Hello from the Bear Market Brief.
This week in the news:
Several prominent members of the Defense Ministry were arrested on suspicion of corruption, including Major General Ivan Popov.
The Dutch parent company of Yandex, Yandex N.V., completed the first phase of its planned divestment from Russia.
The State Duma held a hearing about future tax hikes to finance federal spending on the war.
U.S. policymakers are considering allowing Ukraine to use U.S.-supplied weapons to strike targets inside of Russia.
The European Union approved the use of profits from frozen Russian assets to provide military assistance to Ukraine.
— Sara Ashbaugh, Editor in Chief
Arrests, appointments, and announcements around the Defense Ministry
Russia’s government reshuffle continues with changes in and around the Defense Ministry.
This week, Oleg Savelyev, the former deputy head of Russia’s Accounts Chamber, was appointed Deputy Defense Minister and Colonel General Yury Sadovenko was dismissed from the position. Savelyev, who was also a minister for Crimea in 2014-2015, was likely appointed to help the ministry’s new head, Andrei Belousov, tighten control over war spending. Meanwhile, arrests have also continued. In addition to former Deputy Defense Minister Timur Ivanov, Yury Kuznetsov, the chief of the Defense Ministry’s main personnel directorate, and Lev Martirosyan, the former head of Food Service for the Krasnodar Higher Military School, were also arrested on corruption charges. Furthermore, last week, Major General Ivan Popov was arrested on suspicion of large-scale fraud. Popov, the former commander of Russia’s 58th Army, was removed from his position in July 2023 after complaining about high casualty rates among Russian soldiers invading Ukraine, pointing out a lack of adequate support, and trying to make a push for the rotation of soldiers (which still has not happened). Popov is popular with army troops, and pro-war bloggers have reacted to his arrest with anger.
At the same time, Belousov, a supporter of greater and more direct state involvement in military production, is already facing pressure from the head of Rostec, Sergey Chemezov. Rostec is a major supplier for the Russian army. In an interview with RBC, Chemezov complained about low profit margins in the defense industrial complex; profitability is currently only 2.28%, while it should be between 5% and 10% in order to stimulate development and raise productivity. Chemezov—who, according to Meduza’s sources, had a conflict with ex-Defense Minister Shoigu—indicated that he expects higher payments from the state if war production continues to be a priority. The sector—and manufacturing as a whole—has been suffering from the effects of labor shortages for at least a year. Chemezov and Deputy Prime Minister Denis Manturov, who is considered to be his ally, held a meeting with President Putin on May 11 to outline their views.
On May 21, the Dossier Center published an investigation into Belousov’s past. The report claims, based on a leaked copy of the calendar of late Wagner Group leader Yevgeny Prigozhin, that Belousov was the “curator” of Wagner’s activities in the Russian government. The Dossier Center also found that Belousov owned a villa in Italy (which he sold in 2018) and a bank account in Malta, somewhat tarnishing his image as a relatively non-corrupt member of the federal government.
— Andras Toth-Czifra
The trial began this week for director Zhenya Berkovich and playwright Svetlana Petriychuk, who stand accused of “justifying and promoting terrorism.” The charges relate to Petriychuk’s play, Finist the Brave Falcon, which was directed by Berkovich and produced by the independent theater company Soso Daughters in 2022. The play tells the story of a Russian woman who is seduced by a member of a radical Islamic group and travels to Syria to be with him. “Our goal was to highlight the problem [of recruiting girls], which is what we did,” Petriychuk said on the first day of the trial. Despite numerous artists and human rights activists speaking out against their imprisonment, the pair have been in pre-trial detention for over a year. (photo: SOTAvision)
Yandex parent company divests from Russia
The Dutch parent company of Yandex, Yandex N.V. (YNV), announced that it has completed the first phase of its planned divestment from Russia.
On February 4, 2024, YNV reached an agreement with a purchaser to sell the group’s Russian businesses for 475 billion rubles ($5.3 billion). On Friday, YNV announced the closing of the transaction’s first phase, involving the sale of approximately 68% of its shares in Russian businesses. The final sale of the remaining shares is expected to happen within the next seven weeks, after which YNV will have no interest in Russian businesses. YNV will, however, retain some of Yandex’s international businesses, including cloud platforms and self-driving car technology. YNV will rebrand these and its other non-Russian assets, in addition to changing the company’s legal name, by July 31.
The buyer is a mutual fund called Consortium.First, made up of several Russian companies, including energy giant Lukoil. Yandex’s new parent company, owned by Consortium.First, is a legal entity called MKPAO Yandex. Shares of MKPAO Yandex will be available to trade on the Moscow Exchange on July 10, and YNV will be delisted on the same day. The Dutch company says that it hopes to resume trading of its shares on Nasdaq, from which it was delisted last year.
This sale is the largest by any Western-owned company leaving Russia since the beginning of the full-scale invasion. It was, however, still subject to the mandatory 50% discount that is applied to all foreign investors from “unfriendly countries” who are attempting to sell their Russian assets. Despite this, YNV Board chairman John Boynton spoke positively about the agreement. “We believe that the proposed sale will position both parts of the current group to develop and grow for the benefit of their stakeholders,” he said. The Kremlin also welcomed the deal; “Yandex is a national technology champion. For us, it is of course important that the company continues to work in the country,” Kremlin spokesman Dmitry Peskov said.
— Sara Ashbaugh
Taxes and rates could both grow
The State Duma held a hearing this week about the parameters of new tax hikes planned by the government to finance war spending. According to earlier reporting by iStories, plans to raise an additional 4 trillion rubles ($44.6 billion) included raising the personal income tax (PIT) rate from 15% to 20% for yearly incomes above 5 million rubles ($55,800) and from 13% to 15% for incomes between 1 and 5 million rubles ($11,160-55,800). The corporate income tax rate would also rise from 20% to 25%. Finance Minister Anton Siluanov claimed that only the wealthiest Russians would be affected by the tax hikes, despite the fact that 1 million rubles is only slightly above Russia’s average yearly salary, according to state statistical agency Rosstat. The Finance Minister also said that the government would offer rebates for families with at least two children.
For companies, the federal government is planning to expand an investment support mechanism in the form of tax deductions, which is currently available as a regional tax instrument. The stated goal is to support investment into technological development. At the same time, it would expand the list of companies that can make use of simplified taxation and guarantee that the tax system remains stable for the following years. All this is likely a sweetener for an eventual considerable corporate income tax hike. Alexey Repik, the head of business association “Delovaya Rossiya,” suggested that, depending on the investment support mechanism, the tax rate could be raised from 20% to 30%. While the federal budget shares corporate tax receipts with regions, it is likely that most or all of the extra income would benefit the federal budget and, at least according to Siluanov, will be spent on social policy.
Regions, on the other hand, would be encouraged to tax land and luxury items more heavily to shore up their own sagging incomes. This proposal also gained support from Andrei Makarov, the head of the Duma’s committee on taxes and the budget. Earlier, the government suggested that regions should set up committees to fight illegal employment (however, these bodies would simply collect information and share it with the Federal Service for Labor and Employment).
Siluanov also confirmed that the government would not raise the VAT rate, as this would increase inflationary pressure on the economy. Since inflation is still higher than what was expected by the Central Bank, the Bank will also consider raising, rather than lowering, its key rate at its next Board of Directors meeting on June 7. The last time that the bank raised its key rate was in December 2023.
— Andras Toth-Czifra
Mediators from Qatar facilitated the return of six children from Russia to Ukraine this week, according to Russian state media agency TASS. Six boys, aged 6-17 years old, were reportedly reunited with their families at the Qatari embassy in Moscow. The event was attended by the Qatari Ambassador to Russia Sheikh Ahmed bin Nasser Al Thani and the Russian Presidential Commissioner for Children's Rights Maria Lvova-Belova. Mediation by Qatar has helped return dozens of children to Ukraine, although thousands more remain in Russia. Ukraine estimates that Russia has illegally taken more than 19,000 Ukrainian children, a crime for which the International Criminal Court issued arrest warrants for Lvova-Belova and President Putin. (photo: Anastasia Bobyleva / TASS)
The U.S. debates allowing Ukraine to use U.S.-supplied weapons to strike targets in Russia
Secretary of State Antony Blinken reportedly changed his position on allowing Ukraine to use U.S.-supplied weapons to strike strategic targets in Russia after his visit to Kyiv last week. According to The New York Times, there are now internal deliberations over this policy within the U.S. State Department. However, it is not yet clear if and when the State will propose the policy change to President Biden, who has been unwavering on this restriction. On Monday, a bipartisan group of U.S. lawmakers wrote a letter to Defense Secretary Lloyd Austin urging the Pentagon to authorize the use of U.S.-provided weapons to strike strategic targets inside Russia and Russian-occupied territory. The letter also suggested training additional Ukrainian F-16 pilots and providing additional Patriot batteries to Ukraine to bolster the country’s air defense capabilities. The signatories of the letter include Representatives Michael Turner (OH-R), Jim Himes (CT-D), Gerald Connolly (VA-D), Darin LaHood (IL-R), Linda Sánchez (CA-D), Neal Dunn (FL-R), Rick Larsen (WA-D), Brian Fitzpatrick (PA-R), Brendan Boyle (PA-D), French Hill (AR-R), Austin Scott (GA-R), André Carson (IN-D), and Jason Crow (CO-D).
Ukrainian officials have been pushing their American counterparts to lift the ban on using U.S.-made weapons for strikes inside Russia, arguing that this policy kept them from attacking the enemy’s position as the Russians prepared for their latest offensive in the Kharkiv region. “We saw their military sitting one or two kilometers from the border inside Russia and there was nothing we could do about that,” head of Ukraine’s special parliamentary commission on arms and munitions Oleksandra Ustinova commented. In a recent interview, Lithuanian Minister of Foreign Affairs Gabrielius Landsbergis also supported the Ukrainian plea, saying that the restrictions imposed by the U.S. on using long-range ATACMS missiles inside Russia were a “mistake.”
The UK lifted a similar restriction on the use of British weapons by Ukraine inside Russia earlier this month. During his latest visit to Kyiv, UK Foreign Secretary David Cameron said that it is up to Ukraine to decide how to use British weapons. “Just as Russia is striking inside Ukraine, you can quite understand why Ukraine feels the need to make sure it’s defending itself,” Cameron said. In response, Kremlin spokesperson Dmitry Peskov called Cameron’s statement “a direct escalation of tension around the Ukrainian conflict, which would potentially pose a threat to European security.”
— Lisa Noskova
EU to use profits from frozen Russian assets to support Ukraine
On Tuesday, the European Council announced that it approved the use of windfall profits from the frozen Russian sovereign assets to aid Ukraine. The central securities depositories holding Russian sovereign assets and reserves of over 1 million euros will make a financial contribution from their corresponding net profits, accumulating since February 15, 2024. According to the Council’s statement, 90% of the money will be used to provide military assistance to Ukraine through the European Peace Facility, and the remaining 10% will be used to bolster Ukraine’s defense industry capacities and reconstruction needs with EU programs. The allocation will be reviewed annually. Czech Foreign Minister Jan Lipavsky commented on X that this decision will result in nearly 3 billion euros for Ukraine this year. This amount, however, is merely enough to meet one month’s worth of financing needs for the Ukrainian government.
Reportedly, the question of what to do with the frozen Russian assets—in particular how to turn the windfall profits into a larger chunk of money to support Ukraine’s needs—will be at the top of the agenda during a meeting of the G7 finance ministers this Thursday through Saturday in Italy. As a reminder, approximately 210 billion euros in Russian Central Bank assets were frozen by the EU following the full-scale invasion of Ukraine in February 2022, with roughly two-thirds held in the Belgium-based financial services company Euroclear.
— Lisa Noskova
On the podcast
Russia has taken an increasingly authoritarian turn over the last decade, but is its political system fascist? Marlene Laruelle and Julian Waller join to discuss the blurry lines between politics, ideology, and terminology.
Quickfire: Regions
A state of emergency was introduced in the Transbaikal Territory due to wildfires that the region was unable to contain. Since the beginning of the fire season, the region has experienced fires on a territory of more than 64 thousand hectares, more than twice as large as last year. The situation is similar in the neighboring Amur Region. Authorities suspect that the fires are the consequence of arson to a considerable extent, which often occurs in the Far East to cover up illegal logging or to illegally clear areas for industrial development. However, the governor vowed to fundamentally reorganize the work of firefighters in the region, highlighting that labor shortages are also making it increasingly difficult for regions to prepare for the fire season.
According to an analysis by the Gaidar Institute, based on the first quarterly results of the implementation of regional budgets, almost half of Russia’s 83 regions faced a drop in fiscal revenues in the first three months of 2024 compared to the same period in 2023. In two major oil and gas producing regions, the Tyumen Region and the Yamal-Nenets Autonomous District, tax collection was more than 30% below last year’s indicators. This is mostly due to a drop in corporate income tax revenues, an important source of revenue for regional budgets. Another key revenue stream, personal income tax collections, grew considerably. This is due to rising salaries triggered by labor shortages and war-related production as well as social support payments. While some regional revenues nominally grew in the first quarter, the overall growth was below inflation. It is unlikely that regions will face bankruptcy in the near future—their debt burden, on the whole, is low, and most of it consists of cheap budgetary loans—but the federal government is not planning to increase transfers to most regional budgets. President Putin recently approved the development plans of 10 poorer regions. However, the federal financing of these plans amounts to around 10 billion rubles ($111.6 million) per year, which does not come close to the funds intended for the occupied territories in Ukraine. These territories received more than a trillion rubles ($11.2 billion) in 2023 and will continue to receive comparable amounts of money in the foreseeable future.
The families of mobilized soldiers will hold a protest in Novosibirsk on June 1, the International Day for the Protection of Children. Participants will demand the rotation of mobilized men out of Ukraine, arguing that their children are “deprived of their right to a full family.” The lack of rotation remains the main factor of growing tension between the families of mobilized soldiers and the authorities. The federal government has not indicated that it intends to change its policy, despite the recent changes in the Defense Ministry. Andrei Kartapolov, the head of the State Duma’s Defense Committee, ruled out supporting a bill that would provide deferment to fathers of three from mobilization (currently only fathers of four or more have this right). Meanwhile, Eduard Sharafiev, a deputy in Tatarstan’s regional legislature from the Liberal Democratic Party, proposed demobilizing fathers with at least three children.
— Andras Toth-Czifra