Fear means respect. Oil and gas follow Putin. Customs reveals secrets. Quoting Lenin
February 8, 2022
Fear means respect—doesn’t it?
It seems Vladimir Putin is feeling great after his “offer they can’t refuse” was received and accepted: He has become the central figure of the past few days, the one the leaders of the leading countries want to talk to or visit. Here’s what the open part of his international schedule looked like over the past week:
January 31—telephone conversation with French President Emmanuel Macron
February 1—telephone conversation with Italian Prime Minister Mario Draghi
February 1—talks with Hungarian Prime Minister Viktor Orbán
February 2—telephone conversation with British Prime Minister Boris Johnson.
February 3—telephone conversation with French President Emmanuel Macron
February 4—talks with President of China Xi Jinping
February 7—six-hour(!) talks with French President Emmanuel Macron
A visit to Moscow by British Foreign Secretary Liz Truss and German Chancellor Olaf Scholz has already been announced for next week.
Now, do you understand who the modern world revolves around?
Oil and gas follow Putin
Traditionally, Putin’s administration tries to make his international visits coincide with the signing of commercial contracts, particularly if they concern countries with which Russia has extensive economic ties. The brief visit of the Russian President to Beijing to attend the Olympics Opening Ceremony was no exception. This time, three agreements were signed: On the supply of Russian oil, on the supply of Russian gas, and on the supply of Chinese telecommunications equipment by Huawei for the needs of the biggest Russian oil company (of course, controlled by the government), “Rosneft.” This set of documents demonstrated that the much-publicized “Russian pivot to the East” ended with zero results for the Kremlin. Russia failed to attract neither Chinese financial resources, nor Chinese technology, nor direct investment from the Celestial Empire. For its part, Beijing has been talented at seizing every opportunity to solve its problem, supplying its growing economy with raw materials from Russia.
“Rosneft” has signed a 10-year contract to supply an additional 10 million tons of oil to China annually, which will begin in early 2024. After that, China’s share will be about 45% of Rosneft’s total exports, which on the one hand is good for the Russian oil company, which is actively increasing oil production in Eastern Siberia. Of course, in terms of logistics for “Rosneft,” deliveries to Asian markets are more attractive and convenient. On the other hand, a 10-year contract will not cover all the costs of developing new production regions and makes the company dependent on China’s future policy of transition to a low-carbon economy.
The signing of a 25-year contract to supply 10 billion m3 of gas per year allowed Gazprom to solve two important problems: “loading the pipeline Sakhalin-Khabarovsk-Vladivostok” and the sale of gas from the Yuzhno-Kirinskoye field.
The gas pipeline was built in 2009-2012 to transport gas produced on Sakhalin Island. However, Vladivostok has no major gas consumers, and the regional energy generation relies on coal. The construction of the gas pipeline did not solve this problem at all, because the Russian authorities could not attract significant investments to this region—the regional market is tiny, and there is not enough gas for export industries. As a result, less than a third of the capacity of the gas pipeline in the Khabarovsk-Vladivostok section was utilized.
After a 25-kilometer interconnector is built, gas will be supplied to China from the Yuzhno-Kirinskoye field, which fell under U.S. sectoral sanctions in 2015. Sanctions did not stop Gazprom, which will complete all preparations for gas production in the first half of 2023. However, selling gas from this field proved difficult; no consumer other than China agreed to discuss the project. Undoubtedly, China took advantage of Gazprom’s difficult position and managed to bargain for the most favorable contract terms—the negotiations lasted for six years and ended when Gazprom ran out of time.
Combined with the Power of Siberia pipeline, Gazprom will be supplying China with 48 billion cubic meters of gas per year, a little more than 20% of the gas supplied to Europe. The average price of Russian gas delivered to Europe in 2021 was about $270/1000 m3, and that provided to China was 40% lower ($159/1000 m3).
No opportunities
Russia has a rapidly developing national payment system that allows citizens to transfer money to each other using a telephone number or a debit/credit card number almost instantaneously. This makes doing business in rubles unattractive for international money transfer systems, which are leaving the Russian market.
In the summer of 2020, PayPal ceased its operations in Russia, and from April 1, Western Union will stop carrying out domestic transfers. At the same time, Western Union will continue to provide international money transfer services, which are in demand by foreigners working in Russia. In 2018-2019, they transferred $7 billion-$7.5 billion/year to their home countries; in 2020, that amount dropped to $4.7 billion, and in 2021, it will not exceed $3.5 billion.
Customs reveals secrets
Almost simultaneously, Russian and Ukrainian customs published data on trade between the countries, which was expected to increase compared to 2020 but remains at the level of 2017-2019. Compared to 2011-2013, Ukrainian exports to Russia decreased fivefold, and Ukrainian imports from Russia decreased fourfold.
I do not accidentally use data from Ukrainian customs—Russian customs include in trade with Ukraine the movement of goods between Russia and the territory of Donbas not controlled by Kyiv. Assuming that all other data on exports and imports between countries are the same on both sides of the border, the difference between Ukrainian and Russian customs data gives us the volume trade between Russia and the so-called LNR/DNR.
Based on this data, we can see that in 2021, Russia delivered $1.48 billion worth of goods to the LNR/DNR ($1.77 billion in 2020), and $0.71 billion worth of goods were brought into Russia ($0.98 billion in 2020). Even if all funds received by the LNR/DNR for sales of goods to Russia were used to pay for goods supplied from Russia, it turns out that in 2020-2021, Russia sponsored a “balance of payments” of the self-proclaimed republics to the tune of $700 million per year.
Clearly, this estimate gives an idea of the lower boundary of Russia’s costs by supporting the separatists in eastern Ukraine. The total amount is likely to be 2-3 times that amount—i.e., it could reach $2 billion/year, but we are not talking about tens of billions of dollars, which could be a heavy burden on the Russian economy.
Permission to exchange knowledge
The Russian Ministry of Education has published a draft regulation to the law on enlightening activity adopted last year. As is often the case, this law was very indistinct and contained vague phrases giving freedom to bureaucrats. The definition of “enlightenment activity” itself was not obvious; this term included any exchange of information “outside the educational programs” of official educational institutions. In addition, the law gave broad authority to the state agencies to regulate and limit enlightenment activity.
The document, prepared by the Ministry, introduces state control over the participation of state schools, colleges, and universities in any form of international cooperation. When enacted, it will require obtaining permission from the Ministry of Education or the Ministry of Education and Science. All programs of academic exchange of students, teachers, and researchers; agreements on joint research, “innovation activities” and the exchange of educational and scientific literature, participation in international academic and scientific projects, congresses, symposia, conferences, and seminars fall under the regulation.
The authors of the document do not hide their goals, explicitly declaring their intention to counter “the dissemination of illegal information and anti-Russian propaganda by foreign organizations and citizens in the educational environment” and to prevent “negative foreign interference in the educational process.”
Quoting Lenin
The Levada-Center has published the results of its monthly poll on the country’s state, which indicates that public sentiments remain stable. The percentage of Russians who believe the country is headed in the right direction remains within the 45%-50% range; the share of those who disagree also remains stable, varying between 40% and 45%.
President Putin’s activities approval level is also stable, varying from 60% to 70% over the past four years. Those who disapprove are half as high, ranging between 30% and 35%.
It is not by chance that I draw attention to the stability of the data obtained in the polls. It is well known that in authoritarian regimes, some respondents tend to answer not what they think but what is “right,” if the question concerns the evaluation of the leader of the regime. It seems that such a “systemic error” in Russian polls is a constant value. Although we cannot determine it precisely, this does not prevent us from assessing the stability of the trend—assessments of the situation in the country and the level of approval of President Putin’s actions have remained stable for four years. At present, the stability of the assessments is much more significant than the level of these assessments. The stability suggests that the political storms of recent months (the persecution of supporters of Navalny, the military, and political conflict with the West) have shaken or shocked Russians and have not changed their attitudes toward what is happening around them.
Vladimir Lenin in 1913 gave this definition of the revolutionary situation: The top cannot, and the bottom will not. If we consider that his description has not lost relevance, we must admit that nothing inside the country threatens Vladimir Putin’s regime today.