May 18, 2022
Finally, it’s over
Oil is fluid
Having lost your head, you can’t cry about your hair
The annexation will happen
The annexation will happen. But not now
Strategic assets should be owned by the government
From Russia with a loss
The price of the war
I gave it, and I’ll take it away
The next issue will appear on May 21
Finally, it’s over
One of the most protracted episodes of the Russian war in Ukraine appears to be nearing its conclusion. Since March 18, the Ukrainian military has defended the Azovstal plant in Mariupol while in full encirclement. The hope that the Ukrainian army would be able to conduct a breakthrough operation to Mariupol quickly vanished—today, the Ukrainian military is more than 60 kilometers away from Azovstal. Together with the army in the underground tunnels of the plant, which were built to protect against a direct nuclear strike, hundreds of civilians of the city were there for a long time. Two weeks ago, Ukraine and Russia, brokered by the UN and the Red Cross, agreed to evacuate them, which was completed on May 7. On Tuesday, May 17, President Zelensky publicly announced his order to the military to stop defending Azovstal, lay down their weapons, and agree to temporary deportation to Russia.
I want to emphasize: Ukraine needs Ukrainian heroes alive. This is our principle. I think that every adequate person will understand these words.
Although the cessation of resistance and the withdrawal of Ukrainian soldiers from the shelters are covered in detail by the Russian media, their further fate remains unknown. Ukrainian politicians have stated that the warring parties will conduct a prisoner-of-war exchange soon, and participants in defense of Azovstal will return to Ukraine. However, a member of the Verkhovna Rada of Ukraine, Kira Rudik, who took part in the negotiations for the evacuation of Azovstal defenders, said that the exchange mechanism has not yet been worked out.
According to Rudik, the Ukrainian authorities would like this to happen through a third country, such as Turkey, but Russia is against it. Rudik said Ukraine received guarantees from the United Nations and the Red Cross that Ukrainian military personnel would be okay on Russian territory. “That was the only reason we agreed [to the evacuation] because the soldiers were willing to stand to the end.”
Ukrainian Deputy Defense Minister Anna Malyar said the defense of Mariupol and Azovstal diverted significant Russian army forces and gave the Ukrainian military time to build defensive fortifications in other areas.
Thanks to the defenses carried out by the Mariupol defenders, a grouping of about 20,000 soldiers was prevented from being moved by the enemy... And most importantly, the defense of Mariupol gave us critical time to create defensive lines, form a reserve, and other essential actions of the military operation.
The Kremlin insists that the Ukrainian military surrendered but promises that surrendered soldiers will be treated in accordance with international conventions. “The topic of the release of the fighters and military personnel who had been entrenched at Azovstal was raised during many telephone conversations between the President and his interlocutors and during personal contacts,” said Russian presidential spokesman Dmitry Peskov. At the same time, Russian representatives have never spoken about the possibility of an exchange of prisoners of war.
Moreover, on Tuesday, State Duma Speaker Vyacheslav Volodin proposed a resolution prohibiting an exchange in which Azovstal defenders could participate.
Nazi criminals should not be subject to exchange. These are war criminals, and we must do everything to ensure that they are brought to trial.
At the same time, the Prosecutor General’s Office demanded that the Azov battalion be recognized as a terrorist organization and prohibited its activities in Russia.1 The Supreme Court will consider this demand on May 26. If approved, the fighters will face 10 to 20 years in prison for the mere fact of participation in the “Azov” unit and life imprisonment for establishing this structure. Legal experts say this norm cannot be applied to those who surrendered before its adoption. Still, the same norm is actively used in Russia against supporters of Alexei Navalny: His organization was recognized in Russia as extremist, after which the law enforcement agencies launched a large number of criminal cases against Navalny’s associates and himself.
Leonid Slutsky, the leader of the LDPR faction in the Duma, hinted that a public trial could await the Azovstal defense participants. The accusation will be based on what happened in Mariupol, which is part of the DNR, according to the Kremlin, where there is no moratorium on the death penalty. Although the DNR authorities have never applied this punishment, Slutsky believes that Azovstal’s fighters are “unworthy of living after the crimes [they committed] against humanity.”
Kremlin’s propaganda declared taking over “Azovstal” as a great victory. But I doubt Vladimir Putin is ready to accept this to end the war.
Oil is fluid
Russian oil companies, facing problems selling oil in Europe, began to increase exports to India. Reuters estimated that Russian oil exports to that country more than quadrupled in April compared to March, to 277,000 bpd and 66,000 bpd. According to Refinitiv’s forecast in May, this volume may increase by another 75% and reach 487,500 bpd.
Russia’s share in India’s purchases—the world’s third-largest oil importer and consumer—has reached a record 6%, although in 2021, it was only 0.8%. The reason for this is well known: The price of Russian oil is significantly lower than the price of imports from other regions of the world. According to the Russian Ministry of Finance, in April, the average discount of Russian Urals oil to the benchmark grade Brent was about $34.
The Russian Ministry of Economics has submitted for government discussion a version of the forecast for the period ending in 2025, which will be used to change this year’s budget and calculations for next year. So far, the forecast has not been fully agreed upon with the Ministry of Finance and the Ministry of Energy, which will be done within the next two weeks. Still, we can already talk about a dramatically increased optimism in the Russian government.
Over the past month, the Ministry of Economic Development (Minecon) reduced the rate of economic decline this year from 8.8% to 7.8%, and the inflation forecast (17.5% vs. 20%+). The authors of the forecast say operational statistics show that the immediate effect of the sanctions was weaker than expected and has not yet had a substantial impact on production and the consumer market. However, this effect will be a bit longer in time, and Minecon now sees economic growth only in 2024 (a decline of 0.7% in 2023). That means the Ministry has included in its forecast the scenario of the Russian economy’s quick adaptation to new conditions, which had been announced by the Bank of Russia somewhat earlier.
The Minecon forecast of looks optimistic by many parameters compared to the projections of the Bank of Russia, and I am ready to assume that the main reason for this optimism is related to the desire of President Putin to see that the Russian authorities have found practical tools to resist the sanctions. The proof of my hypothesis can be seen in the significant gap in the forecasted dynamics between the indicators of GDP and the real income of the population, which will exceed 5 p.p. by the end of 2025. Such a ratio of the two indices was observed during the crisis of 2008-2009 when then-Prime Minister Putin built an anti-crisis policy based on a sharp increase in social spending (an increase in pensions and social benefits) and salaries in the public sector. But nothing similar is on the Government’s table today.
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Having lost your head, you can’t cry about your hair
Russia was expelled from the Council of Europe on March 16. After six months, on September 16, 2022, Russia will cease to be a party to the European Convention on Human Rights—i.e., it will be out of the European Court of Human Rights (ECHR) jurisdiction. On this basis, the ECHR decided that the Russians may continue to complain to Strasbourg about the convention violations that have occurred up to this date. Moreover, about 18,000 complaints from Russia are pending before the ECHR, and under Article 46 of the Convention, the decisions remain binding for the Russian Federation.
However, the Kremlin has again decided that Russia will not fulfill its international obligations. Pavel Krasheninnikov and Andrei Klishas, two very influential members of the Duma and the Federation Council’s Committee on Constitutional Legislation, whose legislative initiatives always receive prior approval from the Kremlin, submitted two bills to the Duma, according to which Russia will not fulfill the resolutions of the Council of Europe after March 16, 2022—i.e., when it is expelled from the Council of Europe.
The bills’ authors reminded the Duma that the Council of Europe ignored Russia’s application to voluntarily withdraw from the organization. “By applying unilaterally to the Russian Federation, a formal-coercive mechanism for termination of membership on the grounds of alleged non-compliance with CoE values, the relevant community of countries cannot require compliance with the terms of the documents relating to the law of the Council of Europe... [this] has greatly increased the discretion of the federal legislator in determining the terms of further execution of ECHR judgments in Russia.”
Under the bills, ECHR judgments would cease to be grounds for setting aside judgments in criminal, civil, arbitration, and administrative cases; and the Prosecutor General’s Office would continue paying monetary compensation to applicants until January 1, 2023, but only for court rulings issued before March 16, 2022.
Realizing that their proposal drastically reduces the level of protection of the rights of Russian citizens, the authors of the bill offer formal compensation. In their opinion, the Constitutional Court should be an alternative instrument for protecting the rights of Russians. For this purpose, it is proposed to include in the list of grounds for the cancellation of judicial decisions that have entered into force the interpretation given by the Constitutional Court, if it diverges from the lower court’s interpretation.
In 2016-2021, the ECHR accepted, on average, about 10,000 cases from Russia for review per year.2 It is unlikely that the Russian Constitutional Court will be able to cope with such a flow of cases. Moreover, in Russia, the Constitutional Court decides on the compliance of laws with the Constitution but does not decide on material compensation.
The mayor’s office in Barnaul (625,000 residents, southern Siberia) refused to allow local Communists to hold a picket against the price increase.
The Communists wanted to hold action on May 18. “It was planned that two or three people would participate in the picket. They would come out with posters calling on the authorities to take control of the rise in food prices in the region and hand out our party newspapers to the townspeople. The picket point would be on the city’s outskirts, near residential areas and retail rows,” said Anton Artsibashev, secretary of the Altai Territory Committee of the CPRF.
The city authorities, explaining their refusal to hold the action, explained that the rise in prices of products and services “is caused, among other things, by the political and economic situation in the country associated with the ‘special military operation’ in Ukraine... There was a sharp jump in the dollar, the introduction of anti-Russian sanctions, hence the change in prices of some goods... The economic situation in the country, associated with the introduction of anti-Russian sanctions, can be considered an emergency and unavoidable circumstance... [picket organization] may lead to the dissemination of information to a large number of people and the formation of a negative attitude toward the special military operation in Ukraine," as well as "an unjustified increase in social tension" and even social unrest, which can create a threat to the life and health of an indefinite number of people and damage to property.
The Communists appealed the decision of the mayor’s office in court, which ruled that “...the picket “Against Price Increase!” is economical and has no relation to the special military operation in Ukraine, and, accordingly, is not aimed at “spreading negative information among a large number of people and forming a negative attitude towards it,” and obliged the mayor’s office to reconsider the Communists’ application.
Barnaul city hall was happy with the court decision, which absolved it of responsibility, and immediately agreed to hold a picket.
The annexation will happen
Russian Deputy Prime Minister Marat Khusnullin took a trip to the Kherson region and said that the region would take its rightful place in the Russian family.
We believe that Kherson has a great prospect and that (the region will take) a worthy place in our Russian family. We are waiting for everyone; we invite to cooperate—there is no need to be afraid of anything; we will live and work together further.
The annexation will happen. But not now
Ten days ago, presidential elections were held in the self-proclaimed republic of South Ossetia (whose territory was seized by the Russian army during the aggression against Georgia in 2008). The incumbent president, Anatoly Bibilov, lost them and, in a week, should hand over his powers to the winner, Alan Gagloev. Bibilov, apparently resentful of the Kremlin, which, in his opinion, had not given him enough support, decided to play a dirty trick on Moscow and his successor and signed a decree on a referendum on the annexation of South Ossetia to Russia in July.
The Kremlin will not hand over the republic it controls to Tbilisi, and most South Ossetians support joining Russia. However, everyone agrees that holding a referendum can provoke a new conflict between Russia and Georgia because the annexation of South Ossetia will inevitably launch the process of delimiting the border with all the accompanying disputes.
The new president is well aware of this and will look for an opportunity to cancel the referendum before he gets the Kremlin’s approval. “Today, we see that our strategic partner, the Russian Federation, is dealing with geopolitical issues, conducting a special operation in Ukraine to destroy neo-Nazi formations. We must understand our strategic partner. As soon as there is a signal, we will hold this referendum as soon as there is an understanding that the time has come.”
Strategic assets should be owned by the government
In Russia, reviewing the results of the privatization of the 1990s is continuing, in the course of which the government is transferring ownership of assets which are called “strategic.” The Arbitration Court of the Perm region agreed with the version of the General Prosecutor’s Office. It returned to the state 89% of shares in the Solikamsk Magnesium Plant (SMZ), the largest Russian producer of magnesium, niobium, and tantalum. Experts expect that the state corporation Rosatom may gain control over the plant.
Rosatom has long been interested in this company and in 2011 even announced the completion of a deal to buy it from Suleiman Kerimov (#28 Russian Forbes), but the deal did not take place. In 2014, Kerimov sold his SMZ shares, which were consolidated in 2015-2016 by Peter Kondrashov (#70 Russian Forbes ) and his partners. He, however, was unlucky—the government soon began to challenge his assets (there is a special word for this in Russia – to nightmare). First, the Federal Antimonopoly Service achieved in court the recognition of part of the share purchases invalid under the pretext that the buyers had not received permission from the government commission to control foreign investment in Russia. And last October, the Prosecutor General’s Office filed a suit seeking to have the privatization made in 1992-1996 declared illegal.
At that time, the decision to privatize was made by the SMZ labor collective at a general meeting, during which a joint-stock company was created. SMZ employees received 51% of the shares, and the regional Property Fund received 49%, which was subsequently sold, mainly to SMZ employees. The Prosecutor General’s Office argues that the Russian government should have made the decision to privatize SMZ. The defendants’ arguments that the statute of limitations had expired and that they were bona fide purchasers of the property, having purchased it many years after privatization, were not taken into account by the court with its traditional formulation—the circumstances of privatization violations became known to the General Prosecutor’s Office in their entirety only in 2021.
The Bank of Russia published a very brief report on the assessment of Russia’s balance of payments for the first four months, refraining from publishing estimates of the trade balance and capital outflow (which had been done earlier). However, the published assessment of the balance of goods and services, three times higher than the same period in 2021 ($106.5bn or 6.2% of GDP-2021), shows a catastrophic fall in imports. The Economist estimates that Russian imports fell by 44% in March-April, which has become a significant concern for the Kremlin because it threatens the filling of the consumer market with goods and the work of many companies and the implementation of investment projects.
The drop in imports is due not only to the imposed sanctions but also to the disruption of logistics chains. Finding and building new channels to deliver goods to Russia requires time and money from companies. Understanding this, the Russian authorities decided to help businesses and adopted several solutions to make importing goods to Russia cheaper.
First, exporters were allowed not to sell part of their foreign currency earnings if they directed part of it to pay for import contracts, saving on bank commissions and the cost of conversion operations. Following this, the government abolished import duties on equipment, raw materials, and supplies needed to implement projects in the priority sectors with capital investments of at least 250 million rubles. To the priority sectors, the government referred 47 items—for example, the production of paper, medicines, computers, vehicles, oil and gas, construction, and IT and passenger transport.
After that, the Ministry of Industry discussed a draft government decree on declaring the budget subsidies for loans to purchase priority imports. The document provides an automatic decision on subsidizing loans of up to 10 billion rubles; the Ministry or the government will decide to give subsidies for larger loans.
Today it is impossible to assess how effective the decisions made will be in restoring Russian imports. Still, we can confidently say that the government continues to work in brainstorming mode, grasping at any proposals that might slow down the economy’s decline.
From Russia with loss
Two major companies, Renault and McDonald’s, announced their final withdrawal from Russia almost simultaneously.
Renault was the controlling shareholder of Russia’s biggest car company, AvtoVAZ, and has spent more than a decade trying to make the Russian plant a full member of the Renault-Nissan alliance. On Monday, the Ministry of Industry announced that the deal to transfer the Russian assets of Renault to the government had been completed. The city government became the owner of 100% of Renault Russia, which owns a plant in Moscow, and 67.69% of AvtoVAZ became the property of the state scientific institute NAMI. Renault was given an option to buy back its stake in AvtoVAZ as part of the deal, which can be exercised within the next six years.
AvtoVAZ remains the owner of Renault licenses, which will allow it to produce the entire line of Lada cars and service Renault cars in the Russian market, said Denis Pak, director of the Automotive Industry Department of the Ministry of Industry, adding that components for car production will have to be bought from new suppliers.
An agreement has been reached with Renault on maintaining the entire current line of AvtoVAZ vehicles with the possibility of developing products and mastering new products following the plans that AvtoVAZ already had... Separately, I want to say about the possibility of producing Renault Duster vehicles at AvtoVAZ, but under the Lada brand—an agreement has also been reached with Renault. Togliatti plant (the main AvtoVAZ facility) will produce this model ... We are considering Asian suppliers in China, Turkey, Iran, and other countries that have not imposed sanctions.
Unlike AvtoVAZ, the Renault plant in Moscow will have to build a business from scratch. Today, the plant has no products of its own, no money for investments, and no engineering and technical personnel capable of organizing independent production. The responsibility for the plant’s fate was taken by the Mayor of Moscow, Sergei Sobyanin, who publicly announced it.
I decided to take the plant on the balance of the city and resume the production of passenger cars under the historical brand “Moskvich”... [The city authorities] will try to keep most of the staff directly working at the plant and from its allied workers.
The deputy to Sobyanin, Maxim Liksutov, revealed some of the mayor’s ideas: The Moscow authorities intend to start assembling new cars at the plant by the end of the year, the platform for which “will be found” together with KAMAZ and the NAMI Institute. In the first stage, the production of cars with internal combustion engines will be set up at the plant, and then electric vehicles. Only Russian-made components will be used in the production of these vehicles.
I am very skeptical about the plans of Russian officials, and I assume that after both companies receive huge budget investments, they will produce their cars, which will very quickly lose out to competition from vehicles imported from China and Uzbekistan.
McDonald’s came to the Soviet Union in January 1990, opening a restaurant on Pushkin Square in Moscow that became the most visited McDonald’s in the world. In 30 years, more than 140 million guests came to the restaurant. Today, McDonald’s has 850 restaurants in Russia, which in 2021 were visited by about 1.8 million people a day. And over the years, McDonald’s restaurants in Russia have been visited by more than 6.25 billion people.
Twenty days after the Russian invasion of Ukraine, McDonald’s suspended its operations in Russia, and now the company has announced its intention to sell “its entire portfolio of restaurants” in Russia to local buyers. The new owner will not be able to use the McDonald’s name, logo, branding, or menu.
The humanitarian crisis caused by the war in Ukraine and accelerating uncertainty in the business environment has led McDonald’s to conclude that continued ownership of the business in Russia is no longer feasible or consistent with McDonald’s values.
Renault estimates its investments in Russia at 2.2 billion euros, which will be written off the company’s balance sheet. McDonald’s has said $1.2bn-$1.4bn would be written off its balance sheet.