June 16, 2022

1. Oil export is alive!

2. And it will live on!

3. On the other hand, there were problems with gas

4. Ministers debating for a way out

5. To find the proper reason

6. Everything will be by the law

7. The machine is working

8. Mosaic

Oil export is alive!

On June 2, 1897, the New York Journal published a letter from Mark Twain in which he wrote the now world-famous phrase, “The report of my death was an exaggeration.” Without concealing the idea, I would like to say that the rumors of a contraction in Russian oil exports were exaggerated.

This is evidenced by data on oil and oil products shipments from Russian ports in the first five months of this year. In February, April, and May, average daily oil exports from Russian ports exceeded last year’s figures (in March they were at the previous year’s level), and the fluctuations that can be seen are pretty explainable by weather conditions or other factors unrelated to sanctions.

Data on energy shipments from Russian ports show that in March-May, the export of oil products decreased, and their share decreased from 40% to 30%-32%. But at the same time, oil exports rose, compensating for possible losses of oil companies. (An interesting fact: The cost of 1 ton of exported oil products in Russia is only 1.5%-2% higher than the cost of exported crude.)

In yesterday’s issue, I said that the dynamics of federal budget revenues from oil and gas exports indicated no decline in exports. Today I can say that in May, the federal budget’s oil and gas revenues slightly exceeded the January-April level, considering the volume of exports, the ruble exchange rate, and the oil price.

And it will live on!

The sixth package of the EU sanctions provides severe barriers to exporting Russian oil and oil products: The EU countries agreed to an embargo on the purchase of Russian oil, and a ban was placed on financing and insurance of the transportation of Russian oil.

On the one hand, these restrictions, especially the insurance ban, could hit Russian energy exports hard. On the other hand, these restrictions will come into force at the beginning of December (and for petroleum products at the beginning of February next year), giving the Russian authorities enough time to try to soften their pressure.

The first signal about the possibility of such a scenario came from Germany, the country most dependent on Russian energy imports. The newspaper Handelsblatt reported on German Chancellor Olaf Scholz, who said that the government has (unexpectedly!) discovered that it cannot refuse to import Russian oil, which comes to Germany through the Druzhba pipeline, until the end of 2024. Germany is ready to join Hungary and Slovakia in taking advantage of the opportunity to continue importing Russian oil through the pipeline stipulated in the sixth sanctions package.

The refinery, located in Schwedt, is owned by Rosneft and supplies fuel to most of East Germany, including Berlin Airport. Almost all of the oil at this refinery comes from Russia. Although German authorities said a month ago that they had found other options for supplying oil to Schwedt, the 25% discount on the price of Russian oil was too tempting a tidbit to pass up. 

On the other hand, there were problems with gas

The embargo on Russian gas imports could become part of the seventh package of European sanctions, the preparation of which has not yet been made public. Meanwhile, half of Russia’s gas exports are indirectly subject to Canadian sanctions.

On Tuesday, Gazprom announced that gas supplies through Nord Stream would be reduced by 40%. On Wednesday, it was announced that the reduction in supplies would be 60%. The reason for this was a delay in the completion of preventive repair of two turbines for the starting compressor station of the Nord Stream— “Portovaya.” These turbines were repaired in Canada, and their export to Russia was stopped—according to the decision of the Canadian government, the turbines are dual-use goods and may not be exported to Russia.

Gazprom stopped publishing daily data on gas exports to Europe in late April. Still, the overall picture is as follows: Daily gas exports via Nord Stream in May and early June totaled 170m cu m; exports via Ukraine, a little over 40m cu m; and via Turkey, 20m cu m. The pipeline through Belarus and Poland came under EU sanctions and was stopped. Half of the capacity of the Ukrainian pipeline was lost after Russian troops seized the first compressor station in Ukraine on May 11, and the pipeline operator stopped controlling the entry point. In 2021-2022, in the second half of June, Gazprom supplied 440 million-450 million m3 of gas daily to Europe (excluding Turkey); now, it delivers only a quarter of that volume (67 million m3 through Nord Stream and 41 million-42 million m3).

On Wednesday, Europe’s largest gas consumers (Eni, Uniper, and OMV) were told by Gazprom that their supplies would be cut by 15%-25%. Although these companies have agreed to the Kremlin’s blackmail and switched to paying for Russian gas in rubles, Gazprom has not seen fit to honor its obligations to them, which could be done by increasing gas transit through Ukraine.

Reducing Russian gas supplies will not create problems in Europe, but it will make it much more challenging to fill storage facilities for the winter, which is required by a new EU directive. It is probably possible to find liquified gas, but its price has already risen by more than 20% with delivery to Europe. Vladimir Putin is the only one who has cheaper gas, but it is not yet clear what he will demand in return.

Perhaps we’ll find out from his speech at the economic forum in St. Petersburg on Friday.

Ministers debating for a way out

The St. Petersburg Economic Forum is one of Vladimir Putin’s favorite events, and he regularly appears. Attending the forum is a must for major Russian companies and ministers of the Russian government who talk about their plans and dreams.

This year’s forum has been marked by Russia’s divorce from the leading economic powers. The main topic of discussion is how to build a modern economy in conditions of self-isolation.

Elvira Nabiullina, the chairman of the Bank of Russia, talked most easily on this topic—she limited herself to setting global goals, hinting that the details are beyond her competence.

We as a country are currently losing from participation in the international division of labor because we have exported at a discount, imports at a premium... It was always thought that exports are such our self-value, we have foreign exchange earnings coming into the country... We need to rethink and finally think that a significant part of production should work for the domestic market, more processing, more creating end products.

I don’t understand how the Russian economy may use so much of the oil, gas, metals, and timber that are now being exported. There is no production capacity for their processing, not even intense processing; Russia does not produce technologies for processing; the share of high-value-added products in Russian exports does not exceed 5%; the export of software products is half that of Ukraine, a country that is 3.5 times smaller in population and was 9.5 times smaller in economy size (GDP) last year. And, most importantly, no country in the world has achieved long-term growth rates above the global average without relying on exports.

Finance Minister Anton Siluanov, on the contrary, took a very pragmatic approach to the problem of restructuring, saying that the budget is ready to support import substitution in various ways.

It is necessary to ensure that part of those risks that business has, is taken by the state. Perhaps at the initial stages, subsidize some interest rates, give confidence in the sale of products, and guarantee a minimum rate of return. This is where the budget should help now. At a time when we need to produce more of our goods, our products, which used to be imported, we must take certain risks to sell these goods—like offset contracts. The government may say, ‘Let’s produce, then, an airbag in the LADA [the name of the car produced by the biggest auto company, AvtoVAZ]; we’ll provide you with the demand. Produce power windows; we’ll keep you in demand.

Minister Siluanov did not say how the state could support demand; perhaps he was pressed for time—he had to attend a meeting with Vladimir Putin, who had decided to discuss the problems of the automobile industry. (I see no point in commenting on this meeting, the issue of which was that the President ordered Siluanov to solve all problems based on Russia’s technological sovereignty and restore car production, which had fallen by 6.5 times in April.)

First Deputy Prime Minister Andrei Belousov said that having coped with the first shock of Western sanctions, the government had moved on to solving problems as they came. He called it a “situational response mode.”

For us, it is very familiar: Some problems arise, we realize on the horizon of two to three or five years that “something is going wrong,” and we begin to change things in this “something is wrong.” You can call it reforms, but in fact, it is not reformed. Nevertheless, changes occur, although the essence does not change. Adjustments arise, and the system moves. This may not be the most efficient way, but socially it is the safest because it makes it possible to maintain a balance all the time.

To find the proper reason

One of the Russian government’s global plans was to build a highway from Europe to China via Russia and Kazakhstan. Initially, the project was focused on transit traffic: 95% of the cargo in the business plan was international traffic. A large part of the investment was to be financed by the federal budget, but a private company was to be involved in the construction and operation of the highway.

The rupture of relations with the European Union ended the idea, but Russian business immediately found an alternative solution that would allow it to receive budget financing. The project initiators propose to reorient the Russian part of the highway, replacing the East-West direction with North-South. According to the updated proposal, when it reaches Ekaterinburg, the new road should turn sharply to the south and head toward Krasnodar and the Caspian Sea (which would allow the use of Iranian seaports for new logistics chains).

“... because logistics chains have changed now, it is necessary... not to go to Europe, but to reach central Russia and connect [China] with southern Russia and the north,” said Vyacheslav Petushenko, head of state-run Avtodor (a monopoly for road construction at the expense of the federal budget).

In my opinion, such a road would not be an example of sustainable business: The freight traffic between the Urals and the south of Russia is too small for the toll to recoup the investment, and China can build the road to Iran by itself, bypassing Russia. But given the constant brainstorming in the Kremlin, with an excellent presentation, presidential aides may be persuaded that implementing this project would solve many of Russia’s problems today. What can’t you promise to get a big chunk of budget money at your disposal?

Everything will be by the law

A new type of expertise may appear in the judicial expert institutions of the Russian Ministry of Justice to establish signs of functions of a foreign agent and “political extremism,” said Justice Minister Konstantin Chuychenko.

Special political science knowledge may be in demand when examining public materials to establish the presence or absence of signs of so-called ‘political extremism’ or the political aspects of terrorism... Political science expertise ‘may also be conducted in cases involving judicial challenges to the inclusion of an organization or individual in the register of NGOs and foreign mass media performing the functions of a foreign agent.

The machine is working

In the middle of January last year, the Russian Justice Ministry declared Radio Liberty a foreign agent. Soon after, the entire editorial staff of the radio station moved to Kyiv and later to Riga, Latvia, after the war began. But that did not stop the Russian bureaucracy: Over a year and a half, the Russian censor, Roskomnadzor, drew up 1,044 reports of the radio station violating Russian law, while Russian courts imposed fines of 988.5 million rubles on the station and its CEO.

Mosaic

Instagram, Facebook, and Twitter, which were blocked in Russia, have lost 80% of mobile traffic, the Minister of digital development, Maksut Shadaev, said.

On June 14, blogger Daniil Kulikov published a video on his Telegram channel where the head of the town of Dalnegorsk in Primorsky Territory, Alexander Terebilov, only on the fourth try, could correctly pronounce the word “de-Nazification,” which Vladimir Putin has used to explain the invasion of Ukraine.

The next day, Terebilov and the head of the city military registration and enlistment office came to the blogger’s home to hand him a summons for military training. After learning that the blogger was not at home, the head of the city military agency personally inspected all the rooms, recording what he saw on his phone.

Children born after February 24 in the Kherson region occupied by Russian troops will automatically receive Russian citizenship, said Kirill Stremousov, referred to by Russian media as the “deputy head of the military-civil administration” of the Kherson region.

In March, Coca-Cola announced the suspension of its business in Russia, including supplying ingredients for its drinks to the Russian market. Until today, Coca-Cola Hellenic Bottling Company (HBC), the Coca-Cola bottler, continued to produce and sell beverages, gradually depleting its existing stocks.

HBC announced today that it is ceasing to produce and sell Coca-Cola beverages in Russia.