Everything written below was written up to the moment when Putin announced the start of the war against Ukraine.
We are ready to show you!
As I expected, Russia began to put its territorial claims to Ukraine on the agenda.
The state television channel Rossiya 24 showed a map of Ukraine, on which the territories that Ukraine “received from Russia” are marked in different colors. And the leader of the self-proclaimed DNR, Denis Pushilin, said that the Ukrainian armed forces should voluntarily leave the territory of the DNR.
“Now the question is what to do with the accumulation of equipment, personnel, weapons that are on that side of the line of contact. <...> The best option is for them to leave the territory voluntarily, to remove weapons.”
Of course, neither of these is the official position of the Kremlin today, but it seems that it is a matter of time. Remember Vladimir Putin’s phrase before announcing the recognition of the LNR/DNR:
“You want decommunization? Well, that suits us just fine. But we should not, as they say, stop halfway. We are ready to show you what real decommunization means for Ukraine.”
Asking for a war
Leaders of the LNR/DNR appealed to Russian President Vladimir Putin for help in repulsing aggression by the Ukrainian armed forces, Russian presidential spokesman Dmitry Peskov said.
“Amid the ongoing military aggression by the Ukrainian armed forces in the republics, civil and industrial infrastructure, schools, hospitals, kindergartens—and worst of all, the deaths of civilians, including children—are being destroyed. The Kyiv regime’s actions demonstrate its unwillingness to end the war in Donbas. “Kyiv continues to increase its military presence on the line of contact, while receiving comprehensive support, including military support, from the United States and other Western countries. The Kyiv regime is focused on resolving the conflict by force. “Taking into account the above, the heads of the two republics, in connection with the current situation and in order to avoid casualties among civilians and a humanitarian catastrophe, on the basis of Articles 3 and 4 of the treaties on friendship, cooperation and mutual assistance between the Russian Federation and the republics, ask the President of Russia to assist in repelling the aggression of the armed forces and formations of Ukraine.”
Mosaic of the day
A Russian flag has been lowered over the Russian embassy in Kyiv.
The situation around Ukraine was at the center of a telephone conversation between Russian President Vladimir Putin and Turkish President Recep Tayyip Erdoğan. The Kremlin reported that “Vladimir Putin emphasized the objective necessity of the decision taken in the context of the Ukrainian authorities’ aggression in Donbas and their categorical refusal to implement the Minsk agreements.” The Turkish pro-government Daily Sabah newspaper reported that Erdoğan told Putin that “Turkey does not approve of steps against Ukraine’s territorial integrity.”
The Japanese government has decided to impose restrictive measures against Russia and the Donbas republics, which include, among other things, stopping visas to representatives of the Donbas republics and freezing their capital, banning export-import relations with those republics, and placing and dealing with new sovereign debt of the Russian government.
Australia will impose targeted sanctions on eight members of the Russian Security Council, Prime Minister Scott Morrison announced. They will be banned from entering Australia and prohibited from any financial transactions related to Australian entities and organizations. The sanctions will also affect one state bank of Russia and banks connected to the defense and military industry. Sanctions will also be imposed on all enterprises and organizations of LNR and DNR working in transport, energy, and telecommunications. They will also affect all enterprises in the oil and gas industry of the republics.
The sanctions imposed on Promsvyazbank (a “defense bank”) do not prevent its clients from using its services inside the country. Following the U.S. sanctions imposed in 2014, the Bank of Russia created a payment system that serves bank card payments inside Russia. At the same time, Russia passed a law that required international payment systems (including Visa and Mastercard) to transfer domestic payments to the new payment system. Today the press service of PSB reported that Apple Pay and Google Pay services allowing users to pay for purchases with a smartphone are available to PSB customers and function as usual.
Will it be needed?
Washington decided not to create difficulties for the new German chancellor and not to force him to make a decision on stopping the project called Nord Stream 2. The chancellor was given the opportunity to play his role to the end and not to spoil relations with German business.
The day before it became known that the certification of the pipeline has been suspended. Chancellor Olaf Scholz has asked the Economics Ministry to withdraw the report on the pipeline, which had previously been submitted to the Federal Network Agency, the German regulator. The Ministry of Economics will be preparing a new draft due to changes in the legal and political situation and in order to reassess the risks to Europe's energy security. No one knows today how long it will take to prepare the new report, but it is clear that German authorities have not yet completely crossed out the project.
On Tuesday night, everything came to a head: Nord Stream 2 is on the U.S. sanctions list, making its continuation in the foreseeable future highly problematic. In the long term, the EU's ability to find other sources of gas supply (primarily LNG) that would not allow for an increase in pipeline gas imports from Russia would have a much stronger impact on the pipeline's fate.
Meanwhile, I think the fate of Nord Stream 2 will be much more influenced by the ability of the EU countries to find other sources of gas supply (LNG, for one) without increasing pipeline gas imports from Russia.
Supplies meet the current demand for Russian gas through four routes: “Nord Stream 1” (51%), transit through Turkey (11.5%), transit through Ukraine (32.5%), and transit through Belarus (5%). At the same time, the first two directions are loaded almost 100%, the transit through Ukraine is carried out within the limits of the annual contract (40 billion cubic meters per year), and the Belarusian direction is used exclusively for technological purposes, to maintain the pipeline in working order. Even if Nord Stream 2 is launched immediately, it will not be loaded by more than 50%, and it will require a 75% reduction of transit through Ukraine (and it will be necessary to pay for the pumping of contracted volumes).
Suppose within two-three years the US/Qatar/Australia and Russia’s NOVATEK manage to increase LNG production and contract supplies to Europe significantly. In that case, a situation may arise when European consumers can abandon their contracts with Gazprom. It is still an open question whether they would be willing to do so, given that Gazprom can dump and offer gas at lower prices if they want to.
It’s not an asset, it’s a liability!
The U.S. administration has been exceptionally politically correct in selecting a target for its sanctions among Russian financial institutions. Putting VEB on the sanctions list is unlikely to change anything in the Russian economy or economic system. That is, no one will feel the impact of these sanctions.
Daleep Singh, the deputy assistant to President Biden on national security, described the decision:
“We’re fully blocking from the U.S. and European financial systems the fifth-largest Russian financial company, called VEB, the Kremlin’s famous piggy bank with more than $50 billion in assets.”
VEB is not a bank but a state corporation, and most importantly, it is not a piggy bank; it is not an asset. VEB is a liability. The fundamental difference between assets and liabilities is that an asset generates income, while a liability requires expenditures for its existence.
During the Soviet Union, VEB was the bank that held all foreign currency accounts of Soviet enterprises, organizations, and citizens, having a monopoly on financial relations with the outside world. In addition, VEB was the instrument through which the Soviet Union attracted foreign loans or gave loans to other countries. With the beginning of Russia’s reforms, VEB lost its monopoly on foreign currency operations, and they became available to commercial banks. Still, it continued to act as an agent of the Ministry of Finance for operations with foreign debt. In fact, during the 1990s, VEB became a dedicated unit of the Ministry of Finance, responsible for accounting and conducting all operations with foreign debt.
By 2005/6, Russia had practically paid off its foreign debt in full. In 2005/6, Russia almost entirely paid off its Soviet debts; it became clear that VEB had lost its primary functions. There was no need for its existence, but the Russian authorities did not take this step and transformed it in 2007 into the Bank for Development (its new official name). According to the adopted law, VEB became a kind of investment fund, which the Russian government managed. The Ministry of Finance gave VEB startup capital, and VEB began to place its ruble and foreign currency bonds under the guarantees of the Ministry of Finance. All decisions on financing investment projects were made by the bank’s supervisory board, which consisted of ministers and the heads of the Bank of Russia and was chaired by then-Prime Minister Vladimir Putin. VEB began to manage a second budget, which was spent on financing state and private investments, but there was no public/parliamentary control over VEB’s operations.
Such a business scheme is rarely profitable, and VEB was no exception. The government made decisions that were not supported by financial calculations; however, the law on VEB explicitly stated that making a profit was not its purpose. VEB’s largest political project was financing the construction of sports facilities for the 2014 Olympics in Sochi: Formally, the investors were private companies, but three facilities secured the loans. After the Olympics, it turned out that most of them could not exist as a sustainable business, and the private companies quickly decided to default and hand over the sports facilities to VEB.
In 2014, after the annexation of Crimea and the outbreak of war in Donbas, VEB came under U.S. sectoral sanctions and lost its ability to raise funds on foreign capital markets. The two-fold devaluation of the ruble that occurred in 2014-2015 resulted in massive losses, and VEB found itself on the verge of bankruptcy. In 2015-2021, the Russian government allocated more than 1.6 trillion rubles ($20 billion) to VEB in various forms, with budgets for 2022-2024 providing more than 300 billion rubles to support VEB.
Currently, VEB acts as an agent of the government in providing state guarantees and financing infrastructure and other projects that the Supervisory Board approves is the operator of some national projects—i.e., acts as a back-office that controls the documentation and distributes budget financing. All these activities are carried out in the ruble zone and cannot be restricted by U.S. sanctions.
To summarize: The U.S. bureaucracy has imposed sanctions that do not harm the U.S., European, and Russian economies.
Another import substitution failure
Rosstat bought 312,000 Russian-made tablets equipped with the Russian operating system “Aurora” to conduct the census at the end of 2021. The census is over, the Rosstat no longer needs the tablets, and now the Russian government must solve the most challenging problem: What to do with these devices?
The Ministry of Digital Technology was assigned to solve this problem, and it found out that no one needed the tablets. For example, the Ministry of the Interior was ready to take the tablets. But it requires that they be integrated with the ministry’s information system, has customized applications for the traffic police, and is equipped with a fingerprint sensor. The Ministry estimates that this will take at least a year, by which time the tablets will be obsolete.
