September 13, 2022
He has a dream
Minfin won by a landslide
Budget revenues are disappearing. But don’t worry
Russian Railways beats Kuzbass
The hawks’ attack
To admit a mistake? It is impossible
Just a fact
He has a dream
Russian authorities continue to dream about how confidently Russia will overcome the impact of Western sanctions, which limit the technological development of the economy. It is no secret that one of the most severe problems for the Russian economy is, to put it mildly, the level of development of the electronics industry, without which it is impossible to produce quality goods today. In June 2019, Vladimir Putin instructed the government to develop a strategy for the development of the industry, which according to the President’s plan was to eliminate the lag by 2030. However, the invasion by Russian troops in Ukraine and the imposition of Western sanctions led to the fact that the developed plans, based on cooperation with foreign companies, had to be thrown into the basket. After that, the government had to report to the President that “unfair competition on the part of foreign electronics suppliers” was interfering with the tasks set, and in early June of this year, Vladimir Putin demanded that an updated strategy for developing the electronics industry in Russia be drawn up, relying on its own forces. At that meeting, the President announced the budget would allocate 900 billion rubles for these purposes over the next eight years.
The order was received, and it had to be carried out. The Ministry of Industry took the task seriously and, to begin with, decided to identify the main problems. The list turned out to be impressive:
Technology is 10-15 years behind the world level
Difficulties in mastering processes below 180 nm
Lack of production capacity
Critical dependence of design and production processes on foreign technologies, including software and materials (especially pure chemistry and silicon)
Inability to provide electronic component manufacturers with the necessary equipment
Low investment attractiveness
High cost of producing components in the Russian Federation
Acute shortage of personnel
The process came to a standstill; it became clear that the government did not have a vast arsenal of tools in its hands that could help overcome the problems identified. But because the President’s order cannot be ignored, the authors of the strategy decided to keep it simple and include in the document proposals that, according to the “copy-paste” principle, would find their place in any government program: “Producers will have easier access to grants, subsidies, and soft loans to stimulate off-budget investments.” The authors of the strategy decided to shift everything else on the shoulders of public and private companies, which are invited to “coordinate research in the field of advanced technology”; modernize production capacity, “including through the development of production of microelectronics with modern topological norms”; create an industry of electronic engineering (which today in Russia does not exist, even in embryonic form); and, finally, to abandon foreign architectures in the design of electronics.
The document’s conclusion contains a firm belief that all the problems will be solved in the time frame set by the President—i.e., by 2030. Going forward, Russian microelectronics will begin “expansion into international markets.”
I am ready to assume that the prepared document will be presented to Vladimir Putin, who will approve it after it has been finalized. Indeed, it should have no opponents: The Ministry of Finance is not required to allocate additional money; the Ministry of Economy is constantly working on the conditions for giving budget money, and nothing else is needed of this agency; Rostec would like to see itself as the manager of the electronics development program, but given the close relationship between the head of the corporation Chemezov and Industry Minister Denis Manturov, I do not doubt that these two officials will agree amicably with each other. The last condition does not seem impossible either: Speaking at a meeting with the President, Manturov should present in his usual manner, which Vladimir Putin likes so much and is not repulsed by.
Minfin won by a landslide
On Monday, Vladimir Putin held a meeting on budget planning for 2023, during which critical comments from the Ministry of Economy were addressed. These comments concerned the ministry’s desire to increase public investments by increasing the budget deficit or using the funds from the fiscal reserve, the National Welfare Fund.
The speeches of the meeting participants are not publicly available. Still, according to their comments to the media, we can conclude that Minister of Economy Maxim Reshetnikov could not achieve much success. The President confirmed his reputation as a supporter of strict budget discipline and supported Finance Minister Anton Siluanov with his restrained approach to budget promises. The concept of the Ministry of Finance is to limit the use of revenues from oil and gas to an increased cut-off price, which will be higher than $60 (the exact level is to be determined based on the total amount of expenses, which the President will approve). The budget deficit, in this case, should not exceed 1.5%-2% of GDP.
During the meeting, the participants failed to reach a common point of view on storing the resources of the NWF, which will probably be accumulated in 2023, as well as on the volumes in which the accumulated resources of this Fund can be used to finance investments. But the delay in answering this question does not hinder the continuation of the budget process. In a week, the Ministry of Finance will be able to present an entire construction of next year’s budget.
Budget revenues are disappearing. But don’t worry
The Ministry of Finance published summarized budget execution data in August, showing a growing tension with revenues. If the decline of oil and gas revenues looks unpleasant for the Ministry of Finance—but its reason is well understood—the 20% strengthening of the ruble against the dollar, the stagnation of nominal ordinary revenues, not related to the oil and gas sector, during April-August looks like an absolute disaster. These revenues in nominal terms were 11% lower than last August, and considering the 17% inflation (GDP deflator for the first half of 2022), revenues in real terms have decreased by 25%.
Overall, for the six military months of April-August, ordinary budget revenues were 22% lower in nominal terms than the same months last year and 33% lower in real terms.
Falling revenues are not a problem for the Ministry of Finance this year: It can finance planned expenses without any significant problems, using the accumulated reserves, including the nearly 1.5 trillion surplus received in the year’s first half.
Since the Ministry of Finance does not publish any breakdown of expenditures, we can only note that there was no surge in August.
Russian Railways beats Kuzbass
Decreased loading of the Black Sea and Baltic Sea ports has led to a sharp increase in competition for access to the ports of the Far East. Russian Railways (RZD) became a beneficiary, receiving the right to decide which cargoes will be transported on a priority basis. It is not hard to guess that Russian Railways has prioritized the shipments that bring in the maximum income. Because the transportation of coal has always brought RZD minimal profit, the company announced that coal would be transported last.
When the Governor of Kuzbass, the country’s leading coal region, Sergey Tsivilev, complained that Russian Railways was not fulfilling the President’s order to increase coal exports from Kuzbass through the ports of the Far East—Vladimir Putin had ordered to carry 58 million tons—the deputy head of Russian Railways, Andrei Makarov, quietly replied that the structure of the freight traffic to the Far East had changed dramatically: “We carried North-West cargoes, we carried lumber, we carried more oil, refined products, and chemicals.” According to Makarov, this helped keep more than 300,000 jobs in Russia’s Northwest and Central regions in April and May. Governor Tsivilev couldn’t find anything to respond to this argument.
It looks like Russia’s coal industry will be in a vise in the second half of this year: On the one hand, it is not known whether new buyers can be found after the EU embargo, and on the other, it is unknown how to get coal to traditional buyers in Asia.
The hawks’ attack
After the Ukrainian army’s successful offensive in the Kharkiv Region, the Kremlin faced severe public pressure from “hawks” who criticized the actions of the Russian military. Two of the most prominent hawks are the head of Chechnya, Ramzan Kadyrov, and former FSB colonel Igor Strelkov (Girkin), who instigated the military conflict in Eastern Ukraine in 2014.
Thus, on September 11, Kadyrov stated that if in the next few days “no changes will be made” to the conduct of the military operation, he would “go out to the leadership of the country” to explain to them the situation “on the ground.” Strelkov’s position sounds even more pejorative: “...if we continue to fight the way our troops have been fighting for six months, then we will suffer a crushing defeat in the end.”
Today, Dmitry Peskov, the press secretary of the Russian President, had to answer questions from journalists who asked about the permissibility of criticizing the Russian military from a hawkish position. Peskov’s answer was resolute: To blame the Russian army is the same as to attack the Russian President, who is the Supreme Commander-in-Chief.
Russians support the President. This is confirmed by people’s sentiments and people’s actions... People are really consolidated around the decisions taken by the head of state... As for other, critically minded points of view, as long as they remain within the framework of the current legislation—that is pluralism. But the line is very, very thin. You must be very careful here.
I doubt that Kadyrov or Strelkov will take Dmitry Peskov’s threats seriously. Still, I would not be surprised if two or three lesser-known characters are prosecuted under the “Fake Law” soon if criticism from the “hawks” continues. Of course, I don’t think they will be put on trial and imprisoned as the Kremlin does to war opponents, but I wouldn’t be surprised if the Kremlin wanted to replace the “thin line” with the “red line.”
To admit a mistake? It is impossible
A vivid example of how sometimes Western sanctions are directed in the wrong direction was the situation with delays in coupon payments in favor of non-residents on Eurobonds by Russian banks and companies. According to Bloomberg estimates, Russian corporate bonds denominated today in foreign currencies worth about $28.9 billion are in a state of technical default due to non-payment to holders of debt securities.
Most Eurobonds were issued under English law and placed in London. After the UK imposed sanctions, all Russian issuers had to obtain special licenses from the UK Office of Financial Sanctions Implementation (OFSI) to pay coupons. However, the British agency was not ready to consider all the applications and issue permits within the prescribed period, four weeks, according to OFSI Director Giles Thomson.
The combination of the scale of Russian sanctions, well beyond anything we have seen to date, and the pace of work has proved to be a problem for us.
According to him, the 70 employees of OFSI do not have time to review all applications because “every case is different,” and quickly bring on another 30 people whose hiring has been approved by the government.
In my opinion, the problem is worthless: Not a single payment from Russian borrowers in favor of non-residents can improve the financial situation of the Kremlin or ease the atmosphere in the Russian financial market. In such a situation, the right move on the part of OFSI would be to drastically reduce the documentation requirements or, even better, abolish the need for licenses for such payments.
But it is not only the Kremlin that is not ready to admit its mistakes.
Just a fact
The 72-year-old opposition politician and publicist Leonid Gozman was detained on his way out of the detention center, where he spent 15 days of administrative arrest for publicly equating the USSR and Nazi Germany. On August 30, the politician was detained for a Facebook post in which he compared Joseph Stalin and Adolf Hitler, although the law does not consider this a violation.
Gozman was taken to the police, who informed him of a new accusation of identifying the USSR and Nazi Germany based on a 2013 LiveJournal article. In April of this year, the corresponding corpus delicti of an administrative offense was enshrined in Russian law. The court will hold a hearing in this case against Mr. Gozman tomorrow morning, September 14, and Gozman will spend the night at the police station.
After his first arrest, the politician said he was ready to leave the country: “I will have a choice—to leave [Russia] or die in prison. It remains to be seen what the Kremlin wants.”