April 27, 2022
The tongue always turns to the aching tooth
Stay on alert
Consequences will not stop us
Take back control, and then we’ll see
Going to live in a challenging situation
The tongue always turns to the aching tooth
Vladimir Putin spoke at a gathering of Russian lawmakers and again tried to convince himself that the decision to invade Ukraine was justified.
...our soldiers and officers prevented the real danger that was already hanging over our homeland. With their courage, determination, and heroism, they pre-empted a large-scale conflict that would have unfolded on our territory, but already according to alien scenarios.
The forces that have historically pursued and are pursuing a policy of containment of Russia... do not need such an independent, colossal country, even by their perception. They believe that it poses a threat to them simply because of its existence. Although this is far from true, they pose a danger to the world.
We remember the barbaric plans of the Nazis against the Soviet people—to drive them out. You remember, don’t you? Those who can work—to force them to work, subjecting them to slave labor, slave conditions, and those who are not needed—behind the Urals, to the North for extinction...
We also remember how Western countries in the early 1990s and 2000s encouraged terrorists and bandits in the North Caucasus... to stimulate separatist sentiments in our country, to dismember and destroy it eventually. That’s what they did it all for, to drive us into a so-called bear corner. That’s what many people have always sought to do to Russia.
...Later [these forces] also began to prepare for a massive economic war against Russia, step by step, using all kinds of pretexts, and sometimes even without any pretext, they introduced more and more new sanctions restrictions. By the way, today’s plans of “economic strangulation” have also failed.
Along with this, our country’s enemies have forced the production of new “geopolitical weapons”... they have staked on Russophobia and neo-Nazis, year after year brazenly, unceremoniously turning our neighboring country, Ukraine, into “anti-Russia.”
And then [these forces] led to a clash, to a direct confrontation, pushed Ukraine, and to a direct clash with Russia, with our country. Let me remind you, such plans, including a military attack on Crimea and Donbas, were prescribed, unfortunately, in the Ukrainian doctrinal documents of today, and the Ukrainian people were destined to be “expendable material.”
The entire course of recent events, including... the uninterrupted supply of the most modern weapons to Ukraine, confirms that our reaction to these cynical schemes was correct and timely.
The manic desire to repeat the same arguments shows that Putin understands that they are not perceived by any of his foreign interlocutors (the day before, he met with UN Secretary-General António Guterres and could observe that again). An Azerbaijani proverb, very popular in Russia, says: “No number of words ‘halva’ will make your mouth sweeter.” The Russian leader decided to prove the opposite to the whole world.
Stay on alert
In addition to “explaining” the reasons for the military aggression, Putin decided to once again hint to the West that “red lines” are drawn somewhere in his (Putin’s) mind.
At the beginning of the special military operation, I already spoke about this. I will stress it once again: If anyone intends to interfere in the events from the outside and create threats of a strategic nature unacceptable to us in Russia, they must know that our counter-strikes will be lightning-fast and swift. We have all the tools to do this, which no one else can boast of. And we will not boast; we will use them if we have to. I want everyone to be aware of this; we have made all the decisions on this.
Consequences will not stop us
Russia’s Gazprom has stopped supplying gas to Poland and Bulgaria, claiming that buyers from these countries have not paid for gas supplies in Russian rubles. The condition to change the payment currency and terms of payment (through Russia’s Gazprombank) was sent by Gazprom as a unilateral change in contracts after President Putin signed a decree to that effect in late March. Poland’s PGNiG and Bulgaria’s Bulgargaz said they had fully complied with the terms of the signed contracts and paid for gas supplies in euros to Gazprom’s accounts.
In a statement about the termination of gas supplies, Gazprom said that
Bulgaria and Poland are transit states [through whose territory gas is delivered to Hungary and Serbia, which have agreed to change the terms of payment for gas imports]. In case of unauthorized extraction of Russian gas from the transit volumes to third countries, the supplies for transit will be reduced by this volume.
In turn, the Bulgarian government said it is looking for legal loopholes in contracts with Gazprom to stop the transit of Russian gas to Serbia and Hungary through the Turkish Stream pipeline.
“Let’s do a full review of the contracts with Gazprom—not only for fuel supply but also for transit. We must show that unilateral blackmail is not a relationship Bulgaria will tolerate,” said Bulgarian Prime Minister Kiril Petkov.
Bulgarian Energy Minister Alexander Nikolov said that “Bulgaria’s consumption of natural gas is secured for at least a month ahead, and there is no need to limit consumption.”
European Commission President Ursula von der Leyen said that the European Union was prepared for a possible gas cut-off. Poland and Bulgaria were already receiving gas from EU members through interconnectors.
The member states met today as part of the gas coordination group. Poland and Bulgaria informed us of the development of the situation. Poland and Bulgaria are already receiving gas from their European Union neighbors.
Putin’s decision to use gas as a weapon in his hybrid war with the West should come as no surprise: He is once again employing bluff tactics, raising the stakes, counting on his opponent to lose his nerve and surrender. The Kremlin has already used gas cuts as a weapon in its conflicts with Ukraine, Belarus, and Moldova, but decided for the first time to use it in its relations with NATO and EU member states.
For Poland, the leading energy resource is coal, and its gas storages are 80% full; for Bulgaria, gas plays a more critical role in its energy balance, and its storages are only 17% full, but its gas consumption is minimal compared to the size of the European market. The problem of finding new suppliers will be solved. For Gazprom, Poland and Bulgaria’s share in the total volume of exports to the EU does not exceed 6%, which does not change the overall sad picture of Russian gas exports in 2022—minus 24% as of April 15, compared with the previous year.
Much more significant events should occur in mid-May when payments for gas imports to German and Italian consumers, who account for about 30% of Russian exports (not including China), are due.
For Gazprom, the stoppage of gas deliveries will be a significant negative factor in the long term. In addition to the expense of litigation and substantial compensation for non-delivered gas, the Russian company has questioned the stability and reliability of the system of long-term contracts it has built over the past 53 years. Depending on the duration of Russia’s blockade of gas deliveries and its consequences, the European Commission could retaliate with measures ranging from requiring contract changes to nationalizing Gazprom’s assets in Europe and limiting its business scope. Reduced gas sales in Europe will create production problems for Gazprom, which will have to reduce production at existing deposits, slow down the development of the new ones, and preserve the capacity of gas pipelines to the Baltic Sea, where Nord Stream (the so-called “Northern Corridor”) begins. All this will increase the financial burden on the gas company, whose revenues will consistently decline—exports give Gazprom 75% of its total revenues.
Commenting on Putin’s decree demanding that gas payments be converted into rubles, I noted that the timing for the gas blackmail was the worst possible in terms of effective strategy: The heating season in Europe is over, gas consumption will drop dramatically in the next few months, and Europe can easily survive until September without Russian gas. There’s no threat of an “energy collapse.” European companies will have problems with pumping gas into the storage facilities, which may impact January-February 2023 in the case of a freezing winter. In turn, Gazprom will have to cut back on gas production because the storage capacity located in Russia will not be able to accept all the gas that will not be delivered to Europe.
Having said all this, I must add an important caveat: I don’t think the consequences of these decisions will stop Vladimir Putin from continuing to escalate relations with Western countries.
Take back control, and then we’ll see
One of the priorities for the Russian authorities has been to find solutions to restore production at car plants, most of which have stopped or are working irregularly with long pauses. In March, car production in Russia dropped 72% compared to last year, and the situation will not get any better in the second quarter.
All the car plants in the country (except GAZ and UAZ) are now owned by foreign global companies that supply assembly kits to Russia. The localization level at Russian enterprises varies from 12% to 50%. Still, it is ensured at the expense of low-tech components, and not a single car model in Russia today can be produced without imported parts. To determine the level of localization, the Ministry of Industry has developed unique indicators, and, for example, stamping, welding, and painting the body from Russian metal gives 16%.
Automotive plants are an essential part of the Russian civilian industry and create many jobs, including suppliers. A plant shutdown due to “moral sanctions” after the start of Russian aggression in Ukraine could lead to a severe decline in industrial production and the disappearance of new cars from dealerships. This threat compels the Russian government to be proactive and push automobile company owners to make decisions that will relieve uncertainty about the future.
The first goal set by the Kremlin is to remove foreign companies from the current management. The government has offered them to transfer their shares to Russian companies, a list of which has already been prepared, Industry Minister Denis Manturov said.
We don’t want the market to fail by dozens of percent. We should not expose our market and our production to such risks... When we said, external management—including such solutions will be applied. We will strongly suggest civilized ways [to transfer assets]. Either you decide to give [your shares in management] to local management [or the government will impose external management and take away management rights]... We have an internal plan for who and how they will go into the enterprises of foreign concerns that decide to leave.
According to the Minister, the government is not yet looking for buyers or managers for companies with foreign participation but has not ruled out this option in the future.
We are not actively discussing it today because it is not correct. But it’s also not correct to keep us in this state of contemplation: If we want—we’ll leave; if we want—we won’t leave... We won’t wait long... I mean, it’s clear: A month, two, three to solve logistical problems, as our colleagues say. And if we are talking about political motives, and that they are embarrassed by the special operation and pressured by their political leadership—we definitely will not wait... This will apply to all automakers who will procrastinate with the decision.
Manturov stated that “we [the state] do not claim other people’s property, we do not need it... It is not in our plans to buy or, all the more so, to nationalize. But if a company can’t provide components today, we can’t wait indefinitely. We will be forced to find an alternative.” However, I am willing to assume that control of the most attractive enterprises will be transferred to state-owned companies or organizations. This is precisely what the Minister said when he discussed how he sees the future of the biggest Russian car producer, AvtoVAZ (more than 20% of all sales in 2021), 68% of whose shares are owned by French Renault.
Of those who are in discussions with us about their departure, it is Renault. Renault, indeed, due to a shortage of funds to maintain the performance or operations of its divisions in Russia, decided to transfer shares in AvtoVAZ... most likely, it will be NAMI, our specialized institute, which will take over these shares, with a possible return if colleagues decide to return.
According to the Minister, it is expected that the transfer of shares in AvtoVAZ by the French concern “will be, conditionally, a deal ‘for a ruble’... But with an option for five or six years—a period during which they can decide to buy back shares. And if we make investments during that period, that will also be factored into the value. There will be no ‘gifts’ here.”
I must add that Minister Manturov has a very vague idea of what to do with AvtoVAZ after he takes control—managing the shares does not solve the problem of getting components and the rights to use the intellectual property. But according to the Minister, this topic has not yet been discussed in the negotiations with the French company. “We assume that the main platforms will remain if Renault eventually maintains its current position, but we will change logistics and component suppliers, primarily to Russian ones.”
Going to live in a challenging situation
Chairman of the Russian Accounting Chamber Alexei Kudrin disclosed the details of the Ministry of Economy’s new forecast, which the government will use to recalculate this year’s budget.
It [the economy] is expected to fall by the end of this year, according to the Ministry of Economic Development’s preliminary... forecasts, will be 8.8%, and according to a more conservative scenario, 12.4%... According to preliminary estimates, inflation this year, according to the base forecast, will be 20.7%, and next year will be no small—over 6%...
We all need to feel today that we have reached a new line now: Both the end of the year and the following year—that is, for almost a year and a half or two years, we will be living in a challenging situation. So it is imperative to assess our forces and resources, to assess our objectives in social policy—what to index, what will be indexed ahead of time, or maybe delayed—and how to allocate resources for this.