March 28, 2022
Realpolitik
Censor at work
Amusing court decision
Optimists rule the ball
The currency is not needed
Yes equals no
Return to domestic
Not a space for investors
How realistic is the embargo on Russian oil?
Transneft, an operator of Russian oil pipelines, has announced that in April, oil shipments from European ports are planned at 2.35 million barrels per day (mbd), which is 15% higher than in March. Russian crude exports are planned at 2.12 mbd, or 24% more than in March. The main ports for oil exports in the European part of Russia are Primorsk, Novorossiysk, and Ust-Luga (1.02, 0.66, and 0.53 mbd t in April, respectively). All these ports can receive Aframax and Suezmax tankers, which can carry 120,000 and 15,000 tons of oil, respectively, and have a range of 10,000 nautical miles.
Maritime transportation of Russian oil exports is the primary channel—50% of Russian oil exports are shipped by the sea—so I am skeptical about the prospects of an oil embargo in Europe on purchasing Russian oil. Pipelines export 1.6 mbd of oil from Russia to China via ESPO pipeline, up to 0.2 mbd through Kazakhstan, and 0.7-0.8 mbd to Europe (Germany, Poland, Slovakia, Czech Republic). Thus, the embargo will lead to Russia’s not being able to export only those volumes of oil sent through the pipeline to Europe, which is about 15% of all Russian oil exports or 6.5%-7% of its production. In the spring of 2020, as part of the OPEC+ agreement to limit oil production after the start of the COVID pandemic, Russia reduced oil production by 2.1 mbd.
What will happen to Russian oil that European consumers will stop buying? Of course, it will be purchased at a discount by companies from those countries that have not joined the sanctions. India and Indonesia have already announced such intentions—their combined oil imports exceed 4.2 mbd. In addition, we must remember that until 2018, Indonesia exported more than 200,000 barrels of oil per day; therefore, for the state company, Pertamina, to import Russian oil at a significant discount and export domestic oil can be a very profitable business.
“During the geopolitical situation, we see an opportunity to buy Russian oil at a good price,” said company president Nicke Vidyavati. He said the planned purchase had been coordinated with the Indonesian Foreign Ministry because it is a political issue, among other things.
Close, and that’s it
On Monday, the Russian media censor, RKN, issued its second warning to Novaya Gazeta, claiming the discovery of material on its website that mentioned an NGO-foreign agent without proper labeling. Last week, RKN issued the first warning to the Novaya Gazeta editorial board and founder for the same violation.
Novaya Gazeta decided to suspend its work until the end of the special operation in Ukraine, choosing the lesser of two evils—according to Russian law, after two warnings, the RKN can close the newspaper at any time.
“We don’t know why [they shut it down]. We haven’t even received the first warning yet. That’s why we don’t know the wording either. They [RKN] again sent a message about the warning via media, but they haven’t sent us anything; they haven’t given us anything,” said Nadezhda Prusenkova, a spokeswoman for the newspaper.
After the beginning of Russia’s aggression against Ukraine, the newspaper’s editorial board decided to work in compliance with all censorship requirements—refusing to use the word “war,” refusing to report on Russian troop losses, refusing to quote Ukrainian politicians and Ukrainian media...—focusing on reports by its correspondents. But it turned out that even such a piece of information was unacceptable for the Kremlin—the command “fas!” was given.
The court decided. But it’s not clear what
Moscow’s Tverskoi Court published the full text of the Meta decision, which explains why Meta was deemed extremist in Russia and why its social media products—Facebook and Instagram—are blocked.
But the most exciting thing in the court’s decision is contained elsewhere: The court ruled that the ban in Russia of Meta’s products does not limit the actions of individuals and legal entities in their use.
“These judicial protections do not limit the actions of individuals and legal entities who do not participate in activities prohibited by law to use Meta’s software products,” the court said in the decision.
You may remember the excellent dialogue between the judge and the prosecutor on this issue. It seems that the judge decided to solidify the prosecutor’s position in the document. What follows, and what exactly will be blocked? I’m afraid no one will answer that question. Even more surprising is the ban on Meta products by “persons taking part in prohibited activities.” It is up to the court to decide what activities are prohibited, and the court must determine whether a particular person is taking part in such activities. IMHO, a direct reading of the court’s decision suggests that everyone is allowed to use Facebook and Instagram in Russia, as long as the court does not find a specific person “taking part in prohibited activities.” [I am not a lawyer, and my opinion is not legally valid.]
Optimists rule the ball
By the end of the trading day on the Moscow Exchange, the ruble strengthened markedly against the dollar and euro—by 6.5% and 8%, respectively. The reason for such optimism was the information about the next round of face-to-face negotiations between Russia and Ukraine, which should take place on Tuesday in Istanbul.
This optimism is not clear to me: Judging from President Zelensky’s interview with Russian journalists, the sides’ positions on the critical issues related to Russia’s territorial claims have not become any closer since the negotiations began. In addition, he said, Ukraine has an adamant but clear position on the status of the Russian language, agreeing to a “mirror variant” —giving the Ukrainian language the same status in Russia. If we add to this the fact that the sides have not yet started discussing “technical” questions—how the security of Ukraine will be guaranteed, what weapons systems will not be deployed on the territory of this country within the future neutral status, how the results of the negotiations (when and if) will be implemented in the Ukrainian legislation (referendum or amendments to the Constitution), whether or not Russian troops will withdraw from Ukraine until that time—then, instead, we should get ready for a long negotiation process.
The currency is not needed by those who are allowed to buy it
I think the main factor behind the strengthening of the ruble is a sharp decrease in demand for foreign currency inside Russia. On the one hand, the ruble has lost the status of a convertible currency for current and capital transactions because of the restrictions on its purchase, introduced for residents and non-residents, for the population and companies. On the other hand, Russian companies faced sanctions restrictions and the destruction of old logistics chains, which led to a sharp reduction in imports. Minister of Economic Development Maxim Reshetnikov spoke about this. According to him, the government is trying to simplify customs procedures and reduce import duties to make importing goods into Russia more attractive.
“All this is done to stabilize imports, which we have, according to recent weeks, significantly reduced, as much as possible. Businesses are looking for new suppliers, new countries, actively importing their products. This is all happening against the background that we are working on new logistics chains with our neighbors—actively discussing new ways [of importing goods].”
Yes equals no
Less than two weeks ago, on March 15, the Bank of Russia announced it was stopping purchases of gold from Russian banks (the established procedure in Russia does not allow companies to sell gold directly to the Bank of Russia, requiring the participation of an intermediary bank in such operation. Not surprisingly, the leading players in this “business” are the largest banks controlled by the state: Sberbank, VTB, Otkrytie, Gazprombank). Now the Bank of Russia has announced that it will resume buying gold, setting a fixed price in rubles until June 30, which is 17% lower than the current market price of gold on the world market.
The announcement comes just after the U.S. announced a ban on the purchase of gold from the Bank of Russia. Perhaps the declared discount level indicates the discounts demanded by the buyers of the gold from the Bank of Russia who are not afraid of U.S. sanctions. However, another explanation is possible: The traditional “gold” lobby, which is very powerful in Russia, has put intense pressure on the government, indicating that the refusal of the Bank of Russia to buy gold may stop all activities of the industry. To “make sure that the wolf is fed and the sheep intact,” the Bank of Russia decided to declare the purchase of gold at a low price—anyone who really needed money would agree to any terms.
The risk of strengthening the ruble by 10% and a 10% drop in the world price of gold in the next three months—which would make the purchase price higher than the world price—seems to be beyond the limits of the Bank of Russia’s forecast.
Return to domestic
Two major European beer producers, Heineken and Carlsberg, have decided to withdraw from the Russian market and sell their Russian assets. Both companies noted that their Russian breweries would continue to operate to keep workers’ jobs and serve their customers and consumers until the Russian business is handed over to a new owner. In addition, both companies stated that selling the assets would bring them a loss.
Carlsberg and Heineken are the second- and third-largest players in the Russian beer market (about 30% and about 12%, respectively), and Carlsberg owns Russia’s largest beer producer, Baltika.
Not a space for investors
Abu Dhabi’s sovereign fund Mubadala has decided to refrain from new investments in Russia, Khaldoon Khalifa Al Mubarak, Chief Executive and Managing Director of Mubadala Group, said at an investment conference in Dubai.
“Obviously, under these conditions, we must suspend investments in this market in Russia. (…) What is happening in this crisis between Russia and Ukraine is a mockery with disastrous consequences in terms of human lives and terms of the impact on the world economy. There is no doubt that this crisis must end now in the whole world’s interests.”
Russia represents less than 1% of Abu Dhabi’s $243 billion portfolio. Mubadala’s investment portfolio in Russia includes more than 45 projects in infrastructure, real estate, commodities, banking, and technology. Among the strategic partners of Mubadala is the Russian Direct Investment Fund (RDIF), which has actively worked to attract money from sovereign funds in its projects for 10 years.