Hello from the Bear Market Brief.
This week in the news:
Two people were killed during a shooting at the Wildberries headquarters in Moscow.
The Central Bank of Russia raised the key interest rate to 19% to combat high inflation.
Ukraine continues to attack Russian regions, prompting action from the federal government.
Russia launched a counteroffensive in the Kursk region to reclaim its territory.
A new report from the United Nations Human Rights Monitoring Mission in Ukraine shows that people are fleeing Ukraine due to energy shortages.
— Sara Ashbaugh, Editor in Chief
Wild Wildberries
The conflict over the control of Wildberries, Russia’s biggest online retailer, took a violent turn on September 18 with a shooting at the company’s headquarters in Moscow. At least two people were killed and seven were injured when armed men, reportedly led by Vladislav Bakalchuk, the estranged husband of Wildberries owner Tatyana Bakalchuk, turned up at the building. Armed men also showed up at another Wildberries office. The Investigative Committee has indicted 30 people—including Vladislav Bakalchuk—and arrested six as of September 19. The Bakalchuks have been going through a divorce, prior to which Tatyana Bakalchuk announced the merger of Wildberries with the much smaller advertising firm Russ Group, allegedly in an attempt to prevent her husband from taking over part of the company. The deal, which we wrote about in July, allegedly also received Vladimir Putin’s personal approval.
Apart from being a violent corporate conflict that calls into mind Russia’s “wild 1990s”—not the first since the beginning of the full-scale war, but probably the most important—the altercation is also significant because one of the men who showed up with Vladislav Bakalchuk has been identified as a member of the Akhmat Fight Club, linked to Chechnya’s despotic leader Ramzan Kadyrov. In July, Kadyrov appeared in a video with Vladislav Bakalchuk criticizing the Wildberries-Russ merger in a way that suggested that Bakalchuk was trying to threaten his estranged wife and her allies. Tatyana Bakalchuk called Wednesday’s conflict “a hostile takeover attempt” and issued a video in which she scolded her husband in tears.
The fate of Wildberries seems to be a developing story, and one that can have significant repercussions in Russia. It can draw (or erase) lines for business actors entangled in similar conflicts, all while the war and its economic consequences force Russia to go through a phase of significant asset redistribution. If Putin actually approved the merger, it is especially significant if the conflict over the company keeps escalating in spite of his approval.
— Andras Toth-Czifra
Russia and Ukraine exchanged 206 prisoners of war last weekend in a swap negotiated by the United Arab Emirates. According to the Russian Ministry of Defense, the 103 Russian troops freed in the exchange were captured in the Kursk region. The 103 Ukrainians included defenders of the Kyiv, Donetsk, Mariupol, Azovstal, Luhansk, Zaporizhzhia, and Kharkiv regions. “Our people are home,” President Zelenskyy posted to X on Saturday along with pictures of the returning soldiers. The UAE has facilitated a number of prisoner swaps between Russia and Ukraine since the beginning of the war, including an exchange of 230 prisoners shortly following Ukraine’s Kursk offensive in August. (photo: @ZelenskyyUa on X)
The Central Bank raises the key rate
The Central Bank of Russia (CBR) raised the key interest rate by 100 bps to 19% at their Board of Directors meeting last Friday. This is the second rate hike in a row; the Bank increased the key rate from 16% to 18% during its last meeting in July.
Although some analysts predicted that the CBR would leave the rate unchanged, recent economic data shows that inflation is not significantly slowing. “Underlying inflationary pressures remain high overall and have not yet demonstrated downward trends,” the Bank said in a press release following the hike. Annual inflation was 9.05% in August, down only slightly from 9.13% in July. Although the CBR initially predicted that inflation would slow to 6.5-7% by the end of this year, forecasts now expect annual inflation to remain above 7% until 2025. However, the Bank still hopes that a prolonged period of tight monetary policy will return inflation to its 4% target during 2025. “We feel this is achievable next year and we are pursuing the policy to make that happen,” CBR Governor Elvira Nabiullina said at a press conference. “We are ready to maintain tight monetary conditions for as long as needed, we are also ready to raise the key rate further,” she continued.
Massive government spending and labor shortages are contributing to the overheating economy. “Growth in domestic demand is still significantly outstripping the capabilities to expand the supply of goods and services,” the CBR stated. The labor market remains tight, particularly in the manufacturing sector, where demand has surged considerably. According to President Putin, Russia will likely spend up to 9% of its GDP on defense and security this year—an unprecedented amount. “The main internal risk is the exhaustion of available production capacity and labor force. In such a situation, any additional stimulation of demand will lead exclusively to an increase in prices without an increase in production,” Nabuillina said.
The CBR did not rule out the possibility of an additional rate hike at its next key rate review meeting on October 25. The key rate has not been as high as 20% since 2022, when it was abruptly hiked following Russia’s invasion of Ukraine.
— Sara Ashbaugh
War in the Russian regions
Ukraine claims to have successfully attacked an ammunition depot containing fuel tanks and explosives (among other things) in the Tver Region near the town of Toropets on the morning of September 18. The announcement was supported by footage of a large blast that was posted on social media, as well as NASA’s heat reading and even earthquake monitoring devices, which also suggested that the depot held a significant amount of equipment. The regional government announced a partial evacuation of the area, but later claimed that order had been restored. However, throughout the week, the Russian Defense Ministry reported dozens of Ukrainian drone strikes in several regions. The strikes mostly occurred in regions close to the border of Russia and Ukraine, but Ukraine had previously struck targets as deep in Russia as 1,800 kilometers (over 1,100 miles) from the border, highlighting the inability of Russia’s air defense to fully protect industrial and military establishments inside Russia’s industrial heartland (albeit most drones are shot down). The successful hit also comes on the heels of Ukrainian President Volodymyr Zelenskyy’s ongoing negotiations with the U.S. and the UK for permission to use British and American long-range missiles to strike military targets inside Russia.
This week, reacting to the war affecting an increasing number of regions, the federal government moved along a draft law allowing regional governors to form territorial defense units from the army’s mobilization reserve in the form of state unitary enterprises. Governors are already enabled, by a presidential decree, to recruit people for such purposes—and some, including the governors of the Belgorod and Kursk Regions, have done so—but the Kremlin likely hopes that the new law will give governors more structure. The real challenge, however, is going to be the financing of these units. The Belgorod and Bryansk governors have repeatedly requested federal money for this, highlighting that regions are competing with the military, private military companies, and defense enterprises for manpower on a shoestring budget.
This week, Russia also introduced a new system of electronic draft notices in three regions: the Republic of Mari El, Sakhalin, and Ryazan. Russian authorities have been trying to set up the system since the September 2022 military mobilization, however, due to diffuse control over various databases on citizens (which all had to be aggregated and collated with mostly paper-based military data), this took longer than expected. The new system aims to ensure that no one to whom a draft notice has been issued can evade military service; draft notices will be considered served from the point of their issuance, draftees will not be able to leave the country, and over time they may face further restrictions. An important part of the new system is the harmonization of the Defense Ministry’s draft data with border service data held by the Federal Security Service. The coming months will show how effective the system is, e.g. if it will reduce the impact of endemic corruption that has so far allowed people with means to avoid military service. Following the 2022 mobilization, a boutique industry of people offering various (often fraudulent) draft avoidance services sprang up remarkably quickly on the internet. Data collection and aggregation on Russian citizens has also been increasingly vulnerable to leaks, both as a result of cyber-attacks and of illegal data brokers. According to Novaya Gazeta, the new website was initially vulnerable to data exfiltration attacks too.
— Andras Toth-Czifra
Russian troops continue to advance towards Pokrovsk, a strategic Ukrainian city in the Donetsk region. On September 12, Russian forces destroyed the Dmytrivskyi Bridge connecting Pokrovsk to the nearby city of Myrnohrad. Just a day later, the Vostochny overpass in Pokrovsk was struck by Russian missiles and demolished. Russia has increased its shelling of the city in recent weeks, with a missile strike killing one person in western Pokrovsk on Sunday. According to local officials, Russian troops have advanced as far as 10 kilometers (six miles) east of the city, and frequent missile strikes have cut off access to water and electricity for the city’s remaining residents. (photo: Kostiantyn Liberov / Libkos / Getty Images)
Kursk offensive update
Last week, Russia launched a counteroffensive in the Kursk region in an effort to regain control over its territories. Reports indicate that Russian forces have retaken a few villages. Oleksii Dmytrashkivskyi, a representative of the Ukrainian military commandant’s office in Kursk, stated on Wednesday that Russia's counteroffensive has been halted. “They tried to attack from the flanks, but they were stopped there. The situation has stabilized, and today everything is under control; they are not successful,” he added.
Last Thursday, Ukrainian President Volodymyr Zelenskyy commented on Russia’s actions, stating that Ukraine anticipated a Russian reaction and that this counteroffensive aligns with Ukraine's plans. He also mentioned that Russia intends to deploy between 60,000 and 70,000 troops to the region. A similar assessment came from the U.S., indicating that Russia would need up to 50,000 servicemen to push Ukrainian forces out of the Kursk region. Major General Pat Ryder, a spokesman for the U.S. Department of Defense, noted that Russian actions thus far have been “marginal,” and analysts have not observed the kind of mass or quality necessary to quickly drive Ukrainian troops from the area.
The Institute for the Study of War reported that Ukrainian forces recently made advances in the Glushkovsky district of the Kursk region. Geolocated footage published on Tuesday shows Ukrainian forces advancing east of Krasnooktyabrskoye, located southwest of Glushkovo. Russian sources, including the Russian Ministry of Defense, claimed on Wednesday that their forces repelled Ukrainian attacks near Veseloye (southwest of Glushkovo), Medvezhye (southeast of Veseloye), and Novy Put (south of Veseloye).
— Lisa Noskova
Power outages push Ukrainians to flee the country
A recent report from the United Nations Human Rights Monitoring Mission in Ukraine (HRMMU) shows that Russia’s attacks on Ukraine’s energy infrastructure have led to a significant increase in the number of Ukrainians citing blackouts as a reason for leaving the country over the summer. Between March and August, Russia launched nine large-scale assaults on Ukraine’s power system, damaging or destroying numerous facilities involved in power generation, transmission, and distribution. These strikes disrupted electricity supply, water distribution, sewage and sanitation systems, heating, hot water access, public health, education, and the overall economy. As a result, Ukraine lost approximately nine gigawatts of production capacity, “equivalent to roughly half of the country’s peak electricity consumption during the winter of 2023-2024.”
Border monitoring conducted by UNHCR and its partners revealed a rise in departures from Ukraine in June and July, with 49% of individuals interviewed citing the energy situation as a reason for leaving. Throughout the summer, energy-related issues ranked as the second most significant factor driving departures, following broader concerns about the security environment. Most individuals leaving for energy-related reasons intend to stay abroad temporarily, though the duration of their absence remains uncertain.
In August, the National Bank of Ukraine revised its population movement forecasts, acknowledging that the extensive damage to the energy system has resulted in prolonged power outages and increased risks for the upcoming heating season. They now project that approximately 400,000 people will flee Ukraine by the end of 2024, with an additional 300,000 expected to leave in 2025. It is anticipated that Ukrainians will gradually begin returning from abroad in 2026.
These trends are likely to adversely impact Ukraine’s labor supply and consumer demand, restraining GDP growth. Significant structural changes within the economy and a rising demand for skilled labor may exacerbate imbalances in the domestic labor market, leading to wage growth that outpaces productivity in certain sectors.
— Lisa Noskova
Analysis: What Ukraine’s Kursk Incursion Tells Us About Putin’s Russia
Given that Ukraine's Kursk incursion was the first foreign invasion of Russia since World War II, Russia’s fierce retaliation should have followed. Instead, Russian authorities pretended that this was nothing but a local crisis and a temporary setback. The reality is more complex and the implications are more serious than the Kremlin would like to admit. Read more in a new analysis by FPRI Fellow Olga Khvostunova.
Quickfire: Regions
The past week saw several significant news stories connected to political repression in Russia’s regions. Among these, a Moscow court sentenced Yury Kokhovets, a man who criticized the full-scale invasion of Ukraine in 2022 in a vox-pop interview for Radio Liberty, to five years in a penal colony. Kokhovets was convicted for “spreading fake information” about the Russian army, similarly to many other critics of the war. Journalist Maria Ponomarenko, who was jailed in the Altai Territory on similar charges for six years, announced a hunger strike this week after she was accused of assaulting two prison guards. Ponomarenko’s condition is a cause for concern, as she had previously harmed herself in detention and has little to no prospect of being released soon. Apart from these, a new criminal case has been opened against Yury Boiko, a former independent City Council Deputy from Novosibirsk, who emigrated in 2021 after being accused of “extremism” for his links to Alexei Navalny’s movement. Boiko is now accused of violating Russian law with publications missing the “foreign agent” label.
Prolonged rain has caused problems for grain producers in several Siberian regions. In the Kemerovo, Omsk, Tomsk, and Novosibirsk regions, as well as the Krasnoyarsk Territory, the regional governments introduced local states of emergency. Together with earlier floods and wildfires (which still rage in places like the Western Russian Rostov Region), the Institute of Agricultural Market Studies thinks that wheat harvest will be 2% lower than initially forecast, albeit dropping from a very high base. Nonetheless, food prices are expected to increase significantly over the coming months, partly also as the consequence of ongoing warfare affecting Russia’s two important agricultural regions: Belgorod and Kursk.
The series of corruption cases at the Ministry of Defense continued this week in the Krasnoyarsk Territory, where Roman Bezrukov, the director of the construction company “ERSM Siberia,” was detained. Bezrukov and his associates are accused of having withdrawn almost 1 billion rubles ($10.8 million) from the Ministry for the construction of a communications control center that was never built. Also this week, Ivan Populovsky, the head of a military representative’s office, and Grigory Zorin, his subordinate, were arrested for accepting 11 million rubles ($119,000) of bribes from a supplier. Both cases are just the latest in a series of probes started around this year’s government reshuffle, which saw former Defense Minister Sergey Shoigu transferred to the Security Council as its Secretary, but several of his former appointees and associates dismissed or arrested. The Kremlin is also eager to crack down on corruption-related inefficiencies in the defense industrial complex.
— Andras Toth-Czifra