March 30, 2022

1. War continues

2. Odds and ends of the Soviet past

3. Inflation spirals

4. Do not forget another conflict

5. They forgot the lesson

6. Logistics matters

7. Saving Russian investors

8. Predicting problems 

9. Backstab

Optimism evaporates

The optimistic comments about the results of yesterday’s talks between Ukraine and Russia are gradually coming to naught. Today, the head of the Russian negotiating delegation, Vladimir Medinsky, spoke about some more details of the agreements. In particular, he said: 

Ukraine has declared its readiness to fulfill those principled requirements that Russia has insisted on for all the past years. If these commitments are fulfilled, the threat of creating a NATO bridgehead on Ukrainian territory will be liquidated.

They handed us the principles of a possible future agreement written down on paper. These principles envision: Refusal to join NATO, fixation on the non-aligned status of Ukraine, refusal to possess, purchase and develop other types of weapons of mass destruction, refusal to deploy foreign military bases and military contingents, obligation to conduct military exercises with the participation of foreign military forces only by agreement with the guarantor states, among which will be Russia.

At the same time, Russian presidential spokesman Dmitry Peskov said “the Kremlin did not consider the results of the Istanbul meeting to be a breakthrough.”

The Russian army began withdrawing some military units from the Kyiv area and moved additional forces into the Kharkiv and Donbas areas. The head of the Kharkiv regional administration, Oleg Sinegubov, reported that the Russian army throughout the day was “not firing aimed fire, but firing shells chaotically from multiple rocket launchers, from artillery, from mortars to destabilize the situation in Kharkiv, not allowing a return to everyday life.” 

I can explain but …

A poll conducted by the Levada-Center on March 24-30 showed a significant increase in the level of approval of the main state institutions: 83% approve of the President (65% in December), 71% of the Prime Minister (54%), 70% of the government (49%), and 59% of the State Duma (41%).

In March, the proportion of those who think things in the country are generally going in the right direction significantly increased: They are 69% (in February, 52%). The proportion of those who believe the country is moving in the wrong direction was 22% (in February, 38%).

On the one hand, any war generates support for the authorities at its initial stage. On the other hand, Russians traditionally tend to answer the way they think is right, rather than the way they think, when they are asked politically sensitive questions. But it is also clear that such support ratings indicate that Russians do not have adequate information about the goals and course of the war in Ukraine.

Odds and ends of the Soviet past

There was an informal rule in Soviet economics: The best New Year’s present for enterprise directors who could not meet the production plan was a telegram from the ministry that read: “Consider the fact being the plan.”

It seems that the Russian General Staff decided to use this formula to talk about the goals of the war in Ukraine. Today an official spokesman for the Russian military department, Major General Igor Konashenkov, said:

During the first stage of the special military operation conducted by the Russian Armed Forces in Donbas and Ukraine, the plan was to force the enemy to concentrate its forces, means, resources, and combat equipment to hold large population centers in these directions, including Kyiv. [Our aim was ] To forge them on the battlefield and to inflict such a defeat on the armed formations of the Kyiv regime without an assault on these cities, and avoiding civilian losses; and make it impossible for them to use their forces in the main line of action of our Armed Forces—in Donbas. All these goals have been achieved.

One could agree with General Konashenkov: There is a logic in creating diversionary threats to Ukraine in different directions, forcing the Ukrainian command to disperse its resources. It is only unclear why it was necessary to start combat operations in these directions—in my view, if the Russian grouping were located on the northern border of Ukraine and in Belarus, it would solve the same problems. In addition, although no one can yet accurately estimate the losses of the Russian army in the offensive near Kyiv and Chernihiv, it is clear that the cost of these diversionary operations was relatively high. And finally: So far, the Russian military has not explained in any way the meaning of its offensive on Kharkiv; apparently, they need a few more weeks to realize the futility of this operation, after which they will be ready to declare it a diversionary action as well. 

I foresee higher inflation

Over March 19 to 25, consumer inflation in Russia amounted to 1.16% (after 1.93% from March 12 to 18, 2.09% from March 5 to 11, and 2.22% from February 26 to March 4). Prices in Russia have risen by 8.91% YTD.  

The slowdown in inflation is mainly due to the strengthening of the ruble and a slowdown in the growth of prices of domestic cars, cereals, and medicines, as well as zero-price growth for all utilities, lower prices of foreign tourism, and some household appliances. 

At the same time, the accelerated growth of prices for meat products, poultry, and most dairy products, which exceeded the general inflation rate, drew my attention; in addition, one cannot ignore the very consistent growth (from 3% to 6% per week) for all types of clothing and hygiene products represented in the Rosstat sample. 

My expectations of consumer inflation for the year have risen and are now in the 25%-30% range.  

Do not forget another conflict

South Ossetian President Anatoly Bibilov said that the republic intends to take legal steps to initiate joining Russia soon.

“I believe that unification with Russia is our strategic goal. Our way. The feeling of the people. And this is the path we will follow. We will take the corresponding legal steps soon. The Republic of South Ossetia will be part of its historical homeland—Russia.”

South Ossetia was occupied by Russian troops in August 2008 during the war with Georgia, after which the republic declared its independence. The territory of the self-proclaimed state is 3,900 square kilometers, and according to the estimation of the local authorities, the population is 56,500 people (83,000 before the Russian occupation). Apart from Russia, the independence of South Ossetia has been recognized by Nicaragua, Venezuela, Syria, and Nauru.

They forgot the lesson

The Federal Antimonopoly Service of Russia (FAS), after the start of the inspection of the largest sugar producer Prodimex (which I spoke about yesterday), began anti-cartel reviews of the five largest sugar distributors. 

As part of the ongoing activities, FAS Russia will assess the pricing of sugar by these organizations and examine the reasons for the possible unreasonable increase in prices and reduction of goods on the market. Besides, the antimonopoly body will analyze sugar sales chain from producer to retail.

Since the beginning of the year, sugar prices in Russia have increased by almost 46% due to panic buying by the population. At the beginning of March, the government forced distributors and retail chains to limit their markups to 5%, but this has resulted in many stores selling out all their sugar stocks and welcoming empty shelves. At the end of last week, three major retail chains—O’Kay, Auchan, and Atac—informed the Ministry of Trade of their withdrawal from the agreement after the FAS initiated an administrative case against Pyaterochka and Magnit after customers complained about the lack of sugar in stores when it was in stock. Russian antitrust law considers customer complaints about the lack of essential goods in stores to be sufficient grounds for charges of unfair competition.

I understand the Russian authorities’ dissatisfaction with the fact that the prices of sugar (and other types of goods) are rising. The population’s buying frenzy is causing goods to disappear from store shelves. But it seemed to me that in the 30 years since the collapse of the USSR and the abandonment of the planned economy with fixed prices and a total deficit, the Russian bureaucracy should have learned the basic principles of a market economy and remembered that freezing prices always leads to shortages. But I guess I was wrong.

Joining efforts

Russia will build practical steps in its relations with Iran to circumvent Western sanctions, Russian Foreign Minister Sergei Lavrov said Wednesday.

At the start of talks with Iranian counterpart Hossein Amir-Abdollahian in China, Sergei Lavrov drew attention “to attempts by Western colleagues to undermine the principle of the sovereign equality of states, the principle of non-interference in internal affairs”.

One of the tools of such unacceptable policies are, as you said, unilateral illegitimate sanctions. And in our relations with Iran as our partner, we will seek to condemn this unacceptable phenomenon in international discussions and build practical steps that will circumvent these illegal actions.

Saving Russian investors

A day after the announcement of the Russian Eurobond redemption, due next week, Russian Finance Minister Anton Siluanov explained the reasons for the operation. His words fully confirmed the hypothesis I wrote about yesterday: According to the Minister, the money sent by the Ministry of Finance to Euroclear reaches foreign bondholders but does not reach Russian investors, who own about half of the total issue of redeemable bonds. 

That is why we proposed to settle with our residents directly in rubles to not discriminate against our security holders and proposed the possibility of redeeming our liabilities from Russian residents.... But this will occur in rubles; there will be no restrictions in settlements. That’s why, in our opinion, it’s absolutely fair from the point of view of fulfilling the government’s obligations to the holders of our securities.

The Minister said nothing about whether Russian investors will be able to convert rubles into foreign currencies, but I assume that’s out of the question (for now). 

Predicting problems 

The world’s largest aluminum producer outside of China, Russia’s Rusal, faces serious problems that could lead to a severe drop in production. The company said in a statement that Australia imposed a ban on exports of alumina and bauxite to Russia on March 20, which would affect nearly 20% of Rusal’s needs for raw materials. At the same time, Rusal recalled production stoppage at the Nikolayev alumina refinery in Ukraine, which last year produced 1.8 million tons of alumina, about 20% of Rusal’s total alumina output.

In addition, the company believes there is a risk of stoppages of supplies of raw materials from foreign assets, including the alumina refinery in Aughinish (Ireland), which accounts for 23% of the total output of raw materials.

Logistics matters

Vladimir Dorokhov, the Director of Regional Development for STS Logistics, said that Russian companies face insurmountable obstacles when organizing containerized shipments to Russia. According to him, the main problems arise in the Nordic countries, where the movement of all containers bound for Russia is blocked.

Containers are being held up all over the place now. European customs check documents.... It is possible to deliver a container with non-sanctioned goods stuck there from the ports of Northern Europe, for example, by re-car going through the Baltics. However, the cargo would have to be reloaded into containers belonging to Russian companies or automobile transport since international sea container lines do not give them to Russia…If the blockade from line companies continues soon, we are likely to have a shortage of availability of empty containers inside the country.

Backstab

First Deputy Chairman of the CIS Executive Committee Leonid Anfimov (former Chairman of the State Control Committee of Belarus) made a strong political statement about the possibility of using the Chinese yuan as a reserve currency for mutual settlements instead of the dollar and euro.

In my opinion, the transition to mutual trade between CIS countries in national currencies or currencies of states that do not take unfriendly actions against Commonwealth member countries is entirely justified. First, this is the yuan and other currencies, which can be used as reserve currencies instead of the dollar and euro.

I do not believe that the representative could have made such a statement of Belarus without Alexander Lukashenko’s consent. I am sure that it sounded like a rumble of thunder from a clear sky to the representatives of Russia. The Kremlin is trying to promote the ruble as the main currency for settlements between the CIS countries, especially with its main ally, Belarus. The proposal to use the yuan undercuts the Kremlin’s efforts and many of the agreements on strengthening integration between Russia and Belarus that were signed late last year.