April 25, 2022
Unclear objectives of the war
The situation is under control!
The diagnosis is non-negotiable
If you don’t take risks, you don’t drink champagne
Timely terrorists
Everyone pays for aggression
Unclear objectives of the war
On Sunday, the Financial Times published an article that said, “Vladimir Putin has lost interest in diplomatic efforts to end the war with Ukraine and instead seems intent on seizing as much territory as possible...” Of the Russian leader’s military plans, he said it best himself on February 15, nine days before the military invasion of Ukraine began.
How Russia will act next. According to the plan. And what will it consist of? From the actual situation on the ground. Who can answer how it will develop, the actual situation? No one can say yet.
Maybe the FT sources have adequate information, as perhaps does Maj. Gen. Rustam Minnekaev, acting commander of the Central Military District. Speaking on Thursday last week at an insignificant (politically or image-wise) event, the annual meeting of the Sverdlovsk Oblast Defense Industry Union, the general unexpectedly drew a completely different vision of Russia’s goals for the war, one that sounds in unison with what the FT has written. According to the general, Russia’s goal in Ukraine is to gain comprehensive control of the Donbas and southern Ukraine. “This will give us a land corridor to Crimea and impact vital facilities of the Ukrainian Armed Forces.” Moreover, he added, it would give the Russian army additional access to Transnistria, where the Russian-speaking population is also harassed.
On the other hand, the position held by the general has very little to do with what is happening in Ukraine, and his rank suggests that he is hardly out of touch with Russia’s top military leadership.
Therefore, I am inclined to follow Vladimir Putin in saying that “no one knows yet” how Russia will act next.
The situation is grave but under control
Another phrase caught my attention in the FT article.
“The Russian president seems to hold a distorted view of the war as laid out by his generals and shown on Russian television.”
Not in connection with the war, but rather with what is going on in the Russian economy and what Vladimir Putin knows and thinks about it.
My conversations with people working at various levels of the Putin system allow me to formulate the following picture of what is happening that is being broadcast by Putin down the bureaucratic ladder.
First, an economic war has been waged against Russia, for which Russia has given no reason. This war aims to destroy the country’s economic potential, “enslave” Russia, and gain control over its resources.
Second, the economy of Russia was dealt a heavy blow (the first wave of sanctions), which proved to be very painful. The main success of the enemy was that he managed to sow panic among the Russian population for a short time, which led to a raid on banks, a rush in demand for many goods, and a spike in inflation.
Third, the Russian authorities responded quickly and adequately to the threats that arose and could extinguish all the downbeat processes triggered by the first wave of sanctions. The subsequent sanctions were much less painful and did not affect the current situation. Behavior by the White House and Brussels suggests there will be no new strong sanctions against Russia.
Fourth, the export and logistical restrictions imposed will indeed restrain economic growth in the future. Still, the right decisions taken by the authorities will minimize their effects and create the basis for an economic recovery, relying on their strength.
Fifth, the threat of abandoning Russian energy resources is not actually threatening because, on the one hand, Russian companies will be able to sell oil to China and India, and, on the other hand, the European economy will fall into a deep recession if an embargo on Russian energy imports is imposed.
The diagnosis is non-negotiable
On Monday, Putin held a regular meeting with government members to discuss economic problems. His opening remarks confirmed my opinion that he did not adequately understand the nature of the crisis into which the Russian economy is falling. The quintessence of his analysis may become the following fragment:
It is imperative, as they say, not to let go of control of the situation, not to allow the unbalanced economic dynamics. On the one hand, it is necessary to stabilize price dynamics gradually. On the other hand, [it is required] to avoid a severe reduction of demand, which could lead to disruptions in the work of enterprises and a decrease in budget revenues. Thus, in the current situation, it is necessary to support domestic companies so that they can increase the supply of goods and services.
Putin’s economic advisers apparently have been unable for 22 years to explain to him that, during a period of severe structural crisis in the economy, rapid changes in prices are evidence of the economy adapting to the new realities, and that attempts by the government to freeze prices exacerbate the problems.
Symptomatic for Putin, when he opened the meeting, he announced his decisions: Reducing the interest rate on subsidized mortgages and the extension of this program until the end of 2022, and providing a massive deferral of companies on payment of social contributions to the budget.1 According to Putin, this benefit will cover 2.8 million companies employing 52 million people (70% of the labor force); its value is estimated at 1.8 trillion rubles ($24 bln) - a little more than 7% of the planned federal budget revenues for 2022.
The lack of a transcript of the speeches at the meeting has become a new reality; we will undoubtedly hear about all the decisions made in the coming days, but I don’t expect any breakthrough ideas. I continue to argue that the Russian authorities today do not understand what problems the economy will face in the coming months, and the decisions being made today will not help solve them in any way. A misdiagnosis rules out the possibility of treatment success, especially if the President makes a diagnosis and it is not up for discussion.
If you don’t take risks, you don’t drink champagne
Aeroflot has announced the resumption of daily flights to the Maldives starting May 13. Aeroflot stopped all its international flights on March 8 due to “the emergence of additional circumstances that prevent the flights.” On the one hand, after the beginning of Russia’s aggression against Ukraine, the EU countries and the U.S. closed their airspace for Russian planes, but a flight to the Maldives does not require crossing the EU airspace. In addition, Aeroflot owns many planes bought back by the company, which should be a defense against lawsuits from leasing companies, to which Aeroflot, like other Russian airlines, has not returned the leased planes.
Aeroflot may have reached an interim compromise with the leasing companies to protect its planes from arrest at Malé Airport. Earlier, Aeroflot declared its readiness to buy all the leased planes from the leasing companies but has not received such an agreement yet. In addition, the company does not have the funds to purchase the aircraft, and the possibility of redemption depends on the speed of completion of the new shares, which the government has promised to buy. However, what the company will do if the planes break down (EU sanctions prohibit the delivery of spare parts and services) is still unknown.
Timely terrorists
The Kremlin continues an active propaganda campaign to gain public support for the war with Ukraine.
Today, the secret police (FSB) reported the arrest of a group of Muscovites who were allegedly preparing an assassination attempt on a group of Kremlin propagandists who regularly appear on television shows in support of the war. In addition, the FSB claims that this group was discussing “the burning of cars with symbols in support of special operations and military committees.” According to FSB, members of the neo-Nazi terrorist organization National Socialism/White Power (NSWP), which was banned in Russia in 2021, had been involved in planning the attack on the Russian TV host.
To me, the FSB version does not seem convincing. The NSWP positioned itself in Russia as a fighter for racial purity. Its members were convicted in 2014 and 2019 for attacks and murders on citizens of Central Asian and African countries. I find it hard to believe that such a group could turn into contract killers. However, the FSB has not set out to convince me of the adequacy of its hypothesis.
The army has no medicines
Deputies of the Legislative Assembly of Primorsky Krai have received a request from Admiral Sergei Avakyants, commander of the Pacific Fleet, to buy medicines for the Russian military in Ukraine. At the meeting of deputies, this request was voiced by the speaker of the Legislative Assembly Alexander Rolik:
Unfortunately, medicines, which are allocated and centrally distributed, are not enough. The issues range from colds because they sleep on the ground to the problems related to injuries. On April 19, we were given a list of medicines that medical units would like to receive. And to be sent by a particular flight to Ukraine. The document was signed by the head of the medical service and the commander of the [Pacific] Fleet. There are 36 items—ranging from medical plasters and bandages, hemostatic agents, antibiotics, medical alcohol, hydrogen peroxide, particular medicines to help the wounded, and various other preparations...
Thirty-five of 36 deputies immediately responded to the request and collected 350,000 rubles ($4,700), with which the requested medicines were bought.
Everyone pays for aggression
Russian grain exporters faced severe problems after the beginning of the war. Arkady Zlochevsky, president of the Russian Grain Union, said this:
“A lot of problems now are related to logistics. Freight has become very expensive, and insurance for this transportation has become very expensive. All these factors have led to a concentration of risks in the procurement of our resources. This has also had an impact on pricing. We have an unprecedented discount compared to European and American prices for grain in all the times of our supplies.”
According to Zlochevsky, when Russia first entered the world wheat market, the discount was $10 to $20 per ton. “Back then, it was the norm; we got rid of this discount for a long time. Now it comes to $70 a ton [19%-23% of the price]. This is an astronomical figure. And this is the money that the RF is losing because of the concentration of risks.
Although there is a need for Russian grain, buyers are not very eager to ask for it; they are focused on it last—they first look at what competitors have, Zlochevsky added. Nevertheless, experts of the Grain Union did not decrease the forecast of grain export this season, which may reach 43 million tons. Last September, the Russian Ministry of Agriculture estimated that grain exports from the 2021-22 agricultural year would be 45 million-48 million tons. Still, after the invasion of Russian troops in Ukraine, Vladimir Putin demanded restrictions on grain exports from Russia. In 2020-2021. Russia exported 49 million tons of grain.
As of January 24, 2022, Ukraine exported 36.4 million tons of grain and legumes; at the time, experts estimated annual exports at 59.2 million tons. In the first month of the war, grain exports from Ukraine dropped fivefold, and the yearly forecast fell to 44 million tons.
I have no precise prediction about the effectiveness of these ideas. On the one hand, reducing the mortgage rate should increase demand. Still, on the other hand, the economic downturn inevitably makes people more cautious about new borrowing due to increased uncertainty about the stability of future incomes. Also, on the one hand, deferring the payment of social contributions leaves more money at the disposal of companies, but on the other hand, it reduces the demand for bank loans. In addition, at the end of the deferral period, companies will have to pay double the number of contributions after one year.