May 31, 2022

1. Who is the real enemy?

2. You didn’t respect us

3. Russia wins minds and hearts

4. Mild decision

5. Turkey will follow sanctions

6. Do sanctions hurt?

7. Stealing kids

8. Fluid annexation

9. Lack of European unity

10. A strong ruble must help

11. Two years in trouble 

12. Words and deeds

Who is the real enemy?

Russian Security Council Secretary Nikolai Patrushev once again hinted that Russia’s adversary in the war in Ukraine is the United States. 

These intentions were hatched long before February 2022 and would have been realized regardless of the actions of the Russian Federation... Demonstrably refusing a constructive security dialogue, the United States and its allies have contributed in every possible way to the increase of military tension in Ukraine, fomenting the conflict in Donbas and dragging Russia into it.

The conflict between Russia and Ukraine, provoked and fueled by Washington, is being used by the Americans to solve several of their political and economic tasks, Patrushev said. And the global anti-Russian campaign unfolding in the world proves that Ukraine was only a pretext for the West to openly unleash a hybrid war aimed at weakening and isolating Russia.

You didn’t respect us

Russian Foreign Minister Sergey Lavrov supported his colleague by speaking more bluntly: In his words, Russia started a war against Ukraine because NATO refused to respect Russian security initiatives, seeking to rule the world. According to his Bahraini counterpart, Russia has made efforts over the past 15 years to “secure the European continent and the Euro-Atlantic region as a whole.” It has regularly put forward numerous peace initiatives that “have not received respectful consideration, respectful response” from NATO and the United States itself. 

Russia wins minds and hearts

Last week, the U.S. Treasury announced that it would not renew its license to make payments on Russian government debt. In my opinion, this decision is a mistake. 

The intention of the Treasury is clear: A default on Russian debt would cause the cost of raising new debt (in countries that have not joined the sanctions) for Russia to rise sharply. However, with a solid current account surplus and substantial fiscal reserves, the Russian Ministry of Finance does not need new borrowings. 

At the same time, the impact of such a ban will hit only holders of Russian debt who are not residents of Russia. Russian residents (regardless of the presence or absence of a license) will receive redemption of bonds in rubles to their accounts in Russian banks. But the Russian Ministry of Finance will no longer be able to transfer money to an agent bank for payments in favor of non-residents.

On Friday, May 27, the Russian Ministry of Finance announced the creation of a payment scheme that would allow it to fulfill its obligations to non-residents. It is arranged as a mirror to the way Russia requires payments for gas supplies: A non-resident holder of Russian debt will be able to receive repayment from the Russian Finance Ministry in rubles to his account in a Russian bank and then convert rubles into dollars in the foreign exchange market. So far, the Ministry of Finance has not disclosed how the conversion will be arranged and how quickly non-residents will be able to repatriate their funds. However, in any case, the scheme proposed by the Ministry of Finance of Russia will allow non-residents (without violating sanctions) to receive their funds (possibly with a certain discount), which will be received with gratitude.

Thus, we can say that Russia came out a winner from a short episode of the sanctions war. After the U.S. Treasury made a decision that was detrimental to investors and did not change Russia’s position, the Russian Ministry of Finance offered investors a workable scheme that would save investments. Decide for yourself who investors will love and respect.

Mild decision

After several weeks of discussions, the EU has reached a compromise on the sixth package of sanctions, but the contents have not yet been made public.

The main intrigue—the embargo on oil and oil products—has had an unexpected development. Apart from the fact that Hungary, the Czech Republic, Slovakia, and Bulgaria have received a respite from the refusal of Russian oil, the European Union did not block Russian oil supplies via pipelines and gave Putin sufficient time to find new consumers of Russian energy resources: The embargo on purchases of Russian oil enters into force from December 1, and on oil products, from February 1.

The Russian economy’s losses caused by this decision will not be significant during the year. Today Russian URALS is trading at a discount of $25-$27/bbl (21%-22% of Brent price). Provided the following hold true: 1) Brent price is $120/bbl, the discount remains at the current level, 2) an equal reduction of oil purchases by European companies over the next six months, including purchases of oil transported via the pipeline by German companies, 3) maintenance of Russian oil exports to Hungary, the Czech Republic, Slovakia, and Bulgaria via the pipeline at 2021 levels, and 4) the ability of Russian companies to find new buyers and maintain the total export volume at 90% of 2021—then the reduction of export revenues of Russian companies will be $2.7 bln. 

For reference: with oil exports at 90% of 2021 and the average annual selling price of URALS $90, the total value of exported Russian oil (excluding oil products) will be $127 billion. I.e., Russia may lose 2.1% of annual proceeds. May it stop the war or destroy Putin’s finances? 

Turkey will follow sanctions

Turkey does not support Western sanctions against Russia but will not allow Moscow to circumvent the restrictions with the help of Ankara, Turkish Foreign Minister Mevlüt Çavuşoğlu said.

We are fundamentally against any form of sanctions. Turkey says it will support only restrictions imposed at the UN level. This is a moral position... However, this does not mean that Ankara will allow circumvention of restrictions through Turkey. We will not allow such a channel to be opened. Turkey’s position is obvious and transparent.

Do sanctions hurt?

While Vladimir Putin is explaining to Russians that sanctions do not significantly impact their lives, the Russian government has decided to spread some of the sanctions pressure evenly. On Saturday, May 28, the government published an order on an unscheduled 11% increase in rail freight tariffs starting June 1. The increase in tariffs will not affect imports of consumer goods or domestic food and construction materials shipments. 

Kidnapping

Vladimir Putin signed a decree on the simplified procedure for Ukrainian orphans to acquire Russian citizenship regardless of their location, including the occupied territories of Ukraine. The decree does not establish requirements for collecting evidence of the absence of parents or guardians, allowing the use of documents issued by the authorities of the separatist entities, the LNR and DNR.

Fluid annexation

Last week, Vladimir Putin signed a decree allowing residents of the Zaporizhzhia and Kherson regions of Ukraine to obtain Russian citizenship under a simplified procedure. On Monday, the Russian Federal Migration Service opened an office in Melitopol, the largest city in the occupied Zaporizhzhia region (160,000 people), to accept applications for Russian citizenship. 

Lack of European unity

The buyers of Russian gas from the Netherlands (GasTerra), Denmark (Orsted), and the UK (Shell) rejected Vladimir Putin’s demand to pay for their imports in Russian rubles, after which Gazprom reported that it would stop supplying gas to these companies. Earlier, companies from Poland, Bulgaria, and Finland announced that they did not intend to comply with the Kremlin’s whims.

At the same time, Uniper, the biggest buyer of Russian gas in Germany, made a payment for May using rubles. However, a month ago, German Finance Minister Christian Lindner said, “We will not pay for gas in rubles.”

The German company’s decision suggests that discussions about the seventh package of European sanctions could become endless if the embargo on purchases of Russian gas is included. Perhaps Russia’s permanent representative to the European Union, Vladimir Chizhov, is not very far from the truth when he says that Europe has exhausted opportunities to increase sanctions pressure on Russia.

If we talk about the content, the seventh package, it can only be a gas package because, in principle, the European Union has already approached the limit of what is possible in terms of sanctions. There is nothing more to ban.

A strong ruble must help

The Bank of Russia does not see any problems from strengthening the ruble. Moreover, it believes that it will benefit the economy. At least this opinion was expressed by the First Deputy Chairman of the Bank of Russia, Ksenia Yudaeva.

“The decline in imports and the inability to implement the budget rule with relatively high export earnings led to the strengthening of the ruble. This situation leads to some reduction in the profitability of exports, but at the same time creates more attractive conditions for the import of equipment and structural adjustment of the economy. In other words, incentives are created to rebalance the economy, which should happen when implementing a floating exchange rate policy.”

Two years in trouble 

Russian authorities have publicly admitted severe problems in providing agricultural companies with certain seeds without expecting to solve them within the next two years.   

According to the First Deputy Minister of Agriculture, Oksana Lut, now Russia does not provide itself with seeds for several crops according to the norms of the Food Security Doctrine (at least 75%).

“Everything is more or less good in wheat, we have more than 90% self-sufficiency, but in some other crops, we have quite a weak position... We are working with our institutions, and maybe the season 2022-2023 will be difficult, but in any case, further, from the season 2024, we are confident that we can provide ourselves with their seeds. The necessary volume of seeds in the country [agriculture will receive]—maybe it will not be our selection yet, but we will have seeds.”

Words and deeds

Russian Prime Minister Mikhail Mishustin was unexpectedly concerned that the Russian stock market remains highly volatile and the stock prices of Russian companies are low.  

“There is still high volatility here [on the stock market]. Stock quotes are subject to fluctuations, behind which there are no objective economic factors, and the current low values do not reflect the true price of Russian assets.”

Of course, the Russian prime minister is aware of the connection between the sanctions imposed on Russia and Russian companies, but he suggests that we look for other ways to solve the stock market’s problems. In particular, he announced the government’s intention to allow Russian companies subject to external sanctions not to elect a board of directors, which is required by law. According to Mishustin, “In the current realities, the fulfillment of this requirement may be difficult,” but the prime minister did not say what these difficulties consist of.

The prime minister expressed this idea at a meeting of the government commission for increasing the stability of the Russian economy in conditions of sanctions, in which not a single person dared to express the orthodox opinion that the refusal to elect a board of directors leads to infringement of minority shareholders’ interests and a further decrease in the capitalization of companies.