Knowing everything. Budget is not a problem. Germany's dependence on Russia

November 18, 2021

Statistical enigma

Rosstat has published the first estimate of Russia’s GDP in the third quarter of 2021—a growth of 4.3% compared to the third quarter of 2020. For an unknown reason, Russian statistics refuse to publish data on the dynamics of macroeconomic indicators based on a “quarter over the previous quarter, annualized” approach (in this case—the third quarter to the second) used by most countries. Rosstat prefers to compare any data with the same period of the previous year. This approach leaves ample room for interpretations and assessments by experts.

Undoubtedly, this estimate will be recorded as an official result that is not subject to doubt. Still, it does not allow us to understand the actual dynamics of the economy until more detailed data is available. Let’s take Rosstat’s quarterly data with seasonal and calendar adjustments. It turns out that in the third quarter, the Russian economy fell by almost 5% compared to the second, which looks extremely unlikely. If we take Rosstat’s data without adjustment, then the third quarter’s result will be 33% growth over the previous quarter—that is even less realistic (both estimates are in annual terms).

The man who knows everything

Vladimir Putin chaired an online meeting on the development of genetic technologies in Russia. In 2019, he signed a decree that provided budgetary funding of 111 billion rubles ($1.5 billion) for this program for 2020-2027. The Kurchatov Institute, which has traditionally been engaged in nuclear physics, was appointed the project leader. But Mikhail Kovalchuk, (don’t be surprised!) Putin’s friend, was appointed its director in 2005, and this institute obtained control of the distribution of a significant part of the federal budget funds allocated for scientific research.    

Conducting similar meetings on narrow scientific and technological problems has become traditional in forming Putin’s image as a leader of the country who can sort out any situation and make the right decision. Much like Joseph Stalin, who in 1950, for example, wrote the article “Marxism and Questions of Linguistics.”

This analogy is reinforced by another fact: The second source of money for financing this program is the oil company Rosneft, in which the state holds a controlling stake. More precisely, the origin of financing is part of the dividends that Rosneft pays to the federal budget. This money (11.25 billion rubles, $155 million in 2022) is placed at the disposal of the CEO of Rosneft, Igor Sechin. He has followed Putin since the early ’90s, when he was his lieutenant in the Sankt Petersburg Mayor’s office. I see here a direct analogy with Lavrentiy Beria, who oversaw the USSR’s nuclear program under Stalin.

The peak is passed. Nervousness remains

The wave of coronavirus in Russia is fading—for the first time in the past two months, the number of cases over the past week decreased, albeit slightly, by 2.5%. Moscow has demonstrated major successes. Here the incidence rate has dropped by 23% over the past week. If we subtract the data for Moscow from the total number of cases, then the positive dynamics for the rest of Russia are fragile.

Number of new COVID-19 cases in Russia, daily

The situation with the pandemic keeps Vladimir Putin nervous. He speaks on this topic at almost every meeting he has been holding, regardless of the issue under discussion. At a meeting on genetic research, Putin demanded increasing the speed of obtaining test results—he said that the deadline fixed by the government (48 hours) is too extended. Deputy Prime Minister Tatyana Golikova attempted to object, saying that the conditions in different regions of Russia are different, and that the delivery of biomaterials obtained during the test to the medical laboratory can take a long time. But her position did not find the understanding of the Russian president. “Testing speeds need to be increased,” he said harshly.       

Budgetary problems do not threaten

The State Duma adopted a law that increases the irreducible level of the National Welfare Fund (NWF) liquid savings from 7% to 10% of GDP. At the same time, the law establishes “in absolute terms the permissible volume of use of NWF resources of 2.5 trillion rubles (about $35 billion for three years for the implementation of financing self-sustaining projects,” said Deputy Finance Minister Alexey Lavrov.

Russia has been accumulating its fiscal reserve since 2006, which currently exceeds 13.9 trln. rubles (197 billion, 12.1% of GDP). The source of the new funds is tax revenues, which the federal budget receives if the world oil price exceeds the level fixed in the annual budget law ($44.2/barrel for 2022). According to the Budgetary Code, the funds accumulated in the NWF exceeding an irreducible minimum can be used by the decision of President Putin to finance individual investment programs that are not included in budget expenditures. This leads to intensive lobbying by the CEOs of state-owned companies, which demand funding for their projects. The Ministry of Finance is trying to curb the appetites of lobbyists and in every possible way prevents the spending of NWF. However, in 2018-2020, Putin personally approved many investment projects for which there is no money, either in the budget or in state-owned companies. As a result, the president ordered the Ministry of Finance to provide funding from the NWF amounting to 2% of GDP for 2022-2024. As a “compensation,” the Ministry of Finance obtained Putin’s consent to increase the minimum level of savings in the NWF, which cannot be spent on investments. 

The accumulated fiscal reserve allows the Russian authorities not to be afraid of budget problems. Moreover, if oil prices fall and the government uses a portion of the NWF to finance current budget expenditures due to the devaluation of the ruble, the Fund’s foreign exchange assets will appreciate in ruble terms, and the size of the NWF may continue to grow (as happened in 2014-2015).

The main danger is America’s intentions

A meeting of the secretaries of the security councils of the CIS countries was held in Moscow. Making his speech there, the Secretary of the Security Council of Russia Nikolai Patrushev said that a catastrophe and a new civil war threaten Afghanistan if the new authorities fail to normalize the situation. “An unprecedentedly difficult situation is taking shape in Afghanistan today, both in military-political and socio-economic terms,” ​​Patrushev said. He called the growing flow of refugees from Afghanistan a regional threat. “The scale of this problem could exceed the consequences of the migration crises caused by the irresponsible actions of the West in Libya, Syria, and Iraq.”

However, Patrushev appears to be much more concerned about something else—U.S. actions. A month ago, he accused that “the United States has planted a time bomb in the region, including leaving an unprecedented amount of modern weapons and military equipment… It can easily fall into the hands of groups that pose a serious threat to our states.”   

This time Patrushev went further and accused Washington of wanting to establish its military presence in countries adjacent to Russia: “It is imperative not to allow Afghanistan again to become a testing ground for rash geopolitical adventures of external players. I mean, first, the attempts of the United States and its allies under the pretext of deteriorating the situation in this country to gain a foothold in the region, including in the CIS space... Such initiatives should be suppressed following the decisions already taken at the highest level,” he added.

The European Union is considering an ultimatum

On Monday, Estonian Minister of Foreign Affairs Eva-Maria Liimets disclosed some information to come out of the phone call between German Chancellor Angela Merkel and Alexander Lukashenko. “He wants the sanctions to be stopped, [and] to be recognized as head of state so he can continue,” in return for ending the migrant crisis on Europe’s borders, Liimets told a TV news program. 

The European Union has allocated 700,000 euros for humanitarian aid to migrants in Belarus, according to a statement of the European Commission on Wednesday. The report also stressed that the European Commission is ready to provide additional funding in response to clearly identified humanitarian needs, if humanitarian partner organizations further facilitate access to Belarus.  

Germany will depend not only on Russian gas but also on Russian jet fuel

Being under U.S. and EU sanctions, Rosneft announced that it plans to purchase a 37.5% stake in the PCK Raffinerie GmbH refinery from Shell to increase its stake to 91.67%. This company can process 11.6 million tons of oil per year and is located in Schwedt, Brandenburg. The refinery receives oil through the Druzhba pipeline and supplies jet fuel to Berlin, Stuttgart, Munich, and Nuremberg airports. After completing this transaction, the Italian Eni (8.33%) will remain Rosneft’s minority partner.  

Rosneft is the third-largest player in the oil refining market in Germany. In addition to controlling PCK Raffinerie GmbH, Rosneft owns minority stakes in Miro (24%) and BAYERNOIL (28.57%). 

Crimea became a fortress

The Ministry of Defense announced that a new airborne assault regiment in Crimea will be completed by early December. The ministry said that a group has been created in Crimea that can provide protection against all threats. “The defense of the peninsula is secured by the ships of the Black Sea Fleet of the Russian Federation, naval aviation and air defense aviation. An army corps has been created in Crimea, including coastal defense and reconnaissance units, artillery units, air defense units, engineering and logistic support, communications, and others.”

Ukraine under the pressure of propaganda

In recent days, the Russian authorities have launched an active propaganda campaign against Ukraine. The Kremlin and the Foreign Ministry accuse Ukraine daily of violating the terms of the Minsk agreements and deliberately aggravating the contact line’s situation. Today Sergey Lavrov continued a series of similar statements: “[the fact that]...the Ukrainian authorities and personally President V.A. Zelensky have taken a course to undermine the Minsk agreements and sabotage everything that they have undertaken to fulfil—this is an obvious fact. In doing so, they use the open connivance of their patrons in Berlin, Paris and Brussels.”

Continuing the minister’s line, the Foreign Ministry threw aside diplomatic rules and published the correspondence of the Russian minister Lavrov with his counterparts from France and Germany. In the published documents, the parties set out their vision of the situation and proposals for holding a ministerial meeting within the framework of the Normandy process. 

Accident? Or?

In the morning of November 17, the first power unit of the Belarusian nuclear power station was disconnected from the network by the automatic action, the Belarusian Energy Ministry informed. That the background radiation around ​​the station is normal is additionally indicated in the press release.

Immediately after that, the ministry announced that from November 18, the supply of electricity to Ukraine from Belarus would be stopped. “The possibility of further supplying electricity to Ukraine will be considered by the Belarusian side, considering the technical capabilities,” the ministry’s press service said. On November 2, Belarus supplied 500 MWh of electricity to Ukraine under an emergency assistance agreement. On November 6, the Ministry of Energy of Belarus announced a contract to supply electricity to Ukraine during November 2021. The delivery schedule “will depend on the operating modes of the power system and the capacity of the generating equipment,” the message said. 

Ukraine continues to experience difficulties with energy supply, and the loss of the opportunity to turn to Belarus for emergency assistance may (in a critical situation) make it inevitable to turn to Russia.

I would like to believe we are talking about a minor technical problem at the Belarusian nuclear power plant and not paying attention to the fact that it happened when the temperature in Ukraine dropped to freezing. But let’s not forget that in hybrid warfare, all means are reasonable. 

Recalcitrant neighbor

Vladimir Putin’s desire to forge allied relations with Turkey constantly stumbles upon Recep Erdoğan’s demonstration of strategic differences between the two countries. In the previous issue, I talked about the role of Turkey in the war between Azerbaijan and Armenia in Nagorno-Karabakh and about Turkey’s withdrawal to Central Asia. Today, the Turkish president went even further: During today’s meeting with his partner in the coalition, Devlet Bahçeli, he received as a gift a map of the “Turkic World” on which part of the territory of Russia is designated as included.