March 3, 2022

War

Over the past 24 hours Russian troops made no significant advances in the main directions (Kiev and Kharkiv) and were unable to approach Zaporizhzhya or continue to cut off Mykolayiv. Bombing and shelling of Ukrainian cities continued but was not accompanied by active offensive action. I got an impression that the Russian forces had decided to take a pause, reflect on what was happening and prepare for a new offensive.

Time to check the theory?

Russian leader Vladimir Putin continues to demonstrate his inadequacy and is a threat to the world.

After a 1.5-hour telephone conversation between French President Emmanuel Macron and Vladimir Putin, French television channel BFMTV revealed the content of the conversation, highlighting direct quotes received from the Élysée Palace.

The President of the [French] Republic said he was “pessimistic” after exchanging views with Putin, indicating that the latter’s ambitions were to control all of Ukraine. “Vladimir Putin’s military goals have not changed.”

The head of state did indeed try to make the Kremlin master flinch by trying his best to bring him back to reality...

According to Élysée, Emmanuel Macron, who is on close terms with Vladimir Putin, told him: “You are making a serious mistake: Ukraine is not a Nazi regime, it is a lie.” “You are telling yourself stories. (...) Russian conditions are unacceptable,” Emmanuel Macron told Vladimir Putin.

“The President of the Republic suggested to President Putin not to lie to himself,” the Élysée Palace added.

Vladimir Putin denied the accusations.

“War crimes are being committed by Ukrainians using snipers and human shields,” the Russian President said, recalling that “the aim remains to de-Nazify, neutralize and demilitarise Ukraine.” He added: “The operations are going according to plan.”

According to the Russian President, “Russia did not bomb Kyiv. The attack on the TV tower was targeted and did not result in casualties.” 

In the face of the Russian President’s remarks, “the President of the Republic’s intuition suggests that the worst is yet to come, given what Vladimir Putin has said to the President of the Republic,” the Élysée Palace warned. “Vladimir Putin is determined to see his operation through,” the same source warned. “We are going to tighten sanctions to change the calculations of Vladimir Putin and people in his entourage,” the President added.

During a meeting of Russia’s Security Council, Putin voiced his view on the course of the war against Ukraine. He repeated his claims of an alleged threat to Russia’s security from Ukraine, including nuclear weapons.

“The very course of hostilities shows the fact that we are at war specifically with neo-Nazis. Nationalist and neo-Nazi formations, among them foreign mercenaries, including those from the Middle East, are using civilians as human shields.

“Now on Ukrainian territory, our soldiers and officers are fighting for Russia, for a peaceful life for the citizens of Donbas, for the de-Nazification and demilitarisation of Ukraine, so that no anti-Russia, created for years by the West right at our borders, will threaten us, including with nuclear weapons, as has been the case recently.”

A Madman Theory in American foreign policy emerged during the Richard Nixon administration. Back then, the White House sought to send signals to the Kremlin that were supposed to make it think Washington was ready to make irrational and abrupt unpredictable decisions. At the time, it was felt that such a policy would force Moscow to be more restrained. The roles have been reversed, and the Madman is sitting in the Kremlin. The only difference is that he is not playing this role but actually is mad. Let’s check how efficient are the theories of the U.S. State Department if the US is on the other side.

Better than nothing

During the second round of Russian-Ukrainian negotiations, the sides agreed on creating humanitarian corridors for the withdrawal of civilians from the areas of hostilities. For such passages to function, the sides can decide on a temporary ceasefire for the period of evacuation.

However, it should be stressed that this agreement does not have a direct effect; its details will have to be negotiated by the military, and it is not yet known when the deal will start working. 

Unpleasant news from China

A prevalent hypothesis among experts is that the aggravation of relations between Russia and the West and the imposition of massive sanctions after the Russian invasion of Ukraine will strengthen ties between China and Russia. I cannot support such a hypothesis and believe this will not happen, and we will see numerous confirmations of my position shortly. 

Two days ago, Chinese companies stopped sending containers to Europe by rail via Russia. It could have been perceived with restraint and these decisions attributed to business logic, the unwillingness of cargo shippers to take unnecessary risks. However, the Asian Infrastructure Investment Bank’s (AIIB) decision to stop projects in Russia and Belarus is undoubtedly of a political nature. China established the AIIB as a counterweight to the World Bank, and China plays a key role in its management decisions, being the sole blocking shareholder (26.06%) and the largest donor to the bank. The AIIB’s decision, following Beijing’s words that conflicts in the modern world should be resolved through negotiations and that no country has the right to demand absolute security for itself, means that China will in no way support Russian aggression and will not soften the pressure of Western sanctions through its actions. This is the maximum one can expect from China in a world of realpolitik.

I don’t know if Vladimir Putin’s aides told him this news or if he will find out in a few days, but I’m sure it will come as an unpleasant surprise to him. Of course, this AIIB decision will not stop Russian aggression, but it will undoubtedly weaken the Russian economy.

Trying to keep the exchange rate

The Russian currency market continues to be highly volatile, with the dollar fluctuating over 10% a day in reaction to political news. In trading today, the price of the dollar set another record, 118.35 RUB/$1, which is 57% higher than in mid-February. At the end of the day, when news of Russian-Ukrainian negotiations came in, the ruble began to strengthen quickly in the hope of a peace agreement, and the dollar price fell to 106 rubles. Given that the Russian and Ukrainian delegations have not moved a millimeter in the talks to end the war, we should expect the ruble to resume falling.

The Bank of Russia continues to look for unconventional ways to reduce demand for foreign currency. It issued a new regulation on Thursday morning, requiring brokers to impose a 30% commission on individuals buying currency on the exchange. 

I have not yet been able to find an official document establishing this regulation—there is only a message from the Bank of Russia’s press service in the messenger Telegram. And I do not have an answer to two questions: 1) Based on what law is this decision taken? 2) Who will be the recipient of this fee?

After this commission is introduced, the cost of the dollar/euro for individual buyers will be 30% higher than the exchange rate and higher than the cash currency sale rate at the exchange offices of banks. Maybe this is what the Bank of Russia thinks support for the banking system should look like?

Sanctions bite

More and more reports are coming to the newswires about global foreign companies ceasing to operate in Russia. Today such an announcement was made by IKEA, which is hugely popular in Russia. Immediately after the information, IKEA shops were lined with hundreds of people ready to buy whatever was on the shopping floor.

Today H&M and Mango fashion retailers have also announced the closure of their shops in Russia. We should expect the list to grow in the coming days, and more and more Russians will understand the consequences of the war.

As expected, the hardest hit by this wave of sanctions is Alexey Mordashov (No. 68 Forbes, $22.6 bln.), who owns 77% of Severstal, one of Russia’s largest steel companies, based in Cherepovets (500 km north of Moscow). Severstal sells 2.5 million tons of steel (21.5% of its total) and receives 34% of its revenues in Europe.   

The company has already had to deal with the rejection by European customers of its products because of sanctions against Mordashov, who is now looking for ways to reduce the pressure on Severstal. One option is to switch to Asian markets, which is time-consuming and difficult to achieve because of the highly competitive market. Another option is to turn over the company’s management to a third party, similar to what was done four years ago with Deripaska and his companies Rusal and EN+. However, this option does not look simple either: Severstal does not have as much debt as Rusal did, making it possible to swap the debt into equity. Moreover, it will not be easy to find foreign managers willing to serve on the boards of Russian companies. 

Alexey Mordashov has long been a junior partner in projects carried out by Yury Kovalchuk, a close friend of Vladimir Putin: He was a shareholder in the Rossiya Bank and the National Media Group. In both cases, this allowed Kovalchuk to own less than 50% of the shares in these companies and remove them from the sanctions that Kovalchuk fell under in 2014 while retaining full control over their operations. 

In addition to Severstal, Mordashov owns Sveza (the largest producer of plywood in the world) Power Machines (the largest producer of energy equipment in Russia). Until recently, he owned a 52% stake in Nordgold, a gold mining company, but the company’s website now reports that this stake is held by Mordashov’s wife, Marina, who has not been sanctioned.   

The voice of business

Russian businessmen are well aware that it is only possible to work and make money in Russia if they follow the rule laid down by Vladimir Putin: Stay out of politics! Most of them also are observing it during the war of aggression unleashed by Russia against Ukraine. Nevertheless, there are sometimes voices that can be interpreted as a call for an end to the war.  

Lukoil’s board of directors has expressed concern over the ongoing tragic events in Ukraine and deepest sympathy for all those affected by the tragedy, the company said in a statement published on its website. “We are in favor of the earliest possible end to the armed conflict and fully support its resolution through the negotiation process, through diplomatic means.”

Oleg Deripaska, speaking at the Krasnoyarsk Economic Forum (which is patronized by the Russian government), commented directly in favor of ending the war and gave his assessment of the situation in which the Russian economy finds itself:

“We have not yet faced such challenges. The iron curtain has already come down. I am very much asked not to say this, but I am for peace. It will be clear what will happen to the banks in three weeks. We will see who will be left of our partners. We will be amazed at how many of them left. You will be able to count them on the fingers of your hand. <...> If you take the crisis of ’98 and multiply it by three.”

Deripaska, of course, is a very controversial figure. For a long time, he openly supported Putin and his policies. But for me, that’s not important now. What is important is that he and I stand on the same side on the question of war or peace.