Moscow Facing a USD 3.2 Billion Deficit in 2017

Russian business daily “Vedomosti” reports that the Moscow city budget deficit is expected to reach 218 billion rubles (USD 3.2 billion) in 2017 due to infrastructure development financing requirements. Moscow authorities plan to invest as much as 1.9 trillion rubles (USD 28.1 billion) in infrastructure in the period 2016-2019 after the city halted most of its development projects in 2015 due to economic uncertainty. Most of the infrastructure budget will be spent on transportation (654 billion rubles, or USD 9.7 billion), primarily to support and expand the metro network. The city will also increase its investments in road infrastructure in order to prepare for the FIFA 2018 World Cup

Orthodox Banking in Russia

One of the most bizarre news from Russia this week features the General Manager of the troubled “Peresvet” bank Alexander Schvets who ended up in an intensive care unit just as his bank was forced to limit the withdrawal of deposits to 100,000 rubles (USD 1,500) per client. On October 14, TV channel RainTV reported that Schvets disappeared after the rating agency Fitch published an audit of the bank’s operations and found that it lent 12 billion rubles (USD 192 million) to companies that hardly have any assets at all. “Peresvet” denied the connection between the disappearance of Schvets and the report issued by Fitch.
To make things more interesting, “Peresvet’s” single largest shareholder is none other than the Russian Orthodox Church with 36.5 percent of the shares. Notwithstanding its numinous background, the bank is keen on supporting innovative technologies: “Peresvet” is one of the founders of two venture fund management companies, one of which was established jointly with Rosnano, Russian government agency for investments in nanotechnology, known for massive losses.

What’s Left of Russian Liquidated Banks

…can be found at, the specialized site managed by the state Deposit Insurance Agency for the purpose of auctioning off what’s left of Russian failed banks. reports that the Russian Central Bank closed almost one in three banks in Russia since Mrs. Elvira Nabiulina took over its helm. The state Deposit Insurance Agency is tasked with mopping up and currently oversees the liquidation of 287 banks with total assets of approximately three billion rubles (USD 47.4 million), as well as 34 private pension funds.
Assets belonging to failed banks consist mostly of their credit portfolio (64% of the assets), but as these loans can rarely be retrieved, the remaining 36% of the assets are far more interesting: office furniture, IT equipment, appliances, luxury items, art, etc. According to the Deposit Insurance Agency, some of the banks left behind such improbable artifacts as aquarium with a shark, Aivazovsky’s painting or tens of thousands of Russia’s trademark valenki boots. Total estimated value of items offered for sale through the Agency’s auctioning platform is between 100-180 billion rubles (USD 1.6- 2.84 billion).
Registration on the site is free of charge, but a 10% deposit of a lot’s initial value is required to participate in the respective auction.

Rosinterbank Folds and Buries Data on 3000 Clients

Russian business daily Vedomosti reports that approximately 3,000 Rosinterbank’s clients with 5 billion rubles (USD 80.4 million) in deposits might not be able to get their money from the Russian Deposit Insurance Agency after the breakdown of their bank. These clients opened or topped their accounts after July 18, the date on which the Agency last collected the data on Rosinterbank’s deposits. Information on Rosinterbank’s deposits after that date is lost, as the bank pulled the plug on the system that monitored it before it folded. Therefore, the Russian Deposit Insurance Agency has information on 84,400 clients with 52.1 billion rubles (USD 837.75 million) in deposits, while the actual volume of deposits held in the bank at the time of its bankruptcy is probably closer to 57 billion rubles (USD 916.5 million). Former head of the bank Marina Krasnova tried to be helpful and delivered the bank’s internal data on clients from mid September, but the Agency has no intention to rely on the list coming from the bank that had previously deliberately disconnected the centralized data collection system. The Agency will review any documents presented by the bank’s clients who placed their deposits after July 18, but there are no guarantees that their claims will be met.
Rosinterbank was one of the fastest growing banks in the country, jumping from 938th to 61st position on the list of banks ranked by assets within six years, from 2010 to 2016. Its aggressive lending policies eventually prompted the Russian Central Bank to introduce mandatory supervision and place limits on attracting private deposits. However, the bank seems to have continued to attract private deposits and engaged in shadow accounting. This practice is nothing exceptional in Russia – for example, one of the smaller banks, Arksbank, had 4 billion rubles of deposits on its official balance sheet and ten times as much on its “unofficial” balance.

Putin Puts Money Where His Mouth is: Russia to Increase Defense Spending Regardless of Budget Shortfall reports that the Russian Ministry of Finance prepared a proposal for the 2016 budget that involves an apparent increase of military expenditures. Regardless of the budget shortfall of 374.5 billion rubles (USD 6 billion), the Ministry proposes to increase the expenditures by approximately 300 billion rubles (USD 4.8 billion) to 16.4 trillion rubles (USD 262 billion), increasing the deficit to 3.66% of the GDP. As the Ministry plans to cut practically all “civilian” expenditures to offset the shortfall, this will free up a total of 678.8 billion rubles (USD 10.9 billion). The beneficiaries of this balance are not known, but as they are listed in a confidential annex not open to the public, it is very likely that they are related to defense and/or law enforcement.

As usual, some programs and regions will be impacted by the changes to the federal budget more than others, but it is interesting to note that the sequestration will affect even Crimea, as the program for the socio-economic development of the annexed peninsula will be cut by 15.6%.

Amendments to the federal budget management process also seem to be under way and should enable the Minister of Finance to reallocate up to 10% of all expenditures to military and security institutions without consultations with the Government or the Parliament.

The Ministry of Finance refused to comment on either of the proposed changes.


Vladislav Inozemtsev on Healthcare in Russia

Writing for, Russian economist Vladislav Inozemtsev lists some of the differences between the approach to healthcare in Russia and the West. Starting with the obvious, he writes that developed countries like the United States, Japan, Germany, Israel and Great Britain, as the biggest spenders, set the prices for drugs and medical equipment. While the United States spent over USD 1 trillion on healthcare on the federal level in 2015, Russia allocated only USD 33 billion for the same purpose in its Federal Compulsory Medical Insurance fund. Therefore, it is impossible for Russia to provide a decent healthcare at a low cost, which makes the archaic approach to setting prices of respective services through decrees and standards pointless and harmful.
Inozemtsev claims that federal governments need to spend at least USD 1,500 per capita on healthcare annually if they want to provide a decent level of service. Current federal expenditure on healthcare in Russia amounts to approximately USD 250 per capita.
Since healthcare in Russia still represents a giant bureaucratic structure with few, if any, market mechanisms, it retains ineffective practices and personnel. Errors remain largely without consequences, since malpractice lawsuits in Russia are virtually nonexistent.
Another adverse peculiarity of the Russian healthcare system are the patients themselves. According to Inozemtsev, their attitude towards their health leaves a lot to be desired, which is reflected even in the etymology of Russian words for healthcare and health insurance: the literal translation of the Russian term for healthcare back to English is health preservation, while the Russian term for health insurance is a derivation of the word designating fear. Quite dissimilar to their western peers, Russian patients don’t see their doctors to treat a sports injury and return to a basketball court, but out of fear from serious illness or death. However, often times even that doesn’t provide sufficient motivation. For example, only 7% of breast cancer is diagnosed in the final stage, while the respective figure in Russia is 40% – Russian healthcare system is not great when it comes to prevention.
Inozemtsev ends with a gloomy forecast, primarily because the federal government doesn’t treat healthcare as a priority. If the ruble continues to devalue, the prices of drugs and medical equipment will inevitably rise, and the medical experts will continue to emigrate to the West.

Yandex.Market changes its Game

Russian business daily RBK reported that the leading Russian online search engine decided to change the rules for featuring products on its marketplace Yandex.Market. The new system gives preference to the products sold directly in Yandex’s store, which is currently the option of choice for approximately 20% of the suppliers present on the marketplace. Naturally, this is advantageous for Yandex, as the Russian online heavyweight earns a higher commission for products sold on its pages than for redirection to retailers’ sites. According to Yandex, it currently earns 5.38% of the total sales generated on its Yandex.Market platform.

Yandex will give preference to suppliers that agree to sell their products in its store, placing their offer at the top of respective search results. The new model will be introduced in phases, starting with Moscow and ending with distant regions by the end of 2017. At this point, it will affect 179 most popular product categories, including computers, home appliances, car accessories and baby program. Yandex.Market features approximately 2.000 product categories from 20.000 domestic and foreign Internet stores.

While Yandex believes that a single interface will contribute to customer loyalty, the new system will probably force some products with lower margins to leave its marketplace.