It’s not about business
Europe does the same
Stealing all planes
Buy-buy convertibility
A rat rushes out of the corner
Vladimir Putin has signed a decree on transferring payments for exported Russian gas to rubles for consumers from “unfriendly countries” (52 countries, including all EU countries and Great Britain, where Russian gas is delivered through gas pipelines). In general, the decree changes almost nothing for European gas importers, only forcing them to take the risk of changes in currency regulation in Russia—consumers must (if they agree to comply with the norms of the decree) open their accounts in the Russian Gazprombank (which is under British sanctions). However, this decree is not about money, not about profit, and not about the exchange rate. Vladimir Putin made another attempt to attack the established order (this time on the European gas market). He decided to blackmail European politicians by threatening to stop gas exports if they refused to use rubles.
The book First Person, published in the spring of 2000, just before the presidential election, when Vladimir Putin went to the polls for the first time, contains this fragment:
There [in the staircase where he lived]... I understood once and for all what the phrase “cornered” means. Rats were living in the entryway. And my friends and I used to chase them off with sticks all the time. Once I saw a giant rat and started chasing it until I cornered it. It had nowhere to run. Then it turned around and rushed at me. It was unexpected and horrifying. Now the rat was chasing me. She jumped over the stairs, jumped down the aisles. True, I was still faster and slammed the door in its face.
Before our eyes, Vladimir Putin has turned into such a rat, cornered: The war against Ukraine has not resulted in a lightning victory, and no one understands anymore what Putin’s goals in this war are and how he sees its end; the strongest sanctions imposed by Western countries on Russia have destroyed the country’s financial markets, thrown Russian banks and companies out of the world capital markets, started to destroy production chains, which will soon lead to mass production stoppages; the departure of hundreds of foreign companies from the Russian market has resulted in the closure of many retail shops, shortage of different goods, and soon the employees of many such companies would be unemployed; according to estimates of the professional association, almost 100,000 software engineers have left Russia, and the number is growing every day; a wave of inflation has hit the country, covering different types of consumer goods one after another – 25% is the most conservative estimate of the price rise this year, but it could be much higher if Russian importers wouldn’t solve logistics problems with deliveries to Russia.
Putin does not want to stop the war without achieving a victory that the West recognizes (the complete surrender of Ukraine). He cannot cease it right now because it will be impossible to talk about winning, even within his inner circle. The sanctions imposed will not be lifted, and the destruction of the economy will continue. Putin sees the only way out of this situation for himself is a further escalation of the hybrid war and the start of “combat operations” in the “European direction.” For Putin, jumping out of the corner in which he has been trapped means creating such threats to the Western countries that European politicians will not only refuse to increase pressure on Putin but will instead make meaningful concessions that he will be able to present as his victory.
Requiring Russian rubles for gas exports would allow Putin to demonstrate his dominance and move from being a politician who accepts the restrictions imposed on him to a politician who imposes his restrictions on others (rule-maker, not rule-taker). Suppose European politicians agree to accept Putin’s demands and go along with the blackmailer. In that case, the “rat will rush after them and run until they slam the doors,” until the anti-war unity of the European Union collapses.
Europe does the same
Putin justified his decision to switch to ruble payments by arguing that European companies also changed the terms of their contracts after changes in the law. “Now [he said], the legislation of the Russian Federation is changing.”
As is often the case with Vladimir Putin, his assertions do not stand up to scrutiny. First, the presidential decree is not a change in legislation. The President of Russia does not have the right to change the currency regulations, suspend the Tax Code, or give the Bank of Russia additional powers. Second, in those cases where the European legislation has changed, the EU has not stopped imports of Russian gas but has given the importing companies time to negotiate with Gazprom to agree on changes to the contracts.
The decree comes into force on Friday, April 1, but it does not mean European politicians must make any decisions overnight. Payment for gas imports from Russia is made once a month, a few days after the end of the month, when all the volumes of gas bought/sold can be calculated. Consequently, X-day will come in the first decade of May, when Gazprom or the Federal Customs Service will have to comply with the decree and stop gas exports from Russia to Europe.
“It is prohibited to continue supplying gas if the deadline for payment for the gas supplied under this contract has arrived and the foreign buyer has not paid or has not paid in foreign currency and/or not in full and/or to an account with a bank that is not an authorized bank.”
In terms of pressure on European gas consumers, Putin chose a bad time for his hybrid war—in May, the winter cold will be over, and the summer heatwave will not yet have begun. But the rat can’t set in advance the point in time when it will be cornered. Therefore, it rushes into attack when it feels an “existential threat.” This presence is a reason for Putin to pre-emptively use nuclear weapons.
Remember, Victory Day in Russia is May 9. And the slogan “We can repeat it” is very popular within Putin’s environment.
We steal all the planes
Deputy Prime Minister Yuri Borisov announced that the Russian government has finally decided on the scale of expropriation of planes that belong to leasing companies: Most Boeing and Airbus planes will remain in Russia.
“What decisions have been made. The entire aircraft fleet, meaning foreign aircraft, will remain in Russia—the majority. Some were seized during the sanctions; the absolute majority of Boeing and Airbus remain in Russia. This fleet is quite young, less than 15 years old, and there is an opportunity to operate it—not to the detriment, of course, of the safety of air transportation... And there is certainly a question of their operation soon until we establish serial production in the required number of Russian airliners.”
The Deputy Prime Minister did not explain how the contractual relationship with the lessors would be settled, from which I conclude that they will not receive any compensation for the lost and found. Once again, Vladimir Putin is planting a devastating timebomb under the Russian economy. Sooner or later, Russia will want to exit from the “North Korean scenario,” and then it will have to compensate the aircraft owners for the damage caused. But since this will happen after Putin has left the historical scene, he may not think about it.
Borisov admitted that it would not be possible to establish serial production of the new Russian MS-21 aircraft in the scheduled time frame.
As far as domestic models are concerned, the supply of components, which were present and laid down in a large volume when designing our two flagship models—Superjet 100 and MS-21—forces us to actively and dynamically organize work on accelerated import substitution. This work is organized. But there will still be a shift of 1-2 years, so our original plans for mass production are being shifted.
Previously, in the production of these two flagship models, we were counting on the supply of Pratt & Whitney engines for the MS-21, which now will not be delivered. This means that the production volumes we are planning will be replaced entirely with domestic PD-14 engines. Therefore, it is necessary to provide for the expansion of production at UAC facilities to produce this model.”
The Russian aircraft manufacturer, UAC, has previously promised to start serial production of the new aircraft as early as 2023, producing six aircraft, and to deliver 18-20 aircraft per year in the next four years. I think the plans announced by the Deputy Prime Minister are completely unrealistic—the primary constraint will be the quantity and quality of engines, which has long been the Achilles heel of the Russian aircraft industry.
Not yet perfect
The Bank of Russia, having abolished the convertibility of the Russian ruble for current and capital transactions and severely limited the number of buyers in the foreign exchange market, has taken the next step back to the “glorious Soviet past” by fixing the ruble’s multiple exchange rates. The Bank of Russia recommended Russian banks to set different rates for foreign currencies when selling them to different categories of buyers. So companies-importers and companies that have liabilities on foreign currency loans or bonds will be able to buy currency from banks with a commission fee, which shall not exceed 2 rubles/S. The amount of commission for other companies must be at least 10 rubles/$ (today $1 = 84.5 rubles).
To make the regime of multiple exchange rates quite similar to the one that existed in Soviet times, it was necessary that the authority to determine the categories of buyers of currency and its rates be transferred to the Ministry of Economy, which will make such decisions based on the priorities to be determined by the government.
The answer to that corned rat is to always carry the proper tool/weapons to deter or dismiss that RAT.