Decaying economy
April 5, 2022
Because of technical issues, some of the subscribers didn’t receive yesterday’s issue. My apologies! And please disregard this mail if you got this text yesterday.
Criticizing the anticrisis policy
…and statistics
No plans anymore
Making it worse for others
Putin’s brainwashing
Economic Mosaic
You don’t have to administer everything to the holes
After the outbreak of the war in Ukraine and the imposition of sanctions, the Russian economy has found itself in a new reality, and few major Russian businessmen dare to comment publicly on what is happening. Even more interesting than that silence is to hear from Vladimir Lisin (Global Forbes #70, $23.3 B), the owner of Russia’s largest steel company, NLMK (he owns 79.3% of the company). It should come as no surprise that Lisin doesn’t talk about the political situation and doesn’t give his assessment of Vladimir Putin’s actions and decisions. But he is very frank about what is going on in the economy. He gives a very unflattering review of many decisions the Russian authorities made after the war began.
The critical question for Russian business is not development but survival:
Supply chains that have been forming over the years are breaking down; logistics, payment, and financial infrastructure are failing. And against this backdrop, the game rules are changing daily, and new restrictions appear.
The primary advice that Lisin is ready to give to the Russian authorities is not to hinder business, large and small, and the people themselves in adapting to the new conditions:
You shouldn’t try to administer everything to the holes; it only hurts business. Today’s situation is more than just another economic crisis we’ve faced before. It requires a much more serious approach and well-balanced decisions.
Some of the regulatory initiatives of the Russian authorities are of concern to Lisin:
“Obviously, many measures are being taken now in a hurry, and their consequences have not been thoroughly analyzed. I think the speed should give way to accuracy and adequacy so that the effects would not be destructive for the domestic industry, which employs millions of people.”
One such initiative, he calls the authorities’ intention to expand the list of export goods, which importers will have to pay for in rubles.
The idea is that you can start selling fertilizers, grain, oil, metals, timber, something else for rubles. I don’t know, maybe something will work with gas, but the rest? For decades we have been fighting for export markets where no one is waiting for us. We have built relations with thousands of clients in 70 countries. It’s hard to imagine what could convince our customers to switch to payments in rubles and bear the currency risks. Logistical problems have already complicated the delivery of products to the consumer. Switching to payments in rubles would throw us out of international markets.
Lisin believes that Russian business is caught between two fires: The regulatory ideas of the authorities, on the one hand, and the constant threat of Western sanctions, including personal sanctions, on the other.
My attitude toward the topic of personal sanctions is difficult to reduce to one simple emotion or thought.” On the one hand, says Lisin, they directly or indirectly affect many people who now have to try to work and live in the new reality, and this “cannot help but be alarming because sanctions can destroy everything that has been created over many years. On the other hand—and this is an important part of my attitude—it is a shame to complain about personal problems in a humanitarian disaster situation. Sanctions can seem as unfair as they want, with elements of collective responsibility if you like, but the loss of life and the destruction of cities will be tried to stop by any means available.” In the current circumstances, economic measures can be regarded as “an alternative to military action, which gives the situation a chance not to descend into a global conflict that could turn into a catastrophe for everyone.”
There are lies, big lies, and statistics
Statistics will be very late telling us what’s going on in the Russian economy. Rosstat will present a summary picture of the month of March at the end of next month: The results of February were published on March 30. Therefore, only at the very end of April will it be possible to assess how the war and sanctions have affected the Russian economy. Until that time, it is possible to try to put together a puzzle from separate pieces of information, and understanding the resulting picture may be far from complete or not even adequate.
The problem of time lag will inevitably be exacerbated by the Russian authorities’ old habit of reducing the amount of information provided or ceasing to publish it. At the end of last week, the information unit of the Ministry of Energy, for the first time, did not publish operational data on oil production in Russia but rather provided incomplete information for news agencies. Analysis of this information suggests that average daily oil production in March was slightly lower than in February, but it is most likely not due to sanctions. During the first days of April, oil production decreased more visibly (minus 3.9% vs. March), and at the same time, during four days in April, the use of companies’ oil storages increased by more than 50%, which are now filled by 44%.
No plans anymore
ExxonMobil has frozen the Far Eastern LNG project, Khabarovsk Governor Mikhail Degtyarev said. “The project that the Americans announced—Exxon—in the port of De-Kastri with a pipe from Sakhalin, it is frozen. Until their individual decisions. Why this is being done—it amazes me; it’s shooting itself in the foot. The gas is there, the coast is there, the workforce and investment are there, but they’re freezing the project for political reasons.”
ExxonMobil, the operator of the project, began a bid campaign in February to select contractors to evaluate the quality of construction materials and find manufacturers of reinforced concrete products. The project called for the construction of an LNG plant with a capacity of 6.2 million tons per year, at an estimated $4.2 billion. The launch was scheduled for 2027-2028. In the long term, this project was to be expanded up to 10 mln tons after Rosneft started to develop offshore fields.
The main thing is to make it worse for others
In the second reading, the State Duma passed a bill prohibiting Russian companies from placing their depositary receipts on foreign stock exchanges and obliging them to delist existing ones. According to the bill, the circulation of depositary receipts on the foreign stock exchanges should be terminated 10 days after the publication of the law. Holders of depositary receipts will automatically receive the shares of the corresponding Russian issuers instead, with the relevant information to be entered into the Russian depositories.
As is often the case, the harshness of Russian laws is redeemed by their optional fulfillment: The bill states that the government will be able to allow the circulation of depositary receipts issued earlier.
Vladimir Lisin is extremely pessimistic about this idea: “How can this help stabilize the economy? The Ministry of Economic Development believes that this would reduce the risk of losing control when buying shares at low prices. If some Russian issuers are worried about it now, they have the right to decide on delisting themselves; no one is stopping them. So far, the proposed bill does not reduce the risks but increases them. The rights of shareholders, who believed in Russia and invested in the Russian market for many years, are infringed—for example, those who cannot hold Russian shares directly. They have nothing to do with politics, and there is a risk that their ownership rights will simply be lost.”
I fully agree with this point of view. I want to add that none of the Russian companies whose depositary receipts are traded on foreign stock exchanges has a number of depositary receipts exceeding 25% of the authorized capital. Consequently, even buying up all the receipts by one investor will not lead to a change in the controlling shareholder.
Brainwashing since childhood
A few days after the invasion of Russian troops into Ukraine, Russian schools were ordered to hold lessons on the “peacekeeping operation” in Ukraine. Teachers in grades 7-11 had to retell Russia’s official arguments about the reasons for the military action in Ukraine and show a fragment of President Vladimir Putin’s address to the nation. After that, students had to answer why, in their opinion, Russia decided to start an extraordinary military operation. Among the answers offered by the authors of the scenario was the threat of a military conflict with Russia, the creation of nuclear weapons, the anti-Russian policy of Ukraine, the outlawing of the Russian language and Russia as an enemy, the rewriting of history textbooks, the destruction of monuments and other symbols linking Ukraine and Russia, the construction of NATO bases, the creation of bio laboratories and the growth of weapons, the danger of a dramatic change in the military and political situation in Europe to the detriment of Russian interests, and so on.
A month passed, and schoolteachers received a new assignment: To hold classes for students in grades 5-11 on anti-Russian sanctions and their impact on the domestic economy. The recommendations of the Ministry of Education state that the teacher should “show Russia’s capabilities to overcome the negative consequences of the Western countries’ sanctions pressure on the economic sphere of our society, give an idea of the main directions of the anti-sanctions policy in Russia.” At the beginning of the lesson, the teacher should quote President Vladimir Putin that “Russia is under unprecedented external pressure.”
Economic Mosaic
Only one-third of Novosibirsk enterprises are not planning to reduce production in 2022; 32% of industrial enterprises are provided with orders and raw materials for work in the next three months, said Vitaly Vitukhin, head of the Investment Department of the Novosibirsk City Hall. “The data obtained from more than 240 enterprises show that one-third of organizations do not plan to reduce production in 2022. More than 32% of organizations are provided with orders, raw materials, and materials for the next two or three months. About 18% of surveyed enterprises only see the prospect of maintaining volumes for the next month.” According to the official, many enterprises started laying off workers and switching to a reduced workweek.
Since the middle of February, the inhabitants of the Novgorod region have bought up a year’s supply of granulated sugar and salt, said the Minister of Trade and Industry of the region, Ivan Chekmarev. He added that there is no shortage of these goods, and their stocks at retailers have increased. According to Rosstat, sugar prices in Russia have increased by 46% since the beginning of the year, and salt prices by 15.5%.
The Russian banking lobby began to actively promote the bill on the capitalization of banks at the expense of the National Welfare Fund. On Tuesday, the State Duma passed in the second reading a bill that would allow the government to make decisions on buying bank shares without parliamentary approval and without obtaining approvals from the Antimonopoly Service and Bank of Russia.