June 30, 2022
Steady sliding down
More or less clear
The fate of the liberals
All dividends belong to the Treasury
Good face with a weak hand
No movies, no viewers
Steady sliding down
Traditionally, at the end of the month, Rosstat publishes the results of the previous month, May in the current case, which show that the Russian economy is slowly but surely going downhill.
Based on the data of Rosstat, the Ministry of Economics assessed the dynamics of GDP in May—minus 4.3% as against May of the previous year (the result of April made minus 2.8%). Taking into consideration the strong growth of the economy at the end of last year, I estimate the decrease of the GDP in April-May to the first quarter of this year at the level of 7%-8% per annum.
The most substantial declines are in wholesale and retail trade (minus 15.5% and 10%, respectively). The dynamics of wholesale trade reflected a drop in imports, which were hit by sanctions, problems with logistics, and bank payments. A decline in retail trade reflects a sharp decrease in demand, which is associated not only with inflation, which reduces the real income of households but also with a reduction in nominal wages in all sectors of the economy (except for the government), which was recorded in April at minus 6.9% vs. March (Rosstat gives data on household incomes with a delay of one month relative to the total statistics). In May, the households bought fewer food products (minus 1.8%) and non-food products (minus 17.2%) and spent 5.2% less on food in cafés and restaurants than in May last year.
Not surprisingly, the population is in no hurry to rush to the banks to get mortgages, even though the preferential mortgage rate was lowered in May on the orders of Vladimir Putin. Russian banks have issued four times fewer loans in just one month than in May last year and a quarter less than in April. The total volume of loans was three times less than last year and 13.6% less than in April. At the same time, for a month, households repaid loans more than they received, which decreased the total amount of mortgage debt.
In May, the raw materials industry, according to Rosstat estimates, showed an increase of 2.7% relative to April, with oil production up by 5% compared to April and by 3.5% compared to May of last year; and gas production decreased by 11% relative to May of last year and by 7% compared to April. Rosstat recorded a decline relative to April in all but three sub-industries (beverages, coke and oil products, and chemicals) in the manufacturing industry. Very strong, in addition to the automotive industry, whose problems are well known (the production of passenger cars fell by 33 times compared to May of last year); the decline in May was in the production of medical goods (minus 20%) and in the production of “machinery and equipment not included in other groups,” where Rosstat hides the production of weapons (minus 22% by April). I wouldn’t draw serious conclusions from the latter: Perhaps this decline is a reflection of the fact that, in May, the industry did not deliver large orders to the Ministry of Defense due to the terms of the contracts
Let me repeat where I started: The Russian economy is steadily going down, which due to inertia, does not look catastrophic, but the potential for the decline is far from exhausted.
On June 29, Vladimir Putin flew to the capital of Turkmenistan, Ashgabat, for the sixth Caspian Summit, where he was awaited by the other four Presidents—of Turkmenistan, Azerbaijan, Iran, and Kazakhstan. During this trip, the Russian President again demonstrated his fear of the coronavirus.
When his plane landed in Ashgabat and Putin stepped out alone, he was greeted by a lone Turkmen official, who did not dare to approach the Russian leader and shake his hand. The Azerbaijani and Kazakh Presidents, who had landed shortly before Putin, were met and escorted by the mass of people in a lively crowd at the motorcade. Putin took off his jacket, got into his car, and drove away.
More or less clear
At the end of his visit to Ashgabat, Putin gave a short press conference, during which it emerged that Russia is not against Finland and Sweden joining NATO and that Russia has no territorial or other disputes with these countries.
As for Sweden and Finland. We have no such problems with Sweden and Finland, which, unfortunately, we have with Ukraine. We have no territorial issues or disputes; we have nothing to worry about regarding Finland’s or Sweden’s membership in NATO.
In addition, the Russian President thought to answer again the question about the goals of the war in Ukraine, but his answer did not clarify these goals.
The ultimate goal I have outlined is the liberation of Donbas, the protection of these people, and the creation of conditions that would guarantee the security of Russia itself. That is all.
A conflict triangle has formed in the economic bloc of the Russian government, in which all three participants (the Ministry of Finance, the Ministry of Economy, and—for the first time!—the Bank of Russia, agree that the strengthening of the ruble has gone too far. Still, every two participants disagreed with the third on the question of what should be done to weaken it.
This triangle manifested itself during the public speeches of the heads of the three agencies at the Congress of the Russian Union of Industrialists and Entrepreneurs (RSPP). The congress participants were monolithic in their demand for clarity in the exchange rate policy, which has brought complete uncertainty to business planning in recent weeks.
The speeches revealed that 1) the Finance Ministry and Economy Ministry believe that the Bank of Russia should conduct currency interventions to weaken the ruble, which was categorically opposed by the Bank of Russia, which does not want to give up the floating ruble exchange rate, 2) Ministry of Economy and the Bank of Russia doubt that the attempt of the Ministry of Finance to support the ruble rate via the purchase of currencies of "friendly countries" will be successful. , 3) the Bank of Russia and the Ministry of Finance suggest allocating part of the budget revenues to purchase foreign currency, but the Ministry of Economy objects, arguing that it has already made many expenditures promises.
The Finance Ministry believes that the return of the government to the foreign exchange market is de facto the most effective and the only available measure to influence the exchange rate, while the ministry sees no risk of reduced spending: “Expenses are not worth the income that businesses can receive if the exchange rate is predictable. Investment activity is not related to budget spending, it is in the room,” said Anton Siluanov. The configuration of the budget rule, proposed by the Ministry of Finance, involves the purchase of currency of “friendly countries,” which will affect the value of the dollar and euro against the ruble.
None of the participants in the discussion brought up the fact that it would be impossible to solve the problem of normalizing the ruble without lifting the political prohibitions imposed on non-residents.
The fate of the liberals
Throughout Vladimir Putin’s presidency, many experts talk about the “liberals” and “siloviki” clash in the entourage of the Russian President. Vladimir Mau was undoubtedly a liberal when he was one of Yegor Gaidar’s closest assistants at the beginning of Russian reforms and later, when Gaidar, no longer in the government, remained in the circle of those with whom the authorities consulted.
Since the late 1990s, Mau was head of the government's Working Center for Economic Reforms and took an active part in preparing the "Gref Program," a set of reforms that was prepared at Putin's request. In 2002 he was nominated the rector of of the Academy of National Economy. This huge educational institution trains human resources for the bureaucratic machine. In 2011-2012, Mau was co-leader of the team of economists that prepared the platform for Vladimir Putin’s third presidential term. For this work, Mau received a medal from the President. Since 2011 he serves on the Boards of Directors of Gazprom and Sberbank, demonstrating the Kremlin’s high trust in him.
Later, Mau became an apologist for Putin’s economic policy, explaining and defending all of his decisions. In his circle of associates, he openly preached the theory of small deeds—that it does not matter if the political system smells bad but that it is possible to do something good within the framework of the existing system.
Today he was detained by the police on charges of grand theft in connection with the embezzlement of funds from the academy, and on the same day, the court ordered him placed under house arrest.
I don’t know the contents of the charges, and I don’t want to accuse Vladimir Mau or defend him. All I know is that the bureaucratic system in Russia is set up in such a way that it is impossible to be the head of a state institution that receives budgetary funds without violating any instructions, laws, or regulations. Vladimir Mau may have known this, but he thought his proximity to Vladimir Putin made him untouchable. However, he was wrong.
So was his friend and associate, another of Yegor Gaidar’s aides, Alexei Ulyukaev, who was arrested in 2016 when he was economy minister and sentenced to eight years on corruption charges initiated by an old associate of Vladimir Putin, Igor Sechin.
When I talked about the arrest of Ilya Yashin in the last issue, I did not remind you that he is a municipal deputy in Moscow’s Krasnoselsky District and was chairman of the municipal council for four years after his election in 2017. To be honest, I didn’t think this could be a reason to arrest him, but it turned out I was wrong. Since mid-June, when the campaign for municipal elections in Moscow was announced, 16 incumbent deputies have already been held administratively liable for discrediting the army.
In the 2017 municipal elections, the opposition managed to get 108 of its representatives elected to various councils, and in three (out of 125) councils, it obtained a majority and elected its representatives as chairmen. The powers of municipal councils today in Russia are minimal, but even they were enough to demonstrate what is today’s regime in Russia. In the crosshairs of the deputies were the heads of local governments, who were in charge of managing the municipality’s money, the leaders of city and municipal companies that provided utility services to residents, the military commissars, and so on. Municipal councils could hold public meetings, declaring them meetings with voters, and initiate protests.
In short, the opposition, having been given minor powers, began to terrorize the government, which, to all appearances, decided not to repeat the mistakes of the last election and to discourage anyone who did not support the Kremlin’s current policies from being elected.
All dividends belong to the Treasury
Gazprom’s annual shareholder meeting was attended by 58% of shareholders, the lowest number in the company’s history. Shareholder activity peaked in 2005 when 93.4% of shareholders registered to participate in the meeting.
The government directly or indirectly controls 50.23% of Gazprom’s shares and is in a position to guarantee any decision at the shareholder meeting. This year, the government decided to vote against the dividend payout, which the Board of Directors approved, causing Gazprom’s stock price to plummet 32.3% and halt share trading. Last year, Gazprom made record profits, half of which it was willing to give to shareholders, following its corporate policy. But the Finance Ministry decided that, in the current circumstances, it would be wrong to share the profits of a company controlled by the state with other shareholders. On its initiative, the government submitted a bill for a temporary (three-month) increase in the mineral extraction tax, which would result in Gazprom paying half of its profits from last year to the budget.
Good face with a weak hand
The Russian military abandoned the Ukrainian island of Snake Island in the Black Sea, which was seized in late February and used by the Russian army for airspace control and radio reconnaissance. In recent weeks, the Ukrainian military received Western artillery weapons that enabled it to drive Russian warships away from the island. As a result, the Russian army lost the ability to supply its troops on the island and protect them from targeted fire from Ukrainian artillery.
In this situation, the Russian Ministry of Defense decided “as a step of goodwill” to withdraw its military from the island, stating that they had “completed their assigned tasks.”
“I instruct you to introduce a complete ban on the export from Russia of untreated or roughly, only pro forma treated wood and valuable hardwood timber, from January 1, 2022,” Vladimir Putin said in late September 2020. Said, done. The export duty on untreated timber was raised to 60%, and in 2021 to 80%. Now the export of round wood is permitted only through two rail border points, which will also be closed in the future.
The Kremlin’s desire was clear: To stimulate the deep processing of timber. Timber exporters, especially those in the Far East, were vocal in their opposition to this measure, citing that it would bankrupt enterprises and that it was impossible to build a sufficient amount of processing facilities within the given timeframe. But Vladimir Putin is not one of those politicians willing to reconsider his decisions, and worse, he cannot build causal links between his various decisions.
After he decided to invade Ukraine, it turned out that most of the timber processing plants built were oriented toward the European market, which closed after the sanctions were imposed. As a result, exports of processed wood are impossible because of the decision to go to war, and exports of unprocessed timber fell almost twice in the first five months of the year (by 44.1%) because of the decision that all timber should be processed in Russia.
The biggest buyer of Russian timber traditionally remains China (44% of all exports), although shipments to that country have fallen by half compared with last year. Second place went to Finland (40%), which, on the contrary, increased its purchases by one-third.
No movies, no viewers
The Hollywood majors—Universal, Warner Bros., Disney, Sony, and Paramount—have stopped the distribution of films in Russia since March because of the hostilities in Ukraine. This has resulted in the number of working cinemas in Russia dropping by more than a third. As a rule, some movie theaters close cinema halls on weekdays and open them on weekends, but some cinema halls have not been used for three months: Russian films do not gather sufficient viewers. Analysts claim that the situation will worsen soon, as viewers have traditionally been attracted to Hollywood blockbusters during summer.
According to the Russian Association of Theater Owners, the number of cinemas showing at least one show per day on weekdays in early June was down by a third from the beginning of the year. The situation looks a little better on weekends: The drop is just over 20% compared to January. According to the association, during the week of May 30 to June 5, compared with the average weekly figure in 2021, revenue from cinemas fell by 63%, and attendance by 57%.
Due to the imposed sanctions and the boycott of foreign companies, the Russian market for repairing smartphones, laptops, and other electronics has faced a shortage of components. As a result, service centers are beginning to use new and used gadgets as a source of spare parts. In addition, all electronics imported through parallel imports must be returned to the original destination countries in case of warranty repairs.
Through parallel imports, electronics are supplied and registered in one of the countries of the Eurasian Union, as well as in Serbia or Montenegro. According to the manufacturer’s requirements, the warranty service must be performed in these countries, so distributors have to send the equipment for repair to one of these countries, which increases the repair time.