China-Russia-Iran Axis Emerges As Asian Oil Refiners Anticipate Escalating US Trade War

Although China has backpedalled on proposed tariffs on U.S. crude imports, the move is indicative of its need to diversify sources and steps may now be taken to enable China to play the oil card in the future – including imports from Iran despite sanctions, and drawing closer to Russia. 

A reshuffle of crude oil exports to Asia

Asian oil refiners have been rushing to secure crude supplies in anticipation of an escalating trade war between the United States and China. Last week, Dongming Petrochemical, an independent Chinese refiner, said it has halted crude purchases from the U.S. and turned to Iranian imports amid escalating trade tensions between Beijing and Washington. U.S. crude oil exports to China reached 400,000 barrels per day (bpd) at the beginning of this July, but Beijing has recently threatened a 25 percent duty on imports of U.S. crude as part of its retaliation for Trump’s latest round of tariffs on US$34 billion worth of Chinese goods. In addition, Iran’s foreign minister said on 3 August that China was “pivotal” to salvaging a multilateral nuclear agreement for the Middle Eastern country after the United States pulled out. A reshuffle of crude oil exports to Asia is possible, with China vacuuming up much of the Iranian oil that other nations won’t buy because of the threat of U.S. sanctions.

China, India, Japan and South Korea together account for almost 65 percent of the 2.7 million barrels a day that Iran exported in May. The U.S. has been lobbying these countries and other multinational oil giants to cut crude purchases from Iran to zero by November, the deadline for re-imposition of the secondary sanctions. In view of the current trade disputes with the U.S., China has reacted defiantly to U.S. sanctions banning business ties with the Islamic republic. This could be the determining factor in helping Tehran withstand the sanctions on its vital energy industry.

With China turning to Iran, U.S. oil would start flowing in greater amounts to other leading importers in the region, such as Japan and South Korea. In Japan, the oil industry has yet to respond to this issue publicly. The Petroleum Association of Japan previously warned refiners that they will have to stop loading Iranian crude oil from October onward if Tokyo doesn’t win an exemption on U.S.-Iran sanctions. However, this past weekend,South Korea’s embassy in Iran rejected media reports that the country had suspended oil purchases from Iran under pressure from the U.S. Whether Japan and South Korea would seek more crude imports from the U.S. remains to be seen.

China may have Russia on its side

The sanctions imposed on Russia from the West as well as the trade tensions between China and the U.S. may provide even more room for energy cooperation between China and Russia. Russia’s sour relationship with the West forces it to look for new trade and investment partners, which definitely include China and Middle East countries. Russia has already become China’s single largest crude oil supplier, exporting crude oil worthUS$23.7 billion to China in 2017. Now with China possibly cutting imports from the U.S., Russia may seek to export even more crude oil to China.

On 19 July, China received the first ever liquefied LNG cargo from Russian natural gas producer Novatek via the Northern Sea Route (NSR) alongside the Arctic coast. The $27 billion Yamal project is the world’s largest Arctic LNG project and the first large-scale energy cooperation project to be implemented in Russia after the “Belt and Road” initiative. China’s National Energy Administration said China National Petroleum Corp (CNPC) will start lifting at least 3 million tonnes of LNG from Yamal starting in 2019. Therefore, it’s highly possible that China and Russia will deepen their cooperation in liquefied natural gas (LNG) trade despite U.S. sanctions.

In addition, according to an anonymous Russian government official, Russia is ready to invest US$50 billion in Iran’s oil and gas sector amid mounting pressure from the U.S. to economically and diplomatically isolate Tehran. Russia’s energy minister Alexander Novak said that Moscow was interested in developing an oil-for-goods program that would allow Iranian companies to buy Russian products in exchange for oil contracts to be sold to third world countries. This was evidence of Russia’s consistent strategy of using its strong oil and gas industry to meddle in Middle East issues. Under the current situation, even though China may somehow reach an agreement with the U.S. promising that it will cut oil imports if the U.S. is willing to reduce the trade tariffs, in the short-term China is still likely to get Russia on its side in defiance of the U.S. oil campaign.

Yueyi Chen is a graduate student at the Center for Eurasian, Russian and East European Studies, School of Foreign Service, Georgetown University.

New Regulations For Shipping In Russia Arctic: The Case of Novatek

In early August Novatek, Russia’s largest independent natural gas producer, launched the second train of Yamal LNG even earlier than planned. Although gas production is ahead of schedule, Novatek’s shipping capacities are lagging behind – and there are regulatory factors to contend with as well.

New rules in the Arctic

Since last year, new regulations have been developed for Russia’s Arctic. The Northern Sea Route Directorate, a new overarching authority, was created to take care of the development of regional infrastructure, and manage a nuclear icebreaker fleet. In June 2018, Rosatom won a power battle between different governmental agencies as to who will be in charge of the Northern Sea Route. Vyacheslav Ruksha, a former Director General of Atomflot, Rosatom’s entity, was appointed the new head of the Directorate. The Ministry of Transport upheld the right to grant Russian and foreign vessels permission to sail via the Northern Sea Route. Had the right remained with Rosatom, it could have threatened Novatek’s shipping independence.

Earlier, in December 2017, the federal shipping code was amended stating that the shipping of oil, natural gas, gas condensate and coal which is extracted on the Russian territory along the Northern Sea Route must be loaded to vessels registered under the Russian flag. In light of the ongoing import substitution policy, the amendment aimed to bolster the position of the Russian shipping industry and to limit the involvement of foreign shipping companies.

The new bill would be a major headache for Novatek as it heavily relies on foreign-registered vessels to transport its LNG from the Arctic. Even Sovcomflot’s Christophe de Margerie is registered in Limassol, Cyprus. However, after Novatek’s lobbying, an exception was made to the bill stating that agreements for foreign-registered vessels signed before 1 February 2018 will be allowed to proceed. In addition, the new law defined the Northern Sea Route as the stretch of the Russian Arctic coast between the Novaya Zemlya and the Bering Strait but excluded Murmansk and Arkhangelsk, two major Arctic ports.

These loopholes are of key importance for Russia’s largest independent natural gas producer, Novatek. While the first exception will allow the company to use its fleet of 15 LNG carriers for Yamal LNG, the second exception will help the company to come up with a new strategy for its Arctic LNG-2.

Need for more ice tankers is growing

In early August Novatek launched the second train of Yamal LNG even earlier than planned. By January 2019, Novatek is planning to commence the last third train. The three train LNG terminal is expected to produce 16,5 million tonnes per year (mtpa). In 2022-2025, Novatek plans to start its second LNG terminal – Arctic LNG-2, adding another 20 mtpa. Together, both Arctic terminals will produce more than 55 mtpa of LNG by 2030.

Although gas production is ahead of schedule, Novatek’s shipping capacities are lagging behind. For Yamal LNG, Novatek ordered 15 icebreaking LNG carriers ice-class Arc7 from South Korea’s Daewoo Shipbuilding Marine Engineering. For Arctic LNG-2, approximately the same number of LNG carriers will be needed. Currently, only 3 LNG carriers are in operation, while the rest are set to be delivered by 2020. However, the company will not own any of the 15 carriers.

Novatek’s fleet ownership is divided between Russian Sovcomflot, Canadian Teekay, Japanese Mitsui O.S.K. Lines, Greek Dynagas and Chinese COSCO and LNG Shipping. Sovcomflot, a Russian maritime shipping company, owns only one LNG carrier –Christophe de Margerie. Hit by Western sanctions, Novatek struggled to fund construction of the terminal, let alone its transportation expenses. The costs of Arc7 class carriers are high – $320 million per carrier, resulting in a shipbuilding deal worth $5 billion.

Novatek’s short- and long-term strategies

As the fleet for Arctic LNG-2 should be domestically built, Novatek developed different strategies. In the short term, Novatek is planning to use 5 nuclear-powered icebreakers (60 MW capacity) owned by Rosatomflot. To cope with the production output, two reloading terminals will be built in Murmansk and in Kamchatka where LNG will be reloaded onto conventional tankers. Alternatively, Norway can be used as another reloading terminal. This will allow the optimisation of the logistics: by cutting the distance of expensive-in-usage icebreakers, the transportation costs will be reduced. The first ship-to-ship operation could already start mid-November 2018.

In June 2018, Novatek signed a strategic cooperation agreement with Sovcomflot to develop an effective logistics model on the Northern Sea Route. “Combining our efforts with Sovcomflot, one of the global leaders in navigation in harsh ice conditions, will allow us to achieve maximum efficiency in managing our transportation costs,” said Leonid Mikhelson, Novatek’s chairman.

In the long term, Novatek considers to order LNG carriers with Zvezda, a Rosneft-led shipyard in the Far East. However, experts say that at Zvezda the costs will be 60-80% higher than those made in South Korea and there is no guarantee of the quality or the delivery date. Zvezda still lacks expertise and experience in building ice-class tankers. A cooperation agreement signed with South Korea’s Hyundai Heavy Industries might compensate it though.

In May 2018, Novatek announced that the company decided to build its own shipping company “Maritime Arctic Transport”. In doing so, Novatek’s long-term strategy is to “optimize transport cost and ensure a well-balanced, centralized management structure to improve the competitiveness of NOVATEK’s Arctic projects,” said Mikhelson.

Both Yamal LNG and Arctic LNG-2 are planned to be in operation all year around, but the non-stop shipping via the Northern Sea Route is complicated by climate factors. As the eastern route is free of ice for only 2-4 months in summer, special ice tankers are needed. To face this challenge, a special icebreaking LNG carrier is to be designed. The contract to build a super-powerful nuclear-powered ice tanker “Lider” was obtained by Rosneft’s Zvezda. Designed to break 4-meter-thick ice, its completion is planned for 2027. The contract was assigned for political reasons rather than based on technical expertise.

Unfair competition between shipbuilding companies, together with the lack of expertise in building ice-class tankers, could jeopardize Novatek’s long-term strategy. It is unclear whether the company will resolve its mismatch between production capacity and export capacity in the near future.

Dr. Maria Shagina holds a double PhD degree from the University of Lucerne and University of Zurich and a M.A. from the University of Dusseldorf.

5 Reasons Russia’s Banking System Is Heading For Trouble

Russia’s recent bailout of two major banks will cost the country billions of rubles. But the future of the Russian banking system, and its impact on the nation’s economy, is still uncertain.

Russia is finally emerging from a serious recession, with growth predicted for 2018. However, the recent rescue of B&N Bank and Otkritie Bank highlighted serious problems in Russia’s banking industry – problems that have not gone away following the bailouts, and could endanger the economic recovery if it doesn’t progress quickly enough.

A tale of two banks

Bank Otkritie FC, Russia’s biggest private lender in term of assets, started seeing huge cash outflows in June 2017. Then, in August, came a sudden ratings drop by Fitch.

“Otkritie, B&N Bank, Prosuyazbank and Credit Bank of Moscow are among the banks that have been subject to Russian media speculation in recent weeks, regarding the liquidity position of some and the potential knock-on effect on others.”

Fitch Ratings report, 18 August

The day before, Moody’s had placed Otkritie on review for a possible downgrade, citing increased financing of assets held by its parent company Otkritie Holdings, and volatility of customer deposits.

“Since mid-2017 and following the recent regulatory changes regarding the placement of non-state pension funds’ and state budget deposits, BOFC has experienced a significant outflow of customer deposits.”

Moody’s report, 17 August

It wasn’t long before the Central Bank of Russia (CBR) was forced to intervene. In late August, it became the biggest owner of Otkritie with a 75 percent stake, worth approximately US$51 billion. The strategy was to assuage depositors’ fears of losing their deposits, and stabilise the Russian banking system.

The takeover hurt Otkritie’s shareholders. Their ownership in the bank was reduced to a maximum of 25 percent, with the risk of seeing their investment wiped out completely. CBR deputy chairman Vasily Pozdyshev indicated that the bailout and Otkritie’s recapitalization would cost between US$4.34 billion (250 billion rubles) and US$6.96 billion (400 billion rubles), though the final tally could be higher. This bailout far surpassed the CBR’s rescue of the Bank of Moscow in 2011, which totaled 395 billion rubles. But another disaster was soon to follow.

Three weeks after the Otkritie bailout, B&N Bank, also known as Binbank and Russia’s 12th largest bank by assets, sought help from the CBR. Customers reportedly withdrew approximately 56 billion rubles from B&N in September 2017. Affiliated lender Rost Bank and other banks were rumoured to also require emergency financing from the CBR’s Fund for the Consolidation of the Banking Sector.

The five reasons behind Russia’s banking system troubles

1. Rapid expansion

Otkritie and B&N both had a propensity for rapid expansion through acquisitions. Otkritie was permitted to grow at a very fast pace by purchasing Russian banking competitors such as Nomos, bailing out Rosneft Bank in 2014, while diversifying into non-bank companies. B&N had ambitiously expanded its operations after 2010 by acquiring smaller institutions such as Moskomprivatbank, SKA-Bank, and others, prior to making its biggest acquisition in 2016 by merging with MDM Bank, a large Russian lender. However, it turns out that the banks that B&N acquired had financial problems more serious than previously reported. B&N’s assets expanded fivefold in less than four years while also obtaining funds from the state in order to salvage smaller banks. As it turned out, Otkritie and B&N purchased big financial headaches that later came back to haunt them – and other Russian banks may be in similar situations.

2. International sanctions

US and EU sanctions over Ukraine probably did more economic damage than President Vladimir Putin is willing to admit – and Russia’s banking sector has not been immune. B&N’s situation was aggravated by the residual effects of an economic slowdown partly caused by the sanctions, and the rise of bad debt during the previous three years. Moreover, a key provision of the sanctions prevents Russian banks from raising financial capital on Wall Street. This prevents American investment firms and commercial banks from buying equity stakes or making long-term financing deals, and restricts Russian banks access to foreign capital. For example, Vnesheconombank (VEB)’s access to foreign capital was cut off due to the sanctions and looking at in foreign currency debt totaling US$16 billion. A bailout of VEB could cost the Russian government at least US$18 billion or 1.3 trillion rubles.

3. Sharp decline in oil prices

Under Putin, Russia has effectively become a petrostate, heavily dependent on oil as a source of revenue for the government. The higher the price of oil, the more rubles the Russian government can deposit into state and private banks resulting in a greater influx of financial capital. However, the price of oil has dropped in recent years as the market has become awash in oil due to increased uses of clean energy. This has lowered the amount of funds the Russian government can put into the nation’s banks and, therefore, hurt their cash flows. Compounding the problem is that Russian banks made loans to the nation’s oil companies under the assumption that oil prices will rise.

4. Ruble devaluation

The Russian ruble has lost value in recent years leading to a lack of liquidity for the nation’s banks. In an attempt to stabilize the ruble exchange rate, the Bank of Russia raised interest rates to 17 percent from 10.5 percent.  But this move was not enough and the ruble devalued further. The combination of a depreciating ruble and rising inflation has made it more difficult for large, and especially small Russian banks, to remain liquid. As many Russian banks rely on cash as their main asset, the ruble’s depreciation causes them to lose value and have to acquire more funds. This means increased borrowing at possibly higher rates or seeking government bailouts so they can stay solvent.

5. High number of bankruptcies

As if Russia does not have enough financial headaches, the country has seen a wave of bankruptcies among banks in recent years. Adding to these closings is the increased amount of non-performing loans (NPLs). For example, NPLs went from 6 percent in all of 2013 to 9.2 percent in the first quarter of 2016. The higher the number of NPLs, the greater the chance of bankruptcies among Russia’s financial institutions. Officially, these NPLs make up about 10% of all loans. However, the International Monetary Fund (IMF) estimates the true level of bad loans could be closer to 13.5%. Either way, many Russian banks are facing financial catastrophe. In order to stem the tide of these bankruptcies, between January 2014 and mid-2016, the CBR revoked 214 bank licenses and placed 28 banks into open bank resolution, using public moneys totaling 1.1 percent of Russia’s GDP.

Persistent risks

“The bailout was good for investors, probably bad for the system. They prevented the Lehman effect in the Russian banking system and created a too-big-to-fail mentality.  How many other banks in Russia with the same sort of problems will need a bailout soon?”

Dmitri Barinov, Portfolio Investor, to Bloomberg News

In September there seemed to be a glimmer of hope when Fitch revised upwards the outlooks of 23 Russian banks. Tellingly however, this was off the back of a sovereign outlook upgrade, meaning that it wasn’t the strength of the sector that prompted the change, but the allegedly improved ability of the state to bail them out if required.

Even that capability is in question. Russia is probably in worse financial and economic shape than its policymakers and leaders are willing to admit. It’s well known but worth repeating, that Russia has become too dependent on oil at a time of sustained low oil prices. Oil was supposed to be Russia’s source of financial capital that it could put into its banks and always provide them with the cash flow they needed in good and bad economic times.

But now Russia is walking a financial tightrope that could impact the nation’s banking system for years to come. Unless Russia makes a strong economic recovery in the near future, its banking sector could see more hard times that the CRB will not have the power or resources to bring under control.


Arthur Guarino is an assistant professor in the Finance and Economics Department at Rutgers University Business School. Article as originally appears at:


This column does not necessarily reflect the opinion of the editorial board or Frontera and its owners.

Russian ETFs Are Underwater, But These 7 Stocks Have Mitigated Their Fall Into Negative Territory

Russian equities have had a difficult year compared to many of their peers. In a year when the MSCI Emerging Markets Index has risen 30% until November 13, the MSCI Russia Index has fallen 1%. It is one of only three MSCI country indices in the emerging markets universe which is in the red for the year, Qatar and Pakistan being the other two.

Of the five ETFs investing in Russian equities and traded on US exchanges, two – the VanEck Vectors Russia ETF (RSX) and the iShares MSCI Russia Capped ETF (ERUS) – are broad-based and non-leveraged.

Between the two, US investors have shown a clear preference for the ERUS as shown in the graph below.

Though the year had begun well for the RSX, its fortunes changed from the beginning of March with its shares outstanding going into a broad decline since. On the other hand, the ERUS has seen increased purchases, though it has mostly come in fits and starts instead of continuous flows.

Investor flows exhibits the same trend, as shown in the graph below.

In YTD 2017 until November 13, the ERUS has seen net inflows of $186 million while the RSX has seen net outflows of $604 million, according to Bloomberg data. Even among ETFs listed outside of the US, the ERUS has attracted the most inflows in the year so far. It is followed by the France-incorporated LYXOR RUSSIA (Dow Jones Russia GDR) UCITS ETF – C ($105 million) and Luxembourg-registered db x-trackers MSCI Russia Capped Index UCITS ETF ($74 million).

However, among the US-listed funds, the RSX still remains the larger of the two with $2 billion in assets compared to $650 million for the ERUS.

Head above water

In terms of performance, unlike the MSCI Russia Index, the two ETFs have been able to keep their head above water with the RSX (4.7%) edging out the ERUS (3.6%) in YTD 2017 until November 13.

There’s not much difference in terms of the number of holdings with both invested in about 30 instruments. Further, the expense ratios are nearly the same as well. However, while the ERUS tracks the MSCI Russia 25/50 Index, the RSX follows the MVIS Russia Index.

Portfolio composition difference which explains performance

Though stocks from the energy sector form the biggest chunk of the portfolios of both funds (40% for RSX and 47% for ERUS), there is marked difference in the rest of the composition.

The two most significant ones are the exposure to financials and information technology sectors. While financials forms a quarter of the portfolio of ERUS, it forms only 15% of the RSX. Meanwhile, tech stocks form half of the weight of financials in RSX while the ERUS is not invested into the sector at all.

In terms of contribution to returns, financials are by far the highest contributing sector to the ERUS with materials being a distant second. Telecom services were the only other sector to contribute positively to the fund in the year so far.

On the other hand, stocks from the information technology sector have led gains for the RSX, followed by those from financials and materials sectors in that order. The difference between the contributions of these three sectors is not as significant as it is in the top three contributing sectors of ERUS. Consumer staples was the only sector which has dragged on the returns of the RSX in YTD 2017.

Stocks which have helped gains

The sponsored American Depository Receipts (ADRs) and the common shares of Sberbank of Russia (SBRCY) from financials have been the top two contributors to the ERUS. PJSC Mining and Metallurgical Company Norilsk Nickel (NILSY) from materials was the third largest contributor.

Though the energy sector overall has been a negative contributor to ERUS, shares of PJSC Tatneft (OAOFY) come in at fourth highest in terms of individual contributors, with the biggest five being completed by PJSC Mobile TeleSystems (MBT).

For the RSX, ADRs of SBRCY have been the highest positive contributors in the year so far. And OAOFY and NILSY find themselves ranked third and fourth respectively.

The information technology sector rounds out the top five list for ERUS, with search-engine provider Yandex N.V. (YNDX) emerging as the second highest contributor to the RSX in YTD 2017 while the Global Depository Receipts (GDRs) of online communication and entertainment services provider Mail.Ru Group Limited (MLRYY) edges out MBT for the fifth spot.

Russia: New Energy Projects Move Forward Despite US And EU Sanctions

Despite the imposition of US and EU sanctions in the energy sector, new projects continue to flourish in Russia. Already the world’s largest exporter of traditional natural gas, the country is gaining a foothold in the liquefied natural gas market. For the last 3 years, Russia’s LNG capacity has been growing substantially. 

Competition from Qatar, Australia, and the US, the world leaders in LNG exports, coupled with the impact of political tensions after the Ukraine crisis, have made Russia reconsider its traditional pipeline exports. After Lithuania and Poland built their own LNG terminals with gas from Norway, Qatar and most recently the US, Gazprom’s conventional gas intake was significantly diminished in both countries. Despite Gazprom’s cheaper price, Lithuania and Poland preferred to pay a premium for their LNG to reduce the dependency on Russia’s energy resources.

Gaining a foothold

Novatek, Rosneft and Gazprom each set out to develop their own unconventional gas resources. Novatek’s Yamal LNG is Russia’s most ambitious project. Based on the Kara Sea in the Arctic Circle, gas extraction is conducted under the permafrost, which makes it incredibly challenging. Funded by Russia’s Novatek, France’s Total, China National Petroleum Corporation, and China’s Silk Road Fund, Yamal LNG is a $27 billion facility that will start full operation in 2018. It will produce 16.5 million tonnes of LNG per year. Yamal LNG’s gas plant will be finished in November. As a symbolic gesture, Russia will send the first shipments to China, which supported the project. Another four shipments will follow in December.

Rosneft is developing its Far East LNG project in Sakhalin, which aims to produce 5 million tonnes of LNG gas. Its goal is to deliver supplies to the Asia-Pacific region, in particular to Japan and South Korea.

Gazprom is pushing LNG as in-house transport fuels. Russia’s gas giant signed agreements with Avtodor, the Russian highways state company, and Gazprom Gazomotornoye Toplivo, a Gazprom subsidiary, to grow a network of LNG and compressed natural gas filling stations for locomotives and trucks. Expanding its reach, Gazprom also launched small-scale LNG projects abroad in places like VietnamBelarus,Ghana and Bolivia.

Bypassing Western sanctions

The impact of Western sanctions on Russia’s LNG development proved to be rather limited. Despite the restrictions on financial borrowing and export of Western technologies (e.g. drilling and hydraulic fracturing), Russia managed to keep its LNG projects afloat. Loopholes in the sanctions regime and new partners allowed Russia to bypass legal implications and to find new funding.

While both oil and gas exploration projects were prohibited under US sanctions, the EU sanctions exempted gas projects. This allowed European investors to further participate in the development of Russia’s LNG gas plants. Both French Total and Dutch Shell preserved their 20% and 27% shares in the Yamal and Sakhalin projects, respectively.

Despite Western restrictions on capital, Russian energy companies still manage to attract European investments. Italy’s Saipem is set to be a subcontractor for Arctic LNG 2, Novatek’s second gas plant on the Kara Sea. In 2015, Shell agreed to invest in the expansion of Gazprom’s Sakhalin II, while in 2017, a Dutch company set up a joint venturewith Gazprom to design and construct the Baltic LNG project in the Leningrad Region. However, Rosneft’s Far East and Gazprom’s Vladivostok LNG projects were delayed until 2020 due to a lack of funds and low fuel prices. Partnered with ExxonMobil in 2014, the Far East project was stalled due to looming Western sanctions over the Ukraine crisis. Recently, Rosneft announced that it may build the LNG plant using its own resources exclusively.

Russia’s pivot to Asia and the Middle East lessened the country’s dependence on Western lending. In March 2017, having difficulties raising funds from Western banks, Novateksold a 9.9% stake to China’s Silk Road Fund. Similarly, Rosneft turned to Chinese investors after Glencore and the Qatar Investment Authority cut their stakes. A 14% stake of Rosneft was bought by CEFC, China’s Energy conglomerate, for $9 billion. Recently, investors from Japan and the Middle East showed interest in Gazprom’s Baltic and Novatek’s Arctic 2 LNG projects.

Making strides in the LNG market

With the latest reports predicting 13% growth in the LNG market by 2025 and an overall 53% share in long-distance gas trade by 2040, Russia is under further pressure to develop its LNG projects on time. Currently, Russia exports 10.8 million tonnes and has a 4.2% market share.

Following the completion of the Arctic 2 LNG project, the country might challenge the dominance of Qatar, which currently occupies 30% of the market. By building the second gas plant on the Gydan peninsula, Russia could produce up to 70 million tonnes of LNG annually, just below Qatar’s 77 million. The construction of Arctic 2 is slated to commence in 2019, with the first shipments due on the market in 2023.

Challenging Qatar’s dominance in the LNG market would make Russia not only the world’s largest exporter of conventional natural gas, but also of liquefied gas. The conditions for that are favourable. With funding from China and Saudi Arabia, Russia can bypass Western restrictions on capital. Russia’s LNG exploration sites are strategically close to the Asian market. Located in the Far East, LNG would be easy to transport via sea to Japan and South Korea, the world’s largest LNG importers.


Maria Shagina is an Analyst at Global Risk Insights. As originally appears at:


This column does not necessarily reflect the opinion of the editorial board or Frontera and its owners.

Russian Cash Is Helping Keep Venezuela Afloat In Pursuit Of A Much Larger Strategy

Russia’s cash and credit are helping to keep Venezuela politically and economically afloat. For Russia, access to Venezuela’s oil market is part of its objective to achieve influence in the Latin American region – and beyond.   

Oil deals

Since oil prices crashed to a low of $24 per barrel in 2016, Venezuela’s oil-based economy has been in a state of meltdown. A sharp reduction in export revenue and a lack of petrodollars have severely compromised the Venezuelan government’s legitimacy.  Unable to make adequate provision for basic needs such as food and medicine, economic turmoil has threatened the political survival of Nicolas Maduro’s government in Latin America’s once richest nation.

As a result of political repression and human rights abuses, international support has been a challenge for the Maduro regime. However, it has found a close ally in Russia which is providing the country with essential revenue.  Indeed, Venezuela is increasingly dependent on Russian cash and credit in order to survive. In return, Moscow’s biggest oil firms are profiting from Venezuela’s prized state-owned oil assets.

According to Reuters, Venezuela has been secretly negotiating with Russia’s biggest state-owned oil company – Rosneft. As part of the negotiations, Rosneft has been offered ownership interests in up to nine of Venezuela’s most productive petroleum projects.

Russian leverage and Venezuelan dependence

Fifteen years ago the Moscow-Caracas relationship was one of parity. Venezuela was a leading regional economic power under the vision of Hugo Chavez. Russia, emerging from the depression of the 1990s, strongly benefited from stable commercial ties with oil-rich Venezuela.

However, today Russia is essential in keeping the Venezuelan economy afloat. This represents a major change in the dynamics of the relationship.  Indeed, Russian cash for Venezuelan oil could help Maduro avoid a sovereign debt default or even a political coup. Rosneft’s payments to Venezuela’s state owned Petróleos de Venezuela (PDVSA) have already amounted to nearly 6 billion dollars. In April alone, the PDVSA received $1.02 billion from Rosneft as an advance payment for future crude supplies.

Caracas must be hoping that Rosneft’s operations in Venezuela’s oil industry will underscore confidence in the PDVSA’s financial stability and the country’s business opportunities to international investors. However, the country’s instability and dire economic situation are unlikely to attract more risk-averse investors.

Meanwhile, Russia has also positioned itself as an intermediary in Venezuela’s sale of oil to global customers. On October 3, Eulogio del Pino, the minister of the PDVSA travelled to Moscow for a meeting with the director general of Gazprom International. The aim was to establish ‘‘strategic alliances’’.

Closer political ties

Russia’s support for Venezuela plays a significant role within the Venezuelan national context. At a time when Venezuela is experiencing further sanctions and isolation from Washington, support from the Kremlin provides Maduro with a degree of international legitimacy.

The significance of Russian investment in the Venezuelan economy was highlighted when the Venezuelan Supreme Court gave the government special authority to cut oil deals with Russia, despite the condemnation of the opposition. Maduro reportedly required the power to make oil deals with Russia to facilitate Rosneft’s expansion.

Russian opportunism?

Economic relations between Russia and the OPEC nation have had a positive impact on the diplomatic front. On October 4, Maduro travelled to Moscow for a meeting with Russian President Vladimir Putin.  During talks, Maduro thanked the Kremlin for its political and diplomatic support for the beleaguered nation. Subsequently, Maduro hailed the ‘‘extraordinary’’ working meeting with Putin which served to ‘‘strengthen ties of cooperation’’ between the two nations.  Putin recognised that Venezuela ‘‘is going through uneasy times’’. He also applauded Maduro for ‘‘succeeding in establishing some contact’’ with his political opponents.

Russia appears to be taking advantage of Venezuela’s economic situation. Rosneft is benefiting from Caracas’s economic difficulties by availing of cheap oil. It is also expanding its base in Venezuela at a time of growing social unrest on the streets of Caracas.

Gaining regional leverage

Russia’s economic interests in Latin America are expanding. Russia’s traditional sphere of influence in Latin America was primarily ideological, aligning itself with socialist regimes that espoused anti-Americanism. However, Russia’s latest oil investments in Latin America underscore its more expansive influence in the region. On February 17, Rosneftannounced plans to drill its first oil wells in Brazil. It was also given the green light, along with Russian company Lukoil, to bid on contracts to develop shallow-water oil fields in the Gulf of Mexico. Moreover, Argentine President Macri has welcomed Gazprom’s interest in investing in the country. Rosneft is also a provider of oil to Cuba, picking up one of Venezuela’s key customers.

Both Brazil and Mexico currently have centre-right governments, while President Macri favours open markets. On October 4, the former Brazilian President Dilma Rousseff was in St Petersburg during Energy Week to address a forum on cooperation between Russia and Latin America. At the same event was the former Colombian President, Ernesto Samper, who spoke about the strategic significance of Russia in the Latin American region.

Russia’s wider strategy

Russian support for Venezuela may prove pivotal for the beleaguered country’s economic and political survival, but Venezuela’s difficulty is definitely proving to be Russia’s gain.

The Kremlin’s pragmatic approach to Latin America is strategically positioned on the backdrop of Donald Trump’s ‘‘America First’’ policy and China’s substantial curtailment of credit to Venezuela. This reflects Russia’s broader ambition to influence the nature of the global order, preferring a multipolar world to the dominance of superpowers such as the United States and China.


Niall Walsh is an Analyst at Global Risk Insights. As originally appears at:

This column does not necessarily reflect the opinion of the editorial board or Frontera and its owners.

The Three Largest Russian Telco Stocks, And The One Providing Internet to North Korea

TTK now provides Internet to North Korea

Russia-based TransTeleCom, better known as TTK, has established a fiber optic network to provide Internet connection to North Korea. According to a map on TTK’s website, fiber optic lines have been laid alongside a Russian Railways line on a route from Vladivostok to the North Korean border.

This provides an alternative Internet connection route for North Korea. Since 2010, North Korea received an Internet connection through a route connecting North Korean ISP Star JV and China Unicom, a state-owned telecommunications operator of China.

TTK, is a subsidiary of Russian Railways, Russia’s national railway operator and has been a large player in Russia’s telecom market. TTK provides route communication services to the largest corporations in Russia and also has a significant presence in broadband Internet access, TV and VoIP segments. TTK is 99.99% owned by OJSC RZD Logistics.

The company’s shares are not currently listed so its financial numbers are not available publicly. Investors interested in the sector could consider a number of ETFs heavily weighted towards the sector or listed telecom companies in Russia.

Telecom stocks to consider

Year-to-date, the MSCI Russia Telecom Index has lost 2.5% in value while the MSCI Russia Index has fallen 1.7%.

The VanEck Vectors Russia ETF (RSX) invests 8% of its portfolio in Russian telecom stocks while the iShares MSCI Russia Capped ETF (ERUS) provides 7% exposure to Russian telecom stocks. In 2017 till date, these ETFs have returned 2.5% and 2.1% respectively.

The largest Russian telecom stocks by market capitalization are Mobile Telesystems, Megafon and Rostelecom. Currently, these stocks have market caps of $10.1 billion, $6.3 billion and $3 billion respectively.

Year-to-date, shares of these companies have returned 20.5%, 7.7% and -12.8% respectively.

Mobile Telesystems

Mobile Telesystems, popularly known as MTS, is the largest mobile operator in Russia with 78 million Russian subscribers and 107.8 million subscribers worldwide (as of June 2017). The company currently provides mobile services to 81 regions in Russia as well as other countries including Armenia, Ukraine, Belarus, Uzbekistan and Turkmenistan.

MTS is majority held by the Russian commonwealth and the largest publicly-traded holding company in Russia, Sistema JSFC. The company’s free float is currently 48.5%. Sistema is currently engaged in a $3 billion law suit with Russian oil company Rosneft that could lead to a 50% decline in the book value of its shares. Last month, a court sealed Sistema’s 32% stake in MTS.

In 2016, MTS reported revenues of $6.5 billion and net income of $723 million. Analysts expect MTS earnings to grow annually at an average rate of 9% over the next five years, higher than its peers.

Shares of MTS are listed on the New York Stock Exchange since 2000 under the ticker MBT. The company has also been listed on the Moscow Stock Exchange since 2003 with the ticker MTSS.ME . Year to date, shares of the company have returned 20.5%, outperforming the Russian benchmark index MICEX Index. Comparatively, the MICEX Index has lost 6.4% in value in 2017 so far.


Megafon is the second-largest mobile services provider and third largest telecom player in Russia. The company services nearly 77.4 million mobile subscribers (as of June 2017), just 0.6 million short of MTS. Currently, Megafon operates in 83 constituent entities of the Russian Federation, Tajikistan and in Abkhazia and South Ossetia. Megafon recently acquired 50% stake in Euroset, Russia’s largest mobile retailer from its rival Veon.

Megafon is 56% owned by USM group, 25% by TeliaSonera, and 3.92% by MegaFon Investments (Cyprus) Limited. The free float is 14.59% of the company. Mobile phone services form nearly 85% of the company’s revenue stream while fixed line services and sale of accessories and equipment account for 7.5% and 6.4% respectively. In 2016, MegaFon generated $4.7 billion in revenues, 0.8% lower compared to 2015.

Shares of Megafon are listed on the London, Stuttgart and Frankfurt Stock Exchanges under the tickers MTSS.ME, 17GK.L, MFG7.SG, and MF7G.F. Year to date, shares of the company have returned 7.7%, outperforming the Russian benchmark index MICEX Index.


Rostelecom is Russia’s largest provider of domestic long distance and international telecommunication services. The company holds licenses to provide a wide array of services ranging from telephony, data, TV and value-added solutions to residential, corporate and governmental subscribers and third party operators across all regions of the Russian Federation. The company owns and operates the largest and most extensive fiber-optic backbone network in Russia.

The firm is the market leader in broadband and pay-TV segments in Russia with 12.6 million fixed-line broadband subscribers and over 9.5 million pay-TV subscribers.

Rostelecom is 45% held by the Russian government, while Vnesheconombank and Mobitel hold 4% and 16.2% of the company respectively. The company’s free float is currently 34.8%.

In 2016, Rostelecom reported revenues of $4.4 billion and net income of $182 million.

Shares of Rostelecom are listed on the London, Frankfurt and Russian Stock Exchanges under the tickers RKMD.IL, RTL.F and RTKM.ME. The company’s ADRs are listed on US OTC Markets with the ticker ROSYY.

Year-to-date, shares of the company have lost 12% in value, underperforming the telecom sector as well as the Russian benchmark index MICEX Index.

3 Russian Banks To Watch As The Country Witnesses One of Its Largest Bailouts In History

Russian Banks

The Russian (ERUS) banking sector is primarily dominated by large national banks. The top three banks in the country held nearly 80% of total assets in 2016, making it highly concentrated. These banks also represent nearly 90% of the total loans provided to customers in Russia last year. This concentration has become gradually larger over the past five years. In 2012, these three banks held 53% of assets and accounted for 64% of total loans in the country.

According to IMF classifications, Russian banks are categorized into three groups depending on their ratings, risk exposure and access to interbank markets. The first group is comprised of large top tier banks that have high credit ratings, low funding costs and access to secured and unsecured interbank markets. The second group is made up of mid-sized banks that do not have access to unsecured interbank markets and rely on Central Bank of Russia (CBR) facilities for their funding requirements. Their funding costs generally tend to be higher than large banks. The third group is primarily made up of small banks with low credit ratings, and little or no access to interbank markets.

In the past few years, Russia’s banking system has been under stress due to debt problems at the country’s largest oil company Rosneft. Falling oil prices coupled with a weakening currency have created trouble for the country’s banking sector. Recently, the Russian Central Bank rescued Russia’s largest private bank by assets, FK Otkrytie, the largest bail out witnessed in the country’s history. Prior to this, the largest bank bailed out in Russia was the Bank of Moscow in 2011, for $6.7 billion (395 billion rouble).

Alfa Capital, a Russian research firm, warned in a research note that “three other large Russian banks were in danger of collapsing by the end of September.”

Over the last few years, the CBR has been trying to clean up the Russian banking sector by revoking licenses of under-capitalized banks. In July this year, CBR cancelled the license of Yugra Bank, the 15th largest bank in Russia.

Top Russian banking stocks

Year to date, the MSCI Russia Index has declined 5% while the iShares MSCI Russia ETF (ERUS) has lost 1%. Comparatively, the Russian benchmark MICEX Index has declined 8% in the year so far.The largest Russian banks by revenues are SberBank of Russia, VTB Bank, Credit Bank of Moscow and Promsvyazbank. In 2016, these companies have generated revenues of $47.4 billion, $21.6 billion, $2.3 billion, and $2.2 billion respectively.

The largest Russian banks by assets are Sberbank of Russia, VTB Bank and Otkyrtie Bank. In 2016, these banks held assets worth $4.1 trillion, $2.1 trillion, and $44 billion respectively.


Sberbank (SBER.ME) is the largest bank in Russia with assets of $4.1 trillion in 2016 and a market cap of $70 billion. The Central Bank of Russia is the largest shareholder in the bank with a 50% stake in its authorized capital. Sberbank accounts for roughly 1/3rd of Russia’s banking system and employs nearly 250,000 employees in 16,500 offices. The bank has nearly 137 million retail clients and 1.1 million corporate clients across the world.

In 2016, the bank generated revenues of $47 billion and net interest margins of 5.9%. Furthermore, the Sberbank is also the most profitable Russian bank. Last year, the bank reported return on assets of 2.1% and return on equity of 20.8%, highest among its peers.

The company’s shares have been listed on the Russian stock exchange since 1996 and have returned 9.3% in 2017 to date. Shares of the bank are also listed on the Frankfurt Stock Exchange with the ticker SBNC.F. The bank’s ADRs are listed on OTC Markets with ticker SBRCY and on the London Stock Exchange with ticker SBER.IL.


VTB Bank

VTB Bank (VTBR.ME) is the second largest bank in Russia in terms of assets. The bank held assets worth $2.1 trillion in 2016 and has a market cap of $13.9 billion. The Russian government holds a 60% stake in the bank.

In 2016, ihe bank generated revenues of $21 billion and net interest margins of 3.5%. Moody’s expects VTB Bank’s profitability to improve as the bank’s funding costs decline on higher retail deposits. In a recent report, Petr Paklin, an Associate Vice President at Moody’s stated, “VTB has benefited from a flight to quality among Russian corporate and retail depositors, who have moved their accounts from smaller banks to bigger, systemically important institutions in recent years.”

VTB Bank has set a target of increasing retail deposits to 39% of liabilities by 2016, from 27% in 2016. The bank is shifting away from expensive central bank and interbank sources of funding to cheaper retail deposits. Moody’s believes this trend will result in higher net interest margins for the bank and forecasts NIMs of 3.7% in 2017.

Moody’s also expects the bank’s non-performing loan ratio to decline as the Russian economy recovers.

The company’s shares are listed on the Russian exchange and have lost 14% of their value in 2017 to date. Shares of the bank are also listed on the Frankfurt and Stuttgart Stock Exchanges with the tickers KYM1.F and KYM1.SG respectively. The bank’s ADRs are also listed on OTC Markets with ticker VTBR.IL.

Otkrytie Bank

Otkrytie (OFCB.ME) is the third largest bank in terms of assets and the largest private bank in Russia. The bank held assets worth $44 billion in 2016 and had a market cap of $4.3 billion. Recently, the Central Bank of Russia took a 75% stake in Otkrytie as the bank had to be bailed out after its deposits fell sharply. In June it lost $1.7 billion in deposits.

Otkrytie’s external funding declined nearly 30% while its deposits contracted by nearly $10.6 billion (611 billion roubles) in June and July, equivalent to 20% of the bank’s balance sheet.

Otkrytie turned towards the Central Bank of Russia to fund its gap of $5.7 billion (333 billion roubles) and shrank its corporate loan book by 38%. In July this year, Russian rating agency ACRA raised a red flag on the “low quality” of Otkrytie’s loan portfolio and assigned a BBB- rating.

However, Otkrytie’s filings for 2016 indicate the bank’s capital position was healthy, and met the Central Bank’s requirements. In 2016, the bank reported a non-performing loan ratio of 7.5% and tier 1 capital of 12.3%. CBR’s deputy chairman, Dmitry Tulin, has raised doubts about the accuracy of these numbers. “The capital disclosed in (the previous) reports seems to have been significantly higher than in reality,” stated Tulin.

Investors began selling shares of the bank in June as Moody’s also put the bank on review for a possible downgrade over “elevated volatility of the bank’s customer deposits, which puts pressure on its liquidity position.”

The company’s shares are listed on the Russian exchange and have lost 22% in value in 2017 to date. Otkrytie is 65% owned by Otkrytie Holding, which is in turn owned by executives from oil major Lukoil, VTB bank, and Otkrytie, amongst others.


Valuations within the Russian banking sector are attractive with Russian banks trading at an average price to book ratio of 0.8x. 

Bank of St.Petersburg, Uralsib Bank (USBN.ME) and Kuznetskiy Bank (KUZB.ME) are the most attractively priced banking stocks based on their cheap valuations. These stocks have price to book ratios of 0.38x, 0.45x and 0.47x and are trading at the steepest discount to their peers. Meanwhile, Avangard Bank (AVAN.ME), Sberbank and VTB Bank are currently expensive.

Mexico Gives Thumbs Down To US Treasuries, While These Emerging Markets Are Buying

The August edition of the Treasury International Capital (TIC) report released by the US Treasury Department, which contained data until June, was notable for one aspect in particular: China overtook Japan as the largest foreign investor in US Treasuries after a gap of eight months.

The Asian major had consistently been the largest foreign investor in US Treasuries before it lost the position to Japan in October 2016, as shown by the graph below. In the two year period plotted in the graph, China’s holdings had reached its nadir in November last year.

From June 2015 until November 2016, there were only three months in which the country added to its stock of US Treasuries. The decline over this period was equivalent to an annualized 12% pace. The sharpest decline was also seen in November, when the country sold securities worth $66 billion compared to the previous month.

From that point, except for January this year, China has been consistently adding to its stockpile, with the largest monthly addition of $44 billion seen in June.

However, this was not the only interesting trend in the report.

Trend among emerging markets

The graph below plots the holders of US Treasuries by country except China which had emerged most consistently in the top five over the last five years until the holdings data for June 2017. South Korea was excluded from this graph as Mexico had figured in the top five for three out of the five years considered in this analysis.

We’ve calculated the annualized rates of change in holdings over the past five years for these countries.

Brazil and Taiwan have seen nearly the same pace of change, but in opposite directions. While Brazil has seen its stockpile increase by a 1% annualized pace, Taiwan has seen a decrease at the same rate.

Mexico presents an interesting case. In terms of pace, it has seen the sharpest decline in its holdings at 9.7% annually. Its holdings of US Treasuries had peaked at $87.4 billion in April 2015 and now stand depleted to $32.3 billion – its lowest in these five years.

Russia has also offloaded US Treasuries quite sharply at an annual pace of 8% over the period. However, the difference between Mexico and Russia is that while Mexico had seen a peak in April 2015, Russia’s holdings had seen their nadir in the same month. Further, while Mexico continues to sell, Russia has been buying.

India has been piling in on US Treasuries of late. Its annual pace over the past five years stands at a staggering 17%. South Korea, has been adding to its US Treasuries holdings as well, at a similar pace of 16.8%.

In the next article, let’s look at what these holdings mean for emerging markets and what they may indicate for the future.

Roads And Fools In Russia: Not All That Glitters Is Silk Road

The collapse of the Soviet Union gave rise to a vast archipelago of unclaimed man-made objects and land in Russia and beyond. Thousands upon thousands of roads, bridges, water pipes, gas pipes, power grids, cemeteries, farmland, and more have passed from state hands to no one in the last 26 years. These assets aren’t just lying around. They’re being used.

Without proprietors, inefficiencies, corruption, and extensive shadow economies pop up around them. China’s Belt and Road Initiative – packaged in part as a driver of development for Russia and Central Asia – dodges the myriad issues facing municipalities in the region as a result of the absence of legal responsibility for infrastructure in use. Building new roads and rails to transit goods does little to help the legal chaos surrounding ownerless assets, reiterating the extent to which China’s avowed virtue of non-interference in the domestic affairs’ of others handicaps the utility of projects ostensibly meant to encourage development.

In Russia, all trouble leads (back) to roads

Russia, it is said, has two troubles: roads and fools. Unfortunately, when in power the latter make it exceedingly difficult to build the former. Russia ranks 99th globally according to the World Bank’s LPI (Logistics Performance Index) with some of the world’s worst roads and it’s estimated that Russia’s infrastructure investment needs approach $1 trillion, around 75% of Russia’s GDP. Ownerless roads are an excellent prism through which to observe Russia’s development problems and are emblematic of the issues presented by ownerless infrastructure more generally.

The energy-driven economic resurgence Russia experienced during Putin’s first two terms did not support a road construction boom. Official figures from the Federal Road Agency Rosavtodor show that roughly 6,500 kilometers (km) of new roads were built in 2000. That figure dropped to 2,000 km of new roads built annually by 2005 and has not broken 3,500 km since. The Federal agency Rosstat records that Russia’s road network expanded by 504,000 km between 2003 and 2015. Only 30,300 km were new construction. The rest were ownerless roads legally registered by regional or municipal governments in search of more federal funding, revenues, or control over local economic activity.

The growth of the road network through the registration of roads without a legal proprietor parallels a significant growth in the country’s fleet of light and heavy vehicles. According to Rosstat’s 2016 statistical review, light vehicle ownership has increased almost 2.2 times over figures from 2000. Truck fleets grew around 41%. Greater car ownership means more wear on roads, roads often maintained by strained regional and municipal budgets, informal agreements, or else rural and suburban residents paying out of pocket themselves.

The costs of ‘ownerlessness’

For private property owners, a law was signed in 2014 to calculate property taxes off of cadastral values – the value of the land in the State’s property register. As a result, Russian courts have seen a swell in the number of cases disputing the value of land because inaccurate data regarding land value is grounds for a claim.

Regulations change every few years, hundreds of thousands of assets vanished off of balance sheets during Russia’s market transition, petty corruption can affect claims, and the excess of assets built in the Soviet period seriously complicate determining prices. Municipalities struggle to determine how much to collect, reducing revenues or allowing for arbitrary demands for more payment in taxes. This affects decisions about acquiring ownerless assets like roads.

One can imagine how local, regional, and national elites can exploit that in a market where there often is not enough data to conclusively set a market price, especially since the shadow economy makes up as much as 39.3% of Russia’s GDP. Russian regulations attempt to align valuations of state-registered real estate with market prices, but increasing the state’s role in establishing benchmarks can achieve contradictory ends. There may be an improvement in the transparency of pricing on paper, but it makes bribery or keeping objects off of state registers more attractive depending on the interests of a buyer or seller.

It also potentially hinders the megaprojects Russia hopes for in negotiations with China since cost calculations have to account for land acquisition in remote, sparsely settled areas with considerable quantities of ownerless assets. These issues pertain to road, rail, and pipeline projects, forming part of the chain of corruption that Russian firms like Gazprom and Stroygazmontazh use to inflate the value of tenders they wish to deal to themselves.

Large projects in Russia are generally a means of distributing state wealth to oligarchs whose firms make money on costs, not the profitability of what’s being built. Once built, however, markets can be captured or affected through regulations adopted in Moscow in an ad hoc fashion, often in the guise of creating federal revenues to prop up budgets. The Platon toll system on Federal roads is a prime example.

As a result, prices can be lowballed with the right connections or else exaggerated to justify larger loans for state firms depending on whether the state is providing compensation or a private entity is selling the asset. Both construction of new roads and the incorporation of existing roads into legal registries with all the municipal, regional, and federal implications for budgets and responsibility that entails take a hit.

Incorporating ownerless roads into governmental or private proprietorship can affect functioning shadow economies without necessarily meeting needs, entrenching the interest of those using them to fight proprietorship and local authorities stuck weighing costs and benefits. These issues pertain to everything imaginable, from gas distribution pipelines to power grids, water pipes to cemeteries, and more.

Not that all that glitters is Silk Road

Though the statistics are less forthcoming, these issues pertain to Kazakhstan as well. Take roads as an exemplary case. State figures estimate that Kazakhstan currently has 128,000 kilometers of roads, of which 85,600 kilometers are public use and 42,400 kilometers are private roads for industrial enterprises, farms, mines, and forests. Kazakhstan scores higher than Russia on the LPI – 77th – but has received considerable help from multilateral institutions like the World Bank, Asian Development Bank, and the European Bank for Reconstruction and Development in conjunction with connectivity initiatives predating the appearance of China’s Belt and Road Initiative.

All the same, Kazakhstan ranked 117th for road quality at the World Economic Forum in 2014, dropping from the 98th place it took in 2006. As of 2014, the Ministry of Transport and Communications found that 33% of all roads were in unsatisfactory condition. While multilateral projects for road construction have benefited local communities and brought in civil society actors into the picture, they are unable to address issues plaguing the transport sector in Kazakhstan, some of which pertain to ownerlessness.

Figures from the Ministry of Transport and Communications state that Kazakhstan has 23,044 km of Federal roads, of which 12,301 km were international routes. The other 62,636 km of public use roads are local. Notably, the most recent development program unveiled in response to the collapse in oil prices – Nurly Zhol – only calls for repairs on 7,000 km of road and several landmark projects included in the initiative are functionally grandfathered in from projects initiated by the World Bank or Asian Development Bank. Though Kazakhstan’s budgetary situation has stabilized, part of Astana’s deficit reduction plans call for pulling back on stimulus spending from Nurly Zhol along with tax reform. But tax reform cannot happen without land reform, a continual thorn in the side of property rights and other bases for the development of infrastructure.

How much land does a ‘Stan need?

Land reform is intimately connected to the general legal concept of ownership or proprietorship in Kazakhstan. It’s a pressing issue, one that has inspired protests and fears of foreign ownership. Kazakhstan’s Land Code of 2003 legalized private property for the first time, hence the need for further amendments that have thus far has not led to consensus. About 36% of Kazakhstan’s territory – 98.6 million hectares – is arable land, yet only 1.2 million hectares as of 2015 had clear legal owners. In place of ownership, land is leased.

Last July, Kazakhstan began holding auctions for farmers to buy lands they were currently leasing at as much as a 50% discount. But the sale of land was to be accompanied by an increase in taxes that would bankrupt farmers with low profit margins. The end result is an ad hoc approach that seems to be protecting long-term leases while allowing for auctions on a much smaller scale.

In the past, the methodology to determine land values for sales, leases, or contracts, and taxes included a legal procedure through the courts and allowed for an independent valuation. The independent valuation was crucial, given how difficult it is to assess market prices with hundreds of thousands of hectares going unused or sliding back into state hands after going unclaimed for several decades. The independent valuation was an opening to bribe officials to overrate land values to receive greater compensation from the state since the vast majority of land deals involve transfers of land under lease from the state. Similarly to Russia, statutes were adopted stipulating that these valuations should not be higher than the market price. Instead of providing real reform, those involved in land deals receive much less in compensation, though citizens are able to achieve some redress through legal mechanisms.

These types of legal problems spillover into compensation for ‘urban renewal’ or development in towns and cities as well as legacies of dams, irrigation systems, power grids, and more built in the Soviet period. For example, farmers leasing land from the state are fined or lose land if its productivity declines from when they first leased it. Often enough, the Soviet-era irrigation systems, dams, or water supplies have dried up without the state’s recognition, punishing farmers for something no fault of their own.

More broadly, municipalities and regional governments struggle to fund public projects without effective means to value land, placing more stress on residents paying out of pocket, coming up with solutions informally, or else relying more on financial support from the Federal government at a time when the budget is strained.

The bigger picture

The power gap between federal centers and subnational governments in many of these countries is intimately connected to these problems as well. For example, the number of ‘donor regions’ Russia – regions that can finance services without requiring federal subsidies – dropped from 25 in 2006 to 14 as of 2015. Down from its 80% high, these 14 regions now provide about 60% of all regional tax revenues, a result of conscious efforts to centralize Mineral Extraction Tax (MAT) revenue and other rents in Moscow’s hands. Of these 14, four account for a majority of the money, including Moscow itself. In exchange, Moscow uses its greater budgetary control to dispense favors and buy loyalty. If a region want to incorporate, build, or repair roads, they increasingly need federal money to do so.

As of 2013 in Kazakhstan, only three regions of the country’s 16 received less than half of their budgets through money transferred from Astana. This structure parallels Russia. Oil and gas revenues for the state grew from $2.5 billion in 2005 to nearly $30 billion by 2014 alongside an increasing array of subsidies or support from the capitol. The collapse in oil prices forced Astana to spend the state’s oil fund – Russia did the same – to prop up budgets while cuts and reforms were made. Kazinform has reported that it costs 300 million tenge (around $910,000) to build one kilometer of road in Kazakhstan. Given the size of the country and population, this poses a disproportionate burden on less populated, rural authorities and communities that rely on money from Astana to provide services.

China benefits greatly from the centralization of budgetary power in these countries’ capitals for its purposes. China can negotiate desired infrastructure deals with national elites who largely control state financing and can override competing interests for things like the price of land, local concerns over the costs imposed, or legal responsibility for assets. National projects will provide benefits. A national highway or toll road will have some positive effects. But as long as the profits are directed towards nationally owned companies and any relevant tolls or taxes are collected nationally, it won’t resolve the problem localities face in meeting their own infrastructure needs.

This requires legal reforms and capacity-building for civil society and civic institutions, not exactly of much interest to Beijing. Growth in the short-term may give way to more unrest when the benefits are not distributed fairly and regions lag behind cities. But that’s probably all the same to China, no matter the proud rhetoric of non-interference in domestic affairs it cloaks its interests in. A community of common destiny does not look so pretty at the ground level across much of Russia and Central Asia.


Nicholas Trickett is a Policy Intern at Foreign Policy Initiative. As originally appears at:


This column does not necessarily reflect the opinion of the editorial board or Frontera and its owners.

Russia And Ukraine: Divided By Politics, United By Attractive Bond Yields?

Political quarrels are a dark side of the relationship between Russia and Ukraine. The bright side is the commonality they share pertaining to their fixed income markets: high yields. Just as India and Indonesia lead Asia in terms of attractive yields, Russia and Ukraine do the same for Eastern and Central Europe.

The graph below shows that yields on the 10-year notes of both countries have declined since the beginning of the year. But in the emerging markets universe, these yield levels are still quite elevated comparatively.

This is reflected in the Eurobond issuance conducted by the country in June.

Russian bonds remain popular

In June 2017, Russia sold 10 and 30-year Eurobonds worth $1 billion and $2 billion respectively. The issuance was oversubscribed over two times with a total order book of over $6.6 billion. The issue was beneficial for the country as well because yields of 4.25% and 5.25% respectively were the lowest in its history.

The bond’s popularity can be further gauged from the fact that the sale came on the same day that the US Senate extended sanctions to some Russian individuals and firms in connection with the country’s annexation of Crimea from Ukraine in 2014.

This led to some US investors pulling out of the sale along with some European buyers because VTB Capital – the sole arranger of the sale – was also subject to sanctions. But even then, the order book remained strong.

Points to ponder: Russian bonds

The outlook for Russian bonds looks a bit hazy at this juncture. From purely an investment perspective, yields are attractive and have some room to decline further, thus providing a buying opportunity.

In YTD 2017 until July 17, yields have decline by 64 basis points. Bloomberg reported that Viktor Szabo, an asset manager with Aberdeen Asset Management believes that yields on Russia’s 10-year notes could drop to 7%.

However, the possibility that extended sanctions may be passed by the US House of Representatives is a cause for concern. The bill, in its current form, does not place any restrictions on sovereign debt or derivatives from the country, but has asked for a report on the impact any limits can have.

This leaves the possibility open for either limits or a complete ban on Russian sovereign debt. Foreign investors have already become cautious.

Central bank data had shown that foreigners share of Russia’s ruble securities, known as OFZ bonds, had surged to an all-time high of 30.7% in May. However, on July 13, central bank First Deputy Governor Ksenia Yudayeva said that this share had fallen below 30%.

The other aspect to track is currency. After having strengthened against the US dollar until April, the Russian ruble (RUB) has been weakening. This does not bode well for local currency bonds when converted into US dollars.

Points to ponder: Ukraine

As far as currency is considered, the Ukrainian hryvnia (UAH) has risen against the dollar in YTD 2017, which makes its local currency denominated bonds attractive. However, these bonds are still not eligible for clearing through Euroclear.

Finance Minister Oleksandr Danylyuk has said that the country is serious about making the country’s bonds Euroclear-able soon. This would certainly enhance the appeal of the bonds as trades will be settled easily.

Both countries have further plans for their fixed income markets this year and beyond. Russia plans to swap $4 billion of old foreign bonds for new ones this year. Meanwhile, Ukraine expects to raise Eurobonds worth $2 billion in 2018.

However, geopolitical developments and currency movement will determine their future appeal.

Beyond Russia’s Google: Yandex Is Not The Only Booming Tech Stock In Russia

Top Russian tech stocks

Since 2010, the MSCI Emerging Markets IT Index has surged 144% while the Dow Jones Emerging Markets Titans Technology 30 Index has gained 95%. Comparatively, the MSCI Russia Index (ERUS) has seen losses of 34%.

The largest tech companies by market capitalization in Russia are Yandex (YNDX), (MAIL.IL), Morion PJSC (MORI) , Armada PJSC (ARMD) and Uniform Techno Systems (UTSY). As illustrated in the graph below, Yandex and are in a league of their own.

By sales (in 2016) the largest Russian tech companies are Yandex,, Mikron (MIKN), Yaroslavl Radioworks (YRSB) and Radiotekhnicheskij (RTIM).

Year to date, shares of Yandex,, Morion PJSC , Armada PJSC and Uniform Techno Systems have returned 55.1%, 58%, -52%, -42% and -82% respectively.

Yandex partners with Uber; surged 16% intra-day

Yandex is the most popular search engine in Russia, putting it directly in competition with Alphabet’s Google (GOOG). Based on audience reach, Yandex had a market share of 55.4% in 2016 in Russia. Apart from its search engine, Yandex also offers services including an electronic payment service, a taxi-hailing app, and a cloud storage solution.

In Russia, Yandex competes with Google, and Rambler (a private company). Yandex also operates in Belarus, Kazakhstan and Turkey (TUR) but still derives most of its revenues from Russia.

In June 2017, Google and Yandex had market shares of 47.4% and 47.5% while commanded a market share of 3.3% in the Russian search engine space. But that’s likely to change based on a recent settlement with Google over an antitrust claim. Yandex has been steadily amassing a higher market share after Yandex filed a complaint against Google’s anti-competitive tactics, forcing it to pay $7.85 million as fine.

In mid-July, taxi-hailing service Uber merged its Russian taxi business with Yandex. Yandex will own 59% of the combined company after the merger. The merger is expected to give Yandex an additional 5% to 6% of the Russian taxi market.

In 2016, the company reported a turnover of $1.3 billion, the highest among Russian listed tech companies. The company has a market capitalization of $10.2 billion. Publicly listed on the Moscow Stock Exchange (MOEX), shares of the company have gained 55% over the year so far., established in 1998 as an email service has now grown to become one of the largest tech players in Russia with a portfolio of e-commerce, social networks, online games and cloud storage. The company also has investments in Facebook and Groupon. holds 100% stake in Russia’s most popular social network VKontakte and operates the country’s second and third most popular social networks Odnoklassniki and Moi Mir. It also operates two instant messaging networks (Mail.Ru Agent and ICQ), an e-mail service and Internet portal, as well as a number of online games. Websites owned by have the largest audience in Russia and reach nearly 86% of Russian internet users.

In 2016, China’s Tencent Holdings (TCEHY) had 7.4% stake in, while Russian telecom operator PJSC Megafon (MFON) owned 15.2%. is listed on the London Stock Exchange (LSE) and has a current market cap of $6.2 billion. In 2016, the company generated revenues of $600 million.


Morion is engaged in the development, production and implementation of communications systems in Russia, Belarus, Ukraine, Tajikistan and Turkmenistan. Morion PJSC supplies its products to Russian railways, OJSC Gazprom, the natural gas company, OJSC Transneft – the Russian oil pipeline company and OJSC RAO UES – the Russian electric power provider. It also holds a stake in the Kamatel joint venture with Siemens. In 2016, the company recorded sales of $20.3 million (1.2 billion rubles). The company trades on the Moscow Stock Exchange and has a market capitalization of $183 million. YTD, shares of Morion PJSC have lost 52%.

Ratings & valuations

Sell side analysts remain bullish on tech stocks in Russia as they gain from high growth and rising consumption spending. Yandex has received 10 buy ratings, 2 sell and 6 hold ratings, while has 9 buy ratings and 2 sell and 5 hold ratings.

Valuations within the Russian tech sector are stretched with average one-year forward PE ratio of 34x.

Uniform Techno Systems and Morion PJSC are the most attractive stocks based on their cheap valuations. These stocks have one year forward PEs of 7x and 5.7x and are trading at the steepest discount to their peers. Meanwhile, Yandex and are the most expensive tech stocks in Russia with PEs of 93x and 29.8x, respectively.