A chronicle of the collapse

March 6, 2022

In recent days, the Russian authorities have liquidated many independent media. At the same time, a real information war is going on in the internet space, with a lot of fake news appearing. This has made it considerably more difficult for me to find information for my digest, but it has not stopped my work.

With every day of the war, one can see more and more clearly how Russia is approaching catastrophe. I do not yet see any reason for political change: the anti-war rallies on Sunday were not very numerous; most Russians know nothing about Russian aggression against Ukraine. The country is facing serious economic de-institutionalization: many familiar elements of everyday life are disappearing; qualitatively the economy is reverting to that of the Soviet era.

Before the opening of IKEA shop in its last day of operation

The wrong war

The Russian army is mired in the expanses of Ukraine and has not displayed any meaningful offensive operations for several days. Intense artillery shelling and the seizure of large, medium, and small towns makes no difference in this respect: The occupying forces are few and can only demonstrate their presence. They cannot make managerial decisions concerning everyday life. The Ukrainians are coming out in peaceful mass demonstrations, but the longer the occupation lasts, the greater the chance of a real guerrilla war.

The longer the war drags on, the harder it is for the Kremlin to contain the flow of information. In the hope of a blitzkrieg, the Kremlin decided not to waste energy and resources on preparing public opinion for the war: The phrase “special operation” was supposed to create a sense of something small and not very serious. A small victorious war, in a word. Which it was not. With support from all sides, Ukraine was able to provide the world with a picture of the war, with evidence of Russian bombing of civilians; Russian soldiers killed, wounded, and captured; and destroyed Russian military equipment.

The Russian propaganda could not counter this: Except for access to the North Crimean Canal, no evidence of victory could be presented. And then the Kremlin began to plunge the Russian population into an information bubble, tightening censorship with each passing day. First, the authorities banned the use of the word “war,” then they demanded that only information provided by Russian authorities and state agencies be used. Then came the mass closure of online media, followed by the shutdown of Echo Moskvy radio and TV Rain, and the closure of the BBC and Radio Liberty, whose journalists were expelled from Russia. Facebook and Twitter were blocked on Friday, and President Putin signed a law criminalizing the dissemination of information about the war that contradicts the official version. Independent news media have ceased operations in Russia. The only distribution channels left are Telegram and YouTube, which are filled with Kremlin propaganda that skillfully uses search engine algorithms to promote its content. 

The information bubble tactic was used during the attempted coup d'état in the Soviet Union in August 1991, but it was not successful—the spread of information could not be stopped. I do not think that trying to enter the same river twice will bring a different result, although it will take some time to rebuild the work of the independent media. It will buy the Kremlin some time to continue its war of aggression, but so far, there is no indication that the Kremlin has understood what a victory in this war could be, nor that the Russian forces know how to achieve it.

Sanctions pressure is mounting

Western countries’ robust and concerted action to impose sanctions against Russia, supported by many global companies, is breaking the established structure of the Russian economy before our eyes and ruining the ordinary life of average Russians, who know nothing yet about the war and who are not protesting against it. Of course, the Russian economy will not collapse—there are no sanctions that can destroy the economy of any country to the ground. But some sanctions undermine current prosperity and the potential for future development. We can watch their effect in real-time, knowing full well that their impact will intensify with each passing day. The effect of sanctions is best seen in the financial sector and the consumer market.

The financial sector is bursting at the seams 

The Bank of Russia continues to limit the demand for foreign currency. After a 30% commission was introduced on Wednesday for the purchase of foreign currency by individuals on the Moscow Exchange, the commission was introduced on Thursday for companies that do not have confirmed import contracts. Its level was 12%; simultaneously, the Bank of Russia reduced the commission for individuals to that level. 

On Saturday, the Bank of Russia restricted foreign currency transfers by individuals to their relatives abroad to a level of $5,000 per month. 

On Thursday, Moscow banks received a definite demand from the Bank of Russia to raise deposit rates on ruble deposits to no less than 20% and on dollar deposits to no less than 7% per annum. At the same time, the Bank of Russia demanded that banks impose high fees for early withdrawal of foreign currency deposits.

Although the Bank of Russia managed to keep the ruble from plummeting in the first days, the margin of safety was tiny. Already on Thursday, FX settlements on the Moscow Exchange halted—according to the official version, “due to a large volume of accumulated and not yet executed by foreign correspondent banks.” The exchange expects settlements to normalize by Wednesday, March 9 (March 6-8 is a weekend in Russia). Meanwhile, there is a plurality of dollar rates in Russia: 1) There is the exchange rate that the Bank of Russia uses to set the official ruble exchange rate, 2) There is the exchange rate for households and companies with no confirmed import contracts, which is 12% higher than the exchange rate, 3) There is the interbank rate in the Bloomberg trading system, which by Friday afternoon was 15% higher than the exchange rate, 4) There are dollar sales rates at bank cash exchange outlets, which are at least 20% higher than the exchange rate.

On Friday, Vladimir Putin signed a decree which, from my point of view, laid a land mine under the Russian economy: He gave Russian borrowers (including the Ministry of Finance, regions, banks, and companies) the right to repay their loan obligations (loans, credits, bonds, and other financial instruments) to a lender in rubles at the Bank of Russia official rate (which is now 15% below market rates) without the borrower’s consent. At the same time, the borrower can repay its obligations to both non-residents and residents in rubles. Residents will receive rubles to their accounts and will be able to use them without restriction. Non-residents will receive funds to special “C” accounts, which will be opened for them by the borrower. At the same time, the regime of such accounts—whether it is possible to buy currency and transfer it abroad—has not yet been determined. 

It is evident that Putin’s decision will not be legally binding outside Russia. In case of default on debt repayment, foreign courts will seize the assets of Russian borrowers, including those of the Ministry of Finance. The Russian Finance Ministry said on Sunday that it intends to repay and service its foreign currency obligations to residents in roubles. How it will deal with non-residents has not yet been decided.

Two of Russia’s largest internet companies, Yandex and Ozon, have said they could face severe financial turmoil as Russian shares are halted from trading on the NASDAQ and TISE exchanges. Both companies issued convertible bonds (with investors having the right to demand conversion into shares or redemption at face value upon maturity), the terms of which gave investors the right to request early redemption if trading in the shares was suspended for more than a week. 

Yandex issued $1.25 billion worth of bonds, with about $615 million in the company’s accounts at the end of February, including $370 million in funds outside Russia. The company has warned investors that it does not have sufficient resources to make full repayments.

Ozon’s bond issue is worth $615 million, and the company had sufficient funds in its accounts at the end of February. Still, it is uncertain whether it will be able to transfer the money into the accounts of its Cypriot subsidiary, which was the issuer of the bonds. 

State of near-panic

Over the last week, dozens of foreign companies present on the Russian market have announced that they are ceasing to operate in Russia, leading to the closure of many shops and the emptying of shopping malls. In those shops that do operate, the cost of imported goods has risen following the ruble’s devaluation. Often the growth rate of the prices of imported goods by 50%-100% exceeds the growth of the dollar and euro: On the one hand, sellers are insuring against a rapid depreciation of the ruble; on the other hand, they are telling customers that they do not know when the imported goods will appear in the shops again.

On Saturday, the Visa and Mastercard payment systems announced their withdrawal from Russia. This means that the payment cards of these systems, issued by Russian banks, will no longer be accepted abroad and in foreign online shops, starting March 9. After that, Russians will pay only with their national card, Mir, in seven countries (Turkey, Vietnam, Kazakhstan, Armenia, Belarus, Kyrgyzstan, and Tajikistan) or request the joint Mir/UnionPay card that is accepted broadly. The payment systems’ decision will not affect ruble payments within Russia, as a law was passed in 2015 that obliged all ruble payments to be made at the national settlement center, which the Bank of Russia owns. 

On Saturday, the payment system PayPal announced it would cease operations in Russia.

Rosaviatsia, the national aviation regulator, has recommended that Russian airlines suspend all international flights to other countries using aircraft registered in registers of other states under leasing contracts from March 6. The agency said that the recommendation “is due to the high risk of detention or seizure of Russian airlines’ aircraft abroad,” the agency said. Last week, Pobeda’s Boeing 737 was seized at Istanbul airport and Nordwind’s Boeing 777 in Mexico City.

The restrictions do not affect aircraft registered in Russia. Experts estimate that more than 90% of the aircraft operated by Russian airlines are registered outside Russia.

The only Russian-built aircraft, a Sukhoi Superjet, can fly to Turkey’s resorts with no more than 60% load without landing. 

On Saturday, two Azerbaijani companies, AZAL and Buta Airways, announced the cancellation of flights to Russia.

On Monday, it is possible to fly from Moscow's main airport Sheremetyevo to 15 countries. Already on Tuesday, this list will shrink as Aeroflot will stop flying outside Russia on that day.

Note to mention: no flights to China or Kazakhstan.  

Avoiding sanctions? It's so easy

On February 28, the EU imposed sanctions on SOGAZ, an insurance company run by companies owned by Putin’s friend Yuri Kovalchuk. One of SOGAZ’ assets was the insurance company VTB Insurance, bought from VTB Bank in 2018. According to the sanctions regime, this company was supposed to fall under EU sanctions.
On February 3, Gazprom’s board of directors decided to buy a 51% stake in VTB Insurance and thus bring it out of the sanctions regime.
I would not be surprised if the core business moves from SOGAZ to VTB Insurance (which of course will be renamed) in the near future and soon afterward it will be taken over by Kovalchuk.
I wonder how long it will take the EU to see this?