March 7, 2022
War
The advantage of the Russian army in quantity and quality of armaments is not in doubt among military experts. However, Russia has failed to take advantage of it. On the one hand, apparent logistical failures prevent the troops from moving forward. On the other hand, the Kremlin’s desire to avoid a considerable number of civilian casualties makes the massive bombing of cities a tool to demonstrate the potential for destruction. Still, it does not lead to a change in the overall picture of the war. And, of course, most importantly, there is the fierce resistance of the Ukrainian army and territorial defense forces, who understand the price of war is the future of Ukraine.
I have already pointed out that the capture of large and medium-sized cities cannot be seen as a success for the Russian army. It is not ready to become an occupation force, and Ukrainians have already begun to shift from peaceful protests to local military operations in territories that the Kremlin considers seized.
Many experts say that Putin sees himself as the great 20th-century politician who wants to redraw the world map and fix his sphere of influence. To complete the characterization of the Russian dictator, we should add that he sees the war against Ukraine as an 18th-century war. At that time, under Catherine II, Russia pushed Turkey out of the northern Black Sea coast, and the acquisition of new lands did not lead to the formation of the occupation regime. Russia was a more developed country, which improved the quality of life of the people of the region. Putin has long ago created a virtual world in which Russian-speaking Ukrainians languish under the oppression of nationalist politicians and should therefore welcome with flowers the liberators in the person of the Russian army. As no one in his inner circle seems to have dared to destroy the virtual world, no one seems to have tried to solve the problem of building an occupying administration.
Bolsheviks are back
Monday and Tuesday are days off in Russia, so there is very little news. Perhaps the most “striking” was a statement by the formal chief of staff of the United Russia party, Andrei Turchak, who proposed nationalizing the production facilities of those foreign companies which had announced their withdrawal from Russia after the war began. “Such actions by Western companies are nothing but deliberate bankruptcy... We will not look on blankly. We will take tough retaliatory measures, acting under the laws of wartime.”
After the actual announcement by the Russian Ministry of Finance that Russia refuses to recognize its obligations to investors from 52 “unfriendly” countries, the situation reminds me of the early months of Soviet power. Then the Bolsheviks immediately declared their refusal to recognize the debts of the Tsarist government and nationalized almost all industrial enterprises. Negotiations to acknowledge the obligations continued until the mid-1990s, and in the end, Russia agreed to partial compensation. The nationalized enterprises remained state-owned—none of the former owners or their heirs attempted to secure restitution.
That said, it is worth remembering that neither of these things made the Soviet system strong enough—after 70 years, it collapsed under the weight of the problems it was unable to resolve. I have said many times that Putin’s system would not outlive its creator. The decisions of the past two weeks have made me increasingly confident of that.
Moscow is waking up?
The polling service of Alexei Navalny’s organization conducted four online surveys of Moscow residents from February 25 to March 3 on their attitudes about the war with Ukraine.
With all the reservations made by the authors of the study, the results show that 1) the share of Muscovites who consider Russia an aggressor is steadily increasing, 2) the share of those who believe Russia is to blame for the conflict has increased by 2.5 times and equaled the share of those who blame the West, and 3) the share of those who expect an economic disaster in Russia has increased from 40% to 60% within a week.
Gas blackmail
The Kremlin has decided to blackmail Europe by claiming it can stop gas flow through the Nord Stream 1 pipeline. Deputy Prime Minister Alexander Novak said:
Europe today consumes about 500 billion cubic metres of gas per year; Russia provides 40% of this consumption. For many decades, Russia has always been a reliable partner, no matter what. And today, Gazprom is honoring its contractual obligations for gas deliveries to Europe in full.
“.. due to the unfounded accusations against Russia regarding the energy crisis in Europe and the imposition of the ban on Nord Stream 2, we have every right to take a ‘mirror’ decision and impose an embargo on the flow of gas through Nord Stream 1, which is currently at its maximum capacity of 100%.
If Nord Stream 1 stops delivering gas, Gazprom could theoretically offset the consequences by increasing gas flows through Ukraine. But such a scenario is arguably too unlikely. The alternative is to receive numerous lawsuits from European consumers and lose the “reliable supplier” status the Kremlin is so proud of. In my opinion, apart from financial losses, such a decision of the Russian authorities will only speed up Europe’s refusal of Russian gas.
End of alliance
Boeing has suspended titanium purchases from Russia, claiming that the company has accumulated “considerable stocks of titanium,” including the initiative that Boeing has been implementing for several years, to form a pool of suppliers all over the world.
The Ural town of Verkhnyaya Salda (875 miles east of Moscow) is home to VSMPO-Avisma, the largest supplier of titanium to many global aerospace companies. This company is a major supplier of titanium to many companies in the worldwide aerospace industry, including Boeing. The U.S. accounted for about 40% of VSMPO-Avisma’s exports in 2019. That year, Boeing purchased about 35% of the required titanium from Russia, European Airbus—up to 65%, Brazilian Embraer—up to 100%.
Cooperation with Boeing started 25 years ago, and this partnership is one of the few examples of Russian companies being involved in global value chains. Three months ago, the companies signed a memorandum on expanding their cooperation in the coming years, expecting VSMPO to become one of Boeing’s leading suppliers in building the next generation of aircraft.
VSMPO’s CEO Dmitry Osipov immediately announced that his company is ready to refocus on other markets. As they say, we shall see.
Mosaic of the day
Because of the holiday, Russian banks didn’t operate on Monday, and the currency market was at the disposal of non-residents. In the Bloomberg trading system, the dollar was around 140 rubles for most of the day, but there was a sharp jump to 170 rubles in the middle of the day. The Bank of Russia’s official exchange rate is 106 rubles per dollar.
South Korea has decided to join additional sanctions against Russia in the financial sector, including halting transactions with Russia’s Central Bank and Ministry of Finance.
A Ural Airlines plane with Russian tourists on board was unable to depart from Egypt’s Sharm el-Sheikh due to a foreign lessor’s appeal to Egyptian aviation authorities.
A Russian law criminalizing the dissemination of information about Russian military aggression against Ukraine and calls for anti-war protests came into force on March 5. By March 7, 60 people in 16 Russian cities were prosecuted.
Holders of 72% of Yandex’s convertible bonds have set up a creditors’ committee and entered talks with the company to discuss the threat of a possible default and “find a solution that suits all parties.”
Vladimir Putin has ordered the government to establish a new social benefit paid to low-income families with children aged 8 to 16. Payments to families with children have become Putin’s “calling card,” which he uses whenever the Kremlin wants to reverse negative trends emerging in public opinion.