video International’s chief executive in 2013.

Video International had controlled 70 percent of the advertising-placement market. But in the months before the sale, the government hastily enacted a new antimonopoly law, prohibiting national TV networks from using advertising shops that controlled more than 35 percent of the market. Video International would have to abandon many of its contracts.

But what looked like a debacle for Video International turned out to be a boon for Bank Rossiya. The new law depressed the company’s value - and thus its purchase price. And while Video International gave up many contracts, its new owners managed to profit from the “lost” business: Many of the networks simply brought the placement business in house - while continuing to pay Video International consulting and software-licensing fees.

Reflecting on the way the government’s antimonopoly office has looked the other way, Aleksashenko, the former deputy finance minister, invoked the saying “my friends get everything, while my enemies get the law.”

Among those taking part in the new arrangement was CTC Media, a company with several TV channels that was partially owned by a subsidiary of Bank Rossiya. CTC continues to pay Video International around $80 million a year - but as a consultant.

Yet while the arrangement allowed Video International to maneuver around Russian law, it may actually have placed CTC at risk of violating U.S. sanctions. For though CTC is a Russian broadcaster, its headquarters are in Delaware and it is traded on the Nasdaq. The sanctions prohibit American-headquartered companies like CTC from doing business with entities that are majority-owned by sanctioned companies like Bank Rossiya.

But whether Bank Rossiya retains a majority stake in Video International is impossible to ascertain. Records show that, on paper at least, its shares, held by a subsidiary, are down to 15 percent. Nearly all the rest of the shareholders are buried behind fronts like Med Media of Karpathou Street.

Cyprus is one of the world’s busiest offshore financial-service centers, with one of Europe’s lowest corporate tax rates and laws that enable foreigners to incorporate companies within days. Nearly 270,000 companies are registered there, and many are shells created to shelter income while obscuring the real owners.

Zinonos’ son, Zinon, who is listed as a Med Media director, is an administrator at Scordis, Papapetrou & Co., a Nicosia law firm that not only represents Med Media but helped create it. A partner there, Makis Chrysomilas, said his firm typically uses its own address or those of employees when establishing residence for shell companies.

“We are lawyers for 4,000 or 5,000 corporations,” he said.

Coming up with names for them can be a challenge, he explained. So he has taken names from a book listing the thoroughbred horses auctioned in the United States. He also has named companies after streets in London and other European cities.

Cypriot laws enable the true owners of shell companies to remain secret. Of the eight corporations with shares in Video International, at least five, with a combined stake of 69 percent, are incorporated in Cyprus: Med Media, Namiral Trading Limited, Devar Investments Limited, Reibruk Limited and Attalion Investments Limited. Delving into their ownership produces yet more corporate shells, headquartered in Panama and the British Virgin Islands, equally opaque jurisdictions.

Cari N. Stinebower, who advises clients on sanctions compliance at the law firm of Crowell & Moring, called the web of shell companies a “red flag.”

“The way the law works,” she said, “it’s incumbent on CTC to understand the beneficial ownership of the company they are doing business with” to ensure that there is not “some sanctioned entity at the end of the chain.”

A Video International spokesman would not reveal who was behind the shell companies, and said only that they had not been sanctioned.

“Why is the shareholder structure specifically like that?” he said. “Because the shareholders decided so.”

A CTC official declined to say what if any due diligence the company had done to determine if it was violating the sanctions. But he said CTC was working with the Treasury Department to ensure that it complied with the law.

‘A Medium-Sized Bank’

The day after Obama blacklisted Bank Rossiya, Putin met with his national security council. Told that a total of 20 people had also been sanctioned - including three security council members, Putin compatriots from St. Petersburg - the president turned sarcastic.

“We should distance ourselves from them,” he said, deadpan. “They compromise us.”

As for Bank Rossiya, he went on: “As far as I recall, this is a medium-sized bank. Personally, I did not have an account there, but I will definitely open one on Monday.”

He later directed the presidential administration to begin depositing his official salary - roughly $7,500 a month - into a Bank Rossiya account.

Kovalchuk later gave a rare TV interview with Dmitri K. Kiselyov, a prominent news anchor and ardent defender of Putin’s Russia. The president’s public gesture, Kovalchuk said, had prompted a flood of new customers, including an old, impoverished woman who wanted to deposit her life savings. For a bank with billions in assets, “this old woman means nothing financially, but the fact is that is worth more than any financial investments,” he said. “There is a Putin factor, and it is unconditional. The fact is that people intuitively feel which side of the barricades business stands on.”

Putin’s efforts to protect the bank were not just symbolic. He ordered the Central Bank to provide assistance if needed. State-owned energy companies transferred accounts to Bank Rossiya, and the governors of St. Petersburg and the surrounding Leningrad region told state institutions in their jurisdictions to do the same, according to Russian news reports. Additionally, in the lower house of parliament, the main party loyal to Putin provided the margin needed to rescind the law effectively limiting Video International to just 35 percent of the advertising-placement market.

And on April 10, the Market Council stepped in. The council, which regulates Russia’s $35 billion wholesale electricity market, is a nonprofit organization with 22 members representing government ministries as well as major producers and suppliers of electricity. One of the council’s members is an executive at Inter RAO UES, a private enterprise spun off from the former state electricity monopoly. Its chief executive is Kovalchuk’s son, Boris; its board chairman is Sechin, the president of the state-owned oil giant Rosneft and one of Putin’s closest advisers.

The council met at its office in Moscow’s World Trade Center. A spokeswoman declined to discuss the vote, except to say that a quorum attended, explaining that she did not want to contribute to an “anti-Russian” article. The decision to shift the business to Bank Rossiya, she said, was one of several routine actions taken during a regular meeting that day. In remarks published on the council’s website in May, its director, Maksim S. Bystrov, said Bank Rossiya had “brought us” a proposal with lower commissions than those charged by the previous bank, Alfa. But he declined to provide details, and Alfa Bank declined to comment.

As the United States and Europe continue to ratchet up the economic pressure, it is an open question how long the government can continue to prop up the growing number of institutions faced with sanctions. Russia’s economy had been struggling even before the annexation of Crimea. The European Bank for Reconstruction and Development recently predicted that, with the added impact of Western sanctions and Putin’s retaliatory embargo on Western goods, the economy could contract next year.

Other companies are lining up behind Bank Rossiya, hoping for bailouts. The government recently announced that it would pump $6.6 billion into two state-controlled banks whose access to foreign capital has been cut. And Sechin’s Rosneft has requested a $42 billion loan.

For his part, Putin has denounced the sanctions as unfairly targeting people with no influence over Russia’s policies on Crimea or Ukraine.

“Yes, these people are my friends and I’m proud to have such friends,” he said at an economic forum in St. Petersburg in May. “They are true patriots and their business is oriented towards Russia. Have these sanctions done damage to them? Yes, they have. If I’m being honest, they have. But they are seasoned entrepreneurs and brought all their money back to Russia, so don’t worry about them too much.”

End of Part 3 of 3

 

[Kirkhill]

Vlad needs money he doesn't have.

A reality check from his Finance Minister.

Finance Minister Says Russia's Grand Rearmament Plans are Unaffordable

(Source: Moscow Times; published Oct 07, 2014)

Russian Finance Minister Anton Siluanov says that Russia will not be able to afford its current level of military spending in the long term, as an economic slowdown amid declining oil prices and Western sanctions forces Moscow to drastically alter the expected funding environment.

Russia is currently pursuing a 20 trillion ruble ($500 billion) rearmament program through 2020, and announced last month that another defense program with comparable spending is in the works for 2016-25.

The 2016-25 rearmament plans, however, may not enjoy the same lavish level of funding as the ongoing program. "We want to reconsider the amount of resources devoted in the course of this new program, so that they are more realistic," Siluanov was quoted by RIA Novosti as saying Tuesday.

Siluanov explained that the current proposals for the program were formulated when Russia's economic outlook was brighter.

Russia's economy has suffered from various punitive measures enacted by Western governments over Moscow's annexation of Crimea in March and its alleged role in Ukraine's crisis. U.S. and EU sanctions, besides targeting specific Russian companies and individuals, have also made many foreign bankers skittish over investing in any companies based in Russia.

Meanwhile, the declining value of the ruble, rising inflation, and falling oil prices have forced the Economic Development Ministry to halve their growth forecast for next year to 1 percent.

"Right now we simply cannot afford to carry out [the 2016-25 armament plan] and will work out a means to determine what can be funded by the budget with the defense minister," Siluanov said at a Federation Council hearing.

Various statements from defense officials in recent months have painted an increasingly ambitious picture for the Russian government's military modernization goals. Most recently, Deputy Prime Minister Dmitry Rogozin said that Russia's nuclear forces — the backbone of Russian military power — would be completely outfitted with new missile systems by 2020.

Despite the strain on the federal budget, some analysts have said that high spending on defense helps boost the economy. A report released by Moscow's Higher School of Economics in late September showed that military and related defense expenditures, such as "the production of ships, airplanes, spacecraft and other means of transportation," was one of the primary driving forces of a surge in industrial production.

However, the report cautioned that these developments mask stagnation across most other areas of manufacturing.

link

Does this have any impact on Vlad? Does he expect to be in power in 2025? Possibly-probably.

Does this slow his plans or speed them up?  I think it is likely to encourage him to be more radical.

Does he revert to a command economy? A real possiblity.  He can argue that Russia is under siege and they need to revert to the old ways.
That could possibly fly with the pensioners but will it fly with the oligarchs?

The other solution found in history has been to go invading other countries to capture their gold.  But as Vlad is discovering in Donbas, even/especially a slow motion war wrecks the targeted economy.  And since the value of a country is its GDP and the ability of the GDP to support borrowing an invaded country is a degraded asset that is more likely to be a liability. 

If he can't find enough money to buy an army can he find enough money to buy an empire?  The Brits couldn't and they were the most recent and most successful attempt.

 

[McG]

As we launch into a new round of whack-a-mole in the desert,  some wonder if we are committing ourselves to the lesser dangerous threat.

Putin is more dangerous than ISIL, harder to understand and a much bigger threat to world order
Ottawa Citizen
Opinion - Eric Morse
16 Sep 2014

Judging by reactions at the NATO summit in Wales last week and an emergency gathering of 40 countries in Paris this Monday, European nations view the Islamic Caliphate (ISIS/ISIL/IS) as a greater threat than Vladimir Putin's revanchist ambitions in Eastern Europe. That may be understandable, but it's extremely disturbing.

The Caliphate is certainly a threat. It has occupied/created a black hole in the Middle East. Despite Obama's overheated promise to "destroy" it, that's going to take a lot more doing than airstrikes and some special forces (including Canadian advisers) on the ground can muster.

The upgraded light cavalry tactics that the Caliphate has been using until recently can be beaten back fairly easily with enough intelligence and air power.

Actually retaking territory held by it will be far harder, because that will involve cities with civilian populations.

Retaking a city like Mosul will be a horror. Judging by their performance up to now, Caliphate forces will fight to the death in their strongholds and may try to leave nothing living behind them. Western publics will not like to see their air (or ground) forces used to inflict the kind of devastation that will be involved.

Local disaffection in the face of what terror the Caliphate is accustomed to inflict will not be very helpful. Reducing the Caliphate's power - if it can be done - will be a job for regional states. But it's one thing to show up at a conference (to which Iran was not even invited), another to co-operate effectively in a ground war.

Still, the Caliphate is not an existential threat to world order on the scale that Russia is. We know what the Caliphate wants. We are a great deal less sure about Putin's objectives, only that he is willing to overthrow just about anything to achieve them. Europe's leaders pay more attention to the Caliphate partly because they have no real idea what to do about him. Meanwhile, as of Monday ominous "reports" are coming out of Moscow about "oppression" of the Russian minority in Estonia.

The Caliphate disrupts existing borders and states, some of which may never be revived.

The continued existence of a "Syrian state" supported by Iran and Russia is one of the larger problems in getting a working coalition going against it.

Obama talks of arming the "moderate rebels," but he isn't going to find any. Yet it is perfectly clear (as it was in fighting the Taliban) that as long as there is even a fictitious border to hide behind, an insurgency cannot be fought.

Putin may be happily dismantling sovereignties in Europe, but he is quite firm in supporting that of Bashar Assad in the Middle East, if only because it gives him yet another chance to play spoiler and humiliate Obama and NATO.

He has already declared that any U.S. airstrikes in Syria will be taken as an act of aggression against Syria unless the U.S. allies with Assad - who, Russia reminds us, is allied with Russia and Iran.

At this point, Iran is probably less interested in supporting Assad than it is in fighting the Caliphate, and it also doesn't love Russia. It should have been at the Paris conference, but will likely turn a blind eye to whatever the U.S. feels it has to do in Syria.

Given Russia's Muslim, restive southern flank, Putin should have far greater reason to fear the Caliphate as an imminent threat than the West does. But apparently, he is viewing it as a strategic distraction for the West which he can leverage to achieve his objectives closer to home.

Eric Morse is a former Canadian diplomat who is cochair of the Security Studies Committee of the Royal Canadian Military Institute in Toronto.

 

[Edward Campbell]

In this report, which is reproduced under the Fair Dealing provisions of the Copyright Act from Reuters, that news agency says that China will "bail out" Russia ... that may not be unallayed good news for the Russians:

http://www.reuters.com/article/2014/10/13/us-russia-china-banks-idUSKCN0I20WG20141013

Russia signs deals with China to help weather sanctions

BY VLADIMIR SOLDATKIN
MOSCOW

Mon Oct 13, 2014

(Reuters) - Russia and China signed energy, trade and finance agreements on Monday proclaimed by Moscow as proof that a policy turn to Asia is bearing fruit and will help it to weather Western sanctions over the Ukraine crisis.

The 38 deals, signed on a visit to Moscow by Premier Li Keqiang, allow for deeper cooperation on energy and a currency swap worth 150 billion yuan ($25 billion) intended partly to reduce the sway of the U.S. dollar.

They are among the first clear successes of the eastward shift, ordered by President Vladimir Putin to avoid isolation over the sanctions, since the vast nations reached a $400 billion, 30-year natural gas supply agreement in May.

"I consider it important that, in spite of the difficult situation, we are opening up new possibilities," Russian Prime Minister Dmitry Medvedev said after the signing ceremony.

In a sign that mistrust has still not been completely buried, Li was less effusive, even when holding out the prospect of a deal in 2015 to build a second pipeline along what is called the Western route to ferry Russian gas to China.

"Cooperation over natural gas between Russia and China goes back quite a long way," Li said. But he added: "Further discussion is needed between companies."

For Russia, the agreements offer some relief, with the European Union and the United States showing no signs of lifting sanctions imposed over Russia's annexation of the Crimea peninsula and its backing of separatists in east Ukraine.

The sanctions target the finance, energy and defense sectors, restricting some state firms' and banks' ability to raise financing in Western markets.

The currency swap strengthens China's plans to promote international usage of the yuan CNY= following pledges by Moscow and Beijing to settle more bilateral trade in roubles and yuan. Spurred by their often fraught relations with the United States, Russia and China have long advocated reducing the role of the dollar in international commerce.

China, which has 32 percent of its $4 trillion foreign exchange reserves invested in U.S. government debt, would like to cap its vulnerabilities to any fluctuations in the dollar in the near term. Over the longer term, it wants to increase the yuan's clout and turn it into a global reserve currency.

EASTWARD SHIFT IN OIL SUPPLIES

Medvedev said trade turnover between Russia and China had grown by more than 100 percent over the past six years from $40 billion to $90 billion.

"We are very close partners," he said, although trade with the combined 28 nations of the EU is greater than with China.

Under the new agreements, cooperation will deepen between state oil producer Rosneft (ROSN.MM) and China National Petroleum Corporation, including in liquefied natural gas (LNG) projects and possibly LNG supplies to China.

Banks VTB (VTBR.MM), VEB and Russian Agriculture Bank - like Rosneft hit by sanctions - signed framework agreements with China Exim bank to open credit lines.

Mobile phone operator MegaFon and China Development Bank agreed to arrange financing of $500 million.

Li, who arrived from Germany and will go on to Italy for a summit of European and Asian leaders later this week, is expected to hold talks with Putin on Tuesday.

Another sign that Russian ties with Beijing are improving was the release of energy ministry data showing crude oil supplies to China rose in January-September by almost 45 percent year-on-year. Shipments from the Baltic Sea port of Primorsk toward Europe fell almost 20 percent.

"Much greater changes can be seen in the geographical distribution of these shrinking exports, with flows to the West clearly losing out against prioritized links to the Far East, a trend that could easily be accelerated further in the current political climate," JBC Energy consultancy said in a note.

Beijing has made clear it wants to increase business with Russia and cash in on the crisis in relations between Moscow and the West, now at their worst level since the Cold War.

But time will be needed to end mistrust in relations between countries that almost went to war in a border dispute in the 1960s, when Russia was part of the Communist Soviet Union.

Beijing is interested in investing in infrastructure, energy and commodities in Russia, but Moscow long had reservations about allowing Chinese investment in strategic industries.

China may also have worries about investing in an economy that is stuttering, with the rouble hit by sanctions and a drop in the price of oil, Russia's most important export commodity.

(Additional reporting by Katya Golubkova, Denis Pinchuk, Lidia Kelly and Alexander Winning in Moscow and by Gui Qing Koh in Beijing; Writing by Timothy Heritage; editing by David Stamp)

Russia is used to being in the driver's seat on energy deals and it has, in the past, cut supplies to Europe when it suited it ... it will do that once, and only once with Beijing. The Russian Bear is big, but shambling and weak in the Far East; the Chinese Dragon is bigger, strong, nimble and single minded.

 

[Kirkhill]

As in: if Canada reneges on an oil deal with China then China needs a boat to come and get the oil while if Russia reneges on the same deal it becomes "a mere matter of marching"?

 

[observor 69]

Reproduced under the Fair Dealing provisions of the Copyright Act from the New York Times;

Is it just my imagination or is there a global oil war underway pitting the United States and Saudi Arabia on one side against Russia and Iran on the other? One can’t say for sure whether the American-Saudi oil alliance is deliberate or a coincidence of interests, but, if it is explicit, then clearly we’re trying to do to President Vladimir Putin of Russia and Iran’s supreme leader, Ayatollah Ali Khamenei, exactly what the Americans and Saudis did to the last leaders of the Soviet Union: pump them to death — bankrupt them by bringing down the price of oil to levels below what both Moscow and Tehran need to finance their budgets.


http://www.nytimes.com/2014/10/15/opinion/thomas-friedman-a-pump-war.html?hp&action=click&pgtype=Homepage&module=c-column-top-span-region&region=c-column-top-span-region&WT.nav=c-column-top-span-region&_r=0

Great article. Is that why my gas at the pumps is so low.

 

[Edward Campbell]

Reproduced under the Fair Dealing provisions of the Copyright Act from the New York Times;

Is it just my imagination or is there a global oil war underway pitting the United States and Saudi Arabia on one side against Russia and Iran on the other? One can’t say for sure whether the American-Saudi oil alliance is deliberate or a coincidence of interests, but, if it is explicit, then clearly we’re trying to do to President Vladimir Putin of Russia and Iran’s supreme leader, Ayatollah Ali Khamenei, exactly what the Americans and Saudis did to the last leaders of the Soviet Union: pump them to death — bankrupt them by bringing down the price of oil to levels below what both Moscow and Tehran need to finance their budgets.


http://www.nytimes.com/2014/10/15/opinion/thomas-friedman-a-pump-war.html?hp&action=click&pgtype=Homepage&module=c-column-top-span-region&region=c-column-top-span-region&WT.nav=c-column-top-span-region&_r=0

Great article. Is that why my gas at the pumps is so low.

Thomas Friedman often talks plain, simple sense ... he sees the connections in disparate things. In this case I'm not sure that the perceived strategy is the result of planning or just good fortune. But, in a fully serviced market, the normal reaction of suppliers is to cut production until equilibrium is achieved, but the Saudis are maintaining and even increasing production, despite falling crashing oil prices so maybe there is a plan, after all.

Canada is, of course, being hurt by this process, but ...

Anything that hurts Russia is a good thing.

 

[CougarKing]

Some experts predict Putin's next aggressive move could be in the Baltic states...

Yahoo Finance/Business Insider

Putin's Next Move Could Make Eastern Europe Explode
Business Insider
By Brett LoGiurato – 13 hours ago

(...SNIPPED)

Three of the four panelists —  New Yorker editor David Remnick, journalist and author Masha Gessen, Russian political activist and former grand chessmaster Garry Kasparov, and former Treasury Department official Roger Altman — agreed Putin could soon try to stretch his influence into the Baltic states of  Estonia, Latvia, and Lithuania.

"They already are under pressure," Gessen, the author of a  2012 unauthorized biography  of Putin, said of the Baltics. "That's very much where he's doing his nuclear saber-rattling, and that's where he's planning to call NATO's bluff."

Unlike Ukraine, all three Baltic states are NATO members.  NATO's Article 5 requires all members of the alliance come to the defense of any member that is attacked or targeted.

Putin last month made casual mention of his country's nuclear arsenal, around the same time NATO accused Russian forces of an "incursion" in Ukraine. Many analysts have speculated Putin's next move could come in the Baltic states, something that would be a clear challenge to NATO.

Amid the bluster from Putin — who also reportedly said in a private conversation he could invade Poland, Romania, and the Baltic states if he really wanted to — NATO states made a point of countering with strong rhetoric of their own.

(...SNIPPED)

 

[Edward Campbell]

Here, reproduced under the Fair Dealing provisions of the Copyright Act from the Financial Times, is some informed opinion about the impact of low oil prices on Russia:

http://www.ft.com/intl/cms/s/0/988c386a-552a-11e4-89e8-00144feab7de.html#axzz3Gd5GxIZi

Russia can withstand lower oil prices but not for very long
The government will have either to cut spending or raise taxes, writes Sergei Guriev

Sergei Guriev

October 19, 2014

Russia does not face an immediate threat from the sharp fall in oil prices over recent months. While the economy is heavily dependent on oil, the country’s accumulated reserves and the floating rouble will mitigate the shock, and Russia should be able to withstand levels of $80 to $90 a barrel for about two years. But in the longer term, persistently low prices – reinforced by the pressure imposed by western sanctions – could pose an existential challenge to Vladimir Putin’s regime.

The 25 per cent drop in the oil price over the past three months did come as a shock to the Russian government. The latest draft of the 2015-17 budget assumes a price of $100 a barrel (and average annual gross domestic product growth of 2.6 per cent). Even before the oil price shift, the government planned to deplete its Reserve Fund from 5 per cent of GDP to 3 per cent by the end of 2017, in order to pay for the deficit foreseen in each of the next three years. Much of Russia’s other sovereign fund, the National Welfare Fund, has already been committed to infrastructure and providing support to the banks and companies sanctioned by the west.

Oil and gas account for about half of government revenues in Russia; a price drop from $100 to $80 a barrel would cause a shortfall of about 2 per cent of GDP. Normally this would not be a great problem, as Russia would borrow in international markets, and Russian state-owned banks and companies would refinance their external debt.

In the light of the west’s sanctions, the situation is a lot more uncomfortable. But this does not mean Russia will run out of cash before the end of 2017. The central bank has committed to the floating exchange rate, so the lower oil price will result in a weaker rouble, helping both the economy and the government’s own budget to weather the shock. Russian government spending is denominated in roubles; if depreciation is strong enough, the budget may be balanced even if the oil price is at $80.

This will not solve Mr Putin’s real problem: stagnating, and most likely declining, real incomes. Capital outflows will continue to result in lower investment, and therefore lower growth, in coming years. The government’s 2 per cent growth forecast for 2015 already looks optimistic. Even before the oil price dropped, the consensus was for 1 per cent; the forecast by market analysts and international organisations is now about 0.5 per cent. And while the central bank will attempt to keep a lid on inflation, a weaker rouble will undermine the purchasing power of Russian consumers in real terms. Russia is a net importer of food and consumer goods; while there will be substantial import substitution, overall prices can be expected to increase.

Mr Putin’s government has never faced budget constraints as tough. Even during the 2008-09 financial crisis, the challenge was more manageable. The budget then was based on an oil price of $40 to $50 a barrel, while Russia had much larger Reserve and National Welfare Funds, worth 20 per cent of GDP. Not surprisingly, the state spent its way out of the crisis.

This time, the government will have to choose whether to cut spending, and thus publicly recognise its inability to deliver on Mr Putin’s 2012 electoral promises, or raise taxes – which would further hit investment and GDP growth. Either way, if oil prices remain in the $80 to $90 range, the government will have to placate an electorate suffering lower living standards. The experience of recent months gives us a good idea of how Mr Putin will respond: by convincing the public that they are in a besieged fortress and must rally around the flag whatever the cost. This will require raising propaganda and political repression to yet another level – and may involve even more unpredictable foreign policy choices.

The writer, a former rector of the New Economic School in Moscow, is professor of economics at Sciences Po in Paris

See, also: this in the Grand Strategy for a Divided America thread.

 

[Altair]

Thomas Friedman often talks plain, simple sense ... he sees the connections in disparate things. In this case I'm not sure that the perceived strategy is the result of planning or just good fortune. But, in a fully serviced market, the normal reaction of suppliers is to cut production until equilibrium is achieved, but the Saudis are maintaining and even increasing production, despite falling crashing oil prices so maybe there is a plan, after all.

Canada is, of course, being hurt by this process, but ...

Anything that hurts Russia is a good thing.

As a major oil exporter, I'm not sure Canadians should be chearing this.

 

[a_majoor]

As a major oil exporter, I'm not sure Canadians should be chearing this.

Saudi Arabia is aiming its oil weapon at all potential competitors, Russia and Iran since they are the most dangerous in the short term, but American Shale Oil and Canadian Oil Sands since we are a long term threat to them. OTOH, while Russia and Iran are heavily dependant on oil revenues to survive, Canada and the US have larger and more diversified economies which can weather this more easily. It may not be "good" and it will certainly hurt some sectors of the economy, but not as drastically and probably not as long.

Don't forget that the Saudi Kingdom is also dependent on it's oil revenues to maintain domestic stability by essentially "paying off" its masses of unemployed young people, radicals and various "princes". Low oil prices will make it harder to do this and maintain their external adventures as well.

 

[Kirkhill]

Also, it has been pointed out (by whom I can't remember  :-[ ) that because our dollar is considered a petro-dollar by the market when the price of oil drops the value of our dollar drops.  When we sell into the US we get paid in US dollars.

So with the dollars at par and oil at $100 per barrel then we get $100 CAD for our barrel.  But when the barrel drops to $80 per barrel then the Canadian dollar drops to $0.80 USD / CAD.  Consequently we get $80 USD per barrel which in turn buys $100 CAD.

Our internal economy keeps humming along as before.  Our exports are more competitively priced in all market sectors.  Our imports are more expensive which opens up new domestic market opportunities.

It ain't all doom and gloom.

We are all going to die..... just not today  >

 

[Altair]

Also, it has been pointed out (by whom I can't remember  :-[ ) that because our dollar is considered a petro-dollar by the market when the price of oil drops the value of our dollar drops.  When we sell into the US we get paid in US dollars.

So with the dollars at par and oil at $100 per barrel then we get $100 CAD for our barrel.  But when the barrel drops to $80 per barrel then the Canadian dollar drops to $0.80 USD / CAD.  Consequently we get $80 USD per barrel which in turn buys $100 CAD.

So as long as both drop in tandem the economy wont take so much of a hit?

Well, that works. I remember reading somewhere that for every dollar the price of oil drops the Alberta goverment loses out on 250 million dollars in royalties.

 

[CougarKing]

Speaking of the oil/energy barons:

Reuters

Sanctions bind Russia's energy elite to Putin
BY ELIZABETH PIPER AND TIMOTHY HERITAGE
MOSCOW Wed Oct 29, 2014 2:10am EDT

(...SNIPPED)

The relationship between the two state run firms has long been strained. Most recently Gazprom, successor to the Soviet gas ministry, has been worried by Rosneft's ambition to increase its gas output having become Russia's biggest oil producer, borne out in an intensifying price war for domestic gas consumers.

The mere suggestion that such rivals could cooperate to reduce the impact of sanctions is one of the strongest signals yet of how, after seven months, Western measures are having the opposite effect to the one intended.

Far from dividing those closest to President Vladimir Putin, they have forced the main players in the energy sector to rally behind him. This circle has by necessity become more focused, Western and Russian businessmen, diplomats and politicians said.

(...SNIPPED)

 

[a_majoor]

Well, surprise!:

http://arstechnica.com/security/2014/10/research-links-massive-cyber-spying-ring-to-russia/

Research links massive cyber spying ring to Russia
Foregoing crime, the group targets European, US governments in 7-year spree.

by Robert Lemos - Oct 28 2014, 8:00pm EDT

A professional espionage group has targeted a variety of Eastern European governments and security organizations with attacks aimed at stealing political and state secrets, security firm FireEye stated in a report released on Tuesday.

The group, dubbed APT28 by the company, has targeted high-level officials in Eastern European countries such as Georgia, and security organizations such as the North Atlantic Treaty Organization (NATO). While Russian and Ukrainian cybercriminal groups are known to conduct massive campaigns aimed at stealing money and financial information, APT28 focuses solely on political information and state secrets, according to FireEye.

The report argues that the group is closely tied to Russia and likely part of Moscow’s intelligence apparatus.

“This group, unlike the China-based threat actors we track, does not appear to conduct widespread intellectual property theft for economic gain,” FireEye stated in the report. “Nor have we observed the group steal and profit from financial account information.”

While linking specific actions on the Internet to people in the real world is difficult, FireEye used the report to make the case that a variety of espionage operations can be laid on the collective keyboards of APT28 and that the group is tightly linked to Russia.

This is not the first time the company has taken aim at nation-state cyber espionage. In 2013, Mandiant, now a subsidiary of FireEye, released a report on a Chinese group, APT1, which the company argued was part of the People's Liberation Army and which Mandiant researchers tied to attacks on more than 100 companies. The report has shaped much of the debate over online espionage between countries.

Attributing APT28’s efforts to Russia seems straightforward. More than half of the language setting in the compiled executable are Russian. Also, 96 percent of the malware samples analyzed by FireEye were compiled between Monday and Friday, from 8 am to 6 pm in the GMT+4 time zone, which matches Moscow. Such regularity suggests that the programmers were working during the regular work week in Moscow, the report argues.

The group behind the tools used by APT28 has frequently updated the software and focused on making the resulting binaries difficult for defenders to reverse engineer, according to the report. The technical components include a downloader, dubbed “SOURFACE” by FireEye, a program to give hackers remote access (“EVILTOSS”), and a group of modules to enhance functionality of the espionage software (“CHOPSTICK”). The modular nature of the program, similar to other espionage threats such as Flame and Duqu, allowing attackers to pick and choose the final functionality of any particular attack, as well as tailor the eventual malware to the target's environment.

The code’s sophistication and complexity suggests a professional development group, the company said.

“The coding practices evident in the group’s malware suggest both a high level of skill and an interest in complicating reverse engineering efforts,” the report stated.

For the most part, the analysis focuses on the group’s interests and how those interests are closely tied with the Russian government.

 

[a_majoor]

Russia's agressive attitude creates more blowback. While the military dimension will largely be notional (for now), the political dimension is quite large, both in optics and in harnessing more partners to a common task:

http://www.the-american-interest.com/blog/2014/10/29/nervous-swedes-eye-nato-membership/

Nervous Swedes Eye NATO Membership

Russia’s repeated little “visits” with subs and planes might finally be enough for famously neutral Sweden. For the first time, an opinion poll has found that the majority of respondents want to join the NATO alliance. According to the Financial Times:

More Swedes are in favour of joining Nato than are against for the first time in the Nordic country’s history, according to a poll just a week after a hunt for a suspected submarine in the waters outside Stockholm.

In a new poll by Novus for TV4 conducted over the weekend, 37 per cent of Swedes said they supported joining Nato while 36 per cent were against. Five months ago a poll showed 28 per cent in favour and 56 per cent against.

Sweden’s new center-left government came into office having made anti-NATO pledges, but the conversation seems to have shifted significantly since then. Not only have the Russians been (supposedly) poking around in Swedish waters; they’ve also entered Swedish airspace. As a similar incident over Estonia makes clear, the Russians are testing how much leeway they have in the Baltic after an easy win in Ukraine—but it appears they are finally getting some pushback.

If Sweden did start to explore NATO membership, the move would have regional repercussions:

The three Baltic states, Estonia, Latvia and Lithuania, are particularly keen for Sweden and Finland to sign up to Nato, believing that their own security is weakened without them in the club. This is especially so for Sweden, whose island of Gotland lies in the middle of the Baltic sea and is seen as a tempting and vulnerable target should Russia wish to attack the Baltics.

Sweden and Finland have an informal understanding that they would only join Nato together. The issue of Nato membership is likely to feature heavily in Finland’s parliamentary elections due in the spring with Alex Stubb, the new prime minister, a big proponent of joining the military alliance.

Potentially, then, Russian aggression might be uniting the whole Baltic against Russia, which was not the case during the Cold War. Sweden was officially neutral during that conflict (though it often cooperated with NATO), while at times Finland was practically a ward of the Soviets.

But even if Sweden did join NATO, its military weakness would leave it vulnerable. Meanwhile, NATO’s European members are historically weak, even on paper, and even more so in the field. And above all, American posturing and retreat over the Ukraine crisis has called into question the alliance’s ability to deter Putin from further aggression in the Baltics.

It’s good to see some of the Europeans start taking this threat seriously. But Putin is bringing hard-power realities back to the fore, and should not be underestimated.

and some more on why Sweden is changing its attitudes:

http://www.washingtonpost.com/world/europe/nato-says-russian-jets-bombers-circle-europe-in-unusual-incidents/2014/10/29/6098d964-5f97-11e4-827b-2d813561bdfd_story.html

NATO says Russian jets, bombers circle Europe in unusual incidents
By Michael Birnbaum October 29 at 4:24 PM 

MOSCOW — NATO said Wednesday that it had intercepted a large number of Russian aircraft flying close to European airspace in the past two days, in an “unusual” series of incidents that brought Russian bombers as far afield as Portugal.

The aircraft — at least 19 in all — offered reminders of Russian air power at a time of the worst relations between the West and Russia since the Cold War. Russian military aircraft have significantly increased their activity in Europe since the conflict in Ukraine began earlier this year, with NATO scrambling to intercept aircraft more than 100 times in 2014. But a NATO official said the scale of the latest incidents was the most provocative this year.

Over the Atlantic Ocean and the North, Black and Baltic seas, Russian bombers, fighter jets and tanker aircraft were detected flying in international airspace, NATO said. There were no incursions into national airspace, a violation of sovereignty that would have significantly amplified the seriousness of the four incidents, three of which took place on Wednesday.

“We’re raising it as an unusual level of activity,” said Lt. Col. Jay Janzen, a spokesman for NATO’s military command in Mons, Belgium. “The flights we’ve seen in the last 24 hours, the size of those flights and some of the flight plans are definitely unusual.”

U.S. officials regard the flights as a show of force by the Putin government. “It’s concerning because it’s moving in the wrong direction,” said one U.S. defense official, speaking on the condition of anonymity because he was not authorized to discuss the air activity publicly. “It’s not helping to de-escalate the situation in Ukraine. It’s not helping to improve relations between NATO and Russia. It’s not helping anybody.”

At least nineteen Russian aircraft, including fighter jets and bombers, have been intercepted in four waves over Europe yesterday and today. Smaller-scale incidents have also increased this year, approximately tripling from the same period in 2013, Janzen said.

In at least one of the four incidents, the aircraft had switched off their transponders and had not filed flight plans with civilian air traffic controllers. That means that civilian air traffic control cannot track them, potentially creating a risk for civilian planes.

That incident took place around 3:00 a.m. in Western Europe on Wednesday, when four Tu-95 long-range strategic nuclear bombers and four Il-78 tanker aircraft flew over the Norwegian Sea. Norwegian F-16 fighter jets scrambled to intercept them. Six of the planes returned to Russia, but two of the bombers skirted the Norwegian coast, flew past Britain — sending Typhoon fighter jets to scramble in response — and then finally looped west of Spain and Portugal, attracting Portuguese F-16s. Then the two bombers appeared to return to Russia, Janzen said.

The Tu-95 bombers are not commonly seen close to Europe, Janzen said. Nor are the MiG-31 fighter jets that were intercepted along with other aircraft above the Baltic Sea in two separate incidents Tuesday and Wednesday. It was not immediately clear whether the two incidents above the Baltic represented the same group of seven planes entering and departing a Russian military base at Kaliningrad.

There was no immediate reaction from the Russian government.

Fighter jets from Norway, Britain, Portugal, Turkey, Germany, Denmark, Finland and Sweden were involved in responding to the Russian aircraft, Janzen said. Finland and Sweden are not members of NATO, and they have long refrained from joining the defensive alliance, which was formed after World War II as a bulwark against the Soviet Union.

But military incidents with Russia this year have caused both countries to start to reevaluate their positions. Most recently, the Swedish military last week spent several days searching a vast territory for an unidentified underwater craft suspected to be Russian. Last month, Sweden said two Russian military planes had violated its airspace.

A Novus opinion poll released Tuesday found for the first time that more Swedes favored joining NATO than opposed it.

The most recent violation of NATO airspace was last week, when a Russian spy plane flew almost 2,000 feet into Estonian airspace. This year, NATO increased its air patrols based in the Baltics from four to 16 jets, a measure of the newly hot confrontation between the two military juggernauts.

The incidents appear to have set European militaries on edge this week. British fighter jets were scrambled Wednesday to bring a civilian Antonov cargo jet into a London airport; it stopped responding to radio calls from air traffic controllers while flying over the British capital. That caused a supersonic boom that was audible across a large stretch of southeastern England.

Missy Ryan contributed to this report.

Michael Birnbaum is The Post’s Moscow bureau chief. He previously served as the Berlin correspondent and an education reporter.

 

[CougarKing]

How long till Russia takes advantage of this worsening situation below to bite off another piece of Georgia much like the way South Ossetia became a Russian satellite?

Defense News

Power Struggle Plunges Georgia In Turmoil
Nov. 5, 2014 - 03:29PM  |  By AGENCE FRANCE-PRESSE

TBILISI, GEORGIA — Georgia on Wednesday plunged into political crisis after its youthful prime minister sacked his hugely popular defence minister and the foreign minister resigned in protest.

In the ensuing political turmoil in the pro-Western Caucasus nation, Irakli Alasania — who was fired in a surprise move on Tuesday — said his Free Democrats party was leaving the ruling coalition, robbing Prime Minister Irakli Garibashvili, 32, of a parliamentary majority.

“Free Democrats will no longer be in the coalition,” the photogenic ex-defence minister, 40, told reporters.

The ruling Georgian Dream coalition was left with only 73 seats in the 150-member legislature after Free Democrats’ 10-member-strong parliamentary faction quit.

Observers said the row had all the trappings of a bitter power struggle in which Garibashvili got rid of his charismatic, influential opponent.

(...SNIPPED)

Shortly after he was sacked, Foreign Minister Maia Panjikidze said that she and her four deputies were resigning “to show what threats the country is facing.”

Alexi Petriashvili, the minister for European and Euro-Atlantic Integration and a close ally of Alasania, also resigned in protest on Tuesday.

“Dictatorship is coming to Georgia, our democracy is in danger,” Petriashvili said late on Tuesday.

Georgia’s pro-Western President Giorgi Margvelashvili denounced the “political confrontation that endangers the functioning of state institutions and the country’s Euro-Atlantic integration.”

(...SNIPPED)

 

[Edward Campbell]

Here, reproduced under the Fair Dealing provisions of the Copyright Act from the Financial Times is an article that suggests that the sanctions are working:

http://www.ft.com/intl/cms/s/0/6c059328-666d-11e4-9c0c-00144feabdc0.html?siteedition=intl#axzz3IQQ7jgpE

Plunging rouble raises spectre of fresh financial crisis for Russia

Kathrin Hille in Moscow, Roman Olearchyk in Kiev

November 7, 2014

Russia faces the risk of financial instability, the country’s central bank warned, after dramatic gyrations in the currency amid renewed tension in Ukraine revived fears of a currency crisis.

The warning came after a day of huge swings in the rouble and capped a weekwhen the currency fell 8 per cent, its biggest weekly drop in 11 years.

The rouble is a casualty of falling oil prices, which have plunged more than 25 per cent since mid-June, geopolitical tensions over Ukraine and sanctions that have shut some of the country’s biggest companies out of western capital markets.

For many ordinary Russians, the currency’s slide has evoked painful memories of the financial crises that rocked Russia in 2008-9 and 1998. Analysts said if the rouble’s fall continued it could undermine President Vladimir Putin’s popularity, which currently stands at record highs.

The Bank of Russia said the past few days had seen”extreme demand” for dollars, which could lead to “the creation of risks for financial stability”.

The central bank said it stood ready to increase its foreign exchange interventions “at any moment”, and use other tools in its arsenal, to support the rouble.

It also defended a decision to let the currency float freely, a move which was rigorously stress-tested on Friday when the rouble initially fell as much as 4 per cent to a record low against the dollar and breached the threshold of 60 to the euro for the first time.

The currency later pared its losses and swung up more than 2 per cent against the dollar on the day, after speculation that the central bank would take action to halt the crisis, before falling back again.

The Bank of Russia said Friday’s volatility was part of an adjustment process following Wednesday’ policy changes. “The sharp weakening of the rouble that started late Thursday was caused by a new round of the conflict in Ukraine, fears of new sanctions and the falling oil price,” said brokerage BCS Prime in a research note.

“However, households’ expectations of rouble devaluation are contributing more than ever to the . . . fall these days.”

Kiev said on Friday that dozens of Russian tanks and fighters had recently entered the breakaway regions of eastern Ukraine. Fighting in the seven-month conflict which has claimed more than 4,000 lives had subsided after fierce August battles gave way to a September ceasefire agreement.

But the so-called Minsk accords started to unravel swiftly after separatists held an election on Sunday that was considered illegitimate by Kiev and the west.

The central bank said on Wednesday it would sell no more than $350m a day to support the rouble, arguing that from now on market forces would be key in determining the exchange rate.

The bank did, however, stick to its commitment to make unlimited one-off interventions if financial stability was at risk.

At Credit Europe Bank, a midsize lender in Moscow, customers were queueing at lunchtime to withdraw foreign currency or buy dollars, while the branch manager tried to persuade them to open rouble deposits instead. The lender, and many other smaller Russian banks, have started requiring customers who want to buy dollars to order them at least one day in advance.

The rouble’s slide has raised concerns over whether Russian companies and banks can service their external debt. Some $30bn is due for redemption before the end of the year by Russian corporates and about $10bn by Russian banks.

In total, Russia’s corporate sector has $422bn in foreign currency debt and the country’s banks have $192bn, the central bank said.

The corporate borrowers due to make big repayments by the end of the year are mostly state companies with a steady stream of foreign currency revenues from exports of oil and gas.

For that reason, analysts say the rouble volatility should not affect their ability to service their debt in the near term.

But an executive at a foreign investment bank in Moscow said: “The picture is more worrying for the banks.”

For Russia’s fiscal situation, the cheaper rouble against the dollar is less worrying as it helps mitigate the steady slide in the oil price, which has led to a fall in oil and gas-based revenues.

Moscow equities markets were also under heavy pressure. The dollar-denominated RTS stock index hit its lowest level since 2009, falling below 1,000 points.

Russia’s 10-year sovereign debt yields rose 15 basis points to 10.3 per cent, making its borrowing the most expensive since November 2009. The cost of insuring Russian debt against default returned to its highest level of the year. Credit default swaps for Russia were up 9 basis points to 286 basis points.

With additional reporting by Elaine Moore in London

The real hero in all this may be an accountant.

 

[Kirkhill]

It's enough to give somebody a heart attack....

 

[a_majoor]

Here is a good preview of what we are really up against. Our thinking about defense and security needs to be updated:

www.naa.mil.lv/~/media/NAA/AZPC/Publikacijas/PP%2002-2014.ashx