"How The World Sees Russia"

Issue #21: 08/18/2018

From the Publisher:

This week’s Rossiya Scan is filled with more our favorite topics. Starting with the Russian foreign policy ‘playbook’. The one that we believe to be the strongest in today’s growingly anarchic world. We begin by taking a look at the South China sea conflict and Russia’s growing role within it.

As stated in issue #18 of Rossiya Scan, Russia has been fomenting friendships with 3 of the 6 quarreling parties with much success. With the Philippine’s attempts to purchase Russian submarines we now see the first serious hurdle to this growing relationship. The U.S is a traditional ally of the Philippines and has voiced concern over these purchases. Hence, the fight for influence by both powers in this country is likely to heat up, and by default in the conflict as a whole. We further analyze the current state of Russia’s relationships between all 6 parties in the conflict, and try to forecast how they will do with the remaining 3 countries that they have not shown visible overtures towards.

We then move on to Russia’s attempts to strengthen its position as military arms provider, specifically in the Middle East. Russia is looking to further consolidate its role by trying to provide various countries with their SAM’s S400.The latter are considered by many to be the premium SAM systems in the world. Russia is attempting to sell them to countries that are traditional allies of the U.S. This system is giving Russia an upper hand in world geopolitics, and we do our best to describe how.

Finally, we finish by looking at the Russian economy. By showcasing again, the undervalued nature of Russian equities and by taking a look at how Russian tycoons are starting to plan the transfer of their wealth to their offspring. The latter are a new (and perhaps more western) Russian generation that will likely over time carve out its own approach to business, and politics.

-Rossiya Scan

The South China Sea Heats Up

In issue #18 of Rossiya Scan, we took a gander at Russia’s ongoing moves in the Asia-Pacifc region. Their strong foreign policy playbook is being executed in this part of the world with much success despite the existence of some serious competition from both regional and global powers.

So, who are the competing powers in the South China Sea? And why are they competing for this body of water?

The nations of China, Vietnam, Brunei, Malaysia, Taiwan and the Philippines all have claims to the South China Sea. Specifically, over the rights to exploit the region's possible reserves of oil and gas. Freedom of navigation within the sea is also a point of conflict. The United States and France, have been sending naval patrols through the contested region to make the point that these are international waters. France holds the largest exclusive economic zones in the world (EEZ), and the United States has the second largest. By allowing China to simply take this without a fight, both France and the United States stand to lose a lot. Essentially by setting a precedent that has the potential of endangering their dominance in this field.

The fact the China is even building artificial islands where there were none further complicates the matter, and adds dimensions previously unthought-of.

As stated in issue #18, Russia has increasingly turned eastward as its relationship with the West deteriorates. They are looking for new trading partners, and allies to strengthen their global position. There are two basic strategies that Russia is successfully using to build such an influence, and find new partners across the globe. One is to look at places that have essentially been abandoned, and are in need of new allies (e.g. what Russia has done in the Central African Republic, as we have discussed in issue #10 and #20), or to step into places of conflict and become a friend or frenemy to as many quarreling parties as possible (e.g. what Russia has done in the Middle East).

So, what’s Russia doing in the South China Sea? It looks like we are witnessing a similar strategy to their approach in the Middle East, with some elements of Central Africa. Russia is beginning to deepen its relationship with 3 of the quarelling parties. These are China, Vietnam and the Philippines.

China and Vietnam are nothing new for the largest descendant of the Soviet Union. Both communist nations have had a long history of purchasing Russian made weapons, and of alliances with the Soviet Union. Russia has also strengthened its relationship with both aforementioned countries by signing military roadmap cooperation agreements in 2017 and 2018 respectively.

The growing relationship between the Philippines and Russia is an interesting case. One where Russia is stepping into a country that has traditionally aligned itself with the United States. Most recently, Manila has explained their desire to purchase Russian submarines. These underwater beasts of war are becoming increasingly important in this seascape saber-rattling conflict

Since 1991, 4 of the 6 parties with claims in the South China Sea have purchased at least 2 attack submarines. Taiwan and Malaysia have a total of 2 submarines, while Vietnam 6. China dwarfs all with 73, including a dozen or so nuclear submarines. The Philippine’s does not want to be left behind. Hence, they are in the market for submarines. According to Manila, the reason behind the potential Russian purchase has to do with quality.

“Why did you not stop the other countries in Asia? Why are you stopping us? Who are you to warn us?" said Philippine President Rodrigo Duterte during an event in his hometown of Davao, according to Busines Insider. "You give us submarines, [which] will implode."

Duterte further added that the U.S. had sold them used and faulty weaponry before. Referencing a series of helicopters whose poor condition allegedly led to the deaths of Philippine soldiers.

The U.S. is worried though and has said that such purchase would be detrimental to  the current U.S.-Philippine alliance. Duterte has already made other overtures to Beijing to Moscow, and is distancing himself from the U.S. Most likely because he wants a better deal, and is unsatisfied with the current state of relations between Manila and Washington D.C. 

“I don’t think that’s a helpful thing to the (US-Philippine) alliance and ultimately I think we can be a better partner than the Russians,” said Randall Schriver, U.S Assistant Secretary of Defense for Asia and Pacific Security Affairs in a press-conference the U.S. embassy in Manila. “We’ll be a good ally … there should be no misunderstanding or lack of clarity on the spirit and the nature of our commitment.”

For now, the fight is on though. Duterte is looking towards Russia and the U.S is fighting back. If the U.S. does not provide the Philippine’s with what they want they will likely begin to trade White House for the Kremlin.  It’s the first hurdle for Russia, and one that they can overcome through simple salesmanship.

Who will Russia court next though in this conflict? No word yet on their moves on Brunei, Taiwan or Malaysia. That being said, it’s likely they will maintain a focus on Brunei and Malaysia before Taiwan. With the former two, Russia already has cordial relationships, and has expanded its bilateral trade with each over time. Malaysia has quietly been growing its science, cultural and even military relationship with Russia for the past decades. Brunei less so, but it has at least on the diplomatic front, and through trade. The sultanate is also a fellow petrostate, and by default has many similar national interests to Russia.

With Taiwan, Russia’s overtures are unlikely to go so smoothly. This is because Taiwan is one of the region's biggest allies of the United States. China would also disapprove immensely of them courting the island that they see as a renegade province. That being said, Russia does have trade with the island, and it could surprise us with their diplomatic finesse. They are after all the only country that has managed to build friendships with everyone in the Middle East.

Read more: 

"U.S will be a 'Good Ally' to Philippine's if China Invades," by AFP staff. 

"The Philippine President Does Not Want U.S Submarines," by Ryan Pickrell for Business Insider. 

"Russia May Provide Philippine's with First Submarine," by Duncan DeAeth for Taiwan News. 

"Armed Clash in the South China Sea," by Bonnie S. Glaser for the Center of Preventive Action. ​

Are the Next “Rockefellers” Russian?

What do the Rockefeller, Bolloré and Rothschild families have in common?

Beyond the fact that they are old families with immense family fortunes, these families have done something that the Vanderbilt’s for instance did not achieve. They managed to transfer their massive wealth from one generation to the next. As we sit in 2018, we are on the verge of the largest wealth transfer in history, going to the ‘baby boomers’, and indirectly to many millennials as well.

This transfer will be the single largest transfer ever to occur. In places like the U.S, France, the U.K and other western countries, there is an old culture of how to transfer wealth. Basically, to optimize costs and taxes. In places with newer less ‘educated’ fortunes, such as Russia, this is not the case. Ultra High Net Worth individuals in Russia, acquired their vast wealth in a very short span of time (in sometimes obscure fashions), and only began to do so in the 90’s after the fall of the Soviet Union. For the past 20 years, these people have been working to acquire wealth in all of its possible forms and styles.

These entrepreneurs were working to protect their assets, be it by consolidating or expanding. Always remaining at the helm of their businesses, and not delegating it to boards or family type offices. These businessmen were not professionally trained professionals (e.g. MBA types like the creators of this newsletter). Instead, they are people who emerged from a certain chaos, and as such work well with chaos. They often have a multitude of interests around the globe. However, when your wealth is tied to your core company, and you often treat its funds as if they were private, problems can arise.

In Russia, however, some of the businessmen behind large fortunes are maturing in their view of wealth maintenance. Hence, the former Communist powerhouse nation is finally seeing the emergence of family offices, be they for one family or multiple. As these wealthy individuals begin consolidating their fortunes and start to act like their western forefathers, we will finally get a clearer vision of their assets. As family offices start taking shape, these tycoons are actually moving their whole cast forward by decades, and will spur further global economic development by becoming ‘smart money’ (e.g. money invested by people with expert knowledge). 

In order to professionalize their future inheritors, Russian tycoons have been sending their offspring to various boarding schools and universities around the world. This will in principle teach them how to behave in accordance with their inherited position. It will be interesting to see how this transfer of wealth from direct control to family offices will operate. Even more so, to see how this younger generation is going to run the family business. Considering that they have been educated, and now operate with western manners.

A key difference between wealthy Russian families from western families is their desire to have a liquid portfolio. Russian’s still believe ‘cash is king’ for better or for worse. An explanation for this could be that having a liquid portfolio ensures your ability to move assets swiftly from one location to another. In Russia, there still remains elements of the “wild 90’s.” Thus the heads of these fortunes need safeguards against a total loss.  Safeguards that cash and cash like financial instruments can provide. These entrepreneurs have lived through some very tough periods, and therefore prefer a certain level of control. Hence, they will always be skeptical of certain investment vehicles.

How will the world handle and receive these new “Rockefellers”? Time will tell.

If the West accepts them (and it will most likely) these new princes and princesses of industry are likely to make a cultural, political and economic splash. One that is going to ripple throughout western culture, and perhaps lessen the current "New Cold War" dynamic.

Read more: 

"Rich Russians Start Family Offices as Heirs Lie in Wait," by Alexander Sazonov for Bloomberg. 

"Hiding Russian Money was Easy. Quitting was Harder," by Max Colchester and Margot Patrick for the Wall Street Journal. 

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