Occupation? Or return?
The army continues looting
We’ll do what we can
China turned away again
Incompatibility
Coal loses competition
A contract for the President
Occupation? Or return?
The Kremlin continues to consider various options related to the future of Ukraine’s occupied territories. If there was clarity about the Luhansk and Donetsk regions even before the war—Russia recognized the independence of the self-proclaimed republics, but there is still no answer to the question of whether they will exist in the regime of South Ossetia and Abkhazia or be annexed to Russia like the Crimean Peninsula—then no one knows what to do with the Kherson and Zaporizhzhia regions.
On the one hand, Putin and his cronies have repeatedly stated that the occupation of Ukraine is not part of Russia’s plans. On the other hand, Putin promised not to invade Ukraine, remember? However, it seems that the Russian President no longer perceives the occupied parts of Ukraine as part of the territory of a neighboring state, believing that they were once and by someone taken from Russia. At least he made such a statement today.
“It would seem that he [Peter the Great] fought with Sweden, confiscated something... He didn’t tear anything away. He was returning... He returned; he strengthened them. That’s what he was doing... We also had to return and reinforce them. If we proceed from the fact that these fundamental values form the basis of our existence, we have certainly succeeded in solving the problems we face.”
So, we should be cautious about what the Russian authorities are doing, especially when it comes to First Deputy Head of the Presidential Administration Sergei Kiriyenko, who oversees domestic policy issues (in the Kremlin, Ukraine is domestic policy).
This week he visited Kherson and Melitopol (the largest city in the occupied part of Zaporizhzhia Oblast) for the first time. The trip to Kherson became known from a publication by State Duma Deputy Igor Kastyukevich, Kiriyenko’s longtime aide. In particular, Kastyukevich wrote: “The inclusion of the Kherson region into Russia will be full-fledged, similar to the inclusion of Crimea.” Of course, this phrase can be interpreted as the Deputy’s comment, but the Kherson region’s occupation administration leaders, immediately after Kiriyenko’s departure, began intensively discussing the organization and holding a referendum on joining Russia.
Galina Danilchenko, head of the pro-Russian administration, reported on Kiriyenko’s trip to Melitopol, saying, in part, “We know that our future is one with Russia. The Russian Federation is here forever. And we are now beginning to prepare for a referendum.”
The army continues looting
If the Kremlin has not yet decided what to do with the occupied territories, the Russian army knows well what to do WITH the occupied territories.
On June 7, Defense Minister Sergey Shoigu announced that the Ministry and Russian Railways had created the necessary “conditions for the resumption of full traffic between Russia, Donbas, Ukraine, and Crimea at six railroad sections” and had begun delivering supplies to Mariupol, Berdyansk, and Kherson.
On the same day, a train from Melitopol with grain went to Crimea, said Yevgeny Balitsky, who presents himself as the head of the military-civil administration of the Zaporizhzhia region: “The first railway cars went in the direction of Crimea, 11 cars went with grain from the Melitopol grain elevator.” On June 8, the train arrived in Sevastopol.
Video footage published by the Russian official agency RIA Novosti shows that the locomotive carrying grain from Melitopol belongs to Russian Railways and is assigned to Oktyabrskaya Railways. However, Russian Railways reported that the company was not involved in organizing the transportation of grain, and Kommersant’s sources in the Crimean government said that the organization of transportation is the responsibility of the Ministry of Defense because it is “not the level of the regional authorities.”
In the video frames, the image of a platform with cargo, which most resembles a roll of cold-rolled steel, was caught on the train.
We’ll do what we can
On Wednesday, AvtoVAZ, a controlling stake in the company that the Russian government bought from Renault for 1 ruble two weeks ago, announced that it had resumed car production—the first LADA Granta Classic of the 2022 model year, which the company believes will be the most affordable new passenger car on the Russian market, rolled off the assembly line.
This model is designed “to ensure the maximum possible localization of the car, eliminating the impact of shortages of imported components,” according to a press release from AvtoVAZ. Earlier it was reported that the “lightweight” version of the LADA Granta would be stripped of ABS, airbags, navigation system, and several other systems with imported components.
China turned away again
Sberbank temporarily suspended settlements in yuan from June 7 and is working with partners from China to resume them, the bank’s press service said.
“This temporary measure affected corporate clients—participants in foreign economic activities—carrying out settlements in Chinese yuan,” the statement said.
This situation occurred “due to the policy of the correspondent bank,” Frank Media wrote, citing Sberbank’s call-center tellers. The bank employees noted that the companies would have to make payments through partner banks, leaving contacts in Sberbank, or choose the service of other banks carrying out settlements in Chinese currency.
Incompatibility
Russia’s reorientation toward the markets of the East and, in particular, China, both in terms of food supplies and procurement of agricultural equipment, is still facing several difficulties, participants of the discussion held by the Russian-Asian Union of Industrialists and Entrepreneurs noted. China is ready to increase the supply of agricultural machinery to Russia if Russia makes it easier to import it. Still, the Russian Ministry of Industry and Trade opposes this idea, seeing intense competition for the Russian industry. Russian exports of agricultural products to China are not in line with Chinese phytosanitary requirements[1], problems with bank payments, and internal Russian logistics constraints. However, sanitary requirements are the main challenge for Russian agrarians—the issues of logistics and bank transfers emerged only after the start of Russian aggression against Ukraine—not allowing for increased grain exports. In 2020-21, grain exports from Russia to China amounted to 1.7 million-2 million tons, while Ukraine left 10 million tons yearly.
Coal loses competition
The break-up of Russian logistical chains in the West of the country, toward Europe, forced many exporters and importers to choose routes toward the Pacific Ocean, which led to a sharp decrease in Russian Railways’ interest in coal transportation.
In March, Russian Railways rules on non-discriminatory access to the infrastructure of the Eastern range, which gave preference to coal shipments at the request of Vladimir Putin, who had ordered to increase in coal exports from Kuzbass[2] by 9.5% in 2022, were canceled. The new rules on the order of transportation put the profits for Russian Railways ahead of a presidential dream, after which the company began to prefer non-coal cargoes. Russian Railways attributed the turnaround to concern for those companies that suffered from the disruption of familiar logistics chains.
“The new rules have already created opportunities for export of products of almost 700 enterprises of the Central and North-Western regions of the country, which we’re planning to partially or entirely stop their production in the conditions of Western markets closure,” the monopoly stressed.
Over five months, exporters managed to export 8.7% less coal than a year ago, Minister of Coal Industry of Kuzbass Oleg Tokarev reported. According to his data, May reported the most substantial decrease in export shipments, including westbound loads by 14%, , and eastbound shipments by 12%.
A contract for the President
Russia’s largest airline, Aeroflot, hopes to restore traffic volume in the foreseeable future. This conclusion can be drawn from the announcement that the company is ready to sign an agreement with the United Aircraft Corporation to deliver 300 Russian SSJ100, MS-21, and Tu-214 aircraft. My assessment of the situation is that this contract will be signed for one purpose—to inform Vladimir Putin that the Russian economy is successfully coping with the pressure of sanctions. At the same time, Aeroflot has no intention of buying (or leasing) these planes, and UAC has no intention of (or rather, will not have the ability) producing them in such quantity.
For Aeroflot, international air transportation was the most significant part of its business, both in terms of revenues and gaining a dominant position in the Russian market: 40% of passenger traffic and 60% of revenue in 2019. The drop in international passengers during the pandemic was catastrophic—April 2020 was 200 times less than April 2019 and was only half-compensated in January 2022. In March 2022 (the last month for which Aeroflot provided statistics), international passengers were 10 times less than in March 2019.
If Russia does not emerge from self-isolation in the next 10 years, Aeroflot will not have to count on recovering international traffic. Replacing Airbus and Boeing aircraft over these years might look logical, given that Russia will be deprived of access to original spare parts and qualified service. However, the lower fuel efficiency of Russian planes and smaller cabin size will make domestic transportation more expensive and hamper demand.
On the other hand, Sergey Chemezov, the head of Rostec (the controlling shareholder of UAC), promised that his company would be able to produce 500 aircraft by 2030. Still, widespread sanctions put these plans at risk. Serial production of the MS-21 was initially planned for 2021, but first, the U.S. imposed sanctions on the company AeroComposite, which made it impossible to supply imported materials for the composite wing of the MS-21, and then Pratt & Whitney refused to provide its engines to Russia. Today the beginning of the serial production of these aircraft with the Russian engine is planned for 2024.
Over the past 11 years, UAC could produce only 150 SSJ100 aircraft equipped with engines produced by a joint venture between the Russian Saturn and the French SNECMA. Although the SSJ100 was created 15 years ago, it remains a “crude” aircraft, with many unfixed defects which do not allow it to increase flight hours, and with an almost non-existent maintenance system, the creation of which UAC has not seen among its priorities.
[1] Rosselkhoznadzor reported a sharp increase in non-compliance of Russian grain with phytosanitary requirements detected by Chinese authorities in 2021.
[2] Kuzbass accounts for 55% of Russian coal production and 62% of Russian coal exports (by the end of 2021).