Bloody stalemate
Big looting
…and small
Harshness vs. non-binding
Non-intimidating threats
Exceptions to the rule
Backtracked
Customs turns a blind eye
Economic mosaic
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Bloody stalemate

The intensity of the war in eastern Ukraine has not waned: Both sides are trying to succeed in their plans, but there has been no significant change in recent days.

Attempts by Russian troops to advance south of Izyum and encircle Severodonetsk are blocked by the Ukrainian military. For its part, the Ukrainian army is slowly pushing Russian forces away from Kharkiv, but this seems to be because the capture of this city is no longer relevant to the Kremlin—achieving this goal requires a significantly larger army grouping and a greater intensity of artillery fire, which would lead to more destruction in the city and more civilian casualties. An obvious target for the Ukrainian army is the city of Kupyansk, which is an important logistical center—but the distance to it is more than 100 kilometers.

Big looting

The war continues; negotiations between Russia and Ukraine are practically frozen. Meanwhile, the Kremlin has begun its creeping annexation of part of Ukraine’s territory, as I have already mentioned.

On May 5, the first deputy head of the Kremlin administration, Sergei Kiriyenko, visited Donbas, overseeing the annexation process, including its speed and methods. He visited Donetsk, controlled by pro-Russian separatists since 2014, and Mariupol and Volnovakha, which were seized in the ongoing war.

During his trip, Kiriyenko made no statements that could clarify the Kremlin’s position on the future status of the LNR and DNR. Still, he promised that Russia would provide financial and material assistance to rebuild the ruined cities. Ten days ago, Kiriyenko held an online meeting with the governors of 20 Russian regions and said they should “send there [to the seized territories] people and the necessary materials to restore infrastructure.” Thus, we may not see direct federal budget expenditures for these purposes anytime soon, unless Putin decides otherwise.

At the same time, the average Russian bureaucracy had already begun the “Russification” of Mariupol—by the time Kiriyenko arrived; the city signs had been replaced by new ones with inscriptions in Russian.

Russia also began to establish control over the work of local authorities and infrastructure in the Kherson region. A Russian civil-military administration was formed in the region, which launched Russian television broadcasts and announced that the Russian ruble would become legal tender and that Russian banks and cell phone providers would soon begin operating in the region. Andrei Turchak, the head of the pro-Kremlin United Russia party’s apparatus, who went to Kherson, said Russia intends to establish its total control over the territory.

I wanted to say once again, addressing the residents of the Kherson region, that Russia is here forever. There should be no doubt about that. There will be no going back to the past. We will live together, develop this rich region, rich in historical heritage, rich with its people who live here.

At the same time, Turchak proposed not to get ahead of the issue of the status of the region, pointing out that the people would determine it.

Turchak is not a decision-maker in the Russian political system, but he certainly would not make such statements without explicit instructions from the Kremlin.

... and small

While Kremlin officials discuss plans and technologies, businessmen close to them are pillaging. Deputy Minister of Agrarian Policy of Ukraine Taras Vysotsky said that cars with Russian license plates took out at least 80,000 tons of grain from Kherson and Zaporizhzhia regions. Crimean officials said they had “established a stable supply” of Kherson products to the peninsula and that at least 300 tons of vegetables from the Kherson region were sold in the Crimean capital Simferopol and the peninsula’s leading resort, Yalta. At the same time, the Crimean authorities did not provide any information about the sellers of the goods, and Ukrainian farmers regularly reported visits of military groups taking away the available food.

Crimean administration head Sergei Aksyonov said that for the first time since 2014, agricultural companies have resumed planting rice on the peninsula, which became possible after Russia seized part of the Kherson Oblast territory along the entire length of the North Crimean Canal and began supplying water through it.

We immediately understood that one of the main tasks for us was to establish a water supply for the needs of agriculture. Many Crimean agricultural producers have reoriented from growing moisture-dependent crops to drought-resistant ones. Now there is a new window of opportunity to resume the amount of agricultural production we had before 2014.

Harshness vs. non-binding

The severity of Russian laws is mitigated by the optionality of their enforcement—this phrase has been present in Russian political analysis since the early 19th century. For 22 years of his rule, Vladimir Putin was a legalist and adhered to the practice of “rule by law” when imposing restrictions: First, to draft and approve a law authorizing it, and then impose restrictions. After the beginning of the aggression against Ukraine, this principle seems to have been set aside, at least as far as the imposition of restrictions in terms of economic activity is concerned.

For example, on May 3, Putin signed a decree on the application of “retaliatory measures” to “unfriendly states,” which announced the possibility of imposing bans on any economic relations with representatives of “unfriendly states” included in the Russian sanctions lists. The law prescribes the possibility of introducing such restrictions; however, the provisions of the decree are in direct contradiction with it. Thus, the law provides for the right of the President to impose sanctions against specific organizations and individuals, stipulating the duration of their actions. However, neither of them is fixed in the decree, except for the instruction to the government to make a list of persons and organizations in respect of which the sanctions will be introduced. On the other hand, the decree contains a detailed list of prohibited operations. However, the law clearly states that the government “shall establish a list of specific actions, the performance of which is forbidden and (or) in respect of which the obligation to perform and other restrictions are imposed.”

The appearance of legally inadequate documents, in my view, indicates that the stressful situation in the Kremlin remains, that Putin has set the task to take countermeasures “tit for tat,” and that the quantity of countermeasures is more important to him than their quality.

Non-intimidating threats

Gazprom also seems to have been tasked by the Kremlin to take countermeasures against European consumers and decided to inform them that half of the capacity of the Nord Stream 2 pipeline, whose operation became impossible after the sanctions were imposed, will not be available for export until 2028.

Because the offshore Nord Stream 2 pipeline is currently not used and because of the implementation of the program of gas supply and gasification of consumers in the Northwest region, Gazprom has decided to use the excess Russian onshore gas transportation capacity of the Nord Stream 2 project to develop gas supply to the regions of Northwest Russia. If the German side decides to commission the Nord Stream 2 offshore pipeline, only one string of the pipeline can be put into operation with a 100% load. The start of the second offshore pipeline string of Nord Stream 2 may not be operational before 2028.

The statement looks strange: If Gazprom intends to start a large-scale gasification program in the North-West of Russia, it is not clear why the export restriction will exist only for seven years—gas supplies for the region’s needs will continue after that. On the other hand, experts estimate that cumulative gas consumption in this region, without creating new large production facilities, will not exceed 10bn m3—i.e., less than 20% of Nord Stream 2 capacity. And in a hypothetical situation where Europe may agree to use the power of this pipeline, it is not clear what will prevent the use of all possible capacities.

Gazprom, in the medium term, will face increasing financial and technological problems in case of a reduction of Russian gas consumption in Europe. The cost of creating the so-called “Northern Corridor” (Bovanenkovo-Yamal-Torzhok) specifically for gas supplies via Nord Stream 1/2 in 2018 was estimated at 2.2 trillion rubles (about $35 billion at the exchange rate at the time). The cost of “Nord Stream 1/2” was about 20 billion euros. A substantial part of these projects was financed by loans, which Gazprom will have to repay without receiving all of its planned revenues. Besides, the corporation will have to bear considerable expenses for preserving the gas pipelines and their possible reactivation if their capacities are ever needed.

Nevertheless, Gazprom has long ceased to be a company focused on profit and shareholder value growth and has become a tool for achieving the Kremlin’s foreign policy goals.

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Exceptions to the rule

According to the OVD-Info project, more than 1,250 cases related to “discrediting the Russian army” had been filed with Russian courts by the end of April. A significant portion of these concerned pickets with blank placards, shoes or clothing in the colors of the Ukrainian flag, and quotations from famous writers and poets. A resident of Tomsk was fined 45,000 rubles (78.5% of the average Russian salary) for other protesters’ “silent support.” Most of the cases referred to the courts ended in convictions, but the judicial machine makes acquittals from time to time.

For example, the Kuibyshev District Court of St. Petersburg dismissed the case of a poster with a quote from George Orwell’s novel 1984—“War is peace, freedom is slavery, ignorance is power”—against Alexei Podgornykh from St. Petersburg. The court ruled that the phrase did not contain “any appeals.”

The poster contains antonyms and phrases. Does not contain any appeals, including a call to obstruct the use of the Russian Armed Forces outside the country to maintain peace and balance.

Krasnoyarsk Regional Court canceled the fine of activist Vera Kotova for anti-war writing in the snow. At the beginning of April, the Soviet district court in Lipetsk did not prosecute resident Anastasia Kuzmicheva. She did not even have time to take the poster out of her backpack as the police preventively detained her.

The number of such cases is small and does not form a trend. Practice shows that different courts often make opposite decisions in the same situations. Courts do not always perceive even the Supreme Court’s explanations as binding. In the case of “discrediting the Russian army,” the Supreme Court has not yet indicated that it is ready to review and summarize the practice of applying the law.

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Backtracked

On May 4, the UK expanded technology sanctions on Russian processor developers that will stall them for several years. The announced sanctions and the freezing of assets imply restrictions on the provision of technological services. Thus, Russian companies will not be able to use the British ARM architecture to develop new processors.

The developer of the most famous Russian processors, Baikal Electronics, which produces them based on licenses of the British ARM, owns design and production licenses for all processors up to Baikal S (16 nm topology). However, the company has only design licenses for the next generations of processors in development (Baikal M2, Baikal L, Baikal S2). No factory will work with the company without a production license, and the company will not be able to use the capabilities of the world leaders: UMC, Global Foundries, and TSMC. Experts think that Baikal Electronics can transfer its development to open processor architectures (RISK V, MIPS, VLIW), which will take at least two to three years.

Customs turns a blind eye

After the mass departure of Western companies from Russia, the Russian government decided to ignore the norms of the patent law and allowed the “parallel import” of goods into the country without the right holder’s consent. The list approved by the Ministry of Industry contains 56 groups of goods; the total volume of imports into Russia is $100 billion-$120 billion (35%-38% of all Russian commodity imports in 2021).

The list includes components for foreign cars, electronics and household appliances (including smartphones and computers from popular manufacturers), textiles, clothing, footwear, and chemical products, including cosmetics and perfumes.

“The list of goods for which parallel imports are allowed includes products necessary for the functioning of production facilities and a wide range of consumer goods... The mechanism of parallel imports begins its work from the date of registration of the order by the Russian Ministry of Justice—May 6, 2022,” said the Ministry of Industry and Trade.

The head of the ministry, Denis Manturov, said earlier that the list of parallel imports would not include products of those manufacturers that intend to maintain production in Russia. “If manufacturers will stay, if suppliers will keep their imported products, their logistics, supply their products to the Russian market, then we are interested in their products, brands, not to be included in the list.”

The decision of the Russian authorities is quite understandable: Today, parallel imports are prohibited, and the customs services should block the import of such goods into Russia. With the boycott of Russia by foreign companies, it would be unwise to keep impassable barriers in the way of those goods that Russian companies and the population need.

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The economic mosaic

The Ministry of Transport continues to assess the consequences of Russia’s self-isolation and the almost complete cessation of international flights by Russian airlines.1

According to the pessimistic version of the forecast, passenger traffic in Russia will almost halve by 2025, leading to the dismissal of half of the pilots. Even today, according to the ministry, every 10th pilot is unemployed. Every month, the ministry receives 70 requests from aviation authorities of foreign countries to confirm the qualifications of Russian pilots who seek employment abroad.

When hundreds of Western companies are suspending or terminating their operations in Russia, the Swedish company Hilding Anders has decided to increase its investment in the Russian company Ascona, of which it holds a 73% stake. According to the company, the funds will be used to modernize and increase production capacity, expand the product range, and start new production.

Hilding Anders is owned by KKR, one of the largest private equity funds in the world.

The Petromarket news agency assessed the capacity utilization at Russian refineries and reported that it had dropped by about 7% in April compared to March. According to the agency, the most significant reductions were seen at Rosneft-owned refineries.

The Energy Ministry says Russian coal exports to non-CIS countries in March, the first full month after the start of the war in Ukraine, fell by 5% compared to March of last year. Exports to European countries almost halved, including Great Britain by 50% and Germany by 70%. The Russian companies failed to increase the sales of coal to the Asian countries; they remained at the previous year’s level. The total share of European countries in the export supplies from Russia dropped from 32% to 20%. However, this did not lead to a decrease in revenues of Russian companies—in March of this year, the world prices for coal were almost three times higher than a year ago.

In April, the EU officially imposed an embargo on coal supplies from Russia, giving companies until August to complete existing contracts.

Austria’s Raiffeisen Bank International (RBI) is studying the possibility of selling its Russian bank, which is ranked 13th by capital in Russia.

Johann Strobl, head of RBI, said the bank has received several non-binding offers from private Russian financial and industrial groups and is considering them. Based on the sale of Rosbank to France’s Société Générale, RBI could receive no more than 30% of the Russian bank’s capital if it finds a buyer.

The next issue will appear on May 10

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Today, Russian companies fly to Eurasian Union countries (Belarus, Armenia, Kazakhstan, Kyrgyzstan), Uzbekistan, Turkey, and Ceylon. On May 13, Aeroflot opens flights to the Maldives.

Behind the Iron Curtain

May 7, 2022