April 19, 2022
Donbas battle began
Putin & Economy
Nabiullina’s forecast
Restricted market
New secretes
The energy sector is under pressure
Excessive labor force
Falling demand
What is victory?
The battle for Donbas
began on Sunday, April 17. Russian forces launched an offensive from the north and east without waiting for the capture of Mariupol. From a tactical point of view, this decision worsens supply logistics and detracts from the command’s attention, but the Kremlin’s task to report victory by May 9 outweighs all doubts. At the same time, Russian aviation continues rocket attacks against major Ukrainian cities (Kyiv, Dnipro, Lviv, and Mykolaiv), using airfields in the Rostov and Volgograd regions, as well as in Belarus.
Putin & Economy
Vladimir Putin held a meeting to analyze the situation in the economy with the key ministers of the economic bloc. The Kremlin website published only the Russian leader’s opening statement, which fits well with the practice of maximum concealment of information that the Russian authorities have adopted.
I can make three observations from the published text. The first is that Putin believes he can continue to argue that the sanctions pressure has not been severe and that the Russian economy has held up.
...the main negative factor for the economy lately has been the sanctions pressure... It was calculated to shake up our country’s financial and economic situation quickly, provoke panic in the markets, collapse the banking system, and create a large-scale shortage of goods in stores. But we can already say with certainty that this policy about Russia has failed; the strategy of economic blitzkrieg has failed.
Second, Putin either does not understand the real problems, or his entourage failed to explain them. During the meeting, he said:
...now it is essential to support domestic demand, to avoid its excessive compression. It is necessary to act both on the budgetary system and to ensure greater availability of credit resources for business.
The main problem of the Russian economy in the coming months (or even years) will be a lack of supply—both due to the breakdown of technological and logistical chains due to direct restrictions imposed by Western countries on the export of various goods to Russia and because of moral sanctions, the termination of hundreds of foreign companies in Russia, and the refusal of European companies to provide services to Russian companies outside of Russia. The threat of a contraction of domestic demand does exist. Still, it will be a derivative of a contraction of production (i.e., a squeeze of supply) when companies either must lay off employees or reduce pay. And it would be impossible to cope with such a contraction of domestic demand by increasing budget expenditures or lowering the interest rate on loans.
The third thing I noticed was that the first (and, traditionally, the primary) speech at this meeting was that of Bank of Russia Governor Elvira Nabiullina. This means that in the current economic team, she takes the place of the chief anti-crisis manager, which is no accident. If you remember, Nabiullina was the Minister of Economy during 2008-09, when Putin fought as Prime Minister.
Nabiullina’s forecast
Nabiullina spoke to State Duma deputies the day before and gave a gloomy forecast of the Russian economy's future in the coming months.
Our economy is entering a difficult period of structural changes related to the sanctions. The sanctions primarily affected the financial market, but now they will increasingly affect the real sectors of the economy. The main problems will be related not even so much to sanctions on financial institutions as to restrictions on imports, foreign trade logistics, and in the future to possible restrictions on exports of Russian products.
Now, maybe this problem is not yet felt as strongly because there are still reserves in the economy, but we see that sanctions are tightening almost every day. We see restrictions on the transportation of Russian goods and the work of Russian carriers, among other things. But the period when the economy can live on reserves is finite. And already in the second and early third quarters, we will enter actively into a period of structural transformation and the search for new business models for many companies. And as the Central Bank, we understand this period may be accompanied by a spike in the prices of certain goods. Therefore, inflation will be higher than the target. And it should be understood that such inflation surpassing the target will be largely due not to high demand, but precisely to restrictions on the supply side of goods, with low supply.
Nabiullina focused on the problem of supply in the Russian economy and the fact that it will accelerate inflation. At the same time, she refrained from any assessments or recommendations for the budgetary policy in the coming months. However, she did not clarify the monetary policy, saying only that the Bank of Russia will not influence inflation by traditional methods—i.e., raising the interest rates.
Market in a tight grip
Nabiullina admitted that introducing burdensome currency restrictions and making the ruble a non-convertible currency (although she did not use the latter term) was a deliberate decision to prevent the ruble from collapsing. After the freezing of the currency reserves, the Bank of Russia was deprived, in her words, “of the ability to promptly manage the situation with the currency on the domestic market ... so ... we solved the problem of stabilizing the currency market with an alternative method, limiting the possibilities for a foreign currency withdrawal from the country.”
Nabiullina admitted that the current restrictions imposed were deliberately excessively harsh. In the first days after the sanctions were imposed, “the Bank of Russia practically managed the trading regime in manual mode to limit volatility and cool the emotions of market participants.” Since early April, the Bank of Russia began to soften gradually, and introduced restrictions, but continues to closely “monitor the situation” in the financial market and, if necessary, will be ready to tighten the screws again.
Thus, Nabiullina confirmed my assumptions that external stability in the financial market (primarily, the dollar exchange rate) is a political objective, for the sake of which the Bank of Russia is ready to sacrifice economic efficiency: Administrative regulation of access to foreign currency, which is currently practiced in Russia, leads to its inherently less-efficient distribution from the point of view of the economy, compared to market mechanisms.
New secrets
After the meeting with Putin, the Bank of Russia issued a decision that prohibits commercial banks from disclosing their interim and annual financial statements, the auditor’s report on it, information about the accepted risks, risk and capital management, and data on capital instruments. The restriction applies from December 31, 2021, through September 30, 2022.
The Bank of Russia in 2014, fearing sanctions, created its Financial Messaging System (FMS) as an alternative to SWIFT in the face of sanctions risks. Until recently, this system was not in demand: Although all Russian banks were connected to it in 2021, less than 5% of all payments made in Russia passed through it.
On Monday, Elvira Nabiullina said that 52 organizations from 12 countries have already joined the SPSS. Still, it is impossible to verify or confirm this information. Since Monday, the Bank of Russia website reported that the page with the data on the FMS participants does not exist. As of the end of February 2022, 331 organizations, including banks from Belarus, Armenia, Kyrgyzstan, Kazakhstan, Tajikistan, and Cuba, had joined the FMS.
The energy sector is under pressure
Although Russian authorities have decided not to publish current oil production and refining data, incomplete information comes from various sources.
The Petromarket agency estimated the volume of oil refining at Russian refineries during the first two weeks of April. It concluded that it was 6% less than in March 2022 and 13% less than in April 2021. The main reason is problems with the sales of petroleum products. Oil companies are trying to increase sales on the domestic market, but this leads to a drop in prices. Thus, the exchange price of gasoline had fallen to the level of the spring of 2020, when the oil price was less than $30 per barrel amid falling demand due to the pandemic.
On Friday, April 15, fuel oil exchange prices collapsed almost 16% in one day to January 2021 levels.
Since 2022, coal exports from Russia have fallen by nearly 9%, said Peter Bobylev, director of the Ministry of Energy’s coal industry department.
...As of today, the decrease in export volumes, especially at the end of March and April, is significant—more than 20%. Since the beginning of the year, it has been almost 9%.
Excessive labor
In Russia, the number of workers on idle or part-time work has reached 250,000, which is 3.3% of the total workforce in Russia, said the head of the Ministry of Economic Development, Maxim Reshetnikov.
Falling demand
The number of orders of Russians for delivery of ready-made meals during April 11-17, compared with the week of January 31 to February 6, decreased by 43%, according to results of analysts of CloudPayments, a card payment service company. At the same time, the cost of the average bill was almost unchanged, indicating the desire of restaurants to keep prices down despite the substantial increase in food prices.
Punished for trusting the Constitution
Article 18 of the Russian constitution says: “Human and civil rights and freedoms are directly applicable.” And Article 31 declares that “Citizens of the Russian Federation shall have the right to assemble peacefully without arms, hold meetings, rallies, demonstrations, marches, and pickets.” Nevertheless, the Russian law makes it practically impossible to organize rallies and demonstrations because they require permits from local authorities, which can be denied without explanation. As a result, protests often occur without permits, and participants are detained by the police, many of whom are punished by the courts.
In 2021, courts—according to the Judicial Department—brought 15,579 people to administrative responsibility for violating the established order of holding a rally; 2,194 were sentenced to 10 to 30 days of arrest, 12,709 were fined, and 676 were sentenced to compulsory work.