Inland Empire: Life in Russia Without Visa and Mastercard

buyerThis woman is happy she doesn’t live in Russia, where Visa and Mastercard may soon be banned. Courtesy of Fluencia

Inland Empire: How Will Russians Live Without Visa and Mastercard?
Sergei Khestanov
Republic
July 12, 2019

The new attack by Russian lawmakers on the international payment systems Visa and Mastercard may come to a head, successfully or unsuccessfully, this summer. For the law bill’s sponsors success would mean the near-total financial isolation of Russians from the rest of the world. All that would remain would be to adopt restrictions on foreign currency.

Going Our Own Way
There had long been talk of the need to talk of a completely autonomous domestic payments system, but the events of 2014 and, especially, the imposition of sanctions visibly accelerated the process.

In fact, in the spring of 2014, MPs in the Russian State Duma drafted amendments to the law “On the National Payment System” that would have forced Mastercard and Visa, which had been obliged to observe the sanctions against a number of Russian banks, to deposit amounts of money equal to their two-day turnover in special accounts at the Russian Central Bank. Visa said it would stop doing business in Russia. Negotiations with the Russian government and Central Bank followed this announcement. The draft law was considerably softened. The amount of the obligatory deposit was removed from the bill, and it was decided that international payment systems would operate in Russia through specially established local subsidiaries.

After Mir bank cards were launched, they were quite unpopular among Russians for a long time. Russians preferred time-tested foreign bank cards. Besides, initially there were purely technical problems with Mir that caused their cards to be rejected, but after the Russian Central Bank issued stern warnings, banks updated the software of their ATMs and payment terminals, more or less solving the glitches.

Another problem is that Russian cards are nearly useless abroad since they are accepted almost nowhere. However, given the small percentage of Russians who travel abroad, this is not such a huge problem.

The breakthrough in promoting the domestic cards came in 2018. On July 1, 2018, the electronic wage payments of all state-sector workers were transferred by law to Russian bank cards. By January 1, 2019, they had taken a big bite out of the share of the Russian market controlled by their famous competitors. According to the Federal Anti-Monopoly Service, during the period from January 1, 2018, to January 1, 2019, the share of actively used Visa cards among the Russian populace fell from 45% to 39.5%, while Mastercard’s share fell from 42% to 36%. The reduction in the international payment systems’ share of the Russian market happened as Mir doubled its share of active card users, which rose from 12.5% to 24.5%.

This is not surprising. The traditional Russian principle of pushing certain things, ironically dubbed the “voluntary compulsory” method, is rather effective. Outcomes are achieved quickly, making such methods of promotion quite popular. We should say, in all fairness, that this happens not only in Russia.

Such aggressiveness has a price, however. Compulsory promotion of goods and services reduces competition, since the advantages of using a particular service or buying a certain product derive from the market’s absence. Over time, products and services pushed in this way lag behind their absent competitors in terms of their quality.

Striking examples of diminishing quality in a market in which competition was restricted were the Soviet automobile and electronics industries. The latter lagged behind the world especially disastrously. Remember the old joke, “Soviet handheld calculators are the biggest handheld calculators in the worlds”?

Rejecting the Outside World
But degradation as a consequence of pushing goods and services through non-market methods is only half the trouble. It is much more dangerous to ban and expel foreign products and services from the domestic market. The new regulations described in the draft law “On the National Payment System” could force international payment systems out of Russia since they would be unable to comply with the regulations. Once they leave, Russian bank cards would not be accepted for payment abroad, and cards issued by foreign banks would not be valid in Russia.

Mir cardholders who never travel abroad would not even notice this nastiness. Everyone else would soon voluntarily be forced to join them. Give the Russian state’s high and growing share in the Russian economy, the regulations would not provoke fatal disaffection with the leadership.

Russia’s policy of self-isolation was adopted long ago, and a large segment of the populace has no real objections to it, while people who use their bank cards within Russia mostly do not care what system processes their transactions. What matters is that everything works fine and does not cost too much. Mir’s reliability is now on a par with the international payment system, and so are its rates. Besides, if push came to shove, the Russian Central Bank and the Federal Anti-Monopoly Service could force it to reduce its rates.

There are no rational reasons for establishing a homegrown system when the duopoly of Visa and Mastercard serve the Russian market just fine. China’s UnionPay and Japan’s JBC have been processed by certain Russian banks, but they have never played a significant role. You cannot make money in a highly competitive, mature market, long dominated by world leaders like Visa and Mastercard, unless you employ non-market methods of competition. The market simply does not need new players.

The reason for the persistent promotion of Mir card is not commercial. It is an insurance policy of sorts, one that will have claims made on it if real, harsh Iranian-style sanctions are imposed on Russia. If you regarded this scenario as a serious possibility you would have cause to establish a national system, especially because Chinese banks (on whom great hopes were placed in 2014) have essentially supported US sanctions. In these circumstances, it is better to have a stunted system in terms of its international access than to witness a sudden collapse of cashless payments if harsh sanctions are imposed.

However, this non-competitive idea immediately inspires people who are willing to make money by destroying their competitors.

If regulations pushing the international payment systems out of the Russian market were adopted, it would deprive Russians of the ability to pay for things abroad without cash, and the logical next step of banning or restricting the export of foreign currency from the country would be easy as pie. Simultaneously, Russians would find it much harder to purchase foreign goods in foreign online shops, something that would be incredibly difficult without access to international payment systems.

A side effect of the ban would be the promotion of Russian-registered joint ventures for selling Chinese goods to Russians.  This would have a positive effect on the receipt of VAT from these purchases. VAT matters since VAT revenues constitute up to a third of Russian federal revenues, making them comparable to Russia’s export revenues.

The natural consequence of depriving Russians of access to foreign online shops would be a rise in prices. At first, the government would profit slightly because VAT revenues would grow—until people stopped buying things.

The policy of isolating the Russian economy from the world economy in terms of Russian nationals being unable to spend money outside Russia has been reasserted, and yet another step on the long road of restrictions and bans may soon be taken. The tendency towards restrictions on foreign currency has once again been confirmed. We might recall the recent discussion about restricting unqualified investors from opening foreign currency accounts.

The hope remains, of course, that, as in 2014, the international payment systems would reach an agreement with the Russian government, Russian MPs would be reined in, and cardholders would not feel the pain. Unlike 2014, however, the Russian Central Bank has supported the bill.

Sergei Khestanov is a macroeconomics adviser to the director of Open Broker and associate professor of financial markets and financial engineering at RANEPA. Translated by the Russian Reader

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Nationalizing Russia’s Middle Class

OLYMPUS DIGITAL CAMERAIn the last decade or two, Russia’s monied classes and middle classes have been wildly enriched or merely kept afloat by cheap, disenfranchised labor from Central Asia. I took this photo on April 10, 2017, in the container village inhabited by Central Asian migrant workers building Petersburg’s so-called Marine Façade on 476 hectares of reclaimed land in the Neva Bay next to Vasilyevsky Island.  

Nationalizing the Middle Class: Society’s Previously Most Dynamic Group Seeks to Rely on the State
Vladimir Ruvinsky
Vedomosti
June 26, 2019

Analysts at Alfa Bank have concluded Russia’s middle class has been shrinking. More importantly, it is being nationalized, which distances the prospects of qualitative economic growth.

What constitutes the Russian middle class is mostly a philosophical question: a specific definition of it has never gained a foothold. Some researchers argue it never emerged in the social sense and remains akin to a folklore character. Other researchers, focusing on income levels, have claimed to have sighted it in Russia, but in recent years their observations have been suffused with sadness.

In a new report, “The Russian Middle Class: Lowering the Appetite for Risk,” analysts at Alfa Banks have defined the middle class as a group of people whose monthly income is between 39,000 and 99,000 rubles per person [i.e., between 546 euros and 1,387 euros at current rates], that is, 110–250% of the median income in Russia, and who are able to buy durable goods.

In the noughties, the middle class grew. By 2014, it constituted 37% of the Russian populace. In four years, however, all of this growth had been forfeited. In 2017, only 30% of the populace could be counted as middle class, which was less than in 2004 (34%). Simultaneously, the group’s share in the populace’s total income dropped from 48% in 2014 to 39% in 2017.

The middle class has lost its economic clout, becoming more vulnerable. In some ways, it has lost more than other classes. Alfa Bank’s analysts write that the middle class’s real incomes stagnated in the ten-year period between 2008 and 2018, while the incomes of the country’s most impoverished groups rose by four percent, and the incomes of the wealthiest Russians increased by eleven percent. An indicator of the middle class’s fading fortunes was that its core spent three percentage points more on groceries during the ten-year period, just like the country’s lower classes, while its expenditures on holidays and education dropped by one to two percentage points. In 2014–2018, the middle class’s loan payments grew by 20% in nominal terms. This is probably why it has not been involved in the new consumer loan boom.

Simultaneously, the middle class has been undergoing nationalization. It is a commonplace the middle class consists of people independent of the state and living on their own means. Its progress has been regarded as a vital driver of economic growth, including in Russia.

Its potential, however, appears to have weakened. Whereas in 2003 approximately ten percent of the middle class was employed in the state sector, this figure had grown to fifteen percent in 2017, according to Alfa Bank.

This is not a disaster yet, especially since middle-class employment in commerce, the restaurant business, finance, real estate, and health care has grown. However, the middle class’s share of business income has decreased more than it has among the general populace.

Traditionally considered the core of civil society, the middle class has come to rely more and more on the state for employment, claims Natalya Orlova, Alfa Bank’s chief economist. Even if the middle class does not shrink anymore, its nationalization worsens the prospects for Russia’s progress, since its ranks will be replenished by people who do not power the economy but count on the regime for their livelihoods.

Translated by the Russian Reader

Russian Import Substitution Blues

cherry coke 2018“Try Ripe Cherry Coca-Cola.” Billboard, Petersburg, July 28, 2018. Photo by the Russian Reader

The Consequences of Countersanctions: Food Import Embargo Makes Russian Producers More Inefficient
Vladimir Ruvinsky
Vedomosti
June 25, 2019

Vladimir Putin has extended Russia’s food embargo until the end of 2020, but the policy’s positive effect has dried up. Instead, it has been making Russian producers less efficient and driving up prices. The Kremlin imagined an embargo would be a good response to western sanctions over the annexation of Crimea, but Russian consumers have had to foot the bill.

Putin’s ban has been in effect since August 2014. It prohibits the import of meat, fish, and dairy products from the United States, the European Union, Canada, Australia, and Norway. During his televised “direct line” to the nation the other day, Putin explained that, over the past five years, the sanctions those countries imposed on Russia had led to the loss of $50 billion for the Russian economy since 2014. The west, however, had lost more. According to Putin, the EU had lost $140 billion, while the US had lost $17 billion. Apparently, Russians should take heart knowing they have not been the main losers in the sanctions war.

First, however, the economies of the EU and the US are many times bigger than Russia’s, so, in fact, Russia has lost the most. Second, the losses do not boil down to simple arithmetics. Third, the subject of countersanctions has not really been discussed. Natalya Volchkova, director of applied research at the Center for Economic and Financial Research (CEFIR), has calculated the protectionist policy costs every Russian 2,000 rubles a year: this is the sum total of what we overpay for products in the fourteen categories affected by the countersanctions. She argues that, out of this sum, 1,250 rubles go to Russian producers and 500 rubles go to companies importing food from countries not covered by countersanctions, while the toll on the Russian economy’s efficiency amounts to 250 rubles per person per year.

Full import substitution has not been achieved: suppliers from the sanctioned countries have been replaced by suppliers who work with other countries, who often charge more for their goods. Restricting competition was meant to give Russian agriculture a leg up, and some domestic producers have, in fact, increased output. According to Rosstat, retail food imports decreased from 34% in 2014 to 24% in 2018. Since 2016, however, the dropoff in imports has trailed off. Volchkova complains that most Russian import-substituted goods have increased in price. They are produced by businesses that had been loss-making. This is the source of the overall inefficiency.

Natalya Orlova, the chief economist at Alfa Bank, divides countersanctions into two phases. When they are implemented they have a positive effect, but over time the risks of negative consequences increase.  The only good option on the horizon is the lifting of the sanctions. When it might happen is not clear, says Orlova: it is currently not on the agenda. When it does happen, however, it will be bad news for Russian producers. Countersanctions have helped major players increase their shares of the domestic market. They have become more visible in such cushy conditions but less competitive as well. The longer the conditions are maintained, the less ready the Russian agro-industry will be to face the harsh competition. When the walls come tumbling down, we will see again that European producers are more sophisticated technologically.

Translated by the Russian Reader

People Apps

raidPetersburg police muster at five in the morning on May 29 in the parking lot of the Soviet-era Sport and Concert Complex (SKK) in the southern part of the city before heading off to raid the homes and workplaces of Central Asian migrant workers. Photo courtesy of Fontanka.ru

Petersburg Police Raid Migrant Workers After Diaspora Refuses to Help Find People Involved in Brawl
Mediazona
May 29, 2019

The press service of the Russian Interior Ministry’s Leningrad Directorate informed Interfax that Petersburg police began raiding places migrant workers lived. The raids kicked off when two diasporas [sic] refused to help security forces find people implicated in a large brawl involving knives.

Roman Plugin, head of the Interior Ministry’s regional directorate, gave the order for the raids. He ordered that people involved in a large brawl that took place on Salov Street on May 20 be found. Four people were stabbed during the brawl.

According to police, natives of the North Caucasus and people from a country of the near abroad, who are hiding in Petersburg [sic], were involved in the brawl.

Fontanka.ru writes that three hundred police officers are involved in the raids. 78.ru adds that the police officers, in particular, raided the wholesale vegetable market on Sofia Street and a wholesale warehouse on Salov Street. They were supposed to find people involved in the brawl, which occurred after a “group of Uzbekistanis refused to share turf with Russian nationals from the North Caucasus” [sic].

According to the news website’s source in the police, the security forces had attempted to negotiate the issue with prominent figures who had a say in circumstances at the major wholesale vegetable markets. They, however, had pretended not to know who was involved in the brawl.

Thanks to Yana Teplitskaya for the heads-up. Translated by the Russian Reader

Simon Kordonsky: The Real Russia Refuses to Be Counted

kordonsky
Simon Kordonsky, academic director of the Khamovniki Foundation. Photo by Andrei Gordeyev. Courtesy of Vedomosti

Sociologist Simon Kordonsky: “There Are No Entrepreneurs Listed in the Census”
The Khamovniki Foundation’s Fieldwork Suggests the Country’s Leaders Know Little about Real Life in Russia
Vedomosti
January 29, 2019

The academic director of the Khamovniki Foundation for Social Research is Simon Kordonsky, renowned in Russia’s analytical circles and a former adviser on federal government policy. Nowadays, he has been looking at things from the other side. How does policy affect the lives of the rank and file? Or, rather, how do the rank and file escape the gaze of politics?

“Rosstat Is a Disaster”
Let us start with a simple question. How many people live in Russia?

I don’t know. Feel free to add ten to fifteen percent to the official figures for the mid-sized cities.

So, many more than 146 million people live in Russia?

There are many more. But we are completely at a loss when it comes to the big cities. It is impossible to count people there.

Why? Aren’t there firm indicators such as bread consumption and use of medical services and public transport?

And who in Russia counts this stuff?

I don’t know.

Sewers are used to count people. Judging by the sewerage, around thirty million people live in Moscow.

How do you use sewage to count people?

A certain volume of sewage is flushed into the sewers, and we have a rough sense of the amount of sewage each person generates. Electricity use, on the contrary, cannot give us a fix on numbers of residents, because people steal electricity. It is a rather complex system.

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The Khamovniki Foundation for Social Research was founded in 2006 by Russian investor and hotelier Alexander Klyachin, who currently serves as the foundation’s board chair. The foundation’s advisory board is headed by Simon Kordonsky, a professor at the Higher School of Economics.

The foundation finances and supports academic field research that contributes to describing Russian society. The foundation aims to make the outcomes of its studies accessible to society as a whole. It has supported over sixty research projects. Among the most discussed have been “Seasonal Workers in Small Russian Towns,” “The Garage Economy in the Russian Hinterlands,” and “The Constructive Role of Informal Relations in State and Municipal Administration.” 

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There are no scams involving shit?

Maybe there is an underground shit trade, but we have not studied it. I am saying that it is awfully hard to calculate the consumption of electricity in the 220-volt networks, which are municipal networks. Superimposed on them are other, high-voltage networks, and there are separate stats on each level. Total loss in the network is around fifty percent. It is hard to quantify how much is used by the populace, and how much by industry, because the rates everywhere are different.

It is the same thing with garages [as workplaces]: they usually survive on stolen electricity. They pay for the hookup, but off the books to the folks who do the maintenance work on the power networks. They pay thirty to fifty percent of the real cost and pay minimum usage rates. So, energy use will not help you count people.

Nor will water use. A considerable number of families do not get their water from centralized mains, but from wells, from their own local networks. Besides, in summer, many families live in the countryside at dachas. In winter, some people temporarily leave the villages, while others stay behind. It is hardly possible to quantify this migration.

Official statistical bodies make no effort to count them?

Of course not, but statisticians know all about it. They have their own professional journal, Statistical Issues [Voprosy statistiki]. Several years ago, the journal published an article explaining the discrepancy between the indicators taken into account and what we see with our own eyes. It was necessary to mislead our enemies in the west.

Camouflage the stats?

Yes. Rosstat is a disaster, you see. Their ontology is Soviet, while they imported their methodology from the west. They carry out the census using western standards, and so all the peculiar aspects of life in Russia disappear from their radar. For example, our census does not count entrepreneurs.

At all?

There are no such people as entrepreneurs in the Russian census. There are people involved in businesses of some kind, and there are people who practice the free professions. The census does not differentiate between them. Rosstat regards people who are paid salaries and people who earn their living by making profits as indistinguishable. So, Rosstat is not an organization from which we should expect anything.

Here is another example. What are cities and villages? There are no cities in Russia as urbanists describe them and, so, there are no villages, either. When he was alive, Vyacheslav Glazychev wrote that Russian cities were conglomerations of settlements. Take the district seat in Tula Region that borders Moscow Region. There are 14,000 people in the entire district. From April to late October, however, the population increases to 150,000 people.

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Simon Kordonsky was born in 1944 in Oirot-Tura (present-day Gorno-Altaysk). He graduated from Tomsk State University with a degree as a chemistry and biology teacher. In 1988, he was awarded a kandidat degree, writing a thesis entitled “Cyclical Procedures in Scientific Research.” State Councilor of the Russian Federation, First Class, he chaired the Presidential Expert Advisory Council in 2000. In 2004, he served as a senior aide to the president. He has been a professor of state and municipal administration at the Higher School of Economics since 2006. In 2011, he was appointed director of the Khamovniki Foundation.

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It increases to 150,000 people? Tenfold?

Yes, tenfold. These people are not accounted for. They do not register their residence.

What about medical services? They are designed to deal with 14,000 people. How do they handle 150,000 people? Or do they handle them?

Nearly all dacha dwellers have cars.

They drive to Moscow for medical care?

Why? Serpukhov and Pushchino are nearby, and they have excellent outpatient clinics. Doctors see patients privately everywhere, and you can always come to an arrangement. Medical care is not the problem. The real problem is trash.

That was going to be our next question. As of the new year, a new trash era has dawned in Russia. Does anyone calculate the amount of garbage Russia generates? Does anyone understand the extent of the disaster?

I don’t know. I saw a business plan drawn up by gangsters in the early 1990s. They wanted to take over the garbage business, and they were partly successful. Everything is alright in the places where they were successful. But in the places where first there were towns and villages, followed by municipalities, and now corporations, there is an utter mess.

Moreover, it has been compounded by another problem: gasification. When people used stoves, garbage was burned, metal and bottles were recycled, and there was relatively little plastic. Nowadays, people prefer to throw things away. As soon as a town or village is hooked up to natural gas, the garbage piles up. There is just nowhere to take it, and there are no institutions or stereotypes for dealing with it.

In the garbage business, there is not only collection but also sorting and recycling.

Yes, garbage collection is not what matters. What matters is sorting and recycling. People live in landfills. They even have conveyor belts. They sort the garbage and sell the recyclables to buyers. It is an ecosystem you cannot change by opening or closing landfills, because these are reliable sources of raw materials, with a production cycle and sales channels. It is difficult and dangerous to describe life in landfills and the cottage trades that thrive there.

Do the authorities give the Khamovniki Foundation a hard time?

Not in the least. But they do not support us, either. So far we have not overlapped with the authorities either regionally or federally, but during our expeditions we cooperate with local authorities, of course.

How do you decide where to go on expeditions?

Accidentally. We have done work in all the federal districts, from Kamchatka to Kaliningrad. We have made fewer trips to the south, but now we have seemingly made connections there, too.

Where you have been in the past year? What new things did you find?

We were in the Far East: Vladivostok, Arsenyev, down to Nakhodka, and back to Vladivostok via Bolshoi Kamen. Thirteen people traveled almost 3,000 kilometers, describing the different local cottage trades and crafts.

Artemy Pozanenko recently completed a series of hunting expeditions. He spent several months with hunters and poachers as an embedded observer. Yulia Krasheninnikova has been studying expert evaluations and expert evidence as an institution. It transpires that it has long ceased to exist in Russia as a professional institution. Instead, crappy quasi-expert evaluations and so-called experts have boiled to the top, especially in religious studies, medicine, construction, and science. Dissernet have gone after fake scientific experts, and you know the success they have had.

Olga Molyarenko has been studying ownerless property. It turns out a considerable segment of existing networks and infrastructure in Russia belongs to no one at all.

She started by examining cemeteries. She discovered there are a certain number of cemeteries officially on the books in Russia, but the real number of cemeteries is nearly ten times larger. It is a typical situation. In the villages and small towns, the cemeteries were located beyond the official border of these settlements. They were overgrown by forests and thus registered as forest lands. It is forbidden to bury people in them, but you have to bury people somewhere.

By the way, the land registry is a problem unto itself. Alexander Pavlov added up all the land registered in Russia. Its total area is 1.7 times larger than the country’s official land mass the country, including the northern lands.

Then it transpired that the Defense Ministry’s closed towns have not only collapsed structurally but have also disappeared juridically. The Defense Ministry has not transferred them to the municipalities because, in particular, the municipalities are not capable of dealing with them. They do not have money in their budgets for completing the paperwork and other formalities. You have probably seen concrete two-lane military roads. Most of them belong to no one in Russia. The same goes for the roads along power lines and other infrastructure networks Usually, they belong to no one. They have no legal owners, and they are not listed in anyone’s inventories.

No one maintains them?

They have de facto caretakers rather than de jure owners. Usually, an economy emerges around these ownerless chunks of property The power transmission lines often have no owners. There was a state-owned enterprise that produced its own heat and electricity. The enterprise vanished, but the power station was left running because it keeps the nearby town heated and lit. However, power station itself and its networks belong to no one. Wherever you poke your nose you find the sewerage and water supply all belong to no one. In Krasnodar Region, people simply refused to talk to Olga about it.

What about the city itself, Krasnodar?

It was the same story. In the region’s coastal areas, if they show anyone the real figures for utilities and infrastructure, it would reveal how many tourists actually go there on holiday. They cannot do that, because they would have to pay a lot more taxes.

But how does ownerless infrastructure operate? Don’t contracts have to be signed? Don’t procurements have to be made?

There are people involved, of course. Alexander Pavlov has been making a study of Ulyanovsk for us. There are observable stereotypes. Everything is kept running by relying on connections, relationships, and unwritten rules.

How are fees collected?

The people who benefit pay in cash or favors. Everything is done strictly by the unwritten rules.

Here is a more general question. Are you saying the Kremlin does not know about any of this?

None of it exists on paper. On a personal level, they know. But as officials… Where do you go with it?

Do the aides in the Kremlin show the big brass anything about it?

I don’t think Kremlin aides are capable of helping anyone solve their problems. People have business interests they lobby by tattling on each other. They ask the top brass to make certain decisions, but the top brass keep their distance. A balance emerges, but it is a really peculiar balance, the outcome of a permanent war for resources in which no one can win, since the amount of resources available decreases during hostilities. In turn, this ratchets up tension among belligerent interest groups. However, what really goes in Russia concerns very few people. At best, information about really goes on can be used as arguments in internecine conflicts.

If they are so poorly informed, how do they ensure presidential decrees are executed? For example, when the Kremlin set out to reduce mortality rates caused by cardiovascular diseases?

The rates did drop. There are three lines at the bottom of death certificates: primary cause of death, secondary cause of death, and tertiary cause of death. A person crashed their car because they had a heart attack, and they suffered internal organ damage during the crash. The statistics take stock of what we write on the first line. This is basically how medical statisticians calculate data about mortality. If the Kremlin orders cancer be put in third place, the statisticians will do it, and if the order comes down to reduce mortality as caused by heart disease, the rates will drop.

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Russia’s Underground Cottage Industries
“One of our grantees found a huge cottage industry in a region in the Volga Federal District: around forty illegal airstrips,” says Simon Kordonsky. “Some of them have markings and hard surfaces. They transport goods, teach people to fly, and work in agriculture. Agriculture is their main gig. There is currently no official agricultural aviation in Russia: not only crop dusting but also the constant monitoring of field required by high-tech agriculture. You cannot check out an entire field by walking around it, but these tiny airplanes, often handmade, can do the job.

“By the way, outside of Moscow, there are approximately fifty people who have different airplanes: handmade, store-bought, and imported. These people have the money for them. The circumstances are dicey: air traffic control is not adapted to deal with these aircraft. Pilots of small aircraft make their own deals with air controllers on the side. There are regulations, but complying with them is impossible, and so an administrative market has arisen around this cottage industry. The pilots make payoffs so no one pays them any mind.

“The cottage industries change when the authorities pay attention to them. They exposed the garage economy and started making rounds of the garages, so people have been gradually moving to workshops. Mansions outfitted with workshops are being built outside city limits, just as in the nineteenth century. In Krasnodar, it is plain to see because it is right downtown. There is the market, and the war monument with its Eternal Flame. They are surrounded by one- and two-storey buildings. These are workshops and dwellings.

“Everything you can sell is made there. They distill vodka, roll out meat dumplings, sew linens, build furniture, and rent appliances. There are hotels, prostitutes, hair salons, and hospitals.

“Yes, and the dental industry has gone off the Health Ministry’s radar in certain locales. Outside of Moscow, for example, there are people who own dozens of different clinics. The clinics have no signs on the front door, but the equipment is top flight, and the doctors are terrific. They treat the local elite, so no one is the wiser.

“Did you know that near University subway station in Moscow there is the Nauka research and production facility, an establishment well known in certain circles

“Close to the bluff there there was and partly still is a community known popularly as Shanghai. A few years ago, it contained around five thousand garages, and the artisans who worked there were into everything, including the high-tech production of spare parts for imported cars. They had huge Soviet-era coordinate drilling machines, heavy asynchronous motors, probably imported, and programmers from Moscow State University, and they did great work. Their products were sold as imports.

“Moscow city hall has recently been trying to demolish the place, but Shanghai has resisted. This was place that had an outpatient medical clinic and a barber shop. The cafeterias were really good, featuring food from all over the world.

“Another type of cottage industry is distributed manufacturing, as in the Novokhopyorsk District in Voronezh Region and the Uryupinsk District in Volgograd Region who produce down goods together. They breed sheep and goats, comb the wool, processing it using high-tech machines, equipped with thermostats that fluff the wool, and finally produce the down and weave it. Everything they produce is sold at a wholesale market two hectares in size, open from two to six in the morning. They sell their wares to Roma wholesalers, who distribute the down goods nationwide.

“The government is now in the midst of a campaign against self-employment, but the cottage industries themselves change all the time, regardless of attempts to combat them. In fact, it is not clear what self-employment is. After his state of the nation address, the president gave orders to define the social status of self-employed people. The comrades from the Finance Ministry and Labor Ministry defined their fiscal status, but this is meaningless without defining their social status. What do we call government officials who take kickbacks? Cops running protection rackets? Are they self-employed or not? How do they differ from a university lecturer who works as university exam prep tutor on the side? Or from a physician who puts an ad on the internet saying he will treat patients at any stage in their suffering at any clinic in Russia? 

“There is no difference.

“If we take this approach, we discover the entire Russian populace is self-employed. As I used to say, first we must force people to pay taxes on kickbacks, and then we can deal with self-employment.”

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What do we do in these circumstances? If, as you say, Rosstat has failed to take Russia’s peculiarities into account, and their stats are at odds with reality, this leaves room for playing fast with the facts. What must be done? Should we change the methodologies?

That is a philosophical question. The possibility of accounting itself arises when there is a market. Modern statistics emerged in the seventeenth century when the market emerged, when goods and money parted ways, and people had to account for goods and money separately. If there is no market in Russia (the only market in Russia, perhaps, is the one at our customs border), then accounting can be done arbitrarily, using any criteria you like. The conceptual apparatus of an economy based on accounting and measurement cannot be applied to the realities of an underground cottage industry economy, a clandestine workshop economy, to life in Russia, to an administrative market state organized around the distribution of particular resources. The problem is neither technical nor methodological, but ontological. This is why we cannot count the number of people who live in Russia. 

When you say there are instructions to reduce mortality to a certain level, where do the instructions come from?

Well, there is a Health Ministry in Russia. It reports on the state of the populace’s health. The phrase “increasing life expectancy” appears in all their white papers, although I have never been able to get either ministers or academicians to specify the connection between medical progress and life expectancy. They have different systemic variables. The Health Ministry drafts a report on its work. The report is discussed—I don’t know where nowadays, maybe in the Security Council, maybe in Prime Minister Medvedev’s inner cabinet. The ministry gets orders to improve its figures. This instruction is called a presidential order or government order. On the back of this piece of paper, this order, are the names of the people who will implement the order. They are the folks who come up with the figures and then vet them. You have never heard of these people who draft white papers and come up with figures. You do not know them and you never will, although their administrative weight is no less than that of public officials

Here is a question linked to inflation and estimates. What did Alexander Surinov do so badly he was forced to resign his post as head of Rosstat?

I don’t know the specific reason. He was from the old school, you know, a man taught by folks who belonged to the old school of Emil Yershov [an economist who ran the State Statistics Committee, Goskomstat, from 1989 to 1993, before becoming a full professor at the Higher School of Economics]. Of course, maybe the whole business with driving up the figures and getting phone calls from the top brass rubbed him the wrong way. Perhaps he just freaked out.

By tweaking the stats, however, or, rather by existing in a system in which stats are tweaked, the state does not have a more or less realistic picture of reality, and all the plans, programs, evaluations of these programs, and adjustments to these programs are based partly on stats that it tweaks and dreams up itself, and partly on stats dreamed up by God knows who, a faceless crowd of civil servants.

“The Oppositions Needs a Position”
There are the polls done by VTsIOM, but they say the FSO (Federal Protective Service) does its own polls that tell the truth. Does the FSO keep statistics that show the president the truth?

The FSO conducts polls that consist of around 40,000 direct interviews without sampling, but in the final analysis their data is quite similar to the data produced by Alexander Oslon (Public Opinion Foundation or FOM), when it comes to public opinion, at any rate.

Our government conceives itself, and it has operated this way for three hundred years. People would go abroad, people like Peter the Great or Dmitry Kozak. They saw something they liked, came home, and decided they would do things the way they were done abroad.

It is quite hard to find anything Russian about Russia. Everything has been built by the state, but part of what it built got away from the state, and it is this fugitive part that is regarded as unreconstructed and outside state control, a gray zone. When something happens in the gray zone—young people act up, say—the state registers it and becomes alarmed. People are on the move, meaning there is something to it, so they want to devise a youth police, establish a state agency, a ministry for youth affairs, and get funding for it. What happens, ultimately, is that young people live their own lives, and on the other hand there is a state agency that squanders the federal money allocated to channel young people and their energy. The state is on the lookout for something living or seemingly alive, and this thing is nationalized, it is assimilated by the state. The Russian state consists entirely of such agencies, which ape things that occur beyond the state’s reach.

The FSO’s officers also keep track of societal stability, the different protest movements and so on. If protest movements kick into high gear, it means it is time either to nationalize them, which initially happened with the nationalist organizations, or crack down on them. Otherwise, God forbid, interregional synchronization might occur, and then you call in the guys whose jobs it is to neutralize such things, the Center for Extremism Prevention (Center “E”) and the Russian National Guard.

Do you mean it is impossible for the opposition or protest movements to consolidate?

It is probably possible in quite extreme circumstances, as in the late eighties and early nineties. Local uprisings are more likely. You see, the opposition needs a position. What is the regime’s position? It has no position, and so there can be no opposition. Opposition is based on the very same rationale. The regime’s position is that it is opposed to opposition.

We travel around Russia and we see no one in the mood to protest. Yes, people are dissatisfied, but they have always been dissatisfied. Their dissatisfaction is based on the sense someone got more than they did and this is unfair. They will complain to the supreme arbiter, they think, and he will set things right. But the kind of dissatisfaction that existed in Soviet times in Novocherkassk and Biysk, in the ethnic republics, does not exist today.

Nowhere? Not in any of the regions?

Something quite interesting has been happening in the ethnic republics within the Russian Federation, in Mordovia, Tatarstan, and Bashkortostan, among the Soviet ethnicitie shaped by Stalin in 1927–1928 as part of his policy on ethnic groups. They are not really nations, but ethnic esthates, social groups shaped by the state and bound to particular territories, so that Bashkirs have a particular status in Bashkortostan and a completely different status in Tatarstan. Rustem Vakhitov, who is based in Ufa, has written quite interestingly about this.

After the Soviet Union collapsed, these ethnic groups took on lives of their own: nations have been emerging in all the ethnic republics, sometimes to the point of hilarity, as happened in Mordovia. We went into a shop where the clerks were speaking Russian. When we approached one of them, they started speaking Mordvin. In the local cultural center, the ladies were sitting around a table covered with albums filled with drawings of costumes. They were designing the Mordvin national costume.

You’re saying the process has not been astroturfed from the top down by the regional bosses?

No, it is a search for identity. People are trying to solve a genuinely timely question: who are we?

Ethnic Russians don’t have this problem?

Ethnic Russians alone have not been emerging as a nation. Russians were never the titular nation [in any of the Soviet national republics]. When Stalin’s nation-building was underway, the Russians were forgotten. Everyone who was pushed out from the the ethnic republics became Russians.

So, people in Arkhangelsk Region could have been called Pomors and also emerged as a separate ethnic group?

The Pomors have their own deal. Yuri Plyusnin, a professor at the Higher School of Economics, has described the Pomors as a special ethnic group. Some cunning people politicized his research, and the myth of Pomor nationalism emerged.

These episodes, involving ethnicity, and the absence and search for identity, have been breaking out all over Russia nowadays. What is Siberian identity? People are riled up about this as well. Who are we Siberians? they ask themselves.

Do these trends threaten Russia’s territorial integrity? Will things somewhere boil to the point reached in Chechnya?

This will happen when there is a shortage of resources. Gleb Pavlovsky has described it well. In 1996–1997, when it was obvious the system was disintegrating, it had to be integrated. Two methods of integration were devised. One was financial. There was a multi-currency system. The so-called young reformers nationalized the ruble, turning money into a financial resource distributed by the federal government. The regions and municipalities queued to get their hands on it, competing with each other in the bargain. Elementary order emerged.

The second method was ideological. Vladislav Surkov and his pals dreamed up United Russia and nationalized ideology, trying to manufacture at least a partial copy of the Soviet Communist Party. Their project was generally a success, too, but unlike financial policy, United Russia was not instrumental. No one knew how to use it, except for channeling certain forms of discontent.

So, if there is a threat to territorial integrity, it is a potential threat. However, it is a threat that can be turned to an advantage. An ordinary economy deals with the risks posed by the market: there are winners and losers. Due to its non-market foundations, Russia does not welcome risks. Threats are the dominant tool in Russia’a administrative markets. The people who invent the scariest stores get the cash and the resources. One of the scary stories has to do with the threat to territorial integrity, which the security forces use to obtain resources, because they are supposed to neutralize the threat.

Yet people are always dissatisfied with the way resources are distributed, and so there can be no means of assessing whether threats have been dealt with effectively or not. Once upon a time, threats to public health and public education were identified and prolonged. Resources were allocated for neutralizing these threats, and national projects were launched. Consequently, the threats became even worse. New national projects have been launched, and resources have again been allocated to neutralize the same threats.

We live in the midst of permanent threats, generated by all the stakeholders and pressure groups. The government is faced with the need to emphasize certain threatens and allocate resources for neutralizing them.

Russia was disoriented for a long time, since it had no customary external enemy. Subsequently, different forces united to manufacture this external enemy, and now it is a matter of neutralizing the external threat. I gather that a considerable amount of federal funds and extra-budgetary resources have been earmarked for producing means to neutralized the external threat.

So, we are fighting the good fight against enemies we construed ourselves, against enemies we dreamed up ourselves?

Yes, it’s a good fight. We are winning. We are earmarking resources foor the fight. We are retreating, we are advancing. We are forcing groups to scrap over resources and queue for them. Basically, the scrap going on in the queue is the basis of the current stability.

Russia has been functioning this way for hundreds of years. It generates threats, attempts to neutralize them, and exports its internal tensions through external aggression. This was what happened in Afghanistan.

Can we be completely defeated by such a threat?

We lost in 1991, didn’t we? It was then necessary to generate an internal hotbed of tension, known as “Chechnya,” getting rid of all conflicts in the country and booting them down there.

There were lots of people there who were quite aggressive and itching for a fight. Besides, there was a curious form of self-organization in Chechnya. The first Chechen combat units emerged from construction crews, not from the big clans. Chechens traveled to Siberia together to build cow barns and formed work crews.

“Repeating the Past Is Russia’s Future”
They went there to build cow barns, because there was no work of any kind in Chechnya?

That was not the only reason. It was a very good deal for the local authorities. Building was the only means they had of retaining resources in their area, so numerous construction sites popped up. I was then busy researching construction in the countryside and I saw what was actually happening. I would get an itemized list of the buildings, and there would be ninety sites on it. Then I would make the rounds of the sites and find only forty-two actually being built. The other sites did not exist, but I would find another fifty sites that were not on the itemized list, but which were nevertheless under construction, and it would be Chechens, Ukrainians, and Hutsuls building them. The Chechen work crews came together, because the objective was to protect the forest glades in Siberia.

There is something similar going on nowadays in Tyumen Region, for example. In Dagestan, there are villages that have full-scale diasporas in Tyumen and Surgut. The men have two families, one in Surgut, the other in Dagestan. They ship all kinds of schmutz and fruit to Tyumen, bringing back timber and fish to Dagestan. I imagine it is Tyumen is not the only place where such things go on.

Doesn’t Plato hinder them? It monitors cargo shipments.

Plato monitors the big rigs. There is no system for monitoring trucks under twelve tons. The government farmed out the big rigs with the hope of extending the new system of tolls to low-tonnage transportation. What do I mean by “farming out”? In particular, resources are redistributed from local authorities to corporations. The regions have become less significant in the distribution and redistribution of resources, while corporations have become more important. This will inevitably cause conflicts.

What conflicts?

In the first place, conflicts between the regions and the corporations. And conflicts along the highways, especially federal highways. They are like arteries pumping blood and supporting life: there are tons of gray-zone cottage industries that spring up around them, providing everything from food to prostitutes.

Take the village of Umyot in the Zubova Polyana Municipal District in the Republic of Mordovia, which is on the M5 Ural Federal Highway. Prostitutes are lined up for a dozen kilometers along the highway, along with different roadside establishments. The Zubova Polyana District is home of the famous village of Potma, where five prison camps built during Soviet times as part of the Gulag are still in operation. The district has a population of just over 60,000 people, and around 30,000 of them are convicts, while the non-convict populace are third- and fourth-generation prison guards. So, when a monopolist like Plato appears on the scene, people naturally try and fight back.

There are really interesting migrations underway in Russia nowadays. They say the country is becoming deserted. According to statisticians, people have been moving into the district and regional seats. That is happening, but some of the migrants are regrouping along the big highways. Russia has been shrinking down to a series of highways. New communities are being built, and life there is defined by a highway.

There is another trend, however, of people leaving the cities. These people are adherents of different environmental sects, the Ringing Cedars or Anastasians, for example. We counted several hundred thousand of them. Within a radius of a hundred kilometers from Moscow there are dozens of Anastasian settlements. They have no names,  addresses or anything of the sort. These downshifters are educated people, usually.

Pozanenko sailed several hundreds of kilometers down one of the rivers in the north and counted several dozen settlements that were not registered with the government in any way.  They usually are highly attached to a particular ideology. They go off to live in hermitages, grow cedars, and worship Nicholas Roerich. The ones who survive move away from the ideology after three or four years, becoming ordinary peasants. We have seen this in Altai and other places.

But the inflow is greater from the small towns and villages into the major cities than vice versa?

They are migrants doing seasonal work. Moscow sucks in people who live as far as 400 kilometers to 500 kilometers away. This radius is around 70 kilometers for a large regional capital like Novosibirsk. This is pendulum migration, while migration over great distances is seasonal migration. If we take the Zubova Polayana District again, it is around 400 kilometers from Moscow. The men go to Moscow to work as security guards, while the young women go there to work as “accountants,” meaning prostitutes. This was the case a few years ago, and I doubt whether much has changed.

What a great euphemism!

Here is another thing. A retail chain has agreements with villages to supply laborers for several months. There are several villages, and the villagers take turns going into the city to work. It is very hard to quantify migration like this. On Fridays, it is readily visible at the train stations: the cars are packed because people are going home. Daily migration can be quantified: you just take a look at the terminal stations of the subway and the train stations when people pile into Moscow on the commuter trains. Basically, these are the thirty million people we spoke about at the beginning, the people who shit in Moscow. These are the numbers of people who come to the city. In some regions, as much as forty percent of the population migrates to work.

There is a theory that, in the future, it will be megacities that compete with each other, not countries.

Russia does not have enough oomph for that. What kind of future awaits Russia? Repeating the past is Russia’s future in terms of public opinion and behavior. Look at what people say about the future: the country is going back either to Stalin or Nicholas the Second.

What about a palace coup? Russia has a rich tradition of those.

I don’t believe it.

Why not?

There are way too many competitors.

You said that the Soviet Communist Party collapsed and everything else collapsed with it. Isn’t Putin a similar force for consolidation nowadays?

Putin is not the problem. The problem, as Gleb Pavlovsky says, is transferring power while maintaining stability and territorial integrity. Some people have seemingly decided the problem can be solved by prolonging the leader’s life. Big money is currently being invested in biology and medicine. There are academicians who have long been receiving large sums of money for research on prolonging life.

Do you mean Vladimir Skulachev?

Yes.

They write that he has run into a dead end.

Practically, it is a dead end, of course, but politically the demand for his research is high.

Maybe they will go in search of the Holy Grail?

I think they have gone in every direction they could have. Where do you think their flashy religiosity comes from? What is the cause? They are hoping for a miracle. They really are praying, hoping for a miracle, because there is no rational way out of the impasse.

Translated by the Russian Reader

Sergei Shelin: Isolationism Has Corrupted Russia

vhuo87jzsh8j2vtaThe label from a bottle of Port Wine 777. Courtesy of Collectionerus

Isolationism Has Corrupted Russia
The Sukhoi Superjet 100’s crash shows what happens when a country isolates itself from the world while trying to keep up with the 21st century’s Joneses 
Sergei Shelin
Rosbalt
May 7, 2019

Only Murmansk Region announced an official day of mourning for the people who perished at Moscow’s Sheremetevo Airport on May 5. There was little expectation a national day of morning would be announced, since the protocol for such things, adopted by the country’s leaders for their own convenience, do not stipulate a national day of mourning after disasters of this magnitude. It is thus neither a matter of heartlessness nor the upcoming Victory Day holiday.

The Sukhoi Superjet 100s have not been grounded, however. True, the authorities are currently pushing the hypothesis the crash was caused by pilot error. This is a more intelligible and attractive explanation than the hypothesis that was cooked up just the other day as a diversion, the one about how some passengers, allegedly, prevented other passengers from escaping because they were trying to get their luggage out of the burning plane. Nothing has yet been proven, however, although hardly anyone would argue with the fact that the first passenger jet designed and built in Russia since the Soviet Union’s collapse has been a failure.

The Super Jet was produced long before the current falling out with the west. Its designers made generous use of imported parts, hoping the plane would sell like hotcakes abroad. Today, the few foreign airlines whom Sukhoi managed to persuade to purchase the planes, for example, the Mexicans, complain about the Super Jet’s unreliability, design flaws, and delays in procuring spare parts. It would seem they are looking for a good excuse to stop flying the planes.

The flip side of these failures has been the attempt to force Russian airlines to operate the plane, especially Aeroflot. What would grounding the plane mean now? It would be tantamount to bringing the entire undertaking to a close. Clearly, the Russian state’s ambitions and collective self-interest have coalesced to oppose this decision. The Super Jets are still flying, and we can only hope everything will work out for the best.

Such semi-Russian, semi-foreign collaborations are feasible and normal if the general contractor is not having a spat with the outside world, and airlines are free to choose which airplanes they fly. This was not quite the case from the get-go, but when Russia’s quarrel with the west gained momentum, all the worst aspects of the venture elbowed their way to the fore, turning into a self-sustaining process.

The deeper Russia sinks into isolation, the worse the links in all business chains function, while state protectionism constantly increases for anything that resembles import substitution or at least apes it. The number of failures and breakdowns in all parts of Russian society, some of them involving fatalities, sometimes without them, thank God, inevitably grows.

What is the difference between yesteryear’s Soviet isolationism and the current Russian isolationism? The former was preprogrammed to generate victims and hardship. They were merely part of the system. We need not talk about Stalin’s horrors. Even during its final decades, the Soviet Union was still typified by universal poverty, quite strong societal discipline, and the ruling class’s relative modesty. This state of affairs was maintained by a ragtag ideology and a still palpable fear of the state machine. Isolation was vouchsafed, of course, by the Soviet Union’s lagging behind the outside world. But it did not weigh heavy on every aspect of life and all at the same time. People moved into Khrushchev-era blocks of flats, regarding them as the last word in modern housing. They drank 777 brand “port wine,” having no clue how real Portuguese port tasted.

On the other hand, the Soviet military-industrial complex competed successfully with the rest of the world, at least until the early 1980s. Even though it was a byproduct of military aviation, Soviet civil aviation was quite impressive. The country’s professional communities, including the period’s passenger airline pilots, maintained a strict work ethic longer than Soviet society at large. Crashes were not so rare, however. But they were usually covered up not only due to totalitarianism but also because the information revolution had not yet happened.

The Soviet regime seemed invincible almost to the bitter end. Current attempts to resurrect it, despite their impressive magnitude, are laughable.

Today’s Russia is not the Soviet Union.  It does not have the stamina to compete in arms races and so forth with the outside world. It has even less will to self-denial, both among the elites and the grassroots. People have been adapting to the plans of the authorities to lock them up in a besieged fortress forever, but their life hacks are completely different from what they were in the last century.

Many Russians who have the right skills, experience, and education have been leaving abroad to work. By the way, their ranks have included hundreds if not thousands of the country’s best commercial pilots. Several millions of people, each of them capable of doing something well, have emigrated from Russia during Putin’s twenty-year reign.

Meanwhile, the majority of Russians, who have stayed in Russia, have tried to make themselves as comfy as they can in their import-substitution society, hoping either for special perks or state welfare, or perks and welfare all at once.

Since isolation has kicked in, independent business, already frail, has almost gone extinct. But the bureaucratized “state-minded” capitalists who took over the entire business field have nothing in common with the dexterous captains of Soviet management. As they get filthy rich through import substitution, today’s Russian magnates would never think of depriving themselves of the outside world’s blessings. They do not pretend to be farsighted. Simple minded, they loudly demand that the isolationist feast go on, becoming more creative as it proceeds. From time to time, the peculiarity of their exclamations spices up the sad circumstances, but not much.

Many people laughed at Viktor Linnik, president of Russian agribusiness giant Miratorg, and the National Meat Association when they called on the government to ban individuals from bringing small amounts of sanctioned European produce back to Russia. They were especially amused when Linnik said, “Jamon should be eaten in Spain, while Parmesan cheese should be eaten in France.”

The most striking thing about what Linnik said was not his confusion about Parmesan cheese’s national provenance, but the ease with which one could continue his line of though by saying, for example, that Russian bread should be eaten in Russia and, consequently, it was time to stop exporting grain, one of the few export sectors in which Russia has been blossoming. Would you tell me only a crazy blowhard would suggest such a thing? I doubt you would. Many things that had seemed impossible have already happened during the current orgy of import substitution, which consists of equal portions of greed and persecution mania.

Russia’s newfangled twenty-first-century isolationism not only vouchsafes the country will lag behind others. It is a species of intellectual, moral and professional corruption. It means no lessons can be learned from accidents and disasters. It means decadence, decay, and collapse are fobbed off as a decent, normal life.

Translated by the Russian Reader

Nastiness Is a Warm Gun: The Kremlin’s Cowboys

bd1bf37b99A Miratorg worker tending calves. Courtesy of Readovka

Business Russian Style, or, What is Miratorg, and What Do You Eat with It?
Dmitry Zhuravsky
Readovka
April 30, 2019

How Did a Company Importing Meat from Brazil End Up Getting Most of Russia’s Agricultural Subsidies? 
Miratorg’s own website identifies it as the largest agribusiness investor in Russia. The company is owned the Linnik twins, Viktor and Alexander. Viktor serves as the company’s president. It was Viktor Linnik who, last week, proposed tightening controls on the luggage of people entering Russia and increasing penalties for the illegal import of meat-based products. Today, he encouraged Russians to stop thinking about Parmesan cheese and start thinking more about the country’s growth. To rub it in, he dubbed everyone disgruntled with such proposals “blowhards.”

We should point out right off the bat that the fact Prime Minister Dmitry Medvedev’s wife’s maiden name is Linnik is only a funny coincidence, one which the Linnik twins have never tired of mentioning when they are interviewed by journalists.

The facts back this up. Blood relatives of the Russian state’s second most important person could not have established a giant agribusiness company that keeps all its accounts and founding capital outside Russia.

One hundred percent of Miratorg’s shares are owned by Cypriot offshore companies: 99.99% by Agromir, Ltd. (despite its Russian acronym, the company is registered in Nicosia), and 0.01% by Saudeid Enterprises, Ltd. (also registered in Nicosia).

Nevertheless, Miratorg is on the Russian federal list of so-called backbone companies and, since 2015, due to Russia’s self-imposed ban on meat and produce imports, it has been dubbed a strategic company. These regalia allow the Cypriot-based company to obtain loans from Vnesheconombank at discounted rates, which means it borrows part of its operating capital by drawing on the future pensions of Russians. (We published a detailed analysis of this scheme in a previous article.) It also means Miratorg can apply to the government for subsidies to pay back these selfsame loans.

A Success Story
Considering Viktor Linnik’s current circumstances, Miratorg’s origins appear laughable. The company was initially established to import meat from Holland and Brazil to Russia. To make the job easier, two years after the company was founded, in 1997, Miratorg opened a subsidiary in the Kaliningrad Sea Fishing Port, through which it imported meat to mainland Russia. Miratorg did business this way for nearly ten years. In 2005, it purchased a stake in two BelgoFrance-owned pig farms in Belgorod Region. The import company was transformed into a full-fledged agribusiness.

Kaliningrad Sea Fishing Port. Courtesy of Readovka

Miratorg went on to co-found a farm in Kaliningrad Region. A little later, it moved into Bryansk Region, which has become the company’s second home.

It was also in 2005 Miratorg was chosen to be involved in the National Priority Projects, a program for growing “human capital,” announced by Vladimir Putin on September 5, 2005. Until Dmitry Medvedev was elected president, the program, which included promoting the agricultural sector as one of its priorities, was overseen by the current Russian prime minister. Since 2008, when Medvedev was inaugurated president, the agricultural growth program has had its own line item in the federal budget.

Current Realities
Miratorg is currently Russia’s largest meat producer. According to Kontr.Focus.ru, an online service for assisting in doing due diligence on potential clients and business partners, Miratorg, Ltd., has founded thirty-six subsidiaries in eight regions of Russia. In 2017, the company produced 415,000 tons of pork, 114,000 tons of poultry, and 82,000 tons of beef.

Russia’s regions regard Miratorg as a valuable investor whom nearly any governor would be glad to welcome into his neighborhood. According to Miratorg’s website, the company has made a total of 200 billion rubles in investments. The advent of an agricultural market player of this caliber in a region means a guaranteed inflow of money from the federal budget in the form of subsidies from the government’s agricultural sector growth program and  Miratorg’s own investments.

On paper, Miratorg is a real find for regions heavily dependent on federal government subsidies. Aside from the federal agricultural subsidies it brings with it, Miratorg contributes to regional budgets through the land it leases. Its farms provide jobs while they are being builty and after they are brought on line. In addition, it pays taxes in the regions. The company is not a burden but a blessing, or so it would seem.

Russian Prime Minister Dmitry Medvedev and Miratorg President Viktor Linnik. Courtesy of Readovka

Taking advantage of its status, Miratorg moves confidently around Russia. In the regions, it has become accustomed to acting suddenly and brazenly. The company often receives land under indefinite gratuitous bailments by order of the federal government, whose decrees are personally signed by Prime Minister Medvedev.

Miratorg usually acts in full compliance with the law, although the effects of how it does business trip up regional governments. After three years, the land it leases free of charge is transferred from regional ownership to Miratorg’s ownership.

Last summer, the Bryansk Commercial Court adjudicated a conflict between the Bryansk Meat Company (Miratorg’s local subsidiary) and the Bryansk Regional Government. Miratorg tried to prove that members of a district council had violated the law by refusing to sell them land they had been leasing. According to law, a company that has leased agricultural land for three years has the right to purchase it and continuing farming it. Only two conditions must be met for the deal to go through: the relevant regulatory authorities must have no objections, and the land must be used for its original purpose.

The Bryansk Meat Company had complied with these terms, but local councilors had not signed off on the deal. Originally, they had agree to lease the land to the investor. Later, Miratorg’s subsidiary decided to trick the council and buy the land. Consequently, the local council was not paid the rent promised to it and did not profit from Miratorg’s presence in the district.

Instead of a lease, the local council was offered a one-time payment, which is transferred to the council’s accounts when the investor buys the land. Bryansk Meat Company’s farm occupies thirteen parcels of land totaling 7,398,700 square meters. Under the terms of the sale of the parcels to Miratorg, the average assessed value of one square meter of land is a mere 1.6 rubles. It is a great deal for Miratorg, but not for Bryansk Region.

We found reports of similar law suits ongoing between Miratorg and local governments in other regions of Russia.

Nastiness Is a Warm Gun
Since 2009, Miratorg has also confidently been colonizing Kursk Region. Its investments there began with the Pristen District, but currently the company operates in thirteen districts in the region. Its facilities in Kursk Region include the Pristen Pig Farm, Blagodatnoye Agricultural Enterprise, Renaissance Farm, Fatezh Lamb, and Miratorg Kursk, Ltd. According to Miratorg’s figures, it invested 17 billion rubles on its agribusiness facilities in Kursk Region between 2009 and 2017. In the Pristen District, it built two pig-breeding facilities with three sites each, while in the Oboyan District it built two pedigree breeding units.

Currently, Miratorg is building what will be Europe’s largest refrigerated slaughterhouse with a capacity to process 4.5 million head of hogs or 400,000 tons of meat in slaughter weight. Miratorg has also been building seven pig farms in two other districts in the region.

3fe1ac38af.jpgA billboard showing Miratorg’s assets in Kursk Region. Courtesy of Readovka

Why has Miratorg invested so much in Kursk Region? For the same reason it has invested heavily in Smolensk, Bryansk, Kaluga, Kaliningrad, and other regions in Russia. The Russian federal budget supports domestic industrial agricultural enterprises with subsidies. Some of the federal government’s assistance is earmarked for the largest players in agribusiness, the strategic, “backbone” companies we mentioned earlier. Some of the assistance is filtered through regional government budgets, where it is meant to boost small companies and support local producers. When Miratorg sets up a subsidiary in a region, it automatically grabs the lion’s share of federal subsidies for itself.

In Russia, there are no limits on the subsidies a particular agricultural holding company can receive. By using the subsidiaries it has established in the regions, a national agribusiness company can qualify for regional subsidies. For example, in 2016, the Bryansk Meat Company was awarded 98% of all subsidies earmarked in the federal budget for promoting agriculture in Bryansk Region.

At the same time, Miratorg has been officially designated as a strategic, “backbone” enterprise. Accordingly, the company and its subsidiaries also receive subsidies for pursuing particular projects. Since 2014, Vnesheconombank has lent Miratorg $871.5 million to expand meat production. Thanks to sleights of hand such as this on, in 2016, Bryansk Meat Company left not only farms in Bryansk high and dry in terms of financing but also farmers nationwide by hogging 90% of all subsidies earmarked for agriculture. The total amount of subsidized loans was 33.6 billion rubles, and this financing was obtained by a single Miratorg subsidiary for a single year.

The company has been feeding off this program since it was founded in 2005. Miratorg has received hundred of billions of rubles in subsidies over this period.

The more subsidiaries it gets, the more lines of credit Miratorg can receive. The story  of its rise to the top bears a strong resemblance to the way Yevgeny Prigozhin built his school cafeteria catering monopoly in Moscow. There is one signal difference, however: whereas Concord Catering’s contract implies that Prigozhin’s food production facility does the work for which it was contracted and pays back its debts out of the profit generated by the facility, some of Miratorg’s loan agreements contain an interesting loophole. It can fulfill its obligations to Vnesheconombank one of two ways, either the way Concord Catering does it, by paying back its debts out of its profits, or by selling off its founding shares in its subsidiaries to pay off its loans. Meaning, hypothetically, Miratorg can rid itself of some of its subsidiaries.

Where Do Miratorg’s Profits Go?
Considering the billions in government subsidies it receives annually, Miratorg and its owners do not even have to run a good business to live high on the hog. According to open sources, Miratorg’s profits shrunk fivefold in 2016, amounting to a mere five billion rubles, despite the fact the company received several tens of billions of rubles in subsidies from the Russian federal government.

Nevertheless, Miratorg is the main supplier of meat for huge fast food chains such as McDonalds and Burger King. It has also launched its own cafes and supermarket chain. Miratorg’s profits, which are incomparable to the subsidies paid to the company, end up not in Russian bank accounts, but in offshore accounts in Cyprus.

d79d3fe745.jpgA  Miratorg supermarket, newly opened somewhere in Russia. Courtesy of Readovka

Miratorg’s operations do not resemble an attempt to promote Russian agriculture, but rather a scheme for spiriting federal money out of the country. Given Miratorg is the industry leader in terms of land assets and government support, it should also have come to monopolize supermarket shelves. Its status as a strategic enterprise and the subsidies it receives simply oblige it to aspire to this end. The government’s plan was to have Miratorg replace all the imported meat banned from supermarkets with domestically produced meat.

Instead, Miratorg annually receives several hundreds of billions in subsidies allocated by the government to support the country’s agriculture. Miratorg spends the money to purchase land, which it uses, along with shares from its regional subsidiaries, as collateral to obtain more loans.

Ultimately, instead of building a successful business and resurrecting Russian domestic agriculture according to the government’s plan, Miratorg merely filches money from the federal budget. As long as it keeps feeding the “Cypriot butchers,” real hardworking Russian farmers will have to get by without substantial assistance. Eventually, the whirligig of subsidies could lead to the complete collapse of Russian agriculture as such.

Thanks to Anna Klimenko for the heads-up. Translated by the Russian Reader