Rossiya Scan: Approval Ratings, Nabiullina and the EU

"How The World Sees Russia" Issue #22: 08/25/2018 From the Publisher: This week’s Rossiya Scan is all about the Russian economy, foreign policy and the places where these two topics intersect. Russia is currently facing a problem of unique proportions. For one, the Kremlin has found glory through its foreign policy exploits. It also found praise in its domestic economic policies when oil prices were high. However, with sanctions and low oil prices, the Kremlin is now facing some difficulties on the economic home front. We begin this issue by taking a look at Russian President Vladimir Putin’s sudden approval ratings drop. This was due at heart to domestic economic matters, and we discuss the repercussions that this might have on Russia’s active foreign policy throughout the world. We then move on to Russia’s growing role as an arms manufacturer. Although Russia has always been a top player in the defense industry, their current products and strategy appears to be outflanking some of their main competitors (e.g. the U.S). We look at how Russia is doing this, and how it relates to their global foreign policy strategy. Finally, we shine light on Russia’s impressive Central Banker, and make the case for why the EU needs to make a proper break from the U.S., as far their overall strategy towards Russia. -Rossiya Scan Could Domestic Troubles Force Russia to Retreat from the World Stage? Russian President Vladimir Putin has some of the most enviable approval ratings in the world. Part of the reason for his impressive popularity amongst Russians has been his government's highly successful foreign policy approach, and their constant provision of basic social services. However, with sanctions and low-oil prices, cracks have begun to emerge. According to data from the Levada Center, a Moscow-based polling organization, only 67 percent of Russians approved of Putin’s activities this past July. This is a sharp drop from to 82 percent polled in April, and 79 percent of May. The Levada Center also stated that Putin’s trust rating was also dropping. This time from last January's 60 percent, to this past past June's 48 percent. What is causing this drop? In simple terms, Putin’s approval rating is falling because domestic social services have been weakened by Russia's fragile economy. The key instigator to this decline in support was the government’s proposal to increase the age of retirement for both men (from 60 to 65) and women (from 55 to 60). “The reason for the public outrage is that the proposal is a breach of Russia’s unwritten social contract,” wrote Andrei Kolesnikov, a Senior Fellow and Chair Russian Domestic Politics and Political Institutions Program at the Carnegie Moscow Center. “In which the government preserves so-called stability, maintains modest social benefits, and promotes feelings of national pride in exchange for the public’s political support and indifference to the rife corruption at the top of the political pyramid.” Furthermore, a joint study by the Carnegie Moscow Center and the Levada Center in 2017 made it clear that most Russians are not willing to accept even slight changes to their social benefits. In fact, 77 percent of Russians polled stated that they would not give up benefits today for improved ones in the future. Only 16 percent were willing to accept this. What can Putin do to reverse such discontent? His foreign policy exploits have in fact boosted his popularity in the past. The war with Georgia in 2008, and the annexation of Crimea in 2014, both boosted his popularity. Russia has garnered respect around the world, and its citizens value this immensely. Putin’s ability to also place a certain order in Russia after the wild 90’s has also brought him support. That being said, people want more now at home, and other successful foreign policy exploits are unlikely to yield as much support as they did in the past. Putin promised in his most recent election that the economy would be the focus of his fourth term. Signaling some very bold goals, such as cutting poverty in half and making Russia the 5 th largest economy. These goals were announced at the same time as his government opted to decrease its military spending since Putin took office almost 20 years ago. A sign that could perhaps meant that Russia is going to have a less active military role in the near future. However, freeing oneself from overseas interventions is not as easy as engaging in them. Russia is likely to continue to being engaged at the world stage, and further consolidate its position in areas where it has already done some legwork. Therefore, Rossiya Scan believes that Russia is likely to continue pushing its agenda in the main areas it has chosen to become involved in. Places where it has an edge, sees a geopolitical necessity to be involved or where costs are lower. These include the Middle East, Central Africa, the South China Sea, and the Commonwealth of Independent States. Other areas, are likely to see less involvement, just out of pure domestic necessity. Russia’s foreign policy will get leaner, which in a sense might actually make it more effective, at least in the the areas where they have decided to actively remain. Read more: "Why Putin's Approval Ratings are Declining Sharply," by Andrei Kolesnikov for Foreign Affairs. "Putin Makes a Move for Peace through Force," by Krishnadev Calamur for The Atlantic. "Putin Sets Ambitious Economic Goals for Fourth Term," by Kathrin Hille for the Financial Times. "The Perils of Change: Russians’ Mixed Attitudes Toward Reform," by Andrei Kolisnikov for the Carnegie Moscow Center. A Russian-Made Weapons "Renaissance"? The U. S’s defense budget is 4 times greater than the second biggest spender: China. This has led to countries at the forefront of weapon development technology, such as Russia, to pivot their weapon development strategy. To instead, adapt world-class military equipment to contemporary warfare with a modest a competitive price point, (Remember: “Price is what you pay, and value is what you get”) and identify the military needs of other nations. The truth is, Russia has mastered this over several decades. Modern warfare has evolved in the past century; you cannot win a war simply by fighting large scale battles in open fields, and with a fat check book. The enemy is now small, agile, and at times invisible. This reality has drastically changed the concept of warfare. Expanding on what we said in Issue #21, Russia has been working on more weapons related systems that are defensive, such as the S400 missiles. The latter also happen to be more economic then their closest counterparts, on top of being a game changer in the military field. Russia’s main drivers for weapon development are for their domestic and foreign policy agenda. Understanding what other countries need, (and with the state-owned company “Rosoboronextport” exporting 85% of Russian weapons to over 47 countries) allows Russia to make fast and precise decisions for weapon development. This allows them to allocate resources more effectively than the U.S. Russia has also accumulated a lot of wealth when from the high price oil bonanza 2004 – 2014. In today’s dire times with U.S sanctions and low oil prices, Russia has been investing its past earnings towards the development of new military equipment. The latter is great news for a lucrative sector of their economy, but also a bargaining chip in global power politics. Besides the missile systems, Russia also sells hand weapons (e.g. guns, machine guns, sub-machine guns etc.), tanks, submarines and several aircraft. Its aircraft, in particular, have found much success in Asian countries, such as India, China and Vietnam. On the other hand, the U. S’s most important market is the Middle East, with Saudi Arabia, UAE and Turkey as their biggest customers. At Rossiya Scan, we believe that Russia’s drive to produce these weapons go beyond the economic benefit that they incur in selling them. Having their core market in Asia consolidated, they are now venturing into the U. S’s main market, developing stronger relationship’s in the region, with a track record of their successful support and incursion in Syria; labelling the Russians as a reliable ally with top notch weaponry. Russia supported Syrian President Bashar Al-Assad virtually single-handedly. Al-Assad was outgunned at several points of the war, and despite this fact he has emerged the victor because of Russian help. By developing less expensive weapons that can meet the military requirements of Middle Eastern countries, and at times even surpass the capabilities of more expensive non-Russian models, Russia is likely to obtain more power to pursue its foreign policy agenda. Especially now, that Russia is selling their defense products between enemy nations, creating the need for all to purchase these systems to be able to stand against each other should they ever have to. More Reads: “Weapons sales are on the rise — here are the top 10 countries exporting arms around the world,” by Daniel Brown for Business Insider . “Mapping the World's Biggest Weapons Exporters – and their Best Customers,” by Frank Jacobs for Big Think . “Russia's Military Is Leaner, But Meaner,” by Leonid Bershidsky for Bloomberg . “Why Russia Won't Go Bankrupt Paying for Its Military Buildup,” by Michael Peck for the National Interest . Russia’s "Iron Lady"…. “Russia is a riddle, wrapped in a Mystery Inside an enigma” - Sir Winston Churchill. This famous quote by Churchill about Russia could not be truer in today’s world. Russia, the enemy, the aggressor and the mafia state, bound for collapse, sanctioned, and yet, it still stands. Certes it has not known the same level of growth as before 2014 (oil prices are lower), but it’s still growing. As we have pointed out in previous issues, Russian equities are extremely undervalued

"How The World Sees Russia"

Issue #22: 08/25/2018

From the Publisher:

This week’s Rossiya Scan is all about the Russian economy, foreign policy and the places where these two topics intersect.

Russia is currently facing a problem of unique proportions.

For one, the Kremlin has found glory through its foreign policy exploits. It also found praise in its domestic economic policies when oil prices were high. However, with sanctions and low oil prices, the Kremlin is now facing some difficulties on the economic home front.

We begin this issue by taking a look at Russian President Vladimir Putin’s sudden approval ratings drop. This was due at heart to domestic economic matters, and we discuss the repercussions that this might have on Russia’s active foreign policy throughout the world.

We then move on to Russia’s growing role as an arms manufacturer. Although Russia has always been a top player in the defense industry, their current products and strategy appears to be outflanking some of their main competitors (e.g. the U.S). We look at how Russia is doing this, and how it relates to their global foreign policy strategy.

Finally, we shine light on Russia’s impressive Central Banker, and make the case for why the EU needs to make a proper break from the U.S., as far their overall strategy towards Russia.

-Rossiya Scan

Could Domestic Troubles Force Russia to Retreat from the World Stage?

Russian President Vladimir Putin has some of the most enviable approval ratings in the world. Part of the reason for his impressive popularity amongst Russians has been his government's highly successful foreign policy approach, and their constant provision of basic social services. However, with sanctions and low-oil prices, cracks have begun to emerge.

According to data from the Levada Center, a Moscow-based polling organization, only 67 percent of Russians approved of Putin’s activities this past July. This is a sharp drop from to 82 percent polled in April, and 79 percent of May. The Levada Center also stated that Putin’s trust rating was also dropping. This time from last January's 60 percent, to this past past June's 48 percent.

What is causing this drop?

In simple terms, Putin’s approval rating is falling because domestic social services have been weakened by Russia's fragile economy. The key instigator to this decline in support was the government’s proposal to increase the age of retirement for both men (from 60 to 65) and women (from 55 to 60).

“The reason for the public outrage is that the proposal is a breach of Russia’s unwritten social contract,” wrote Andrei Kolesnikov, a Senior Fellow and Chair Russian Domestic Politics and Political Institutions Program at the Carnegie Moscow Center. “In which the government preserves so-called stability, maintains modest social benefits, and promotes feelings of national pride in exchange for the public’s political support and indifference to the rife corruption at the top of the political pyramid.”

Furthermore, a joint study by the Carnegie Moscow Center and the Levada Center in 2017 made it clear that most Russians are not willing to accept even slight changes to their social benefits. In fact, 77 percent of Russians polled stated that they would not give up benefits today for improved ones in the future. Only 16 percent were willing to accept this.

What can Putin do to reverse such discontent? His foreign policy exploits have in fact boosted his popularity in the past. The war with Georgia in 2008, and the annexation of Crimea in 2014, both boosted his popularity. Russia has garnered respect around the world, and its citizens value this immensely. Putin’s ability to also place a certain order in Russia after the wild 90’s has also brought him support. That being said, people want more now at home, and other successful foreign policy exploits are unlikely to yield as much support as they did in the past.

Putin promised in his most recent election that the economy would be the focus of his fourth term. Signaling some very bold goals, such as cutting poverty in half and making Russia the 5^th largest economy. These goals were announced at the same time as his government opted to decrease its military spending since Putin took office almost 20 years ago. A sign that could perhaps meant that Russia is going to have a less active military role in the near future.

However, freeing oneself from overseas interventions is not as easy as engaging in them. Russia is likely to continue to being engaged at the world stage, and further consolidate its position in areas where it has already done some legwork.

Therefore, Rossiya Scan believes that Russia is likely to continue pushing its agenda in the main areas it has chosen to become involved in. Places where it has an edge, sees a geopolitical necessity to be involved or where costs are lower. These include the Middle East, Central Africa, the South China Sea, and the Commonwealth of Independent States. Other areas, are likely to see less involvement, just out of pure domestic necessity.

Russia’s foreign policy will get leaner, which in a sense might actually make it more effective, at least in the the areas where they have decided to actively remain.

"Putin Makes a Move for Peace through Force," by Krishnadev Calamur for The Atlantic.

"Putin Sets Ambitious Economic Goals for Fourth Term," by Kathrin Hille for the Financial Times.

"The Perils of Change: Russians’ Mixed Attitudes Toward Reform," by Andrei Kolisnikov for the Carnegie Moscow Center.

A Russian-Made Weapons "Renaissance"?

The U. S’s defense budget is 4 times greater than the second biggest spender: China. This has led to countries at the forefront of weapon development technology, such as Russia, to pivot their weapon development strategy. To instead, adapt world-class military equipment to contemporary warfare with a modest a competitive price point, (Remember: “Price is what you pay, and value is what you get”) and identify the military needs of other nations. The truth is, Russia has mastered this over several decades.

Modern warfare has evolved in the past century; you cannot win a war simply by fighting large scale battles in open fields, and with a fat check book. The enemy is now small, agile, and at times invisible. This reality has drastically changed the concept of warfare. Expanding on what we said in Issue #21, Russia has been working on more weapons related systems that are defensive, such as the S400 missiles. The latter also happen to be more economic then their closest counterparts, on top of being a game changer in the military field.

Russia’s main drivers for weapon development are for their domestic and foreign policy agenda. Understanding what other countries need, (and with the state-owned company “Rosoboronextport” exporting 85% of Russian weapons to over 47 countries) allows Russia to make fast and precise decisions for weapon development. This allows them to allocate resources more effectively than the U.S.

Russia has also accumulated a lot of wealth when from the high price oil bonanza 2004 – 2014. In today’s dire times with U.S sanctions and low oil prices, Russia has been investing its past earnings towards the development of new military equipment. The latter is great news for a lucrative sector of their economy, but also a bargaining chip in global power politics.

Besides the missile systems, Russia also sells hand weapons (e.g. guns, machine guns, sub-machine guns etc.), tanks, submarines and several aircraft. Its aircraft, in particular, have found much success in Asian countries, such as India, China and Vietnam. On the other hand, the U. S’s most important market is the Middle East, with Saudi Arabia, UAE and Turkey as their biggest customers.

At Rossiya Scan, we believe that Russia’s drive to produce these weapons go beyond the economic benefit that they incur in selling them. Having their core market in Asia consolidated, they are now venturing into the U. S’s main market, developing stronger relationship’s in the region, with a track record of their successful support and incursion in Syria; labelling the Russians as a reliable ally with top notch weaponry.

Russia supported Syrian President Bashar Al-Assad virtually single-handedly. Al-Assad was outgunned at several points of the war, and despite this fact he has emerged the victor because of Russian help. By developing less expensive weapons that can meet the military requirements of Middle Eastern countries, and at times even surpass the capabilities of more expensive non-Russian models, Russia is likely to obtain more power to pursue its foreign policy agenda. Especially now, that Russia is selling their defense products between enemy nations, creating the need for all to purchase these systems to be able to stand against each other should they ever have to.

More Reads:

“Weapons sales are on the rise — here are the top 10 countries exporting arms around the world,” by Daniel Brown for Business Insider.

“Mapping the World's Biggest Weapons Exporters – and their Best Customers,” by Frank Jacobs for Big Think.

“Russia's Military Is Leaner, But Meaner,” by Leonid Bershidsky for Bloomberg.

“Why Russia Won't Go Bankrupt Paying for Its Military Buildup,” by Michael Peck for the National Interest.

Russia’s "Iron Lady"….

“Russia is a riddle, wrapped in a Mystery Inside an enigma” - Sir Winston Churchill.

This famous quote by Churchill about Russia could not be truer in today’s world. Russia, the enemy, the aggressor and the mafia state, bound for collapse, sanctioned, and yet, it still stands. Certes it has not known the same level of growth as before 2014 (oil prices are lower), but it’s still growing. As we have pointed out in previous issues, Russian equities are extremely undervalued when compared to their western equivalents. They trade at far lower EBITDA multiples despite a rise in profits.

Some of the main reasons behind this discount on share price is due to the political ‘risk’ factor associated with Russia, and the perceived lax corporate governance present in some Russian companies. The latter two concepts will pummel the true value of a stock. Recently, the increasing sanctions are also taking their toll on the market despite the rising of commodity prices.

Sberbank’s (MCX:SBER) most recent results have come out, revenue grew more than expected, toping analyst’s prediction by 5%. Yet the stock continues to decline. As stated in a previous issue, Sberbank can be used as a benchmark to see how well or badly the Russian economy is doing. Again, through Sberbank we are able to see that the economy is not doing so well despite the bank's improved performance. With the fall in the ruble’s value, paying out loans and dividends has become even more complicated. As newer sanctions begin to hit Russia, the government announced that they are lowering their forecast for growth this year from 1.9% to 1.8%.

This is all well known though, the real reason though why Churchill’s quote is on point is the fact that in a time of adversity, Russia has a nag for having capable people emerge from the darkness. In this case, the darkness shed the light on Elvira Nabiullina, the 54-year old head of Russia’s Central bank. Over the last couple of years, she has earned international praise, such as in 2017 when a U.K based magazine dubbed her “Central Banker of the Year”, or when the IMF praised Nabiullina for her superb leadership, and macroeconomic prowess.

Nabiullina has gone against the usual canons that western countries have set in motion to jump start their economies. She began by closing the “bad banks” against the opinion or desires of presidential advisers, and prosecutors. With her “iron fist” she managed to increase the payout to depositors from an all-time low, to a generally acceptable amount. Her firm regulations and aims for low inflation have brought stability to the system despite several economic hurdles. When the first sanctions happened in 2014, and the ruble collapsed, Nabiullina decided to carry out an exceptional 17% hike for core interests lending. This allowed the economy to carryon despite stifling spending and curtailing the middle class’s purchasing power.

However, under her “reign” a new situation has emerged. One in which 2/3 of all private lending and deposits are now held by government owned lenders. Nabiullina has announced that until end of September, Russia will suspend its purchase of FX and the sale of rubles in order to avoid a further slide in its value.

Here at Rossiya Scan we believe Nabiullina is a capable figure and well worth watching. One which is much needed in other states with economic difficulties. That being said, monetary, expansionist policies have shown their limits. We will be playing close attention to see how things turn out.

"Sberbank: Bear Hug," by the Financial Times.

"Rouble Sinks 1% On Rising Concerns Over U.S. Election Interference," by the Financial Times.

"Bank of Russia Halts Ruble Slide by Stopping FX Purchases," by Anna Andrianova and Alexei Anischuk for Bloomberg.

"Russia will Probably Lower Forecast for 2018 Growth," by Reuters Staff.

Time For a More Independent EU…

The UK has just urged the EU to take further action against Russia and impose new sanctions over the Sergei Skripal incident. This call from the UK has caused a selloff in Russian equities, and a further fall of the ruble. Although the UK is set to exit the EU by 2019, a majority of the EU countries accepted to expel Russian diplomats over the incident. That being said, it is as of now not certain whether the member states will impose new sanctions.

After all, the UK will no longer be a member in the near future. Additionally, Italy, Austria and Greece are carrying out a rapprochement with Russia that is easing tensions with at least some of the union. The EU requires unanimity of votes of all 28 member states to impose a common policy. Therefore, it is unlikely for the EU to impose more sanctions on Russia.

That being said, with the UK out of the picture, the EU (with Germany and France leading) is finally acting on the best interests of their union. This means developing its own foreign policy completely independent of their U.S and U.K allies.

Both the UK's and U.S.'s interests are not always aligned with the EU’s. Also, an alliance with the U.S is no longer bulletproof. As we have seen recently, the U.S can turn on an ally very quickly, as has been the case with Turkey. Maybe, we are reaching a point where the EU truly does break off, and charts its own agenda independent of NATO and the U.S.

U.S national security advisor John Bolton recently stated that the sanctions against Russia would remain, as long as they do not change their, “behavior”. But what does this actually mean? What behavior is the U.S expecting from Russia?

The sanctions on Russia have had not just an effect on the individuals that they were imposed on . This week Credit Suisse had to ring-fence Russian assets of customer related money to the amount of 5bn$ in order to avoid U.S sanctions. Freezing or ring-fencing actions towards people who are unrelated to the issue at hand, and that have not violated any laws is a form of coercion.

Finally, battering Russia with sanctions without creating a major financial and energetic crisis is simply impossible. The major victims of such a crisis would be the EU, and not the U.S. Therefore, the EU must deal with Russia on its own terms. It has to practice self-determinism, and not cede to the pressures of an ally that for this particular situation is not acting on their interest.

In this sense, Brexit is a positive outcome for it will rid the EU of the UK. This “Trojan Horse” was more interested in their special relationship with the U.S. than in actually being a true member of the EU. Of course, there is still a lot of work to be done in the EU internally to develop a united and strong foreign policy strategy in the longterm. It will take years of labor and consolidation to create this policy, but perhaps this rift is the beginning of a stronger EU at the world stage. One where it becomes a powerful geopolitical player, and not just an economic bloc.

"Bolton: U.S. Sanctions to Stay Until Russia Changes its Behavior," by Pavel Polityuk for Reuters.

"EU Unlikely to Heed British Call for More Russia Sanctions," by Gabriela Baczynska for Reuters.

"The U.S Can't Bring Russia 'To Its Knees'," by Leonid Bershidsky for Bloomberg.

"Credit Suisse Says Committed to Russia After U.S. Sanctions," by Reuters staff.

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