March 17, 2022

War

There are no significant changes on the battlefields. Russian troops are unable to carry out any further offensive, while Ukrainian troops do not have the necessary weapons to do so.

Markets are actively playing up rumors of progress in negotiations. Over the last week, the dollar lost 13% against the ruble (from 120.4 to 104.8 rubles).

Vladimir Putin’s meeting on economic issues provided some pieces of information about the Russian economy’s limitations and how the Russian authorities will try to deal with the emerging problems.

Prices are skyrocketing

For the week of March 5-11, 2022, the consumer price index, according to Rosstat estimates, was 2.1% (after 2.2% the previous week). This brought the inflation rate over the past 12 months to 12.5%, but in my opinion, this figure will be of little value for understanding the situation. Accumulated inflation speaks to what was in the past, and it is well understood that the case in the Russian economy changed fundamentally on February 24. Undoubtedly, two weeks do not provide grounds for long-term forecasts. Still, the available information allows us to draw two conclusions: 1) panic has begun in the Russian consumer market when the population starts to buy many products with a long shelf life. As a result, stores impose limitations on the volume of purchases, but this does not stop the growth of prices. Since the beginning of the year, the price of sugar increased by 20%; prices for medicines, by 8%-15%; for salt, cereals, pasta, baby food, by 6.5%-7%; 2) prices for imported goods began to grow massively after the ruble devaluation; household appliances went up in price by 15%-25%, imported cars, by 20%. 

However, it is already clear that the prices for imported goods will continue to grow as the trade stocks are exhausted. The supply of goods is limited due to logistical problems or foreign companies leaving Russia. For example, Chinese car manufacturer Haval (the Tula plant, one out of the four car plants that have not stopped operating in Russia) has announced a 50% increase in selling prices for dealers, which has not yet been reflected in retail prices. 

Of course, the new realities will require profound structural changes to our economy, said Putin at a meeting on economic problems. I will not hide it; they will not be easy. They will lead to a temporary increase in inflation and unemployment.

The rapid rise in prices has begun to worry the Kremlin. Putin has already instructed the government to prepare proposals to index wages, pensions, and social benefits. Still, in conditions of high uncertainty, the Ministry of Finance will find it very difficult to find an indexation parameter that will suit everyone.

The Antimonopoly Service has already plunged its troops into the battle against prices as it announced the start of inspections of companies involved in sugar production and sale—one should expect the decisions on administrative limitation of prices to be “voluntary” when companies promise the government to limit the rise in sugar prices to be taken shortly.

Minister of Industry and Trade Denis Manturov held a meeting with owners and top managers of steel companies, at which an agreement was reached to form a list of agreed prices for primary products. However, no one understands how and who will control these parameters in conditions when the manufacturer can simply make minor changes in the specification and offer customers products that are not included in the list of the Ministry.

At a meeting with Putin, Deputy Prime Minister Khusnullin, who is responsible for the implementation of investment projects financed by the budget, and the heads of the region complained to the President in chorus about the rising prices of construction materials. Do not be surprised if the corresponding order to the government appears shortly.

We must get the money

The refusal of Boeing and Airbus to supply spare parts and service aircraft operated by Russian companies has already resulted in many of these aircraft being transferred to the Russian aircraft register, and thus out of the control of their owners, leasing companies.

Aeroflot announced today that its subsidiary had received a certificate from Rosaviatsiya, which permits the maintenance of Boeing and Airbus aircraft in its possession.

At the same time, Russian authorities announced that they would strive to increase the production of civil aircraft developed in Russia. Deputy Prime Minister Yury Borisov, who is in charge of the defense and civil industries in the government, said that “there is no pause in the work of enterprises and there will not be one. Everyone keeps working. Let me stress once again: We are forcing the implementation of our flagship projects, MS-21 and SSJ-100.” He also admitted that the situation in the civil segment of the Russian aerospace industry is more complicated than in the “defense industry,” due to sanctions because the projects were initially launched in extensive international cooperation.

Sergey Chemezov, the head of the state corporation Rostec, which includes the UAC, admitted that we should not expect “large-scale serial production of new import-substituted airliners SSJ-NEW and MS-21” to start very soon because the task of replacing many imported components must be solved. As an intermediate solution, he mentioned the possibility of resumption of serial production of medium-range Il-96 and Tu-214. This idea, in my opinion, has no rational basis. 

Serial production of these planes has never started. The IL-96 has been produced at Voronezh Aircraft Plant since 1988, and during this time, 32 aircraft have been made, including seven in the past 10 years. Tu-204/214 has been produced at Ulyanovsk and Kazan since 1989; during this period, 89 aircraft were built, including 15 in the past 10 years. There are currently 17 Il-96 and 40 Tu-214 planes in service in Russia. I don’t think these plants can produce more than 3+6 aircraft a year today, much less than Russian airlines need. Of course, the appearance of these airplanes will “untie the hands” of those companies that want to fly abroad, but it is impossible to build an effective route network with several such planes.

Such statements are well understandable: To get the maximum amount of budget money for the import substitution program, the results will never be checked, especially since Sergey Chemezov is an old friend of Vladimir Putin.

Fifteen years for saying “war”

The Russian Investigative Committee opened the first three criminal cases in the issue of “public dissemination of knowingly false information about the actions of the Armed Forces of the Russian Federation, motivated by political hatred or hostility, under the guise of reliable information.” We are talking about disseminating information about the course of military operations in Ukraine. Responsibility for this was introduced in the Russian legislation at the beginning of March this year and provided a penalty of imprisonment for up to 15 years. 

Thus, the Investigative Committee reported that the Federal Security Service of Russia opened criminal cases against a resident of Seversk and a resident of Tomsk. “According to the investigation, the suspects posted in one of the social networks and messengers under the guise of reliable messages deliberately false information about the losses of Russian servicemen and their actions on the territory of Ukraine during the special military operation and its results. This information they allegedly received from eyewitnesses from the scene of the events.”

The black market is back

Banks’ ban on the sale of cash currency and the suspension of trading on the stock exchange has led to the emergence of shadow financial markets in Russia that take advantage of social networks. At the same time, transactions in stocks and bonds are conducted at prices corresponding to those on the last day of the stock market, while the dollar and euro selling rates are 20%-30% higher than the official rate of the Bank of Russia.

Cloudy deficit

The Russian government has unexpectedly encountered a shortage of computing power, which may lead to the malfunction of government information systems in the coming months. This situation was caused by the withdrawal of the companies that provided cloud services in Russia and the restrictions imposed on the government agencies and regions on purchasing server capacities in Western countries.  

The hope that Chinese companies will supply the necessary equipment is not justified yet: The prices for Chinese equipment have increased several times, the logistics of supplies are disrupted, and some Chinese companies have not decided on their attitude toward the sanctions regime. For example, Huawei suspended its equipment sales in Russia until the end of March. 

And, here we go again!

Viktor Chernomyrdin, the Russian prime minister of the 1990s, is remembered by many Russians for his explicit statements that have become commonplace. One of them is, “There has never been anything like it, and here it is again!”   

Over the past two weeks, Russian Finance Minister Anton Siluanov and Vladimir Putin have repeatedly said that Russia intends to pay interest and principal on its Eurobonds in rubles, citing that the Ministry of Finance accounts have been frozen. Following such statements, rating companies downgraded Russia’s sovereign rating to pre-default and confirmed that payments in rubles would inevitably lead to a legal default. This led to a 70%-80% drop in Russian securities prices. On Tuesday, the Finance Ministry said that it paid the coupon payments due on March 16, in dollars, as stipulated in the bond’s prospectus. Immediately after that, the Eurobond quotes began to rise steadily.  

I told you that servicing Eurobonds is not a problem for Russia this year: Total payments (coupons and repayments) do not exceed $3.5bln. At the same time, a default on one of the issues might have triggered investors’ demands for early redemption of all Eurobonds worth over $38bln. As the saying goes, it’s not worth the trouble.

I don’t know if the Finance Ministry did or did not read my comments before paying the coupons in rubles. Still, I am absolutely sure that some Russian investors knew about the plans of the Ministry of Finance and made good money by buying bonds at low prices and selling them at higher ones. This barbaric practice of insider trading is well known in Russia, but no one has ever been held accountable for it. 

It never happened, and here it is again!