Agriculture Minister Tkachev, the (Un)likely Beneficiary of the Winter Olympic Games in Sochi

Russian business daily Vedomosti writes about the success of Tkachev Agrocomplex Company Ltd., a major agricultural holding with revenues of 38.7 billion rubles (USD 600 million) in 2015 and leading market positions in milk, wheat, and rice production. Located in the southern Russian region of Krasnodar, the holding consists of 60 farming companies and a retail chain with 600 outlets.
Mr. Tkachev, currently serving as the Minister of Agriculture in the Russian Government, bought the company that became the foundation of the future agricultural holding through voucher privatization in the 90’s – not surprising, as his father managed the company (and got Tkachev his first job there) in the Perestroyka years. Tkachev begun building his political career as well, becoming a representative in the regional parliament in 1994 and a Federal Duma deputy in 1995. In 2000, he became the Krasnodar Region Governor and got a big break when Russia became the host of the 2014 Winter Olympic Games in Sochi, located in the region headed by Tkachev. After the games, Tkachev’s agricultural holding received generous financial backing by state-owned Sberbank and Russian Agricultural Bank and started its aggressive expansion, eventually doubling its revenues and land under management.  One of the factors that helped Tkachev’s expansion was a wave of bankruptcies that affected the agricultural sector in the region, enabling his holding, formally owned by his family members, to acquire companies at very low prices and refinance their debt with the aforementioned state banks at favorable rates.  However, on a couple of occasions, Tkachev’s competitors withdrew their offers for the purchase of acquisition targets without explanation, enabling Tkachev to buy the desired companies at lower prices. Financial contortions, generous attitude of the banks and reticent behavior of Tkachev’s competitors indicate that Tkachev’s business success might be more than meets the eye. At any rate, it coincided with Tkachev’s participation in the most important PR project of Putin’s third presidential term and demonstrated that in Russia, business success often mirrors political career.
Tkachev’s business continues to receive government support: in 2015, the Russian Government paid 1.13 billion rubles (USD 17 million) in subsidies to Tkachev Agrocomplex Company Ltd., or approximately 20% of all agricultural subsidies in the Krasnodar region.  To be fair, this is not uncommon, and other major agricultural holdings in Russia receive significantly larger subsidies.

Russians Renounce Responsibility for the Country

Citing the Levada Center research institute, Kommersant reports that only a third of Russian citizens feel responsible for the developments in their country. However, a full 22% consider their responsibility to be insignificant. As many as 64% of the surveyed stated that they feel no responsibility for the fate of their land whatsoever.
Only 22% of the surveyed Russians believe that it is possible for them to influence the society they live in, while a full 73% feel that such a possibility doesn’t exist at all. Sense of control grows as the focus narrows: 42% of the surveyed feel they’re able to control the situation in their city or region.  The same percentage of Russians believe they have the situation at work under control.
In a separate survey, Russian Public Opinion Research Center VTsIOM found that only 26% of Russians believe that their country belongs to the group of major powers. A majority of the surveyed consider the welfare of citizens as the main characteristic of a major power. At the same time, a non-profit organization “Public Opinion” found that 48% of the surveyed citizens are interested in politics, a record-high figure since 2001. As many as 60% of Russians believe that their government is running a successful foreign policy.

Turkey Reinstated as the Most Popular Destination for Russians 24 Hours After Becoming Accessible

Russian business daily RBC reports that merely a day after President Putin lifted the ban on the sale of organized tours to Turkey, the country became the most popular destination on the Yandex.Travel pages.  The portal that aggregates Russian tour operators’ offer registered a fourfold increase of demand for tours to Turkey, while the demand for Crimean tours dropped by two thirds.  The number of various tours to Turkey available to Russians stood at around 500, which is still only half of the previous year’s figure.

President Putin lifted the ban on the sale of organized tours to Turkey after its president Erdogan issued an apology for downing a Russian military jet over the border with Syria in November 2015.  While the ban was in force, only 138,000 Russian tourists visited Turkey, or 83% less than the year before (802,000).

Brexit, Another Worry for Russian Pensioners

Russian independent TV station Rain TV considers the possible impacts of Brexit on Russian pensions.  According to Deputy Finance Minister Ayrat Farrakhov, the primary concern for the Russian pension fund managers is the ensuing volatility on the financial markets.  However, the Russian Central Bank doesn’t think that Brexit represents a direct threat to the Russian economy, while “United Russia” party officials stated that they won’t insist on pegging the pensions to the actual inflation this year, which certainly makes the problem of the pension fund deficit more manageable.
Professor of finances at the Russian Economic School Oleg Shibanov stated that Brexit already negatively affected the oil market, but that he doesn’t expect the oil price to fall by more than three dollars per barrel. He believes that the Government might use external volatility to justify internal economic problems, as the central government budget is well underway to breach the planned deficit of 3% of BDP.  Professor Shibanov believes that the markets will continue to fall, but other circumstances will prove to be just as important as Brexit – for example, changes to the FED rate.  He advises against moving personal savings from one currency to another in times of volatility, as ordinary investors will hardly be able to guess the direction in which the exchange rates will move.  

Ivanov is Wrong: Sanctions Hurt Russian Exporters

Russian daily Vedomosti writes about decreasing Russian exports to the EU in the period 2013-2015.  Some Russian government officials, most notably President’s Chief of Staff Sergei Ivanov, stated that the international sanctions imposed after Russia’s annexation of Crimea are hurting the EU more than Russia.  However, the data indicates that total Russian exports to the EU dropped from USD 275 billion to USD 150 billion, mainly due to falling oil and gas prices.  The EU now sources only 7.9% of its imports from Russia, compared to 12.3% in 2013.  The EU is still the biggest export market for Russia, accounting for close to half of its total exports.

While Russia boosted its exports of copper, fertilizers and wheat, its vehicle exports dropped by 26%.  It turns out that the only exporters benefiting from the falling ruble are those that have little need for processing; Russian production with a higher share of processing is actually becoming less competitive in foreign markets. This is because the international sanctions and falling ruble are preventing Russian exporters from sourcing the most competitive production equipment and raw materials from abroad, leaving them with domestic suppliers as the only choice. Although this conclusion sounds counterintuitive at first, Russian exporters that create higher added value are actually benefiting from the ability to import competitive raw materials and processing equipment.

A View from the Top: Chief of the Presidential Administration Sergey Ivanov Welcomes Sanctions

Kremlin Administration Chief Sergei Ivanov is rooting for sanctions against his country as they work in favor of domestic production, reports  Ivanov believes that Russia weathered the most difficult period and that it’s all downhill from here.  He also seems completely oblivious to the bleak perspective of the two national reserve funds that wrote about a couple of days ago.  “The Reserve Fund and the National Wealth Fund haven’t been reduced,” Ivanov stated., however, found that the money from the two reserve funds leaked at a pace of approximately USD 12,000 per second in the period from February 2015 to June 2016.

Ivanov was quite explicit about his desire to keep the sanctions against Russia in place longer, as they help diversify the local economy, something the Russian administration has been advocating, at least in public, for years. Ivanov highlighted the 30-35% growth of the chemical industry as one of the benefits of the sanctions and praised the Russian Central Bank’s reasonable monetary policy that reduces the inflation and increases the foreign currency and gold reserves.  He added that the EU countries realized that Russia survived the sanctions effortlessly, while the damages to EU businesses continue to rise.  Ivanov doesn’t expect the sanctions to be lifted by the end of this year.  He believes that the sanctions are not Russia’s fault anyway – in his opinion, it is obvious that Ukraine has no intention to uphold the Minsk Protocol that Russia, Ukraine and its two secessionist regions signed in September 2014.  Fulfillment of the Protocol is one of the main conditions for lifting the sanctions against Russia.

Russian Budgetary Contortions

Russian Prime Minister Dmitry Medvedev is hoping for a budget that will provide for all social expenditures regardless of the circumstances, Russian daily Vedomosti reports. He stated that the Government shouldn’t expect positive developments on the commodities market, where Brent crude traded at around USD 50 per barrel this week. Russian Ministry of Finance based this year’s budget on the average price of USD 40 per barrel and a deficit of 3% of GDP.

Prime Minister’s demands to fully provide for social expenditures might collide with the Finance Minister’s recommendation to keep the budget deficit under 3% of GDP in order to keep the interest expenditures under control. The Ministry is preparing recommendations for budget restructuring and better management, as well as the reduction of expenditures. Earlier, Mrs. Natalia Akindinova of the Higher School of Economics suggested that the most probable scenario for cutting budgetary expenditures is keeping its nominal value unchanged and letting the inflation erode its value in real terms. And while social expenditures increased faster than other outlays in the last seven years, some government officials don’t think they can be reduced.  The Government might give up on its plan to peg the growth of pensions to the expected inflation in 2017 (6.5% according to the Ministry of Economy) and suspend the respective law as it did in 2016, when pensions increased by mere 4% and failed to keep up with the inflation of 12.9%.  Pensions and taxation of the oil and gas industry are among the contentious issues that get in the way of putting together the budget for the next three years.  As it is difficult to cut social expenditures close to elections, all unpopular decisions will likely be postponed until 2018.  According to Mr. Vladimir Tikhomirov of BKS Bank, they might include rising of taxes, reduction of government administration and cutting of subsidies.

Slon Magazine writes about the two reserve funds at the Russian Government’s disposal – the Reserve Fund and the National Wealth fund with total assets of USD 112 billion, or approximately 9.3% of Russia’s GDP. Given that the budget deficit in the first four months of 2016 amounted to 4.7% of GDP, this doesn’t sound like much.  Should the price of oil drop to USD 25 per barrel, Russia will have depleted the reserve funds by 2019.  According to Standard&Poors, Russia’s government debt should reach 18% of GDP in 2020 – still far less than in most western countries.