LIVE UPDATES: The House Committee on Foreign Affairs of the US Congress approved the Global Magnitsky Act, amid challenges from some members citing Kremlin disinformation.
Welcome to our column, Russia Update, where we will be closely following day-to-day developments in Russia, including the Russian government’s foreign and domestic policies.
The previous issue is here.
Recent Analysis and Translations:
– Who is Hacking the Russian Opposition and State Media Officials — and How?
– Does it Matter if the Russian Opposition Stays United?
– Russian Foreign Minister Lavrov Has Invented A Version Of History To Meet His Needs
– Getting The News From Chechnya â The Crackdown On Free Press You May Have Missed
The European Union’s foreign policy chief Federica Mogherini has told the German newspaper Die Welt that the EU is once again set to renew sanctions levied against Russia for its intervention in Ukraine. Wall Street Journal reports:
In an interview published Thursday, Ms. Mogherini was asked if the economic sanctions expiring in July will be extended.
“I expect so. EU leaders had tied the lifting of sanctions to a complete implementation of the Minsk agreement. That hasn’t been achieved until now,” she said.
“In the second half of this year, EU governments are expected to undertake a complete political assessment to determine to what extent the Minsk agreement was implemented and what the path going forward to resolve the conflict in Ukraine looks like.”
One diplomat said that backing for the renewal of sanctions has strengthened in recent weeks because of a rise in violence and tensions in eastern Ukraine between government-backed forces and pro-Russian rebels. That has stalled already slow progress in implementing the February 2015 Minsk cease-fire and peace agreements.
EU Ready to Extend Russia Sanctions Over Ukraine Crisis
News Corp is a network of leading companies in the worlds of diversified media, news, education, and information services. Bloc's foreign policy chief says ongoing turmoil in Ukraine makes renewal of sanctions likely BRUSSELS-The European Union's economic sanctions against Russia look set to be extended beyond July because of the continuing conflict in Ukraine, the bloc's foreign policy chief said Thursday.
There have been concerns that some members of the EU would block the extension of sanctions since countries like Greece have elected governments that are more sympathetic to Russia, and since the Dutch recently passed a non-binding referendum against Ukraine’s association with the EU.
RFE/RL adds that Mogherini clearly stated that Russia’s non-compliance with the Minsk agreements is the primary reason why sanctions will not be lifted.
“The heads of state and governments had required that the sanctions be lifted when the Minsk agreement is fully implemented,” Mogherini said in an interview published on May 19 by Germany’s Die Welt newspaper. “But, that’s something that we haven’t achieved yet.”
Reuters reports that the sanctions are likely to be extended for six months.
Italy, Greece, Cyprus, Hungary and Bulgaria are among EU states skeptical that sanctions should be extended, diplomats say, facing off against Britain, Sweden, Poland and the Baltic states.
“I don’t see how we could not extend them in July. The conditions, including Minsk, are not met,” said one EU official.
Another official said the most likely scenario was a six-month extension, adding that G7 leaders would discuss the matter at their next summit in Japan on May 26-27 as the EU and the United States aim to keep a joint stance on Russia.
Last year, G7 leaders meeting in Germany vowed to keep sanctions in place until Russia fully implements the terms of the peace deal. Italian Prime Minister Matteo Renzi later briefly opposed extending the restrictive measures at the end of 2015, but eventually fell into line.
The IMF today announced that while they have revised their expectations for the Russian economy, the country would still face the negative consequences of low energy prices and international sanctions. Market Watch reports:
The combination of falling prices and international sanctions led to a contraction of 3.7% in the Russian economy last year. In 2016 it is likely to shrink by an additional 1.5%, the IMF said.
The IMF’s new forecast, however, is more optimistic than its April prediction that the oil-dependent country would contract by 1.8% this year.
“We have improved our outlook for Russia, part of which has come due to higher oil prices relative to our last forecast. In addition we have seen inflation declining faster than we had anticipated,” said Ernesto Ramirez Rigo, IMF Mission Chief for Russia.
The IMF now sees an average price for oil, Russia’s key export, at $41 per barrel this year compared with $35 per barrel previously.
— James Miller
Domozhirov, who is chairman of the movement Vmeste [Together] and the the Vologda representative of the Party of Progress founded by anti-corruption activist Alexey Navalny, later wrote about the attack on his LiveJournal page:
Translation: On today’s attack on me.
He said at 7:30 am, just after he had taken his son to daycare, a man on a bicycle drove by, shouted something at him, them pumped 4 bullets from an Osa trauma pistol into his back and arm. Domozhirov tried to hide behind a car as the attacker kept shooting at him. He summoned police, who asked a lot of questions. They, along with his blog readers, wondered what the motives of the attackers could be.
Domozhirov says he has been involved in combatting local corruption for five years, and has focused on construction companies recently, which had “turned the city into stone jungles.” He believes a man named Igor Vorobyov, who works for Sergei Shonurov, a local mafia-type businessman could be behind the attack. Domozhirov characterized Shonurov as having been involved in “drugs, prostitutes, and machine guns” and had provided protection to boxers and also extorted protection payments. Eventually he “legalized” his cash by taking over a number of businesses, including a collection agency, a gas and electric company, a construction firm, and a private security firm and put Vorobyov as the front man for the companies.
Domozhirov was investigating this businessman and found ties between him and a private security firm called Checkpoint M and other organizations he believed were involved in organized crime and were winning all the construction contracts in the city, including the building of a clinic, the Prague Center and others.
Domozhirov noted that this was the second time he had been attacked by the day care center; three years ago he was beaten on the head and suffered a severe gash; police never investigated the case and claimed he had hurt his head himself.
— Catherine A. Fitzpatrick
“The activity of a criminal group was intercepted whose members planned to commit terrorist acts according to the Paris scenario in major cities of Russia. After that they wanted to go to Syria and join the ranks of ISIL.
But thanks to the joint efforts of the FSB and Belarus’ KGB, the would-be terrorists were found who had been placed on Russia’s international wanted list of citizens who have fought in Syria and have planned to hide in European countries.”
“authoritative representatives of civic, religious and youth organizations, and continue the practice of strengthening in the public mind of the awareness of “the concept of the incompatibility of terrorism with the dogmas of traditional Islam and also the inevitability of punishment for terrorist acts committed.”
“Inter-religious and inter-ethnic conflicts, ‘color’ revolutions, civil wars, essentially, have become habitual phenomena. The modern agenda requires from us a search for preventive measures, effective ways of reacting to emerging challenges and threats and organizing a reliable system of defense on CIS territory from destructive external actions.”
Earlier, authorities had described all the suspects as Tajiks, and arrested a larger number, some of whom they released and some of whom were deported.
Oil is the headline on the markets today. At last count, Bloomberg puts the price of a barrel of Brent crude oil down more than 2% on the day at $47.93, a sharp decline from just two days ago when an oil rally looked like it could top $50 a barrel.
Here’s oil over the last month:
The two key reasons for the drop in oil prices today are the rising value of the dollar and the supply glut which has not gone away. The strong dollar could also get stronger, as the US Federal Reserve is discussing raising rates soon which tends to improve the value of the currency. Since oil is priced in dollars, devalued oil and the improved American currency spells a double hit for countries that base their wealth on energy.
But it’s the glut in oil supply that reveals that oil’s recent rise in price is based on short-term indicators, and a return to expensive oil may still be far off. Market Watch reports:
In the U.S., crude-oil inventories unexpectedly rose by 1.3 million barrels to 541.3 million barrels last week, the Energy Information Administration said Wednesday. Oil inventories in the U.S. have been hovering near all-time highs, underscoring the continuing global glut of crude.
Still, demand for refined products including gasoline and distillates such as diesel fuel rose to more than 20 million barrels a day, the EIA estimated, the highest weekly level since January.
In recent weeks, ongoing wildfires in Canada and supply disruptions in Nigeria and Libya have fueled the rally in oil.
“Disruptions continue to offer support to the market,” said Hamza Khan, head of commodity strategy at ING Bank. He estimates that supply outages have taken at least 1 million barrels of oil offline each day.
All of this means that the outlook for the Russian economy is still incredibly bleak. The Russian government constructed their 2016 budget with the expectation that Brent crude would be $50 a barrel. So far this year the average price of a barrel of Brent has been about $33.70 according to the Statistics Portal, about 33% lower than the Russian budget estimated. While the ruble has been steadily gaining ground, as recently as two days ago Bloomberg warned that the rally could be short lived:
The ruble is flirting with the 64 level it hasn’t breached since Nov. 5, an important psychological barrier for traders, according to Piotr Matys, a strategist for emerging-market currencies at Rabobank in London. Oil has climbed 77 percent from a record low on Jan. 20, bolstering the currency of the world’s biggest energy exporter, but Matys said the gains are meeting resistance.
“While the bullish momentum in oil keeps the bias skewed to the upside in the ruble-dollar, the 64 level is proving tough to clear,” Matys said.
Internal drivers may contain the ruble’s rally of 14 percent this year, the biggest among major world currencies. Once the average price of Brent in rubles matches budget targets for 2016, it will relieve pressure on the Russian government to undertake fiscal tightening, Matys said. Brent in rubles rose to 3,189 on Monday, the highest level this year and about 25 rubles above the average the finance ministry needs to meet its budget assumptions.
Today Bloomberg reports that the ruble has fallen more than most of its peers, even other emerging markets:
The Russian currency’s two-day retreat this week interrupts a rally that has continued through the year, making it the strongest performer among emerging-market peers over the last three months, largely reflecting a rebound in energy markets from 12-year lows in January. The median forecast of 45 strategists surveyed by Bloomberg is for the currency to weaken to 67 per dollar through the second half of 2016.
“Investors have been scared off by oil’s retreat and the Fed’s rhetoric,” said Alexei Egorov, an analyst at Moscow-based Promsvyazbank PJSC, which is among the most bullish forecasters in the survey. “The ruble can strengthen to 63 after investors weigh the Fed comments and oil recovers. At current oil prices, the ruble should be at about 63.”
Here is the ruble, priced in dollars, over the last month. An increase on the graph is a devaluation of the ruble:
But it’s not all bad news for the Russian economy. In fact, while the economy is still in its longest recession in more than two decades, it has beat many forecasts and could, by some estimates, turn a corner as soon as the second quarter of this year. Bloomberg offers this cautious-but-somewhat-optimistic assessment that efforts to diversify and reform Russia’s economy are under way and its monetary policy over the last two years has set the economy on a path toward eventual improvement:
With oil prices stabilizing, inflation reached 7.3 percent from a year earlier in the past two months, down from a 13-year high of 16.9 percent in March 2015, putting the central bank on track to meet its 4 percent target in 2017.
To measure the vital signs of the economy, look to industries including agriculture, whose share in GDP last year rose to 4.4 percent, the highest since 2003. The success of farmers — boosted by a weaker ruble and tit-for-tat sanctions over the conflict in Ukraine — was one reason last year’s economic contraction of 3.7 percent was less than half the decline during the last recession, in 2009.
The legacy of the crisis so far also includes such outperformers as the information technology industry, where output soared 28 percent last year, with pharmaceuticals adding 8.8 percent and chemicals climbing 4.4 percent. No breakdown by industry is yet available for this year.
For all the signs of improvement elsewhere, oil and gas remain the lifeblood of the economy. Any gains will prove short-lived without a broader overhaul that unlocks investment.
Russia Retools After Crash as Post-Oil Economy Takes Shape
Call it a stealth overhaul. With none of the that greeted Saudi Arabia's plan for the post-oil era, the Russian economy is quietly getting its biggest makeover under President Vladimir Putin. A trail left by crude's collapse has turned up some unlikely survivors and even industries that found a way to prosper as the broader economy burned.
Morgan Stanley, however, is nowhere near that optimistic. Business Insider reports that Russia’s ” Vulnerability Scoring Index” shows an increase in volatility in the Russian economy throughout 2016. Morgan Stanley also reports that the Russian economy has recovered at a slower pace and in a different pattern than it did in 2009 and in previous recessions, indicating more serious structural issues. They also point out that their own models which predicted the Russian economy to founder have been very accurate:
“Looking ahead, barring a strong rebound in oil prices or the lifting of sanctions, we see the recession lasting much longer through 2016, unlike the V-Shaped rebound in 2009, particularly given the rising risk of further sanctions,” Slyusarchuk wrote in a note soon after Russia’s financial crisis started.
Here’s the chart from this month’s note showing that the V-shaped recovery hasn’t been forthcoming:
MORGAN STANLEY: Things will only get worse for Russia's battered economy
Morgan Stanley has a warning for Russia: Don't expect things to get better anytime soon. The world's largest country (geographically speaking) has been mired in a financial crisis since oil prices started to crash in mid-2014, and according to Morgan Stanley economist Alina Slyusarchuk that crisis has some way to run yet.
The following headlines were taken from 7:40 na Perrone, Slon, Interfax, RosBalt, Gazeta, Meduza, Mediazona, RFERL
What We’re Reading
— Catherine A. Fitzpatrick