March 10, 2022

War

In Turkey, the first high-level talks between Russia and Ukraine since the war began were held today. The foreign ministers talked for an hour and a half; the result was minimal: They agreed to continue discussions on humanitarian issues (ceasefire and corridors for civilians to leave the besieged cities). 

The Ukrainian minister announced Ukraine’s readiness to declare the neutral status (i.e., to withdraw the question of its NATO membership) on the condition that it receives international guarantees of its security. The Russian minister said that Russia insists on fulfilling all the requirements put forward by the Kremlin.

Asked whether Russia plans to attack other countries, Sergey Lavrov said: “We are not planning to attack other countries, we have not attacked Ukraine either... But we have simply repeatedly explained to Ukraine that a situation has arrived that poses direct threats to Russia’s security.” There is no war, but there is an explanation by using bombs, missiles, and shells.

Default has not happened, but it is promised

After Gazprom, which redeemed its Eurobonds in foreign currency, Rosneft, also controlled by the state, followed the same path: the company redeemed its $2bn bonds with a three-day delay. According to Bloomberg, the next significant redemptions are due on March 28 (gold mining company Polyus, $482m), April 4 (Russian Finance Ministry, $2bn), April 5 (Russian Railways, $625m), and April 8 (Norilsk Nickel, $500m).

The problem of debt repayment by the government was discussed at a meeting with Vladimir Putin. Finance Minister Anton Siluanov said that, in his opinion, “the West has defaulted on its financial obligations to Russia, has frozen our gold and foreign currency reserves” and noted that “we will repay our external obligations in rubles, and we will convert them by unfreezing our gold and foreign currency reserves.” 

If the government takes this step, it is likely to default, first “technically,” and then 30 days later, an actual default. After that, we expect many investors to exercise the right to present bonds for early redemption (cross-default), and that Russia will redeem bonds in rubles again for investors from “unfriendly” countries. After that, we can expect lawsuits against Russia and seizure of the Bank of Russia’s assets to redeem the investors’ claims. 

This decision of the Ministry of Finance can hardly be called rational: There are no benefits, only costs. But it fits well with the Kremlin’s general logic—to play on aggravation and break off all ties with developed countries.

Not as scary as it seemed

The Russian government has implemented the presidential decree and defined the list of goods banned for export from Russia. The official document has not yet been published. Still, according to the press service, “The list includes technological, telecommunications, medical equipment, vehicles, agricultural machinery, electrical equipment—more than 200 types of goods, including railway cars and locomotives, containers, turbines, metal and stone processing machines, monitors, projectors, consoles, and panels.”

Vladimir Putin’s Press Secretary, Dmitry Peskov, clarified that the Kremlin initially had no intentions to limit Russian exports and that it was a ban on the reverse export of goods imported into Russia. “There were many materials and raw materials that for various production chains were brought into Russia, some companies were winding up their contracts, and a ban was imposed on the export of such materials from the country.”

If we take Peskov’s words at face value, then we must admit that once again, the presidential decree introducing the ban was legally sloppy. However, I would not rule out the possibility that at some point, the Kremlin may want to use this document to impose more severe restrictions. 

Vladimir Putin de facto disavowed Deputy Prime Minister Alexander Novak’s words about the possibility of stopping Russian gas exports, saying that “we are fulfilling all our energy supply obligations... We are supplying everything in full. We must supply everything to our main consumers in Europe and other world regions; even the Ukrainian GTS is 100 percent loaded under our contracts. It’s amazing, but it’s a fact.”

Closing the window to Europe

On Thursday, Russia’s Foreign Ministry stated Russia’s intention to withdraw from the Council of Europe, which it joined in 1996.

Like all statements by the Foreign Ministry in recent months, it has a highly polemical tone, alongside direct insults. 

The EU and NATO, unfriendly to Russia, abusing their absolute majority in the Committee of Ministers of the Council of Europe, continue their policy of destroying the Council of Europe and the common humanitarian legal space in Europe.

The course of events is becoming irreversible. Russia does not intend to tolerate these subversive actions carried out by the collective West in line with the imposition of a “rules-based order” to replace the international law trampled by the U.S. and its satellites. Russia will not participate in NATO and obediently follow the EU transformation of the oldest European organization into another platform for Western superiority and narcissistic spells. Let them enjoy communicating with each other, without Russia.

Konstantin Kosachev, Vice-Speaker of the Federation Council, stated that Russia would take the necessary decisions and exercise its right to leave the Council of Europe this year. He added that Russia’s withdrawal from the Council of Europe implies the simultaneous denunciation of the statute of the organization and the European Convention on Human Rights. The consequence would be the impossibility for Russian citizens to sue for protection of their rights at the European Court of Human Rights.

A plan to combat the problems

At a meeting with Vladimir Putin, Russian Prime Minister Mikhail Mishustin outlined the content of the Russian government’s anti-crisis plan. Most of the points of this plan resemble the decisions made two years ago at the beginning of the COVID epidemic (tax and credit deferrals, reduced bureaucratic pressure on business). In my opinion, they could/should have been made at any time during the previous 22 years of Vladimir Putin’s rule. Only two areas of the government’s work are directly related to the newly emerged problems. These are:

- Preventing the shutdown of companies owned by foreign investors. Mishustin said that a bill on the possibility of introducing external management would be sent to the State Duma shortly. According to the persons involved in its preparation, this law would transition ownership rights: External management bodies would get the right to issue and sell shares. Thus, there will be no direct nationalization in favor of the state, but the owners will lose their rights. Vladimir Putin approved of this approach, saying: “There are enough legal, market instruments; there is no need to be arbitrary.”

- Solution of problems that transport companies are facing. First, it is the fate of a foreign leased aircraft fleet. The Prime Minister said that “we will help the airlines keep them [the planes]. In addition, the Prime Minister named the new task facing the authorities: “We will try to level out the influence of international organizations on the work of the Russian railway transport.”

The vital problem

The Ministry of Transport has published a draft decree of the government, which prohibits Russian airlines from returning airplanes to the lessor—i.e., makes them steal them. The document says that if the lessor terminates the agreement with the airline and demands the early return of the plane or engine, the decision on the return will have to be approved by the government commission on import substitution (Deputy Prime Minister Yuri Borisov heads it). Without the commission’s decision, the carrier will continue to use the aircraft. The document proposes transferring lease payments in rubles [with the unclear possibility of conversion and repatriation from Russia]. It allows aircraft maintenance “in organizations having a document confirming their compliance with the requirements of federal aviation regulations”—i.e., in violation of technical regulations and without manufacturers’ supervision.

China has denied Russian airlines repairs of Airbus and Boeing aircraft and the supply of aircraft parts, said Valery Kudinov, head of the department, to maintain aircraft airworthiness at the Russian FAA (Rosaviation). 

“We instructed the airlines themselves to determine where they can receive these parts. As far as I know, there was information that they applied to China, for example, and the Chinese said no... We will look for [opportunities] through other countries. Perhaps through our partners—through the Turks, maybe through India. Each company will negotiate on its own—we [Rosaviation] will help legalize these parts.”

Valery Kudinov also said that Russian airlines had re-registered about 100 aircraft that were previously registered abroad over the past two weeks. He specified that a small number of aircraft were recorded in the Russian registry or “monotonically transferred”—about 70 units before the sanctions. Now there are 176 aircraft registered in Russia, including 145 jets of the Aeroflot group (“Russia,” “Pobeda,” “Aeroflot”). However, after a short time, Rosaviation denied this information but did not give any alternative data. Most likely, we are talking about planes owned by Russian companies.

Ural Airlines has 53 Airbus jetliners under operating leases. Igor Poddubny, the director of the company’s aviation technology center, thinks that the planes can fly for two or three months without suffering from a need for spare parts. He believes that the company will be able to solve this problem during this time.

“... Neither today nor tomorrow, we will not stop, that’s for sure. And Ural Airlines planes will fly safely without ‘stripping’ the fleet, without stopping planes and without ‘vandalism,’ that is, without removing anything (parts from one plane to another), for two or three months... we have found some ways out, which I will not tell you about now. Nevertheless, there are options; they are pretty civilized. The materials offered to us are compliant with both European and domestic airworthiness standards.”

It’s easy to produce oil, difficult to sell it

Deputy Prime Minister Alexander Novak acknowledged the problems with Russian oil sales. According to him, “Production is going in full—both gas and oil ... in March the contracting [sales of oil for export] was already carried out in full... the contracting for April for the supply of oil and petroleum products is underway. We have certain problems here, first, concerning financing. There are questions concerning the use of vessels; the insurers here have also taken a break, so issues concerning the availability of tanker fleet are being solved manually regarding certain deliveries. Not everything is smooth, but we solve the issues related to production and export together with the companies and help them in manual mode.”

Novak admitted that Russian authorities are looking for new payment mechanisms for Russian exports and that ways to circumvent sanctions must be found individually for each contract. “We find other ways, for example, with Chinese companies—this is not a reliable method, these are isolated cases. I can tell you that there are different ways to pay.”

Russia has no claims. Are you sure?

Russia has no territorial claims against Kazakhstan. President Kassym-Jomart Tokayev was assured of this by Vladimir Putin, the country’s Foreign Minister, Mukhtar Tleuberdi, said.

“During the working visit of our president to Moscow, it was confirmed at the highest level that Russia has no territorial claims against Kazakhstan.”

If I were the Kazakh authorities, I would not take such assurances of the Kremlin seriously. Suffice it to recall that Russia and Ukraine still have an agreement on mutual recognition of borders that emerged after the collapse of the USSR and numerous statements by Vladimir Putin and his entourage that an attack on Ukraine is not in the plans of the Russian authorities.

Running from sanctions

On Wednesday, the European Union imposed sanctions on one of the wealthiest Russians, Andrey Melnichenko, SUEK, and EuroChem. On the same day, the accounts of Lifosa, a Lithuanian phosphate fertilizer plant that is part of EuroChem and employs 1,000 people, were seized.

On Thursday morning, news outlets reported that Melnichenko was no longer the beneficiary of both companies, thus getting them out of the sanctions. Who became the new owner of the assets, the value of which is about $16 billion, is still unknown.  

The head of Aeroflot, Mikhail Poluboyarinov, who fell under EU sanctions, decided to resign, and move to Russia’s Post Office. 

Orwell every day

In the Eurasian Economic Union, formally, there is equality of member states, and all decisions must be taken in agreement. But as the saying goes, “All animals are equal, but some animals are more equal than others.”

The Ministry of Agriculture of Russia has prepared proposals for a ban on the export of grain to the EEU countries and sugar export outside the union.

According to the Ministry, the member countries of the Union have already purchased enough grain for their domestic market. At the same time, the introduction of the ban will prevent the “overflow” of Russian grain to other countries in conditions of rapidly rising world prices. 

In addition, the Ministry of Agriculture is discussing the possibility of temporary nullification of import duties on some food products, including vegetables (potatoes, onions, cabbage, carrots), cocoa, fruit puree, and the base to produce breast milk substitutes, as well as ready-made food products for infants.