Isolated everywhere. Drafting a budget is easy. GULAG-lite. Open secret
November 19, 2021
Isolated everywhere
Vladimir Putin made a speech at the expanded collegium of the Russian Foreign Ministry. This was one of the few events the Russian president has held offline—a mystical fear of the coronavirus forces him to stay in his residences most of the time, holding important events via video link. Another confirmation of Putin’s fear of the pandemic appeared during this event - there was no one next to him at the presidium table. Even the owner, Foreign Minister Sergey Lavrov.
From the entire text of the almost half-hour speech, I want to draw your attention to the following fragments:
1) Despite the measures taken, the pandemic is far from being defeated, the risks of the spread of new waves of the disease are likely...the role of the World Health Organization (WHO) is growing. Their work deserves every support. - A painful point for Putin is that the Russian vaccine Sputnik V has not received official recognition from the WHO. For many months, he and his entourage talked about political reasons for non-recognition, unfair competition, etc. WHO, meanwhile, has made several statements that Russia does not provide the requested documentation on time and cannot solve technological problems in the production of vaccines. The refusal to continue confrontation is an unexpected change in the behavior of a highly conservative and inflexible Russian president.
2) “As for the Black Sea, this generally goes beyond certain limits: Strategic bombers fly at a distance of 20 kilometres from our state border, and they, as you know, carry very serious weapons.” “…We constantly express our concerns about this, we talk about the “red lines.” But, of course, we understand that our partners are very peculiar and so—how to say it mildly?—very superficially listen to all our warnings and talks about “red lines.” - Putin says straight that if the West crosses his Putin-drawn “red line,” the answer may come without warning. “Once, I saw a huge rat and started chasing until I cornered it. She had nowhere to run. Then she turned around and threw herself at me. It was unexpected and very scary. Now the rat was chasing me.” (From Putin’s memoirs “First Person”)
3) “…Our recent warnings [about the creation and testing of new types of weapons] still make themselves felt and produce a certain effect: an essential tension has nevertheless arisen there… this tension must be preserved for them as long as possible.” - Putin likes sabre rattling, and he believes that it brings him political dividends. At the very least, it makes the West nervous.
4) “...we must raise the question of seeking to provide Russia with serious long-term guarantees of ensuring our security in this area; because Russia cannot exist, constantly thinking about what might happen there tomorrow.” - In my memory, this is the first such statement by Putin when he admits that the military-political tension on the line of contact with NATO makes him worried.
5) “Although the European Union remains our leading trade and economic partner, the previously fruitful cooperation between Russia and the EU is experiencing serious difficulties at the current stage. The European Union continues to repel us with sanctions, unfriendly actions, and unfounded accusations, ignoring the obvious benefits of interaction in politics, economy, and humanitarian sphere.” - A direct hint that Russia is ready to give serious economic benefits to European companies in the event of a relaxation of the sanctions regime.
Putin and Biden to meet online
An online meeting between the presidents of Russia and the United States, Vladimir Putin and Joe Biden, is expected. Still, its exact date has not yet been determined, the Kremlin’s spokesman, Dmitry Peskov, said today.
Commenting on a telephone conversation between the Secretary of Russia’s Security Council Nikolai Patrushev and U.S. Presidential National Security Advisor Jake Sullivan, Peskov said: “Indeed, all this was in preparation for the expected contact at the highest level.” He noted that Patrushev and Sullivan exchanged views on topical issues: Ukraine and the migration crisis on the Belarusian-Polish border. “There was a synchronization of clocks in the areas of the dialogue that is going on—this is strategic stability and cybersecurity.”
It is so easy!
Traditionally, the process of adopting the Russian budget in the parliament has been very smooth. The main parameters of the budget, detailed breakdown of expenditures, the incorporation of new programs or the completion of old ones—all this is discussed in detail at a series of budget meetings in the government and with President Putin. After the budget is submitted to the Duma, nothing serious should happen—the Ministry of Finance lays down certain reserves (2%-3% of the total expenditures) in the draft law, which is distributed “under pressure from the deputies.”
This year, as required by law, the budget was submitted to the Duma on September 30 and was adopted in the first reading four weeks later. At this moment, according to the Budget Code, the main parameters of the budget (income, expenses, and deficit) are fixed and cannot be changed.
The sharp rise in inflation came as a big surprise to the government—in its budget forecast, all calculations are based on the 5.8% price increase in 2021, but it looks like the final inflation will be close to 8%. The Russian budget uses an indexation of a significant part of expenditures (payments to the households) with the inflation rate. This is done either directly—by fixing the growth of wages and pensions—or by increasing the state subsistence minimum, to the size of which many budget benefits are tied.
Of course, the government could have ignored the higher inflation—in the past, the rate of indexation has often lagged the rate of price growth. But this time it was very difficult to do—15 months ago, amendments to the Russian Constitution were adopted at a national plebiscite. One of which says that the rate of pensions’ indexation cannot be lower than the inflation rate. What to do?
On the one hand, the direct norm of the Constitution must be complied with. On the other hand, Vladimir Putin personally approved the budget parameters. None of the officials wanted to go to him with a report that the president was mistaken and needed to revise the key parameters of the budget. Russian pensioners and those who receive budget benefits were lucky—the Russian president somehow found out about this problem and made all the necessary decisions on his own.
At a narrow meeting with officials of the second level—the Prime Minister, the Deputy Prime Minister for Economics, the Minister of Finance were not even invited—there were no reports or discussion of the problem. Putin gave a short order to increase the rate of pensions’ indexation and the subsistence minimum, which will now amount to 8.6% and change the federal budget’s parameters. The public sector workers were not lucky—Putin did not gift them an increase in the rate of salaries indexation. The military and law enforcement officers became fortunate earlier—at the end of September, Putin announced that they would receive 9% more in 2022 than in 2021. And this was included in the budget.
It’s so easy! Isn’t it?!
Monetary policy’s goals are approved
The State Duma approved the Bank of Russia’s monetary policy guidelines for 2022-2024. The document reflects the Central bank’s view of the current state of the economy and its forecast for the medium term and defines the main goals of the monetary authorities.
In the baseline scenario, the Central bank assumes that the pandemic will be controlled, global demand growth will slow after a recovery period, and the increase in inflationary pressures will be temporary. After accelerated recovery growth in 2021, in the following years, the Russian economy will grow at a pace close to its potential; consumer activity will slow down; investment activity will return to traditional levels as business sentiment improves. A decrease in inflation to the target level (4%) is expected by the end of 2022. Until that time, the Bank of Russia intends to keep its key rate above the neutral level.
In addition to the baseline scenario, the Central Bank is considering three alternatives: “increased pandemic,” “global inflation,” and “financial crisis.”
Modus operandi: Report actions, not results
The Federal Antimonopoly Service (FAS) of Russia has publicly reported on the implementation of President Putin’s order to limit price increases. According to its head, Maksim Shaskolsky, FAS recorded a decrease in retailers’ margins for socially significant food products in federal retail chains to 15% against 22% in August.
“Retail chains in several entities of the Russian Federation, within the boundaries of municipalities, often occupy a dominant position. They set margins higher than in their shops in neighboring municipalities, where they do not dominate. Therefore, we identified such cases and [after our instructions] markups have been reduced,” he said.
Shaskolsky added that the FAS is in dialogue with retail chains, with the participation of the Ministry of Industry and Trade. According to the head of FAS, retailers tend to choose “the path of responsible pricing.”
In the first half of November, consumer prices in Russia grew at 7.5% (annualized) versus 2% in August. But in a bureaucratic system, a good official knows how to report on the work done, leaving a report on the results achieved to someone else.
GULAG-lite
Director of the Federal Penitentiary Service (FPS) of Russia Alexander Kalashnikov said that Russia dropped to fourth place in the world in the total number of prisoners—469,283 people as of November 1—after the United States (more than 2,200,00), China (about 1,650,000), and Brazil (607,000). Over the past 12 years, the number of prisoners in Russia has decreased by almost 400,000. In terms of the number of prisoners per 100,000 of the population, Russia ranks 26th globally. At the end of 2017, Russia ranked 12th.
Kalashnikov also said that the FPS and the Ministry of Justice are drafting a bill that gives the green light for prisoners’ labor at construction sites to be included in Putin’s infrastructure plan. He clarified that the prisoners could be used “in the construction of large industrial facilities, as well as cleaning up pollution and improving the Arctic zone of the Russian Federation.”
Forced labor, as a type of criminal punishment, has been used in Russia since 2017. The maximum term is five years. The legislation allows replacing imprisonment with forced labor for prisoners who have served at least a third of the term (for minor crimes) or at least half of the term (for serious crimes). According to the Minister of Justice, Konstantin Chuychenko, 188,000 Russian prisoners could be entitled to such replacement. The minister believes that by 2030, the number of prisoners in Russia may decrease to 250,000-300,000 due to the application of this norm.
According to the Judicial Department, in the first half of 2021 in Russia, 527 people were sentenced to forced labor out of a total of 273,888 convicts. Today, institutions for serving forced labor operate in 76 regions of the country, where there are about 9,000 convicts.
The law stipulates that a convicted person must perform forced labor in the region where he lived before the conviction, but this norm is practically impossible to fulfill. On the one hand, no one can guarantee the availability of a certain number of people sentenced to forced labor in a particular region. On the other hand, the demand for low-skilled labor in Russia is not very high. The convicts, as a rule, do not have the qualifications required for modern business, and private companies do not see any reason to waste money on the permanent training of newcomers.
As a result, almost the only place where convicts’ labor is used is construction. In large Russian cities, the primary unskilled workers on construction sites are labor migrants from Central Asian countries. Still, it is impossible to lure them to work in remote areas with terrible living conditions (-60 F in the winter).
If the law is adopted, the state will create the GULAG-lite system and provide construction projects financed from the budget with labor resources. The use of forced labor will open a space for corruption: budgets for construction projects are approved based on market salaries, and convicts will receive only a portion of that. In addition, no one will control the amount of bills that convicts will have to pay for housing, food, and clothing.
Open secret
Russian Prime Minister Mikhail Mishustin said that “...we [Russia] are providing support in overcoming the consequences of illegitimate unilateral economic sanctions that were imposed on Belarus.”
As a matter of fact, this is not a big secret. Without Russia’s help, the sanctions imposed on the leading Belarusian exporters should have demonstrated a tangible impact on the exchange rate of the Belarusian ruble and the Belarusian economy. It is important to note that this public statement was made when the EU countries were discussing a new package of sanctions against Belarus. Russia says in advance that it will do everything to make the new sanctions toothless.
Blackmail’s details
Alexander Lukashenko’s spokeswoman, Natalia Eismont, disclosed another piece from the phone call between her boss and Angela Merkel. According to her, Lukashenko proposed the following: “The European Union is creating a humanitarian corridor for 2,000 refugees in the camp [to go to Germany]. We undertake to assist (as far as possible and if they wish) the remaining 5,000 to return to their homeland. And Angela Merkel, according to the agreements, will negotiate with the EU, including on the organization of a humanitarian corridor to Germany.”
Adding salt and pepper
Deputy Prime Minister and Minister of Foreign Affairs and European Integration of the Republic of Moldova, Nicu Popescu, visited Moscow. During negotiations with Foreign Minister Sergey Lavrov, he reassured the Kremlin that “...all Moldovan governments proceeded from the assumption that, according to our Constitution, we are a neutral state... We have a dialogue with NATO member states and not-NATO states, and with the CIS and with Russia. In this sense, there are no risks of [Moldova] moving towards NATO.”
At the same time, Popescu threw in a sufficient amount of salt and pepper to his Russian counterpart. First, he confirmed the course of the Moldovan government toward joining the European Union: “Our government is for joining the European Union. We want to transform Moldova into a normal European state. This is what our population expects from us. This is a long process, this is a complicated process, but we want to move there.”
Second, he accused Russia of the trade and economic blockade of Moldova. “We should have a free trade zone on paper with Russia. De facto, the Russian side suspended free trade in Moldovan goods. We want the Russian side to return free trade in Moldovan goods.”
Third, he demanded that Russia withdraw its troops from the territory of Moldova, where they have been since the collapse of the USSR helping separatists retain control over Transnistria. “The Russian Federation is an important participant in the Transnistrian settlement. The Russian Federation always says that it recognizes the territorial integrity of the Republic of Moldova. Moldova—we are a neutral state. We are a neutral state, but our neutrality also means that no foreign troops should be present on our territory—in this case, Russian troops.”