March 24, 2022
Sanctions for a tick
He is not almighty
Coal? No need
A legal challenge
It had been worse
The censor never sleeps
Planes vs banks
Quantity not quality
On Thursday, March 24, the U.S. administration announced new sanctions against Russia that had been discussed for the past few days. In short: A swing on the dollar, a bump on the cent.
The introduction of the new sanctions was supposed to increase pressure on the Russian economy so that the balance of costs and results of continuing the war against Ukraine would change in the eyes of the Kremlin and force it to agree to stop the aggression. Most of the announced sanctions, however, missed the target.
In the Hegelian dialectic, there is a law of transition of quantity into quality, and it seems to me that Washington’s actions reflect the hope that, in this case, too, this law will work. I cannot otherwise explain the imposition of personal sanctions against 328 deputies of the State Duma and 48 defense enterprises, none of which have any sizeable assets in the United States. The Russian financial sector, on which pressure could produce quick results, and the oil and gas sector, which helps finance the Kremlin’s aggressive foreign policy, remained outside the scope of this decision.
Even stranger to me is that, despite earlier announcements, the EU refrained from announcing new sanctions.
I decided, but...
At a meeting with members of the government on Wednesday, President Putin said:
...I have decided to implement in the shortest possible time a set of measures to convert... our natural gas supplied to the so-called unfriendly countries into Russian rubles, that is, to abandon the use in such settlements of all the compromised currencies. But I would like to point out separately that Russia will undoubtedly continue to supply natural gas in line with the volumes and prices set out in the contracts we signed earlier.
However, a moment later, he corrected his statement by ordering the government to issue a directive to Gazprom’s Board of Directors to start negotiations with consumers on changing the terms of the contracts. Indeed, the question of the currency of payment for the contracts is a matter of agreement between the seller and the buyer, and neither of them can change the agreement unilaterally. The buyers of Russian gas have reacted differently to this statement.
Austrian OMV and Polish PNiG stated that they do not need to revise the contract; Bulgaria and Moldova reported that they might switch to payment in rubles; on behalf of German consumers, Chancellor Olaf Scholz stated that Germany has no desire to change the currency of payment.
The idea of converting payments to purchase Russian natural resources into rubles had been discussed for several years by Russian officials, with varying degrees of intensity. Still, except for Belarus, none of the consumer countries has moved toward the Kremlin’s wishes.
Demand for coal is falling
Coal plays a much smaller role in the Russian economy than oil. Still, in recent years, the Russian authorities have allocated enormous funds to develop Russian Railways’ ability to export coal. Up until the start of the war against Ukraine, Russian coal companies increased production and exports (domestic coal consumption in Russia, barely growing). Although direct sanctions have had little effect on the coal industry—only the United States and Australia have so far imposed restrictions on Russian coal supplies—it has begun to feel serious problems with export supplies.
According to Reuters, sea shipments of Russian coal to Europe in the first two weeks of March fell to 1.16 million tons, against 3.37 million tons in February and 3.88 million tons in January. Exports to Asia are also declining (1.84 million tons versus 6.16 million tons in February and 4.88 million tons in January).
An interesting legal case
Russian companies whose owners are under Western sanctions began to face difficulties in servicing foreign debts—Western banks refuse to make payments to pay coupons. Severstal, controlled by Alexei Mordashov, and SUEK, Russia’s largest coal exporter, and EuroChem, one of Russia’s largest fertilizer producers, both controlled by Andrei Melnichenko (Forbes No. 1), have faced this in the past 10 days. Immediately after the sanctions were imposed, Melnichenko said he was no longer their beneficial owner but did not name the person to whom he sold/transferred his shares.
Evraz (major, but not controlling shareholder Roman Abramovich) and PhosAgro (beneficiary Andrei Guryev) declared they encountered problems in making payments but with some delay the money reached bondholders.
Following the Ministry of Finance, the largest Russian companies decided not to default and continue servicing their debts on schedule in full. Most of them are exporters of raw materials, and they should have no problem getting the foreign currency they need for payments. Thus, if creditors are unable to receive the payments due to the refusal of banks from countries that have joined the sanctions against Russia to make such payments, we can expect exciting legal processes: The courts will have to decide who—the borrowers or the government agencies that imposed the sanctions—are to blame for the fact that creditors did not receive their funds.
The market fell, but it had been worse
After almost a month’s break, the Bank of Russia decided to resume trading on the Moscow Exchange’s stock market on March 24. Trading was allowed in shares of 33 of the most-liquid companies for four hours. At that, non-residents and short sales are forbidden for these shares. Besides, many institutional investors commented about the calls received from the Central Bank, warning about the undesirability of big sales.
As a result, the first trading day passed quietly enough: Stock quotations moved in different directions. Compared to mid-February, the Moscow Exchange index dropped 30%, and the RTS index (estimated in dollars) dropped 45%. A big plunge, but there have been worse. For instance, during the 1998 crisis, the RTS index fell almost 90%; in 2008, it fell 80%; from the middle of 2011 to the beginning of 2015, 62.5%.
Traders refrained from forecasting the dynamics of trading in the coming days, noting that on the first day, trading activity was primarily determined by the need to close short positions formed before the close of trading.
The censor never sleeps
Russia’s media censor, Roskomnadzor, blocked access to news aggregator Google News in Russia at the request of the Prosecutor General’s Office, saying the service provides access to publications with fakes about the Russian military special operation in Ukraine.
“These American online news resources provided access to numerous publications and materials containing unreliable publicly significant information about the course of the special military operation in Ukraine.”
Another issue of Novaya Gazeta was not delivered to subscribers: The entire print run was detained in post offices and confiscated as “extremist.” Meanwhile, all of the newspaper's materials are available online.
Considering planes, not forgetting about banks
The Russian government will have to decide on buying back more than 500 foreign airplanes, said Vitaly Savelyev, Minister of Transportation.
First of all, we need to decide with the government what the airlines, which we, in general, encouraged to keep the planes, should do—i.e., redeem the planes or not. Because the companies have to keep paying lease payments.
Already requests have been received for [the return of] more than 500 foreign-made aircraft... We are now determining with the government; I’ll tell you the volume of the buyback is $20 billion at residual value if you buy back what we underpaid. It is a considerable sum.
According to the Minister, it would be impossible to sell 500 planes without delay. If the government decides to keep the planes in Russia, he believes Russian banks will have obvious problems.
The second part is letters of credit. That’s about 200 billion rubles ($2 bln) for all airlines; our banks—about 20-odd banks—were putting up letters of credit against foreign banks, guaranteeing these payments. Now, these letters of credit have been opened and [we are waiting for] an airline default, which will take place on March 28; we will hopefully find a solution by that time... [otherwise] this default will give a cross-default on our banks.
You get your nose out, your tail gets bogged down (Russian saying).