July 12, 2022
War as modus vivendi
There is an army. But no soldiers
Who is carrying out the annexation, and how?
Just a chart
Don’t wait for the new one
Deputies, to my foot!
Investments are vanishing
Oil avoids sanctions
There are more worries
War as modus vivendi
The meaning and purpose of Russia’s war against Ukraine are becoming less and less clear. The more the Kremlin tries to explain them, the more obvious it becomes that there is no clear sense of purpose in the very head that makes the decisions.
Five days ago, at a meeting with the leaders of political parties represented in the Duma, Vladimir Putin seemed to set the record straight by saying that since the West had started a war against Russia, let the West be the first to show its willingness to negotiate peace.
We are told... that we started the war in Donbas, in Ukraine. No, it was unleashed by this very collective West by organizing and supporting an unconstitutional armed coup in Ukraine in 2014 and then encouraging and justifying genocide against the people in Donbas. This collective West is the direct instigator, the culprit of what is happening today.
If this same West wanted to provoke a conflict to move on to a new stage of fighting with Russia, to a new phase of containment of our country, then we can say that it has succeeded to a certain extent. And the war has been unleashed, and sanctions have been imposed...
Today we hear that they want to beat us on the battlefield. What can I say? Let them try... But everyone should know that we, by and large, have not really started anything. At the same time, we are not rejecting peace talks, but those who are rejecting them should know that the further they go, the harder it will be for them to negotiate with us.
And, on Tuesday, presidential press secretary Dmitry Peskov suddenly pulled out a new thesis: It turns out Russia is waging war to change the political regime in Kyiv. The special military operation is not against Ukrainians. It is going against the regime, he said.
I am far from thinking that Peskov, in this case, was “blathering” (as Putin once called his press secretary’s amateurism)—this is too important and meaningful a thesis concerning Russian foreign policy for Peskov to be willing to state his own point of view.
In any case, both Putin’s and Peskov’s words suggest that the Kremlin is set up for a protracted war, which is becoming the only raison d'être of Putin’s Russia.
There is an army. But no soldiers
Yesterday I talked about Russian governors being given a new “party assignment,” that they are now personally responsible for finding and recruiting volunteers for the war in Ukraine. This was confirmed today by Dmitry Peskov, who said he supported the initiative of Governor Oleg Kozhemyako of Primorsky Krai to form a battalion of volunteers in the region to participate in the war.
This is exclusively a volunteer initiative, which, of course, deserves the highest appreciation... We treat it with respect and very, very positively.
Three months ago, during a meeting with Defense Minister Sergei Shoigu, Vladimir Putin first approved the involvement of volunteers in the war on the side of the Russian army. Still, at that time, the Kremlin did not think to discuss the participation of Russian volunteers. There was no talk of our fellow citizens, Dmitry Peskov said on March 11.
Apparently, the military experts who talk about the lack of personnel in the Russian army know their business well.
Who is carrying out the annexation?
While continuing military action in Ukraine, Russia is not oblivious to the need for a creeping annexation, with the Russian ruble as one of its main instruments and the Russian Central Bank as the leading actor.
The head of the civil-military administration of the occupied part of the Kherson region, Vladimir Saldo, reported that bank card and wire payment systems had been launched in the region. According to him, in early June, the first Russian bank (whose name was not disclosed) started working in the region, and later Promsvyazbank began to work. However, the wire payment systems could not be launched for several weeks because of technical nuances related to quality communications.
In mid-June, a large group of Russian officials, headed by Deputy Minister of Labor and Social Protection Alexey Vovchenko and Deputy Chairman of the Pension Fund Yevgeny Pisarevsky, visited the Kherson region to address the issue of creating a database of pensioners and state employees. At the end of June, the Russian Pension Fund began paying ruble-denominated pensions to Ukrainian pensioners living in the Kherson region.
None of these issues—the system of non-cash payments, the work of Russian banks outside the country, the organization of the new office of the Pension Fund—can be solved without the leading role of the Bank of Russia, which by a strange coincidence continues to be considered by Washington and Brussels as liberals and remains free from Western sanctions.
Just a chart
Don’t wait for the new furrow
Finance Minister Anton Siluanov was very frank about the fact that the restrictions on capital withdrawal from Russia for non-residents are political and will not be lifted as long as Vladimir Putin remains in power.
The question of whether to open a capital account under such conditions lies on a different plain. For this, let us recall once again why such measures were introduced. Western countries have blocked our companies’ money with them, and the country’s foreign currency reserves have been frozen. Therefore, the decision to open a capital account, to unfreeze the funds of non-residents, will depend on the mirror actions of Western countries.
Capturing and holding hostages and using them as leverage in negotiations is a trademark of Vladimir Putin’s policies that have been clear since his first days in power. As the Russian proverb says, an old horse won’t make a new furrow...
Deputies, to my foot!
The Kremlin has decided to show the Duma deputies that they may consider themselves mobilized according to wartime laws.
On July 6, the regular session of the lower house of the Russian Parliament ended. The next day, President Putin met with the leaders of the Duma and Duma factions. In a calm tone, he thanked them for their work, drawing attention to the need to prepare for the single day of voting in September. (The Duma deputies have until the end of July to work in their constituencies, and in August, they have vacations.) But in two days, the Duma leadership announced that an extraordinary session would be held on July 15, the need for which is “connected with the fact that there is an accumulation of issues that require urgent solutions.” What these issues are is still unknown.
Investments are vanishing
According to estimates by the analytical center CMASF, which is close to First Deputy Prime Minister Andrei Belousov, investment activity in the Russian economy continued to decline in May. The CMASF index is based on data on the supply of investment goods. It is a weighted average index of production and import of investment equipment and vehicles and the supply (production and import minus exports) of construction materials.
According to the center, the index value in May was 91.9% of the 2019 monthly average. At the beginning of the year, the index value was 125. The experts’ comments note that the production of construction materials in Russia is at historic highs, suggesting a more substantial drop in the production and imports of investment equipment.
Estimates from CMASF correlate well with the new forecast from the Ministry of Economy, which predicts a drop in investment of nearly 20% in 2022 and does not promise a recovery until 2025.
Against this backdrop, the statement by Kirill Tremasov, director of the Monetary Policy Department of the Central Bank of Russia, who saw signs that the Russian economy was stabilizing, looks rather strange. However, Tremasov did not provide any quantitative confirmation of his assessment, noting only that the economy is falling more slowly than expected three months ago.
The crisis is developing on a softer, more gradual trajectory than expected at the beginning of spring. If we take April-May, based on the Rosstat data, we can conclude that the GDP decline in these months did not exceed 3%-4% compared to the previous year. This is probably half as much as economists expected at the beginning of spring... We are clearly moving on such a more gentle trajectory. And now we’re seeing signs of stabilization.
Oil avoids sanctions
Are sanctions on Russian oil exports working or not working? I am often asked the question. My answer is no, they are not—mainly because the sanctions are still very lax and apply more to petroleum products than crude oil.
Bloomberg disagrees with this conclusion and states, based on an analysis of tanker traffic from Russian ports, that since mid-June, Russian offshore oil exports have been declining.
In my opinion, any assessment of oil export dynamics that analyzes data for three to four weeks looks a bit lightweight. There are too many different factors that can have their effect. Data from the Association of Russian Seaports indicate that in June, the exports of seaborne Russian oil and petroleum products were slightly lower than in June last year, due to a lower volume of petroleum product exports. As for the decrease in exports as compared to May, most likely it should be a matter of seasonality—a similar decrease was registered last year. Overall, in the second quarter of this year, the total exports of oil and petroleum products from Russia increased by 1% compared to 2021, with the share of crude oil rising from 65% to 71%.
By comparison, Russia’s offshore imports in the second quarter of this year fell by a third from a year ago and from January-February.
There are more worries
The consulting company CROS has published a “National Anxiety Index” from February 24 to the end of March. The index is based on an analysis of the Russian media’s information agenda and the topics Russians discuss on social networks. Traditionally, it is published at the end of each quarter, but this spring, the study’s authors reasonably decided to shift the observation period.
According to CROS estimates, the topics that attracted the most attention from Russians this spring were, quite expectedly, rising prices and shortages of goods, as well as the war in Ukraine (special military operation, SMO) and Western sanctions. Three important points should be noted: 1) The level of Russians’ anxiety has risen sharply over the past three years: If throughout 2019, the maximum value of the index was at 50-60, by the end of 2021, it rose above 1,000 (the topic of COVID QR codes), and this spring it approached 2,000 (1,873, rising prices and shortage of goods); 2) In 2019-2021, the first most “disturbing” lines occupied topics that were more intensively discussed in the media than in social networks. This spring, media attempts to promote topics unrelated to the war and economic hardships on the information agenda were unsuccessful: The topic of Russophobia in the West and the “ban on Russian culture,” which took second place in the media, did not make it into the top 10 topics of concern to Russians.
A derivative index reflecting the intensity of discussion in social networks concerning the intensity of these topics in the media was called the “habitability index.” The leading lines in this index were topics the media tried to talk about as little as possible: The course of the SMO (5.5), restrictions on the internet (3.66), the public reaction to the special operation and Western sanctions (3.6).
According to CROS, social media users closely follow the development of the situation in Ukraine and express fears about its aggravation—up to and including the threat of the use of nuclear weapons—as well as actively discuss losses and the protracted period of the SMO, suggesting that it is far from over.