Putin's sabre -rattling. Inflation and corruption make life more complicated. Sanctions?

November 4, 2021

We have only two allies—our army and navy

Vladimir Putin would have gladly agreed to be the author of this phrase if the Russian Emperor Alexander III had not uttered it 140 years before him. This phrase is written on a monument dedicated to the emperor, which—four years ago—the Russian president opened in the occupied Crimea (the city of Yalta).

On November 3, Putin held his last meeting of this year with the leadership of the Defense Ministry and defense sector companies. The announced topic was equipping the army and navy with systems based on new physical principles. At the meeting, Putin said,  “The creation in our country of the laser, hypersonic, kinetic, and other weapons, not having analogues in the world, has become a real breakthrough in the field of military technology. It has seriously raised the strength of the Armed Forces, for many years, even decades, and provided a high level of Russia’s military security, helping to strengthen the strategic parity.”

He also said that “tests of the sea-based Zircon hypersonic cruise missile are nearing completion…. As early as next year, these missiles will begin to be supplied to equip the Russian Navy.”  

New types of weapons will form the basis of the new State Armaments Program (2024-2033), the drafting of which has begun at the Ministry of Defense.

Putin continues to defiantly announce the development of new types of weapons in Russia. He believes that, on the one hand, this serves to increase his level of support in the country. On the other hand, Putin has consistently adhered to the informal “scared of me, respect me” principle of Soviet teenagers’ courtyard crowds. He understands all too well that the only reason for attention to him by the leaders of other countries is the colossal military arsenal of Russia and its unpredictability in foreign policy. 

There is no logic in the fight against COVID

Two days ago, at a governmental COVID-19 task force meeting, Rospotrebnadzor Chairwoman, Russian Chief Sanitary Doctor Anna Popova (her duties are not medical but surveillance over compliance with rules and restrictions) reported that the incidence of COVID-19  continues to grow. The increase in the number of cases in Russia over the past week was 8.7%. A decrease was recorded in only two regions (Karelia and Kalmykia).

The “non-working days” regime announced by President Vladimir Putin is valid throughout the country until November 7, but already four regions have announced its extension (Novgorod, Tomsk, Chelyabinsk, Kursk). Governors of three more regions announced that they are considering extension (Komi, Ulyanovsk, Amur).

Rospotrebnadzor’s ruling was published today, extending COVID-19 restrictions in schools across the country until January 1, 2024.

Given this situation, Moscow Mayor Sergey Sobyanin’s statement that the non-working days regime in Moscow will not be extended is unexpected. So far, Moscow authorities cannot confidently say that the peak of infections is over. While the number of detected cases shows the first signs of decline, the number of deaths continues to rise.

Daily COVID-19 related deaths in Moscow

The rectors of several large Moscow universities (Higher School of Economics, Academy of National Economy, Bauman University) announced that students are being switched to online teaching methods, with a minimum number of classrooms.

According to rbc.ru, members of the federal task force didn’t support Sobyanin’s statement but decided not to block it and not to bring the Moscow case to Putin. 

Staff shortage in Moscow hospitals

Moscow hospitals are experiencing a severe shortage of medical personnel. One of the largest medical universities in Russia (Sechenov University) cancelled classes for advanced-level students of the clinical and pediatric faculties from November 8 to December 17. The university administration sent 1,600 students to outpatient medical institutions in Moscow for “practical training” not provided in the curriculum. Similar decisions were made by the heads of medical universities in Nizhny Novgorod, Omsk, and Khakassia regions.

The practice of forcibly recruiting students to work in COVID-19 hospitals was consolidated in April 2020 by order of the Ministry of Education and the Ministry of Health. At the end of November last year, Deputy Prime Minister Tatyana Golikova announced that the federal government had decided to pay 10,000 rubles ($131) each to students of federal medical universities and 7,000 rubles ($92) each to students of federal medical colleges for working with “coronavirus” patients in November and December. There were, respectively, 60,296 and 5,382 recipients of the payments. At the same time, Golikova said the regional authorities were obliged to make similar payments to students of regional medical universities and colleges, who were attracted to work in hospitals. Funds for such expenses were provided by the federal budget. The total number of student recipients of the payments is unknown.     

Russia, like everyone else

The chip shortage is having a substantial negative impact on the automotive industry in Russia. In September, Russian companies produced 25.5% fewer cars than a year prior. Sales of the largest Russian company, AvtoVAZ, decreased in September and October by 51% and 31%, compared to September and October of last year. 

Inflation makes Putin’s life difficult 

On the instructions of Vladimir Putin, the Russian government introduced non-tariff quotas for the export of nitrogen and complex fertilizers containing nitrogen. According to Prime Minister Mishustin, this measure will be effective from December 1 to May 31 of next year. Mishustin said the purpose of this decision is “...to prevent a shortage [of fertilizers - CA] in our domestic market and, as a result, an increase in food prices.” 

The government’s logic is clear: A sharp rise in gas prices in Europe and the shutdown of several European enterprises producing nitrogen fertilizers make the export of Russian fertilizers extremely profitable. The domestic gas price for industrial consumers in Russia is less than $70/1000 m3 (the price of Russian gas under long-term contracts of Gazprom for European consumers is $270-$350/1000 m3). The growth of fertilizer exports will lead to their deficit and a decrease in Russia’s harvest. A decline in harvest will inevitably lead to a further increase in food prices, which occupies 31% of the consumer basket (another 6% for alcohol and tobacco, and 3% for food outside of the home).

Prices for some basic types of food (sugar, sunflower oil) began to rise in Russia in fall 2020. This came as a complete surprise to the government. The Kremlin has chosen to coerce manufacturers and retailers to make “voluntary” commitments to freeze prices as the primary tool in the fight against rising prices. In some cases (for example, sugar), the government moved to compensate from the budget for producers’ losses when they sold sugar at a price below costs.

Throughout 2021, the inflation rate continued to increase, and by the end of October, it amounted to 8.1% over the past 12 months. This significantly exceeds the target of the Bank of Russia (4%) and the government forecasts laid down in the budget (5.8% in 2021 and 4% in 2022). The acceleration of inflation raises the requirements for indexation of budget expenditures and “eats up” the growth of nominal wages and pensions, which feeds people’s dissatisfaction with the government’s policy. 

The rise in inflation in the 2022/2023 agricultural year will prevent the government and the Bank of Russia from bringing inflation down to an acceptable 4% by the end of 2023, when (as everyone believes) Putin will announce his decision to retain the presidency in the Kremlin for another six years.

Fake news is not news

More and more often, Vladimir Putin plays the role of Pinocchio, telling his own versions of various events and processes, unsupported by facts. “This is not some kind of investigation, this is the legalization of materials from the American special services”—with these words in December last year, he commented on the investigation by a group of journalists into the circumstances of the poisoning of the leader of the Russian opposition, Alexey Navalny. Navalny was poisoned with the chemical weapon Novichok in August 2020 in the Siberian city of Tomsk. The investigation relied heavily on the billing of telephone calls among the Russian secret police (FSB) officers involved in the operation to eliminate the politician.

Nine months have passed, and The Insider journalists received the materials of the FSB investigation at their disposal. According to these data, the bills used by the journalists were actual and purchased from professional fraudsters who built their business on it. One of them bought a fake ID of an operative officer of the Russian police headquarters (MVD). His accomplice made mock court rulings. Afterwards, they turned to mobile operators and the most significant Russian internet portal mail.ru to obtain access to the personal data of the people for whom they received the paid order.

Thus, the FSB acknowledged that the leading assistant in the investigation into the circumstances of Navalny’s poisoning was not the American special services but Russian corruption, which affected the entire Putin power structure, including law enforcement agencies.

Vladimir Putin sees no point in a serious fight against corruption in Russia. He does not believe that an official can be honest but does believe that no one can avoid the temptation of this sin. At the same time, he has at his disposal materials confirming the corruption of officials, which are a kind of guarantee of their loyalty to the regime. Recently, however, corruption has often opened up access to materials that are used in high-profile investigations. The loudest of them was the film “Putin’s palace. The story of the world’s biggest bribe,” which Alexei Navalny posted on YouTube on January 19, 2021. Two days later, Navalny flew to Moscow, was detained at the border control, and sent to a colony on fictitious charges. The film about Putin’s palace was watched by at least 120 million people.

Sanctions do not interfere with doing business

Western sanctions against several Russian banks, companies, and individuals have long been routine. They do not significantly interfere with doing business, and their impact cannot be assessed at the macro level. But from time to time, the effect of these sanctions becomes noticeable.

In September, SMP-bank, owned by one of Vladimir Putin’s closest cronies, Arkady Rotenberg, attracted almost $1 billion in household foreign currency deposits for more than a year. This figure is significant, even for the largest Russian banks. This month, the largest of them, Sberbank, reported a decrease in household foreign currency deposits by $100 million. The second-largest bank, VTB, reported an increase in similar deposits by $127 million. At the same time, the volume of assets of Sberbank and VTB exceed the volume of assets of SMP-bank by 60 and by 30 times, respectively, and interest rates in SMP-bank are lower than in Sberbank and VTB. Even for SMP-bank itself, this growth in deposits in September exceeded 10% of its assets.

Gazprom CEO Alexey Miller and Arkady Rotenberg

The source of the new deposits is unknown. I can assume their appearance is associated with the beginning of the development of three gas fields in Yamal (Tambey group). This was discussed at a special meeting with Putin a week ago. The field reserves are over 5.2 trillion cubic meters of gas and 380 million tons of oil and gas condensate. Gas production may amount to 55 billion cubic meters per year (8/5% of annual gas production in Russia). The licenses for these fields belonged to Gazprom. In 2017, Gazprom unexpectedly announced the transfer of a 50% stake in this project to Rusgazdobycha, an affiliate of Arkady Rotenberg. For the acquisition of this share, Rotenberg’s company, according to Gazprom CEO Alexei Miller, promised to finance “absolutely all the costs of research and preparation of all documents for the pre-investment phase.” The source of the money was the state-controlled Gazprombank, which provided Rotenberg’s company with a loan secured by these 50% shares.