July 26, 2022

1. Sanctions hit China

2. Three years in jail. Waiting …

3. Not that beautiful, but national

4. Popular but not very trustful

5. Mega political

Sanctions hit China

The largest (if not the only) joint Russian-Chinese technology project to build a wide-body, long-haul passenger airliner (CR-929) is close to being shut down. There are two reasons for this: The rapid increase in the level of competence of Chinese specialists and the Western sanctions imposed on Russia, which limit the possibility of achieving the desired quality of the new aircraft.

The project was launched during Vladimir Putin’s visit to Beijing in 2014 and involved the Shanghai Commercial Aircraft Corporation (COMAC) and Russia’s United Aircraft Corporation (UAC). In 2016, a mockup of a new 280-seat airliner to compete with the Airbus A330 and Boeing 777 was introduced at the show.

When in September 2021, China announced the start of assembly of the first airliner, it became clear that the projected aircraft could not become attractive in the global market, as the technical level of many systems was far behind modern standards. In this situation, COMAC offered to use the undercarriage produced by German and American companies, but UAC insisted on Russian designs, although their safety indicators were worse.

Besides, the partners had financial disagreements: COMAC proposed a disproportionate distribution of revenues, leaving for itself 100% of revenues from sales in the Chinese market and giving the Russian company 70% of revenues from international sales. Because UAC understood that the leading sales would be in the Chinese market, this idea was not accepted.

Western sanctions against Russia made it impossible to use American or European engines on the new aircraft. Because the Russian engine was in the very early stages of design, this meant freezing the project for another year and a half.

As a result, shortly before his resignation as Deputy Prime Minister, Yuri Borisov admitted that the project was on the verge of collapse.

We have this project with China, and it is not going in a direction that suits us. China, as it becomes an industrial giant, is less and less interested in our services; we have our design bureau and tremendous experience... But the Chinese have more needs than we do today. Our involvement is getting smaller and smaller. I don’t want to make any predictions about this project, whether we will withdraw from it or not, but for now, it is, in fact, underway.

One project manager on the Chinese side said on condition of anonymity that COMAC sees no alternative to cooperation with European and American companies and that “the Russian side sees Beijing’s decision to use Western components as a white flag demonstration to the West amid global sanctions following Russia’s invasion of Ukraine.”

3 years in jail. Waiting …

In March 2019, the FSB detained former Russian government minister (2012-2018) Mikhail Abyzov, who was charged with fraud and organizing a criminal association. Subsequently, 12 more people were arrested, whom the Investigative Committee believes to be accomplices of Abyzov’s crimes. According to investigators, the companies in which Abyzov was the beneficiary sold four power companies for 4 billion rubles, while the real value was 186 million rubles. The primary trial began in March of this year. Still, before that, the prosecutor’s office expanded the charges against Abyzov, accusing him of violating the ban on commercial activities. At the same time, he was a government member, and the courts confiscated Abyzov’s assets worth 32 billion rubles.

During the last session, the court considered the prosecutor’s motion to extend the arrest of the accused until November 10, which the defense objected to. According to the lawyers, the prosecution has not brought a single argument to prove their words about the possibility of the defendants hiding, threatening witnesses, or obstructing the proceedings in case of the change of preventive measure to house arrest. Moreover, the prosecutor’s office did not show the court any evidence to the contrary.

Speaking at the hearing, Abyzov stated that his fellow defendants were executives and employees of companies and that the crimes alleged against them related to economic activity. One of the defendants had recently undergone serious surgery, after which he needed long rehabilitation, which is impossible in prison. Another, after learning of the criminal charges, voluntarily returned to Russia to give an explanation and prove his innocence but was arrested during interrogation. Three of the accused were questioned as witnesses for a year and a half or two years, but they did not hide from the investigation and returned to Russia after their trips abroad. One of the defendants, during the session, said that the investigators had repeatedly offered him the opportunity to testify to the satisfaction of the investigation. But he did not go for it, as he “does not consider it possible to slander a person.”

All these arguments did not convince the judge, who granted the request of the prosecutor’s office almost without a second thought.

The only exception was the accountant Katsiaryna Zayats, in whose case the Court of Cassation reversed the previous decision of the district and city courts on the arrest: During her detention, she had undergone five retinal operations and had almost lost her vision, as the many hours of jolting while being transported from the prison to the courthouse overrode the results of the operations. 

Not that beautiful, but national

The Swedish company Tetra Pak was founded in 1951 and is known for its aseptic packaging, in which food can be stored without refrigeration for up to a year. Tetra Pak products are used in 170 countries. It is the most popular packaging in the world.

In 2007, Tetra Pak launched its factory in Russia, which became the largest plant in Eastern Europe to produce packages for liquid food products. The plant produced seven out of 10 Russian milk and juice cartons used in the country; a large portion of the production was exported to Belarus, Kazakhstan, Azerbaijan, Mongolia, Serbia, Turkmenistan, Uzbekistan, Ukraine, and Ecuador.

After the Russian invasion of Ukraine, Tetra Pak did not stop its activities but warned that the company faced problems organizing supplies of polymers and colorants from other countries. First, the company stopped the production of packages for wine and beverages in the 2-liter size but promised to continue producing packages for dairy products and baby food. Later it became known that the company was running out of paint. Therefore, the packaging would be white with a minimum of colors.

Yesterday Tetra Pak announced that the company is leaving Russia and will transfer all its assets to the current management, which will organize an independent company. The terms of the deal have not been announced, and the fate of the equipment installed at the plant, which was leased from the Swedish company, remains unknown.

Russian authorities are sure that Tetra Pak’s withdrawal from the Russian market will not be a big problem—the government is ready to support Russian companies trying to create similar products. This was stated by Deputy Prime Minister Victoria Abramchenko, noting, however, that the appearance of Russian products will not be attractive:

We hope that the experiment [to create similar packaging at the plant in the Komi Republic] will be successful. Maybe there won’t be that beautiful white packaging, familiar to the eye, but it will be gray, as we call it, “eco-friendly,” but it will be ours, domestic.

It is expected that mass production of the “Russian tetra pack” will start this year, but it is not clear yet how much more expensive it will be. However, Abramchenko does not consider this an obstacle to the project’s implementation:

It is tough to talk about it now. We are in an experiment: How to replace imported packaging with domestic packaging and how to make synergies between the timber industry, pulp, and paper industry, in particular, and the food industry.

I understand the Deputy Prime Minister’s position: The departure of Tetra Pak from Russia will lead to a sharp decrease in supply and level of competition, in which a price increase for Russian analogs will be perceived as usual.

Popular but not very trustful

The results of the latest Levada-Center poll show which sources of information are the most popular with Russians and which of them they trust as the most reliable.

Television continues to be the most popular source of news—its share over the past two and a half years has been in the 62%-65% range (except for the April surge associated with the outbreak of war in Ukraine). Similarly, the popularity of social networks is stable (36%-39%). Internet publications in third place have lost a significant portion of their audience over the past year, which should be no surprise. During this time, the Russian authorities sharply tightened censorship and closed down several dozen popular news sites.

The war in Ukraine led not only to an increase in the popularity of television as a news source but also to a certain amount of trust in the information received from television that went beyond the statistical margin of error: From a local low of 44% in January 2021 to 54% and 50% in April and July of this year. As “compensation,” at the same time, the trust of Russians in information obtained from social networks and internet publications fell from 24%-26% to 16%-18%. So far, it is difficult to say how stable this change in the “balance of forces” will prove to be: We may soon see a decline in the surge of interest in military news, which is inevitable as we become accustomed to war.

For the first time in Levada-Center surveys, TV channels as a source of information equaled the category of “relatives and acquaintances” and surpassed the degree of trust.

Also for the first time, in its surveys on this topic, the Levada-Center identified Moscow residents as a separate category. The results confirmed the significant differences between the capital and the rest of the country. For Muscovites, the popularity of the internet is significantly higher than for Russia (50%), almost identical to television.

Muscovites learn news from the internet as often as they do from TV. Of the various sources of information, Moscow residents trust television (31%, which is noticeably lower than the Russian average), internet publications (26%), and Telegram channels (23%) the most. In addition, Muscovites are much more critical of information received from television (31% trust) and significantly more trustful of information received from the internet and Telegram channels (26% and 23%, respectively).

Mega political

The desire to implement an infrastructural mega-project of geopolitical significance is a characteristic feature of the last generations of Soviet/Russian leaders. This desire is based on the myth of the geographical exclusivity of the country occupying the dominant position in Eurasia. A characteristic feature of all such projects is a complete lack of economic feasibility, an inability to explain how the increase in economic potential from the implementation of the project will correlate with the capital costs of its implementation and the current costs of its maintenance. 

In the last 20 years of the Soviet Union, such a project was the construction of the Baikal-Amur Mainline and the “turn of Siberian rivers.” Under Boris Yeltsin, this was the Moscow-Berlin-Paris high-speed freeway project and a high-speed container transportation system between China and Europe using Russian railroads.

In the first years of his reign, Vladimir Putin was ready to continue the projects conceived in Yeltsin’s time. Still, the complication of political relations with the West undermined the plan to build a freeway. The firm position of the Russian Ministry of Finance, which refused to provide guarantees to Chinese investors willing to take on the railway project, put an end to it.

In addition to the apparent projects linking East and West, in the late 1990s, Russian geopolitical strategists proposed creating the International North-South Transport Corridor (ITC), which would link Russian ports on the Baltic Sea with ports in the Persian Gulf. On September 12, 2000, Russia, Iran, and India signed an intergovernmental agreement on creating the North-South Corridor. In February 2002, Russia ratified the agreement.

From 2000 to 2002, hundreds of containers were shipped from India and Iran to Russia along this corridor, after which it became clear that the transportation speed would be unattractively low without substantial investment. In addition to the frustratingly slow speed of Russian customs, the most severe obstacles were the lack of connection between the railroads of Azerbaijan and Iran and the different widths of railway gauges in the two countries.

As a result, transportation along the route stopped. Still, the project initiators continued advertising it and persuaded some countries (Armenia, Azerbaijan, Belarus, Kazakhstan, and Oman) to join it. However, this did not make the project any more attractive and did not help find those willing to invest in its implementation.

The project received a new impetus after Russia launched a military operation in Syria and intensified relations with Iran. In 2016, the governments and railroad companies of Russia, Azerbaijan, and Iran held detailed consultations but found no reason to support investment in the project. The cost of building the railroad from the border city of Astara in Azerbaijan to Resht in Iran (164 km) and the electrification of the Garmsar-Inche-Burun line (495 km) in Iran were estimated at $2 billion, and Azerbaijan was ready to lend Iran $500 million, but estimates of the potential investment were so low that no other investors were found.

“There was no luck, but unhappiness helped,” says the Russian proverb. The war in Ukraine, sharp aggravation of relations between Russia and the West, and a potential blockade of Russian ports on the Black Sea and the Baltic Sea prompted Vladimir Putin to revive this project. During his visit to Tehran, the Russian leader said that Russia was ready to build a railroad from Resht to Astara and allocate up to $1.5 billion for the MTC development.

To all appearances, the Russian President does not care that the project will not be economically profitable, as the potential freight traffic, according to experts, does not exceed 40% of the MTC’s design capacity, based on which the return on investment was calculated. The project envisages the transportation of 30 million tons of cargo per year through the MTC, and containers from St. Petersburg and Mumbai will be delivered in 15-24 days, compared to 30-45 days, which is required by the traditional route via the Suez Canal. Russian experts believe the railroad construction from Resht to Astara will increase cargo traffic along the corridor by 3 million-10 million tons a year, but it does not save the business plan. Kazakhstan, interested in reducing its transport dependence on Russia, could become a potential participant in the project. Still, this country is interested in exporting grain, which requires grain carriers rather than containers.

Today, the economics of the project are supported by the coronavirus epidemic, which has led to a sharp rise in maritime container shipping tariffs: Before the epidemic began, the tariff for shipping a container from Europe to Mumbai was $1,000-$1,200; by September 2021, it had increased eightfold. Although the tariff has since dropped by 50%, it is six times the level of early 2020. The authors of the ITC project in the Russian Ministry of Transport are not ready to propose a tariff level for container transportation below $2,500, provided that the container will travel loaded in both directions. With today’s tariffs for sea container transportation, such a proposal looks very attractive, but who is ready to guarantee that in some time, the sea tariff will not decrease 3-4 times more?