July 19, 2022

Jul 19, 2022

More rivalry than friendship
Not to repeat mistakes
Collapse
A good harvest is also trouble
Some people find profit anywhere
There will be a price to pay for political games
Google is bankrupt
Is YouTube doomed?
Two brothers, two fates

More rivalry than friendship

Vladimir Putin flew to Tehran to meet with the Presidents of Turkey and Iran, who have become the most essential negotiating partners for the Russian leader: This year, Putin has spoken at least nine times by phone with Turkish President Erdoğan, and met twice and spoke twice by phone with Iranian President Raisi. However, Russia’s relations with these two countries cannot be called 100% friendly or a partnership. On the one hand, the three countries, with varying degrees of confidence, are pursuing a course of confrontation with the West. Iran has been following this path for almost 50 years and does not seem to be about to change its course. Russia, beginning in 2014, loudly declared a break in partnership with the West but continued to maintain economic ties, and only the full-scale invasion of Ukraine marked a decisive Russian leap toward Iran. The Turkish President is not like his colleagues and has a pragmatic position: Criticizing the West and demonstrating his disagreement with its values in every way, Erdoğan is trying to integrate the Turkish economy into global chains and is not against taking advantage of Russia’s problems, so that Turkey, for example, could take the place of an intermediary in logistics for Russian companies.

But on the other hand, the presence of a common “enemy” does not make these countries friends, because each of them has a set of political and economic claims to another. The most severe point of conflict for the three countries is, of course, Syria, where they are trying to strengthen their influence. Iran and Russia support incumbent President Assad, and Iran is seeking to enhance the role of religious figures in Syria, which Russia opposes because it could cause problems in the Muslim republics in the North Caucasus. Turkey has a long history of conflict with Syria, which has had both wars and hot friendships, and today Turkey openly occupies part of the Syrian territory and intends to increase it, accusing the Syrian and Iranian authorities of supporting the Kurdistan Workers’ Party, which is recognized as a terrorist organization in Turkey.

Turkey’s active involvement in the rearming and training of the Azerbaijani army and its open military support during the war in Nagorno-Karabakh in October 2020 led to the defeat of Armenia, which has always considered Russia its military ally and on whose help it counted. As a result of that war, Azerbaijan regained control over much of Nagorno-Karabakh which it had lost more than 30 years before. At the same time, Turkey formed a political and economic alliance with Azerbaijan and gained access to Central Asia, which Turkey sees as a sphere of Turkic influence. Moreover, speaking at a rally in Baku in December 2020, President Erdoğan recited part of a nationalist poem about the union of the two Azerbaijanis, the existing state and the Azerbaijani Iran, which sharply inflamed the already competitive relations between the two countries.

Despite the imposition of UN sanctions against Iran, Russia has always tried to find ways to circumvent them, viewing Iran as a market for its products (machinery, equipment, aircraft, nuclear power plant...). But the introduction of Western sanctions against Russia after the invasion of Ukraine led to the formation of a point of tension between the two countries: For many years, Iran had been selling its oil at discounts to Asian countries, and this spring, Russian oil companies, facing problems in the traditional European market, began to offer consumers more substantial discounts and pushed Iran out of traditional markets.

Recently there has been a lot of talk in the media about the possibility of Iranian combat drones being delivered to Russia, which are far superior to Russian drones in terms of their qualities. However, such a deal does not seem very likely to me. On the one hand, buying Iranian drones would acknowledge the serious lag of the Russian military-industrial complex in developing and producing the most promising types of weapons for modern local warfare; I do not think Putin is ready to go for such a public humiliation. On the other hand, for many years, the Kremlin has pursued a policy of equipping the Russian army with weapons that do not use imported components. Agreeing to arm the military during high tension with imported weapons and becoming utterly dependent on another country is hardly consistent with Putin’s concept of technological sovereignty.

Not to repeat mistakes

The Kremlin seems determined not to repeat the mistakes of the past and does not intend to put control of Ukraine’s occupied territories in the hands of semi-bandit groups, as it did after the formation of separatist entities in eastern Ukraine after the 2014-2015 war.

On Monday, it was announced that Anton Koltsov, who previously served as First Deputy Governor of the Vologda region, was appointed head of the government of the Zaporizhzhia region, 80% of whose territory is occupied by Russia. In July 2021, Koltsov completed his training at the “school of governors”—a joint program of the Russian Presidential Academy of National Economy and Public Administration and the Presidential Administration to train the personnel reserve—and was included in the Kremlin’s personnel reserve.

Collapse

The MMK Group, one of the three largest steelmakers in Russia, reported a sharp drop in production in the first half of the year: Minus 9.5% compared to the previous year. At the same time, the company reported that its sales in the first six months fell by 15.7% year-on-year. Overall, the company’s exports fell 37.8% in the first six months and 60% in the second quarter. At the same time, sales within Russia and in the CIS markets fell by 8.5%. The company attributed the sales drop to “the compression of demand for steel products on the Russian market, the restrictions in force, and the unfavorable situation on the export markets.”

At the end of June, the company’s Chairman of the Board of Directors and its main shareholder Victor Rashnikov announced that its investment program had been halted.

A good harvest is also trouble

A good harvest is as big a problem for Russian farmers as a bad harvest.

This year the Russian grain crop may amount to 128 million-130 million tons, while the wheat harvest—88 million tons—may be a record. But the law of economics is harsh and relentless: Growing supply leads to falling prices, and Russian agrarians face this problem all over the country. However, the new harvest started only in the southern regions. The fact is that these regions (Krasnodar, Stavropol, Rostov) are much closer to the Black Sea ports through which Russian grain is exported, and their logistics costs are much lower than for those who produce grain in the Volga region or Siberia. As a result, the grain of the new crop is becoming more competitive for export, and wheat prices in different areas of Russia fell 3%-5% over the week.

By mid-July, Russia had harvested about 20 million tons of grain (15.5% of the forecasted harvest), and the authorities are afraid of further price collapse. The only mechanism they have at their disposal is the purchase of grain into the state intervention fund, which according to the Ministry of Agriculture, will start in August. Moreover, the grain will be purchased in the regions most distant from the seaports.

I have strong doubts about the effectiveness of this mechanism. On the one hand, the announced volume of grain purchases, 1 million tons, is highly insignificant to the Russian market: Compared to last year’s grain harvest, this year will be 7 million-8 million tons bigger. On the other hand, grain is not subject to long-term storage, and sooner or later, the state-owned company, OZK,[1] will have to start selling it and compete with private companies. The practice of the past years shows that traders of the state company did not learn how to sell grain at a profit—i.e., the more grain the government buys today, the more losses its sale will bring.

Some people find profit anywhere

The imposition of Western sanctions and the refusal of Western companies to cooperate technologically with Russia became a good reason for the power-generating companies to increase their earnings.

Almost all thermal power plants built in Russia after 2000 are outfitted with foreign equipment, and these plants can produce the cheapest electricity (among coal- or gas-fired thermal power plants).[2] After the start of the war in Ukraine, companies began to report problems with repairs and the replacement of foreign equipment. They suggested that the government put such plants on standby, keeping their capacity partially paid for by consumers. The government supported this initiative, and System Operator, the government-owned company responsible for centralized operational dispatch management of the energy system, stated that switching on TPPs with foreign gas turbines was allowed only in exceptional cases. At the same time, the companies said they were “forced” to increase electricity production at older plants, with higher production costs and prices.

There will be a price to pay for political games

Gazprom’s management has realized that everything has a price and that the company will have to pay for the Kremlin’s decisions to use gas supplies to Europe as a weapon.

At the end of last week, Uniper and RWE, Germany’s two largest consumers of Russian natural gas, received letters from Gazprom announcing force majeure on June 14. From that day on, the supply of Russian natural gas to Europe decreased rapidly: Exports to Germany, Austria, and the Czech Republic decreased by 40%, to Slovenia and Italy by 50%, and to France, where deliveries stopped utterly.[3] Gazprom stopped meeting its contractual obligations, which gave consumers the right to demand compensation for losses due to the need to buy more expensive gas on the spot market.[4]

In an attempt to protect itself from paying the fines, Gazprom announced that it was in force majeure, which, according to the company, was the detention of a turbine for Nord Stream in Canada. Moreover, Gazprom extended the force majeure a month ago, from June 14.

Lawyers are skeptical about the success of Gazprom’s attempt to avoid responsibility. Companies declare cases of force majeure due to events beyond the control of the company—natural disasters, fires, etc. In Gazprom’s case, however, we are talking about technical malfunctioning of equipment, which is a normal part of business processes and should be taken into account by the company when planning its activities.

If Gazprom fails to settle its claims out of court, the consumers’ claims will move to the stage of court proceedings that will take many months. At the same time, Gazprom’s chances of success will not be very high: In the winter of 2014-2015, Gazprom tried to prevent the start of reverse gas supplies to Ukraine, reducing the volume of supplies to European consumers below the level of contractual obligations, and the company had to pay all the required penalties for under-delivery of gas.

Google is bankrupt

On December 24, 2021, a magistrate judge in Moscow fined Russian company Google Russia LLC 7.22 billion rubles for refusing to comply with a Russian prosecutor’s demand to remove “illegal content” posted on the YouTube service. A few days later, court bailiffs debited the amount from the company’s accounts. On April 1, the Moscow Arbitration Court upheld the claim of the TV channel Tsargrad, whose channel was blocked, on YouTube, for 1 billion rubles. “Tsargrad” received this amount and promised to use the money to support Russia’s military operation in Ukraine. Two weeks later, Gazprom Media filed a similar lawsuit in connection with the blocking of the TNT channel on the YouTube service, and the court seized Google Russia’s accounts as an interim measure.

After that, the American IT giant realized that trying to slip between the trickle of rain in Russia would not work, and in mid-June, its Russian subsidiary filed for bankruptcy. The company said that the seizure of Google Russia’s bank account made it impossible to operate its Russian office, including retaining employees and paying salaries in Russia, paying suppliers and contractors, and fulfilling other financial obligations.

However, that did not stop the Kremlin’s machine. On Monday, a magistrate judge in Moscow found Google guilty of an administrative offense and imposed a fine of 21 billion 770 million 392 thousand 317 rubles, which amounted to 10% of Russia’s annual revenues.

The reason for bringing the company to administrative responsibility was a protocol drawn up by Russian media censor Roskomnadzor, accusing Google of the fact that video hosting YouTube

purposefully contributes to the dissemination of inaccurate information about the special military operation in Ukraine, discrediting the Russian Armed Forces, and materials promoting extremist views and ideology of terrorist organizations, as well as instructions for the production of explosives…
The materials listed in the protocol are a small part of the content banned in the Russian Federation, unsuccessful by the administration of the video hosting site. At the moment, more than 7,000 illegal materials remain unsuccessful.

I don’t know if Google Russia has enough money in its accounts to cover the fine. Still, I assume that if the fine is not paid, the executives could face criminal charges for premeditated bankruptcy.

Is YouTube doomed?

Igor Ashmanov, a member of the Presidential Council for Civil Society and Human Rights, said YouTube would be blocked in Russia by Autumn. Vladimir Zykov, director of the Association of Professional Users of Social Networks and Messengers, agreed, arguing that the only obstacle is the lack of server capacity at RuTube and VKontakte.

I believe YouTube will stop working in Russia after RuTube or VKontakte start working normally. In my opinion, right now RuTube simply doesn’t have the server capacity to take in the entirety of users that would flood into it, should YouTube be blocked. Accordingly, the blocking could happen as soon as they are technologically ready.

Two brothers, two fates

The children of many of Putin’s cronies have had brilliant careers. The eldest son of Nikolai Patrushev, Secretary of the Russian Security Council and ideological cardinal of the Kremlin, Dmitry Patrushev was no exception in this sense. What cannot be said about his brother whom someone may call ‘looser’.

He graduated from the FSB Academy in 2006 and became Senior Vice President of Russia’s second-largest bank, VTB. In 2010, he got his hands on Rosselkhozbank, another state bank whose business is built on the distribution of various budget subsidies and subsidies to companies related to agriculture. Here Dmitry Patrushev’s business talents blossomed to their fullest: First, the bank stopped making profits, which decreased fourfold, from 3 billion rubles in 2010 to 729 million rubles in 2013; then, it started generating huge losses (220 billion rubles in 2014-2017), which were covered by budget transfers. Such successes were why Vladimir Putin entrusted Patrushev Jr. first with a seat on Gazprom’s Board of Directors and then, in 2018, with a seat as Minister of Agriculture.

The fate of Dmitry’s younger brother Andrey was not as fortunate, although his career started successfully: The same FSB Academy, work in the Directorate “P” of the FSB, which monitored oil companies, and position of advisor to Igor Sechin, then Deputy Head of the Presidential Administration and Chairman of the Board of Directors of “Rosneft,” and after just seven months of work, Andrey received an order from Vladimir Putin “for achieved success and many years of conscientious work.” In 2011, Andrey became Deputy General Director of the state-owned company Zarubezhneft. In 2013, he became a member of Gazpromneft’s Management Board, responsible for offshore projects. And suddenly... in the fall of 2019, Andrey Patrushev leaves Gazpromneft without explaining the reasons for his decision or commenting on his plans. A month later, he became a minor shareholder in an IT company that wanted to enter the service market for oil companies, apparently promising to establish contact with potential customers. But nothing came of it, from which we can conclude that leaving Gazpromneft was associated with severe problems.

However, with a dad like Nikolai Patrushev, his son’s business talents are bound to show up. A year later, Andrey became the owner of 38% of the shares of the Marine Arctic Geological Expedition, which became one of the largest contractors for the state in the study of the shelf seas, transit, and coastal zones of the Arctic, including the search for gas and oil deposits. At that time, President Putin approved a gigantic program to study and develop the Arctic shelf, so budget funding for MAGE seemed to be guaranteed. But again, Andrey had terrible luck: After careful analysis, it turned out that the cost of the presidential program’s implementation exceeded initial estimates by several times, and it was impossible to implement it without the participation of foreign companies.

The other day it became known that Andrey Patrushev’s next business project is connected with his established business: He is buying a significant stake in a service company, 85% of the revenue which comes from orders from NOVATEK, Russia’s largest private company engaged in gas production and LNG exports.

Behind the Iron Curtain

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