Hello from the Bear Market Brief.
This week in the news:
The Russian government released its draft 2025 federal budget, which includes significant spending on the war in Ukraine.
President Putin’s meeting with Energy Minister Sergey Tsivilyov sparked rumors that Russia plans to further nationalize its energy sector.
Ukraine launched an e-residency program that enables foreigners to remotely register a business in Ukraine.
Ukrainian forces withdrew from Vuhledar under threat of encirclement by Russian troops.
— Sara Ashbaugh, Editor in Chief
Details of the 2025 federal budget
Following the outline figures announced last week, this week, Russia’s government presented a detailed, almost 7,000-page-long draft of the 2025 federal budget with additional plans for 2026 and 2027. The main takeaway remains—as we highlighted last week—that expenditures on the war in Ukraine (direct, indirect, and hidden) will grow further next year. The Kremlin expected a turning point in the war in 2024, and, because it has not materialized, every other policy will have to take a back seat. Social spending, for example, which the government named a “priority,” will drop even in nominal terms, even though this heading also includes payments to soldiers’ families.
The draft assigns 13.5 trillion rubles to defense spending, a 25% growth on this year’s projected figures—significantly above projected inflation—and 5 trillion rubles higher than what fiscal projections adopted at the end of 2023 envisaged. An additional 3.5 trillion will be spent on national security. The federal government also plans to earmark more than 1.29 trillion rubles over the next four years on the “reconstruction” of occupied territories in Ukraine, which were destroyed by the Russian military. This sum does not include further subsidies and grants transferred to the so-called “new regions” (as Russia refers to the occupied territories) under other budgetary headings or funds allocated to the occupied territories from the budgets of Russian regions and state-owned companies that assumed tutelage (“shefstvo”) over occupied districts.
Apart from cutting or delaying budgetary allocations on investment projects, salary hikes, and similar policies, the increased expenditures—which will rise from a projected 39.4 trillion rubles this year to 41.5 trillion rubles in 2025—will be covered by a combination of increased borrowing (4.8 trillion rubles), high oil prices (which, according to the government, should be enough even to replenish the National Welfare Fund), and growing corporate and personal income taxes and VAT receipts. However, borrowing plans may be complicated by the Central Bank’s assumption that its key interest rate, currently at 19%, may have to be raised further next year due to growing government expenditures. The government also expects higher income from fines, albeit this is not a very significant source, estimated at slightly under 600 billion rubles. At the same time, the government is canceling the mineral extraction tax (MET) surcharge that affected Gazprom in order to aid the company’s investment program, which suffered after Gazprom gave up most of its European export markets.
The budget can still be modified until its final adoption. However, the main priorities are and will remain clear: in order to further finance the war in Ukraine and its domestic consequences, the federal government is ready to take on the risks inherent to the overheating of the economy, including stagflation and underinvestment into infrastructure.
— Andras Toth-Czifra
On Monday, Russian Prime Minister Mikhail Mishustin traveled to Tehran to meet with Iranian President Masoud Pezeshkian. During the meeting, the pair celebrated their countries’ joint projects in the energy and agriculture sectors, including a long-term gas agreement negotiated earlier this year. They also discussed the ratification of a free trade agreement between Iran and the Eurasian Economic Union, which is expected to come into force next year. Mishustin’s visit came just days after the Israeli assassination of Hezbollah leader Hassan Nasrallah, which Russia and Iran have both condemned. (photo: government.ru)
Shifting gears in nationalization?
The Kremlin declined to confirm reports that, at a meeting over the past week with Energy Minister Sergey Tsivilyov, President Putin discussed the nationalization of the country’s fuel and energy complex, which would turn Russia’s biggest oil companies into a state-owned corporation. Officially, the meeting’s topic was power cuts in Southern Russia over the summer, but rumors suggesting that the pair discussed the nationalization of the energy sector started spreading on Telegram soon afterwards.
In spite of the Kremlin’s assurances over the past year that there is not going to be a major nationalization wave, the state has methodically targeted and taken under state control a series of key companies in the defense and food sectors, as well as other industries. Some of the assets given over to the state have been taken from owners who left the country (or from foreign investors that decided to leave Russia), but several companies were effectively nationalized through the Prosecution by annulling “fraudulent” or “illegal” privatization deals from the 1990s. Arguably, the Kremlin has also been using this tactic as a means to build a pro-war coalition and to control who gets the assets abandoned by foreign investors.
The nationalization drive has particularly affected companies in the energy sector. In July, for example, TGK-2, a major thermal power generator, was nationalized and transferred to Gazprom. However, in that case, the authorities stripped the asset from Sergei Lebedev, a former senator accused of white-collar crimes. The alleged plans presented by Tsivilyov to Putin would represent a different magnitude of nationalization.
It should be noted that at last month’s Eastern Economic Forum in Vladivostok, Tsivilyov—who is also the husband of Deputy Defense Minister Anna Tsivilyova, reportedly Putin’s first cousin once removed—did tell Putin that the Russian energy sector reserves built up by the USSR have already been exhausted. This would present problems with the planned scaling up of energy generation capacity in Russia’s Far East.
— Andras Toth-Czifra
Ukraine launches e-residency for foreigners
Last Friday, Ukraine’s Ministry of Digital Transformation launched an e-residency program called uResidency, enabling foreigners to register a business in Ukraine from anywhere in the world using just a smartphone. There is no requirement for physical presence in Ukraine. E-residents can open bank accounts via their phones, with the only in-person step being verification at a consulate. They will also benefit from one of the most favorable tax rates among countries offering e-residency: 5% on income up to 180,000 euros (almost $198,000). If this limit is exceeded, the tax rate increases to 15% on the amount above the threshold.
Currently, only citizens of India, Pakistan, Thailand, and Slovenia can become e-residents in Ukraine. The program is particularly well-suited for small businesses in the IT, gaming, and digital technology sectors, as well as online services in the creative economy, such as marketing, sales, web design, project management, and media. The list of eligible countries is expected to expand in the future.
To obtain e-residency status, applicants need a smartphone, a foreign passport, and 15 minutes for offline verification at a Ukrainian consulate in their country. This is the only step requiring physical presence, but, eventually, this step will also be completed remotely. All other processes, including opening a bank account and withdrawing funds, are conducted online.
The process begins with submitting an application through the uResidency website or app. Following that, the application undergoes verification, which may take up to 30 days. Applicants then register for an offline identification appointment at the Ukrainian consulate through the mobile app or web portal. The verification at the consulate lasts up to 15 minutes, during which the e-resident simply needs to take a photo and show their passport for verification. After this, the applicant receives an identification code and a QR code for authorization in the mobile app, allowing them to generate a Diia.Signature.
Next, the e-resident can open a private entrepreneur account through the app or website and finally, register a bank account. Having a bank account enables the e-resident to manage their finances, including receiving funds and transferring them to a personal account abroad. Online banking is a significant advantage of this program.
uResidency allows foreigners to experience the ease of registering and managing a business with just a few clicks—something Ukrainians have already become accustomed to. Additionally, it aims to build trust in Ukraine from the international business community, particularly in attracting investment in Ukrainian technological products and projects. Each registered business also contributes to the Ukrainian budget. Within a year of launching the project, the Ministry of Digital Transformation plans to attract 1,000 e-residents, which could generate millions of hryvnias for the budget and support the economy during the ongoing full-scale war.
— Lisa Noskova
Rescuers saved a family of killer whales beached on the Kamchatka Peninsula this week. On October 2, a group of orcas, including two adults and two calves, were caught in low tide at the mouth of the Bolshaya Vorovskaya River near the coast of the Sea of Okhotsk. Russian Emergency Situations Ministry employees and volunteers sprayed the orcas with water and attempted to push them out of the shallow part of the estuary. After a 3-day rescue operation, the Ministry reported that the mission was successful; the orcas had been moved to deeper waters and were able to swim out to sea. (photo: Head of the Sobolevsky Municipal District of the Kamchatka Region Andrei Vorovskiy via VK/Handout via Reuters)
Ukraine withdraws from Vuhledar
Earlier this week, Ukrainian forces withdrew from Vuhledar, a town in the southeastern Donetsk region. As discussed in last week’s brief, Russian attacks on Vuhledar have intensified recently, leaving Ukrainian troops at risk of encirclement. On Tuesday, photos emerged online of Russian soldiers waving flags atop buildings near the city center. By Wednesday, Ukraine's eastern military command ordered forces to pull back to avoid becoming surrounded. “The High Command gave permission for a maneuver to withdraw units from Vuhledar in order to save personnel and military equipment and take up a position for further operations,” the Khortytsia group (a group of Ukrainian troops operating in the region) posted on Telegram. The 72nd Mechanized Brigade, which has been defending Vuhledar since August 2022, also withdrew from the city. Many were wounded or killed in the retreat, soldiers told the BBC.
Russia has been attempting to capture the city for more than two years—since the beginning of its full-scale invasion. An earlier report by the Financial Times estimated that the effort to take the city has cost Russia thousands of troops and hundreds of tanks. The former coal-mining town became a target for the Russian military because of its strategic position on the southern flank. In an interview with The Moscow Times, Ukrainian military analyst Ivan Stupak described Vuhledar as a gateway to the southern Donbas. In addition to standing on elevated ground, Vuhledar is also at the intersection of the southern and eastern front lines, making it an important location for delivering Russian military supplies. The town’s capture will allow Russian troops to advance north towards Pokrovsk, a key logistics hub for Ukrainian defenses in the Donetsk region. Russian forces are expected to attempt to take Kurakhove next, a nearby city that lies between Vuhledar and Pokrovsk.
— Sara Ashbaugh
On the podcast
Kyiv-based journalist Fabrice Deprez returns to the Brief for another update on the mood in Ukraine, including a report on his recent trip to the frontline city of Pokrovsk.
Quickfire: Regions
In a further blow to Russia’s flagship liquefied natural gas project, Arctic LNG 2, India announced last week that it is not planning to buy gas from the project because it is under Western sanctions. Novatek, the owner of Arctic LNG 2, still expects to launch the project despite significant delays and key suppliers withdrawing from it—problems that have already caused Novatek to postpone the launch of the third production line. However, according to the Kommersant Daily, it appears that due to existing sanctions and the prospect of further sanctions, the company will need to redesign, rethink, or abandon two further planned LNG projects: the Murmansk LNG and the Ob LNG on the Yamal Peninsula. Work on the Volkhov-Murmansk-Belokamenka gas pipeline, key for the Murmansk project, has been suspended.
As per the latest figures published by Rosstat, the three regions experiencing the highest increase in nominal wages in the first half of 2024—Udmurtia, Kurgan, and the Republic of Mari El—are all regions relying on machine-building and arms manufacturing. Real wages also grew by 7.4% across the country and by more than 10% in the regions that experienced the highest wage growth. Altogether, Rosstat has revised its estimate of industrial production growth across the economy to 5% and to 9% in the manufacturing sector in the first half of 2024. The above suggests that the growth is still mainly driven by state orders from the defense industrial complex. A more granular examination of production data (e.g. by the Central Bank) suggests a slowdown of consumer sectors over the summer.
The State Duma will consider five draft laws that aim to establish stricter control over migration in Russia. Among other things, the bills would make staying in the territory of Russia illegally an aggravating circumstance for crimes, and introduce stricter punishments for organizing illegal migration or providing services to illegal migrants. Over the past months, especially after the Crocus City Hall terrorist attack in March, several regions across Russia have introduced restrictive measures affecting migration and migrants’ access to the labor market. In several regions, this has led to disruptions in the provision of certain public services that rely on migrant labor, such as sanitation and transportation. In the latest moves over the past week, the Khabarovsk Territory, the Sakha Republic, and the Kaluga Region introduced further restrictions on migrant labor. Meanwhile, the government of the Saratov Region significantly reduced the number of medical institutions that are allowed to examine foreign citizens.
— Andras Toth-Czifra