We are afraid, but you should also be scared of us!
State secret—the most essential anti-crisis instrument
Still, they need laws
Every cloud has a silver lining
No need for a mortgage
… and for a lead
Transformation
A product pit ahead
We are afraid, but you should also be scared of us!
The Kremlin propaganda demonstrates its effectiveness: Most Russians (82%) have a negative attitude toward NATO. As is often the case in polls on political topics, the difference in the evaluations of younger and older respondents is visible this time as well: The share of respondents having a positive attitude toward NATO among the 18-24 generation is four times higher than their share among the 55+ generation, but the absolute values of these shares look dismal at 16% and 4%, respectively.
Increased propaganda on the eve of and after the invasion of Ukraine has led Russians to look again with much greater apprehension at NATO member states. In November, the share of respondents who believed that Russia had reason to fear NATO member states and the percentage who held the opposite view were roughly equal: 48% vs. 44%; by the end of May, this ratio had changed dramatically to 60% vs. 35%.
However, Russians have an increasingly realistic view of their country and consider that the NATO member states have serious reasons to fear Russia: While in November 2021, their share was 36%, in May this year, it was 60%, which was the highest level ever measured. However, the survey does not allow us to reject the following hypothesis: Perhaps the survey participants believe NATO countries should fear Russia more than before, not because Russia is an aggressor country, but because Russia will be able to give a decent response to aggression on the part of NATO countries. As Vladimir Putin said, “Russia’s response will be immediate. And it will lead you to consequences that you have never faced before in your history.”
State secret—the most essential anti-crisis instrument
Russian authorities continue their fight against disseminating information about the state of the economy. After the suspension of reporting on oil and gas production, refining, and exports, along with a ban on the publication of monthly bank statements, the Ministry of Economic Development proposed drastic measures and started classifying basic macroeconomic information.
The Government Commission on Legislative Activity approved the bill, prepared by Minecon and agreed upon with the Ministry of Finance and the Bank of Russia, making it possible to classify information about the size of the gold reserve and the currency reserves of the Russian Federation. Such practice existed during the Soviet Union and was discontinued in 1993 when the law stipulated that the information about the currency and gold state reserves could not be classified. The prepared bill proposes to exclude this information from the list of unclassified information, which at the next stage will allow the Bank of Russia to declare this information a state secret.
From my point of view, this idea is controversial. On the one hand, the Russian authorities are building up liquid reserves in foreign currency, taking advantage of the low dollar exchange rate and substantial current account surpluses. Because the U.S. and EU sanctions prohibit transactions with the assets of the Ministry of Finance and the Bank of Russia, any information about the accumulation of foreign currency reserves can be a reason to identify possible ways to escape sanctions. On the other hand, the current level of foreign exchange reserves of Russia, published weekly by the Bank of Russia, is no longer informative, because a significant part of the reserves of the Bank of Russia is frozen as a result of the sanctions imposed. Besides, the introduction of the secrecy regime will create considerable problems in the work of state structures, forcing officials to use archaic ways of information exchange.
Still, they need laws
The Kremlin seems to have realized that many of the provisions of presidential decrees signed after the invasion of Ukraine, which impose various restrictions on current economic activities, are not legally valid enough and often contradict the norms of existing laws. Because the view prevails in the minds of officials today that the most acute phase of the crisis, caused by the imposition of sanctions, is behind them, the government has decided to introduce new restrictions by amending the laws.
The first such proposals will concern the rules for regulating the financial market and corporate relations. In particular, a government commission approved a norm to abolish the right of creditors to demand early repayment of Russian issuers’ obligations on other bonds in case of default on Eurobonds (cross-default). Of course, most Eurobond issues by Russian issuers are governed by English law, and the norm of Russian law will be of no importance in the consideration of claims in foreign courts. Its only positive aspect will be the opportunity to extend court disputes—which, however, makes very little sense.
Another innovation, which the government commission approved, is the right of Russian issuers to issue “substitute” bonds to redeem previously placed Eurobonds. The placement of such bonds will be carried out according to a simplified procedure, without an issue prospectus. The bonds most likely will be denominated in rubles and kept in Russian depositories. In fact, we are talking about the fact that Russian issuers will have the right to transform their liabilities into perpetual bonds. However, in my opinion, this norm will be in demand only by those Russian banks that have fallen under sanctions and will have no motivation to return borrowed funds to their creditors. At the same time, Russian companies whose business is built on the export of raw materials will not use this opportunity, fearing the arrest of their assets outside of Russia.
Every cloud has a silver lining
The Russian government has found a joyous moment in the fact that after the Russian army invaded Ukraine, many Western countries expelled Russian diplomats from their capitals. The Finance Ministry believed that this would reduce the Foreign Ministry’s expenses by 635 million rubles by saving on salaries, employees’ travel expenses, and major repairs of the Russian Foreign Ministry’s buildings abroad. The government ordered that the savings be No need for a mortgage
The Bank of Russia published statistics on mortgage lending in April, which, as expected, turned out to be poor but, in many ways, unexpected.
Most experts attributed the reduction of the total volume of loans issued by three times compared to April 2021 to the growth of the key rate of the Bank of Russia, which increased mortgage lending rates. However, the data analysis shows that the average mortgage rate was the lowest in the past 10 months. This means that banks were technically giving loans in April, which were approved before the Bank of Russia rate hike.
Moreover, although Russian banks extended more than RUB 161bn in new loans ($2 bln), the total mortgage debt of the population decreased by RUB 10.5bn—i.e., all the funds obtained were used to repay earlier loans. This situation was observed during the 2008-09 crisis; later, there was only one month, January 2017, when mortgage debt declined.
The Bank of Russia rate increase also led to a decrease in the volume of household debt on other loans (consumer and car loans): In two months, their volume contracted by 5.9%.
The decrease in the interest rate of the Bank of Russia in May-June is likely to revive the demand for mortgage loans, which will be stimulated by the extension of the program of subsidizing interest rates from the federal budget. But whether this stimulus will be enough to restore consumer lending…?transferred to its Reserve Fund.
Nobody needs mortgage
The Bank of Russia published statistics on mortgage lending in April, which, as expected, turned out to be poor but, in many ways, unexpected.
Most experts attributed the reduction of the total volume of loans issued by three times compared to April 2021 to the growth of the key rate of the Bank of Russia, which increased mortgage lending rates. However, the data analysis shows that the average mortgage rate was the lowest in the past 10 months. This means that banks were technically giving loans in April, which were approved before the Bank of Russia rate hike.
Moreover, although Russian banks extended more than RUB 161bn in new loans ($2 bln), the total mortgage debt of the population decreased by RUB 10.5bn—i.e., all the funds obtained were used to repay earlier loans. This situation was observed during the 2008-09 crisis; later, there was only one month, January 2017, when mortgage debt declined.
The Bank of Russia rate increase also led to a decrease in the volume of household debt on other loans (consumer and car loans): In two months, their volume contracted by 5.9%.
The decrease in the interest rate of the Bank of Russia in May-June is likely to revive the demand for mortgage loans, which will be stimulated by the extension of the program of subsidizing interest rates from the federal budget. But whether this stimulus will be enough to restore consumer lending…?
… and lead
Russian factories producing lead are on the verge of shutting down due to a complete halt in exports.
Russia produces about 200,000 tons of lead annually, and more than 60 tons are exported. The primary market for Russian companies was the European Union, which accounted for almost half of the exports (47% in 2021). This year, domestic demand for lead has nearly halved after the shutdown of the auto industry and a drop in battery production. Due to the halt of exports and falling demand domestically, plants have already accumulated two months of lead inventories, and lead production in April fell by 15% compared with the previous April.
The situation was aggravated because, in the middle of May, the government unexpectedly introduced licensing of lead exports and obliged companies to receive one-time licenses for each export shipment. However, the Ministry of Industry and Trade still has not issued any permits and has not indicated when it will be ready to start giving them. A serious barrier to this is the excessive activity of the Russian bureaucracy.
Untreated lead in Russia comes from lead-containing waste—in particular, from old lead-acid batteries. To receive permission to export lead, a company must have a license to collect, recycle, treat, and neutralize hazard class 2 toxic waste (including batteries). However, according to industry experts, no plant in Russia, even one with a license to handle such waste, has permits for all battery activities, because each company uses different technologies.
Theoretically, the solution to the problem could be sought through import substitution: Russia imports a significant amount of lead batteries (to the tune of $600m/year; total lead exports were $260m in 2021), and the appearance of a plant that produces them would meet the necessary demand for lead. But...equipment for such facilities does not come from Russia and is supplied by the EU.
The circle is closed.
Transformation
On June 24, 2010, Russian President Dmitry Medvedev visited Apple headquarters in Cupertino and received from Apple President Steve Jobs the latest (at the time) model of the iPhone smartphone, which was to go on sale a few days later.
On June 7, 2022, now-Deputy Chairman of the Russian Security Council, Dmitry Medvedev, wrote, “I am often asked why my Telegram posts are so abrupt. I answer—I hate them [Western politicians]. They are bastards and scum. They want death for us, for Russia. And as long as I’m alive, I’ll do anything to make them disappear.”
A product pit ahead
The Russian electronics market is likely to face “a fairly serious product pit” as early as the summer, according to Mikhail Slavinsky, CEO of Citilink (Russian electronics retailer).
The main issue for us now is that the daily sales are twice as much, approximately, as the incoming goods. We’re expecting a pretty serious product hole in the short term.
According to Slavinsky, the problem should be divided into technology products (laptops and other things) and appliances.
With the second category, no particular problems are expected—the range of these products will be sufficient. As for microelectronics and everything related, we see pretty big issues there. Import substitution is still at a very early stage.
We will probably feel quite a severe narrowing of the range in the summer. Now it is not handled yet...the number of laptop models at the beginning of the year amounted to about 2,000 items; now there are about 1,500. Household appliances were 7,000 to 8,000; currently, about 5,000.