July 28, 2022
Soviet legacy is over
Approaching the collapse
Forecasters’ optimism vs. dismal data
Catch up and overtake the USSR
The plan failed. Let’s be more ambitious!
How to raise personal incomes?
Pivot to China
The situation changed
Causeless assignment of discrediting label
Soviet legacy is over
President Putin met with the General Director of Roskosmos, Yuri Borisov, who until two weeks ago was the Deputy Prime Minister of the government. This meeting took place in Putin’s official office in the Kremlin and should show that Borisov remains in the “ranks” of the Russian President and that lowering his status should not be perceived as a disgrace.
An experienced bureaucrat, he immediately warned the President that “the industry is in a difficult situation” and that he would have to wait before Roskosmos could provide “the Russian economy with necessary space services... this includes navigation, communication, data transmission, weather and geodetic information, and so on. These are the most demanded services, which modern life is impossible to imagine without.”
Putin’s decision on full-scale confrontation with the West has become two significant problems for Russian cosmonautics. On the one hand, Roskosmos lost orders for launch services—the only niche in the space services market where Russia held strong positions. On the other hand, most domestic projects related to the creation of satellites will be suspended shortly due to the lack of a radiation-resistant electronic component base. According to estimates of Ivan Moiseev, research supervisor of the Space Policy Institute, the share of foreign components in Russian spacecraft ranged from 60% to 90%. Borisov has worked in the electronic components industry for many years and understands its capabilities and potential. But how successful will his attempts to implement space import substitution be in a few years?
The most important episode of this meeting was Borisov’s announcement that Roskosmos will stop participating in the International Space Station after 2024 and will begin implementing an alternative project independently. Thus, Putin draws a line under the 50-year Soviet/Russian-American cooperation in space that started with the Soyuz-Apollo project, the agreement signed in May 1972 by American President Nixon and Soviet Prime Minister Kosygin.
Approaching the collapse
There must be some symbolism in the fact that cooperation in space comes to an end when Russia is decisively destroying another long-term project that linked it to the West.
On February 1, 1970—around the time NASA Director Thomas Paine proposed that President of the Soviet Academy of Sciences Mstislav Keldysh discuss the possibility of a joint space project—an agreement was signed between the USSR and West Germany to supply gas from fields in Western Siberia to Germany and other European countries, dubbed the “gas-pipe.”
Deliveries through the USSR-Western Europe gas pipeline began in 1973 and helped European countries alleviate the oil crisis. Today, the Kremlin’s actions are precisely the opposite: Over the past year, Gazprom has consistently decreased its gas supplies to the European market, and today they amount to 72 million cubic meters per day, while in 2016-2021, they were at 400-500 million cubic meters per day in the last week of July. Given that the share of Russian pipeline gas in Europe’s energy balance was more than 35% in 2021, it is not surprising that gas prices in Europe have increased 8-10 times, and the European Commission began to develop a contingency plan in the event of a complete cessation of gas supplies from Russia.
The Kremlin is blatantly using gas as an instrument of pressure on European countries to economically and politically destabilize them, blackmailing politicians and the population with threats of a cold winter and an economic downturn. We cannot say that these attempts are not successful at all: We can see that the desire of European Union countries to increase sanctions on the Russian economy and increase military aid to Ukraine has practically come to naught. But I would predict these tactical victories will turn into a strategic defeat for the Kremlin: European politicians have seen and realized the real risks of energy dependence on Russia and intend to do everything possible to get rid of it as quickly as possible. Of course, they will not be able to do it in six months or a year, but in 3-5 years, there might be no place for Russian gas on the European market.
The loss of the European market will be a severe blow to Gazprom’s business model: Sales in that market accounted for 30% of the total volume and generated 75% of the company’s income. In June 2022, gas production in Russia fell 20% to May and 23% to June of the previous year. Of course, these losses have been offset by sharply higher gas prices, but I see this as a “first call” and expect a rapid displacement of Gazprom from Europe.
Forecasters’ optimism vs. dismal data
In April, the Bank of Russia predicted an 8%-10% decline in the Russian economy, and the International Monetary Fund agreed with that estimate, predicting an 8.5% decline. In July, the Bank of Russia lowered its forecast, saying that the economy would fall by 4%-6%, and the IMF agreed with that forecast.
Meanwhile, the actual situation in the Russian economy is getting worse from month to month: The rate of economic decline is increasing. The Ministry of Economics released its June operative estimate of GDP, which suggested a 4.9% year-on-year decline (while in May, the decline rate was 4%, and in April, it was 2.3%) and a 4% drop in the second quarter.
Rosstat data on the first half-year results confirm the estimates of the Ministry of Economy: The rate of decline in retail sales in April-June remained at 10% y-o-y, while during the quarter, the decline in manufacturing, wholesale trade, and transportation services accelerated. The only “bright spot” in the statistical data is the sharp slowdown of households’ real-income decline, minus 0.8% for the first half of the year, which, however, poorly combines with the 10% decrease in retail sales and drop in real wages by 6% in May after the fall of 7.5% in April (Rosstat has not published data for June yet).
In June, there was an apparent decline in some sectors of industry: Gas production fell by 20% year-on-year, tobacco production by 32.4%, plywood and parquet production by more than 25%, linen fabrics by 45%, newsprint by 20%, wallpaper by 32.5%, detergents by 26%, air deodorizers by 30%, elevators and excavators by 60%, locomotives by 87.5%, freight wagons by 35%... and the list could go on. Of course, most of these items do not occupy much space in the structure of the economy, but all together, they show that the economic downturn is spreading wider and wider with each passing month.
Catch up and overtake the USSR
Deputy Prime Minister Marat Khusnullin, a model official in the eyes of Vladimir Putin, decided to take advantage of the situation and strengthen his balance by taking away some powers from the Ministry of Finance, the Ministry of Economy, and all other ministries.
According to Khusnullin, the existing order of planning and implementation of projects related to the construction of various objects at the expense of budgetary funds has serious flaws: No one knows the total number of construction sites and the degree of completion, the decisions on the construction sites are not linked with the decisions on the allocation of budgetary funds, and every year there is a growing number of “unnecessary objects,” construction of which began, but the urgency of the object disappeared. And most importantly, no one in the country knows how much cement, metal, and other materials are needed to perform construction work ordered by the budget, and no one centrally monitors the change in the cost of government contracts due to rising prices.
Marat Khusnullin decided that the best way to solve these problems would be to transform the Ministry of Construction, under his control, into a mega-contractor that would receive the right of current management of all the budget construction sites. Explaining his proposals, the Deputy Prime Minister recalled the experience of the Government Commission for Regional Development, which during the coronavirus pandemic period was authorized to reallocate budget funding for road, housing, and infrastructure construction. As a result, according to Khusnullin, 99% of the funds budgeted for construction financing were used. In addition, speaking from the position of “single customer,” in 2021 he managed to knock out for the Ministry of Finance (with the help of Vladimir Putin) an additional 100 billion rubles in compensation for rising prices for construction materials.
The Deputy Prime Minister’s proposals envisage that the Ministry of Construction will have the right to accelerate or slow down (stop) the individual construction projects, redistributing funds among them. In addition, in his opinion, the centralization of control and management will identify those objects for which there is no demand, after which it will be possible to decide on the change in the project.
I am sure that Khusnullin’s request for increased powers will cause fierce resistance from the ministries and other recipients of budget financing—the amount of budget money that the official can dispose of is always one of the essential criteria of his importance and significance in the bureaucratic system. But not every official has the opportunity to call Vladimir Putin and present his proposals, as Marat Khusnullin can do.
Khusnullin’s plan to create a mega-contractor may take place if the Deputy Prime Minister can agree with the Minister of Finance on creating an “alliance to control the rational use of budgetary resources.” In this case, he will be able to surpass the Soviet system, where no one set the task of ensuring this level of centralized control and management of construction.
The plan failed. Let’s be more ambitious!
In November 2020, the Russian government approved a roadmap for the development of 5G mobile communications, agreeing to allocate 28 bln.rubles ($350 mln.) for this purpose. Rostec State Corporation was appointed as the executor of the program. Still, it was difficult to understand its role—without the government’s and Rostec’s participation, Russian mobile operators were installing equipment supporting the 5G standard in their networks. But not a single Russian operator supports 5G, because the frequencies in the 3.4-3.8 GHz range, on which this standard works worldwide, in Russia are occupied by special services.
All Rostec’s plans to use budget money were based on the use of imported equipment, which became unavailable to Russian companies after the invasion of Ukraine by the Russian army. In this situation, Rostec suggested that the government make cosmetic changes to the roadmap, replacing “5G” with LTE (the previous generation already working in Russia). But lest the government think that Rostec proposes to mothball the technological backwardness of Russian mobile communications, the state corporation offered to start developing a new 6G communications standard and asked the Ministry of Finance for an additional 30 billion rubles for this purpose. At the same time, Rostec promised that Russian equipment for new-generation networks would be created by 2025.
Russian Deputy Prime Minister Dmitry Grigorenko supported this project and ordered the Ministry of Finance to allocate money for the purpose. However, it seems that the Deputy Prime Minister is unaware that the International Telecommunication Union (ITU) plans to receive proposals from telecom operators and equipment manufacturers to form a technical standard for the 6G level in 2027. A key issue with the new standard is moving to higher, less-congested radio frequency bands in the 95 GHz to 3 THz range, which will require rebuilding networks worldwide. In addition, the terahertz band has not yet been allocated to anyone in the world for practical use, and it has not been studied in terms of data transmission or safety for humans.
And, of course, Deputy Prime Minister Grigorenko, in his assignment, sidestepped the question of which countries and equipment manufacturers Russia is going to coordinate its efforts with. All the latest communications standards were made possible only due to extensive international cooperation, and each successive standard required more effort and funding.
How to raise personal incomes?
A year ago, Russia’s largest retail chain, Magnit, closed a deal to acquire the Dixy chain, increasing its stores to 2,000. In approving the agreement, the Federal Antimonopoly Service (FAS) demanded that 148 stores be excluded from the deal. It imposed “social obligations” on the merged chain to have a zero markup on essential food products (milk, bread, and chicken). The period of validity of this requirement was set at one year.
During the year, the FAS had no complaints against Magnit, but at the end of that period, the antitrust service decided to extend the “social obligation” period for another year, explaining it very simply—we think it is the right thing to do.
The extension [of the injunction] will contribute to the service’s continued monitoring of the retailer’s compliance with social obligations. It will also help preserve jobs and the availability of food products to citizens in small municipalities.
From the point of view of antimonopoly policy, the requirements for the retail chain make no sense; instead, on the contrary: A zero markup means no profit, which will push the management to close area stores with a limited assortment and low rate of sales—located, as a rule, “in small municipalities.” But remember: Recently, Vladimir Putin designated an increase in the population’s real incomes as the government’s most important task. And freezing prices, from the official’s point of view, is an effective way of formally fulfilling this task. Wouldn’t the President, who considers all businessmen crooks, scold an official for making business unprofitable?
Pivot to China
Sales of new smartphones in Russia in Q2 2022 were the lowest in five years, the Vedomosti newspaper reported, citing mobile operators. Sales in MTS salons fell by 30% compared to last year, for Megafon 17%, and 23% for Tele2.
The collapse of sales is associated “with a decrease in demand” for brands such as Apple and Samsung, the official supplies of their gadgets to Russia have been discontinued, and the prices have snowballed. Not surprisingly, the share of Chinese smartphones has grown from one-half to two-thirds of total sales.
The situation changed
The Philippine government last month decided not to buy 16 Russian Mi-17 military transport helicopters, fearing possible U.S. sanctions.
The contract for the Mi-17s was signed in November 2020, and the first batch of helicopters was expected to arrive at the end of this year. In early March, the Philippine government stated that it was not planning to give up buying Russian helicopters because of the situation in Ukraine and expressed the opinion that U.S. sanctions would not prevent the completion of the deal since the first payment for the helicopters was made immediately after the contract was signed. But...
Causeless assignment of discrediting label
The District Election Commission did not allow Denis Prokuronov, an incumbent deputy of the Filevsky Park district in Moscow, to participate in the next municipal elections this September. According to the commission, he unreasonably called himself a person affiliated with a foreign agent NGO and thus gave misleading information about himself, which was grounds for denying him registration.
According to the law, a candidate affiliated with a foreign agent is a citizen who, within two years before the appointment of elections or during the election campaign, was a member of a foreign agent organization, was its founder, member, participant, manager, or employee, or was engaged in political activity and received money or property from a foreign agent, including through intermediaries.
A year ago, Prokuronov worked with the NGO Civic Assistance Committee, which the Ministry of Justice included in the register of organizations performing the functions of a foreign agent in the spring of 2015. After consulting with lawyers, the candidate decided to notify the election commission, but it turned out that such “amateurism” backfired against him.
In its decision to deny registration, the Election Commission pointed out that Prokuronov was not entered into the appropriate register by the Ministry of Justice and thus violated the law. According to the Election Commission, “the existence of the status of a candidate who is affiliated with a person performing the functions of a foreign agent cannot be made dependent on the wish of the candidate himself.”
According to the law, the Election Commission must notify the candidate about the deficiencies in the documents and allow him to correct them three days before deciding on registration. If this does not happen, the withdrawn candidate has an excellent chance to defend his registration in court. Denis Prokuronov has already said that he will file a corresponding lawsuit, but I do not doubt that the court decision will be political, rather than legal, in nature.