President Putin liked this format. Comrade Xi troubles us. QR codes to be!

The Kremlin radiates optimism 

The main objectives have been achieved. The talks took place, Putin’s fears were conveyed to the U.S. President, who agreed to continue discussing them. On the next day after the call with Putin, President Biden said he will announce by the end of the week a high-level meeting between Russia, the United States, and four other key NATO countries “to discuss the future of Russia’s concerns relative to NATO.” In addition, he clearly stated that the U.S. would not go to war with Russia if the latter invaded Ukraine.

“...there is no particular reason for optimism yet, but the presidents have agreed that on strategic issues of security in Europe, on those ‘red lines,’ to put it primitively, the presidents will appoint their trusted representatives, and these representatives will enter into negotiations very quickly… The presidents talked about the need to communicate again after the contacts of these representatives take place. But... it is not possible to answer when that will be... The format [of Putin’s new meeting with Biden] is not important. This format allows for quite frank conversations. And, at least, President Putin liked this format,” Kremlin spokesman Dmitry Peskov said.

Almost friends

An aide to President Putin, Yuri Ushakov, said that Russia and the U.S. could deepen cooperation on cybersecurity, “Both the Americans and we are ready for that.” 

“Mutual satisfaction was expressed with the way the parties began to implement the Geneva agreements to exchange views on issues of information security and combating cybercrime”. According to Ushakov, a special dialogue platform has been created, and five meetings of this group have been held. “And the progress is evident,” he said.

A tiny grain of salt

The only disappointment for the Kremlin was the White House’s unwillingness to eliminate embassies’ restrictions immediately. Dmitry Peskov said that the Russian leader suggested “resetting” all reciprocal limits on diplomats’ work, according to which “the U.S. side has so far proven unwilling to discuss it substantively”. At the same time, presidential aide Yury Ushakov said that he had seen hints of a possible solution to this problem: "[Biden] hinted that as a first step, access would be granted to our diplomats to simply see what state our confiscated diplomatic property is in”.

Independent regulator logic

Consumer inflation (CPI) in Russia declined slightly in November compared to October (0.96% for the month vs. 1.1%), which, in my view, is within statistical error. Over the past 12 months, the CPI growth has been 8.4%, and in February-March, it may exceed 9% even if inflation slows down, because of the low base of early 2021. 

The Bank of Russia began to prepare public opinion for a new key rate hike, which it will announce on December 17. Experts say it could be a significant move from 7.5% to 8.5% amid continuing inflationary pressure. 

Alexei Zabotkin, Deputy Governor of the Bank of Russia, described the logic of the monetary authorities: “... for the December decision, it will be important not only and not so much what inflation will loom at the end of December but understanding how much the October-November data cumulatively add to our understanding of the sustained level of inflationary pressure that determines the extent of inflationary pressure next year. That’s what will underpin the decision. Plus, the picture on inflation expectations is also essential for us because this is a significant part of the drivers of this very sustainable inflationary pressure.”  

The Kremlin sees no need to give instructions on the level of the rate to the Bank of Russia and, in general, is not ready to interfere in the Central bank’s work. According to Dmitry Peskov, Putin’s instruction on the need to return inflation in 2022 to the target level of 4% instead refers to the government. “Vladimir Putin cannot instruct to raise the rate... The Central bank makes this decision, and it is entirely the prerogative of the mega-regulator... The President cannot send signals to the mega-regulator. The mega-regulator makes these decisions independently.”

In my opinion, Peskov was frank about his boss’ principles: Monetary policy is too complex for him to be willing to make his own decisions. The current Chairwoman of the Bank of Russia, Elvira Nabiullina, enjoys his full confidence, raising no doubts about her loyalty and professionalism. Of course, the Kremlin can demand some action from the Bank of Russia, but these demands concern individual banks and companies. Elvira Nabiullina is not petty in principles.  

Rumors of falling demand for mortgages are somewhat premature

Woland, the hero of the novel The Master and Margarita, was right, saying “the apartment question has only spoiled them [Muscovites].” The Soviet Union never managed to solve the problem of housing construction, which remained a pipe dream for several generations of Soviet citizens. With the start of reforms in the ’90s, the situation slowly began to change, and the emergence of mortgages in the early 2000s made the dream a reality for much of the population. Total mortgage loans provided in Russia exceeded 14 mln. loans—i.e., one loan for every 10 people—while the total mortgage debt of the population exceeded 11.5 trillion rubles ($157 bln. or 9% of GDP).

The Bank of Russia recently released a rather pessimistic (in terms of conclusions) study predicting a decline in demand for mortgages and, therefore, a slowdown in the huge housing-related sector of the economy. This study relies on the author’s conservative hypotheses stemming from sluggish economic growth and the lack of household income growth in recent years. Although I am often accused of being pessimistic about the Russian economy, in this case, I am an optimist.

In my opinion, people’s desire to live better is the primary driver of economic growth in any country, and Russians are no exception. The critical factor in deciding whether or not to take out a mortgage loan is the interest rate level, which has been well demonstrated over the past year and a half. Whilst Russians’ economic optimism has weakened markedly during the pandemic, with aggregate income growth becoming a statistical consequence of one-off budget payments, from July 2020 to October 2021, the average monthly increase in household mortgage debts was twice as high as 2018 to mid-2020 (RUB 202bn/month vs. RUB 100bn). The chart clearly shows that it was during this period when mortgage rates fell rapidly due to the government’s mortgage subsidization initiative.

Today, this program has been discontinued, and the Bank of Russia is rapidly raising its key rate, which will necessarily lead to higher mortgage rates and lower demand for mortgages. My optimism hinges on the fact that the Bank of Russia may suppress inflation, if not by the end of 2022 as President Putin has demanded, then by mid-2023. Mortgage rates would decline, and Russians would once again go to the banks for loans. 

That, if Woland is to be believed, will make them better.

Comrade Xi troubles us

Chinese authorities continue to fight the pandemic. As a side effect, new barriers to Russian exports are emerging. This time, Russian fishermen have fallen under the “Chinese press.”

The order of the General Administration of Customs of China, which will come into force on January 1, 2022, obliges importers to mark a package’s outer and inner parts. In addition to the standard list of information (details about the manufacturer, name of the goods, name of the vessel, area of catch, etc.), it is also necessary to specify registration numbers and addresses of all the enterprises related to the exported goods, including fishing, processing, and transport vessels, as well as temporary storage warehouses. Exporters cannot do it in advance because they do not know the names of transport vessels which will deliver from the fishing area, nor the names of refrigerated warehouses which will store them. Decisions on selecting such facilities are made in the moment and depend mainly on the availability of capacity.

To meet the requirements of the Chinese authorities, it may be necessary to install additional packaging lines on the processing vessels. Experts estimate that the cost of such equipment could amount to 6% of the total value of fish exports to China. 

The Russian Association of Pollock Producers appealed to Minister of Agriculture Dmitry Patrushev to propose that the Chinese authorities cancel the new labeling rules for frozen products for export to his country. I wonder if Vladimir Putin will persuade Xi Jinping to meet halfway with Russian fisheries when the two leaders meet in February in Beijing at the opening ceremony of the Olympic Games. A hedge between keeps friendship green?

Climate is climate, but everyone needs gas

Russia’s involvement in solving global climate problems does not cool the interest of Russian business in hydrocarbon production. The tender for undeveloped gas fields in Eastern Yakutia brought unexpected results. During the tender, in which Gazprom and Yakutsk Fuel and Energy Company (YATEC) took part, the price of licenses increased 80, 90, 120, and even 200 times. And one of the licenses was bought by Gazprom at a price 1,200 times higher than the starting price. According to the VNIGNI Institute of the Russian Ministry of Natural Resources, there were no proven hydrocarbon reserves in these areas in 2017. 

A representative of YATEC believes that the auction showed underestimation of the potential of the areas sold, as “we are talking about opening up a new oil and gas province.” The company acquired licenses for three other fields in the region in January, and in September, it discovered the large Hailah gas condensate field. As a result, the company’s total reserves increased to 423.5 billion cubic meters and 26.5 million tons of gas condensate. 

The fields are in the unpopulated part of Yakutia, and most likely, no demand for gas will ever appear there. However, experts believe that once the company’s gas reserves amount to 600 billion cubic meters, it will start developing a gas liquefaction plant project on the coast of the Sea of Okhotsk, which will allow it to enter the Asian LNG market. 

However, even in the most optimistic scenario, the company will not sell its first gas until 2035-2037. For this purpose, it will be necessary to invest about 30 billion euros.  

The naive question is: Why did Gazprom participate in the tender if it has no other fields in the area and no need for additional gas volumes for the Power of Siberia gas pipeline to China? The answer is obvious: Only to undermine the position of a potential competitor.