Information vacuum. Water wears away a stone. All builders are equal, but Putin friends...

November 17, 2021

Information vacuum for everyone

On Monday evening, the U.S. State Department announced that Russia had tested anti-satellite weapons and destroyed a Soviet military satellite that had been in orbit since 1982. Denials rained down in Russia on Tuesday morning. 

First, Deputy Chairman of the State Duma Defense Committee Yuri Shvytkin said that the statement of the State Department was untrue and that “Russia is not engaged in the militarization of outer space.” Foreign Minister Sergey Lavrov followed him, saying “There are no facts” and accusing the United States of an arms race in space. The main argument of the minister was that in 2020 the United States created a Space Command. The minister, it seems, forgot that Space Forces have existed in Russia since 2001.

Sergey Lavrov (left) and Sergey Shoigu

However, less than an hour after the Foreign Minister’s statement, the Russian Ministry of Defense issued an official statement “...a test was successfully carried out, as a result of which the inoperative Russian spacecraft Tselina-D was hit”. Russian Defense Minister Sergey Shoigu said that the missile was launched “with pinpoint precision.” 

What happened confirms the fact that there are no horizontal contacts between the heads of the most important Russian political structures—they pass on key information about their activities to their colleagues only after Vladimir Putin gives permission to do so. As a result, not only does Putin himself live in an information vacuum, but so too do his closest aides.

The blockade is broken

The previously discussed telephone conversation between German Chancellor Angela Merkel and President of Belarus Alexander Lukashenko lasted 50 minutes. This was Lukashenko’s first contact with a Western leader after the brutal crackdown on opposition protests last summer following the presidential elections. The call caused outright discontent in the countries of Eastern Europe. For example, the Chairman of the Foreign Affairs Committee of the Estonian Parliament Marko Mihkelson declared: “It was a serious disappointment, because we took a common position that we do not recognize Lukashenko as the head of the Belarusian state. Such a contact with Merkel creates a rather strange impression. Moreover, she did it by overpassing Poland, and Putin would really like that.”

Lukashenko revealed the main theses that he voiced during the conversation:

• Belarus does not use armed forces on the border, but “we have plans to counter any aggression from their [Poland] side”; later in the day, during a telephone conversation with Vladimir Putin, they discussed “joint actions to defend the borders of the Union State”;

• “We do not collect refugees all over the world and do not bring them to Belarus”; During the fall, more than 5,000 refugees (60% from Iraq) were deported from Belarus;

• The main problem today is the refugee camp: More than 2,100 today, and maybe already more, are concentrated on the “Bruzgi” border checkpoint; “Something must be done with these people immediately.”

"In this regard,” said Lukashenko, “I made a proposal in general on how to resolve the situation. I will not specify it now. We agreed with Merkel that we will not talk about this specifically. She asked for time, a pause to discuss this proposal with EU members.”

It is not yet known what Merkel said during the conversation, but on Tuesday, Lukashenko ordered many refugees to be taken to a nearby logistics center—there the Belarusian authorities organized food distribution and accommodations for women and children.

The intermediate results of the crisis sound like this: With the help of Putin, Lukashenko was able to break through the Western blockade and achieve the restoration of dialogue with the EU countries. Today this dialogue is limited to the crisis with refugees, but as the Russian proverb says, water wears away a stone. Alexander Lukashenko is ready to maneuver between Moscow and the West again.

Intentional (?) halt

The statement by the German Federal Network Agency (Bundesnetzagentur, BNetzA) on the suspension of the Nord Stream 2 certification process spilled a bucket of cold water on those in the gas market who believed that the certification process had already been completed, and, therefore, soon new volumes of Russian gas would come to Europe at lower prices. The gas price on the spot market immediately increased by 25%.

BNetzA noted that this delay is of a technical nature: “Following a thorough examination of the documentation, the Bundesnetzagentur concluded that it would only be possible to certify an operator of the Nord Stream 2 pipeline if that operator was organized in a legal form under German law.”

It went on to say: “Nord Stream 2 AG, which is based in Zug (Switzerland), has decided not to transform its existing legal form but instead to found a subsidiary under German law solely to govern the German part of the pipeline. This subsidiary is to become the owner and operator of the German part of the pipeline. The subsidiary must then fulfill the requirements of an independent transmission operator as set out in the German Energy Industry Act (sections 4a, 4b, 10 to 10e EnWG).”  

It turns out that Gazprom’s lawyers either did not study the requirements of German legislation, or deliberately submitted documents in such a form that the certification process would drag on. This once again makes me think that the Kremlin and Gazprom are interested in maximum destabilization of the European gas market, and in maximum price volatility, and know how to use the Western bureaucracy to help them. 

Europe be ready for competition

Gazprom’s data indicate that in the past 10 days, gas transit through Ukraine is at the level of 109 million cubic meters per day, which is in line with Gazprom’s obligations under the contract with the Ukrainian gas pipeline operator, “ship or pay” (40 billion cubic meters per year). At the same time, the level of gas pumping through Belarus in the first half of November amounted to only 32% of the throughput capacity of the Yamal-Europe gas pipeline. In general, in half a month, European consumers bought 32% less gas from Gazprom than in the same period in 2020, and 20% less than in August-September 2021 (daily average).

While European consumers are in no hurry to increase their purchases of gas from Russia, China has announced it is ready to buy as much gas as Gazprom can pump. Gazprom does not want to upset Chinese consumers and “...gas supplies to China...since the beginning of the month...daily exceed Gazprom’s daily contractual obligations by more than 30%,” Gazprom said in a statement.

It should be emphasized that today Europe and China are not competitors for gas that goes from Russia through pipelines—“Power of Siberia” going to China and pipelines going to Europe do not have interconnectors, and the regions of gas production for Europe and China are hundreds of kilometers apart. But Gazprom plans to build a new gas pipeline to China, Power of Siberia 2, which will receive gas from the same fields from which gas flows to Europe. The capacity of this pipeline will be 50 billion cubic meters—more than 25% of the total gas exports to Europe. A feasibility study should be completed by the end of this year.

Everybody is happy

One of the most common and convenient ways of privatizing budget money in Russia is the government’s approval of investment plans of state-owned companies, which cannot be financed from their own resources. In this case, the board of directors of the company, the majority of which belongs to the ministers, their deputies, or their clientele, decides to raise loans. The creditor is necessarily a state bank. At the same time, both the company and the bank are well aware that the company’s income will not allow it to repay the loan. Interest on a loan is partly incorporated into the cost of goods and services that the consumer pays, and partly converted into debt. When the amount of debt and the amount of interest payments become too noticeable, this “problem” is brought to the attention of the president, who orders the Ministry of Finance to allocate a budget subsidy to this company to pay off the debt.

All participants in this “project” benefit: The state-owned company receives a lot of money for investments, some of which, of course, “stick to the hands” of top managers or their friends (who else can be the contractor?!); the state bank receives a high-quality loan portfolio that brings good interest income; officials on the board of directors report to the president on the successful completion of investment projects.

Recently, the Russian government showed that this scheme is working successfully—Prime Minister Mikhail Mishustin signed a decision to allocate almost 200 billion rubles ($2.8 billion) to Russian Railways. Three-quarters of this amount will go to repay bank loans that were received in 2018-2020 to finance investments... But you understand that in 2021, Russian Railways took new loans from banks and is going to take more in 2022—the company’s shortage of financial resources for the next year is estimated at 270 billion rubles ($3.75 billion). The company promised the government to additionally increase tariffs for some of its services to find 20% of this amount, and the rest—there is nothing to be done, it will have to get more credits.  

The simple idea that it is more convenient for the federal budget, which has a fiscal reserve of more than 12% of GDP, to give subsidies to a company when its budget is approved and, at least, save on interest payments, is not discussed in the government. Nobody is in favor of it, get it?

 

All builders are equal, but some …

In yesterday’s digest, I talked about the limitations in the implementation of Putin’s investment plans associated with a shortage of labor resources. Experts say another limitation could be the absence of large construction companies in Russia and their poor financial position.

In 2020, according to Rosstat, the volume of construction in Russia increased by 0.1% (which is very surprising to me—in nominal terms, the growth was 4%, and the inflation rate in construction was more than 10%). Because private business has sharply reduced investment activity due to the pandemic, and the profitability of government orders is close to zero, the final profit of Russian construction companies amounted to less than 0.5% of their revenues. This led to a sharp increase in debt—the total debt of construction companies increased by 25% during 2020. 

Of course, “a holy place is never empty.” Over the past 10 years, several large companies, which worked mainly on budgetary contracts, have gone bankrupt in Russia. This sad experience should have taught Russian businessmen, but bankruptcies are replaced by new companies, which again go to the corridors of the Ministry of Construction and the Ministry of Finance and sign contracts with zero profit. Since no one has canceled kick-back in Russia, to receive profit from government contracts, builders must overvalue planned costs, not pay their suppliers, and not return bank loans, hoping that everything will be limited to an ordinary bankruptcy. If, during such a risky business strategy, you cannot “thank” everyone, then, in addition to bankruptcy, you may face criminal prosecution and a conviction.

However, “All animals are equal, but some animals are more equal than others”—and in Russia, there are companies that should not worry about their sustainability.

By the end of 2020, there were six companies in Russia with annual revenues of over 100 billion rubles ($1.4 billion), but the real competition for large government contracts is even less. Of the six companies, three operate in narrow sectors (Gazprom, Rosatom, Russian Railways), and one is regional, owned by Moscow City Hall. As a result, the main competitors for large contracts are two companies: One belongs to SIBUR main shareholder, Leonid Mikhelson and a friend of Putin, Gennady Timchenko; the other belongs to the state corporation VEB and another Putin friend, Arkady Rotenberg. (Both friends are under U.S. and EU sanctions).

As you well understand, neither lack of profit, nor bankruptcy, nor criminal prosecution threaten them.