September 19, 2022

Sep 19, 2022

The courageous woman
Goodbye...
The inevitable conflict
“Rosneft”—a threat to stability
Must listen to the Kremlin
Unexpected liberalism
Oil is fine
...but not so much with gas
(Dis)inflationary fog
Her word vs. fact
Just a fact

The courageous woman

Alla Pugacheva, for the Russian public, is a cross between Oprah Winfrey and Madonna. She became nationally known in 1975 when she won the Golden Orpheus contest. Her stage life spanned 35 years, with a repertoire of more than 500 songs in Russian, English, German, French, Hebrew, Finnish, and Ukrainian. Pugacheva recorded 19 CDs with a combined circulation of more than 250 million copies.

On Sunday, Alla Pugacheva made a harsh anti-war statement, which could become a factor in changing public consciousness in the country.

...I stand in solidarity with my husband, an honest, decent, and sincere man, a true and incorruptible patriot of Russia. He wishes his homeland prosperity, a peaceful life, freedom of speech, and an end to the killing of our guys for illusory goals that make our country an outcast and weigh down the lives of our citizens...

Pugacheva is an iconic figure for the 50+ generation—i.e., the main base of support for Putin, his policies, and the war in Ukraine. On the other hand, the singer has almost 3.5 million followers on Instagram, which speaks to her popularity and authority with a younger audience.

I think the Kremlin made a grave mistake when it attacked Pugacheva by declaring her husband, Maxim Galkin, a foreign agent. It is no secret that until then, Pugacheva had openly taken an anti-war stance but at the same time did not make such outspoken statements. If Pugacheva decides to continue the public discussion about the senselessness of the war, the Kremlin should prepare for an uphill battle.

Goodbye...

On September 17, Russia withdrew from the European Court of Human Rights, where it had participated for 24 years. Although the Russian authorities have often refused to execute court decisions in recent years, the ECHR has undoubtedly been an influential factor in improving the quality of many aspects of the Russian judicial and law enforcement system.

The withdrawal from the ECHR, which Russia initiated shortly after the invasion of Ukraine, will weaken the instruments for protecting the rights and interests of ordinary Russians.

The inevitable conflict

After the refusal of global automakers to work in Russia, Russian motorists faced a severe problem—service centers began to have issues obtaining spare parts, which led to delays in the timing of warranty repairs.

The current law requires machine manufacturers to carry out repairs under warranty within 45 days; if the fault is not eliminated during this period, the consumer has the right to terminate the contract of sale, replace the goods, or reduce the price. In this case, a penalty of 1% of the value of the goods is charged for each day of delay in repair. According to the law, similar costs can be incurred by manufacturers if the car was in repair for more than 30 days in each warranty year due to the elimination of various defects.

In early September, the Association of European Business in Russia appealed to the Russian authorities with a proposal to introduce a nine-month moratorium on the application of these law provisions, arguing that the pressure of sanctions could exceed the cost of a new car. The association recalled that the government had given such relief to developers who breached the deadlines for the completion of housing—for them, the penalty was reduced 75 times, from 0.225% to 0.03% of the key rate of the Bank of Russia.

I doubt that the Russian authorities will immediately agree to accommodate foreign companies; it is more likely that the Kremlin will go the way of escalating tensions and supporting numerous lawsuits brought by citizens against car manufacturers. The snowballing avalanche of cases will result in the amounts of payments confirmed by the courts exceeding the profits earned by the automobile companies.

So far, most global companies refrain from direct supply of parts to Russia but are willing to cooperate with dealers if the latter use the possibility of parallel imports and organize their supply of parts in Russia.

“Rosneft”—a threat to stability

“Rosneft,” which the Russian government controls, became a major player in Germany’s refining market in 2011. After acquiring stakes in three German refineries[1], the company gained 12% of the market. In addition, until recently, Rosneft provided some oil imports to Germany, including through the Druzhba pipeline.

The formal reason for the government’s decision is said to be that Rosneft’s participation in the refineries’ equity capital threatens their economic activities: In May, Rosneft came under blocking sanctions of the European Union, after which insurance companies, IT companies, and banks and clients refused to maintain relations with Rosneft and German enterprises, in which the Russian company is a shareholder. According to observers, one of the triggers for this decision was the Russian company’s refusal to agree on alternative sources of oil supply.

Control over Rosneft assets has been placed in the hands of the government for six months. If the identified threats are not eliminated during this time, the German Ministry of Economics has the right to decide to nationalize these assets.

Must listen to the Kremlin

On Tuesday, September 20, election for the President of the Russian Academy of Sciences (RAS) will be held. The day before the election, Alexander Sergeev, the current President of the Academy, withdrew his candidacy for re-election as head of the academy, stating the forced nature of his decision.

The events of recent days forced me to withdraw my candidacy for the election of the President of the Russian Academy of Sciences; it is a forced decision.

Sergeev, speaking at a general meeting of the RAS, said that the election of the Academy’s President is taking place in “unprecedented conditions.” According to him, many members of the academy “are subjected to psychological and even external administrative pressure, especially after publicly stating their position.” Sergeev did not want to share details; academician Yury Solomonov, who had previously agreed to support Sergeev’s candidacy only “on the condition that the country’s leadership supports him,” did so for him.

...I received information from the country’s leadership that they did not support Sergeev’s candidacy. I informed him about this and told him that under the circumstances, it was not about sympathies or antipathies, it was about the fate of the academy. In this connection, I withdrew my consent... It is simply impossible to imagine that the country’s leadership does not support the head of an enterprise that has FGBU status...

In 2013. Vladimir Putin initiated the reform of the Russian Academy of Sciences, during which the academy lost its property and independence; during the reform, the right government deprived academicians of the opportunity to determine research priorities and distribute financial resources among institutes. According to experts, in this way, the Russian leader took revenge on the academicians who refused to elect Yuri Kovalchuk, brother of Vladimir Putin’s closest ideological adviser and owner of Russia’s second-largest media empire, as a full member of the academy.

According to the law, after the Presidium of the RAS approves the list of possible candidates for the presidential election, the list of candidates is considered by the government, which decides on the admission or non-admission of candidates to the election.

After academician Sergeev refused to participate in the elections, academician Gennady Krasnikov, the academic secretary of the department of nanotechnology and information technology of the RAS, had the best chance of being elected President of the RAS. According to RAS vice-president Yury Balega, Krasnikov’s election could become a turning point in the academy’s work.

Sergeev is more inclined to ask questions of fundamental science. He believes that it is the foundation of human development. And Krasnikov is sure that the academy should work more in such fields, which are of priority importance for industry development in the current time.

Corresponding member of the Russian Academy of Sciences Oleg Melnik, who believes that Krasnikov’s focus on applied science will bring him support “from the top,” agrees with him.

The orientation of science toward applied problems from the speeches of high-ranking officials is obvious. Therefore, it will not be easy for the future Academy President to maintain the RAS to solve fundamental scientific problems, both because of the reduction in funding and the shift of the focus to applied development.

Unexpected liberalism

Ivan Chebeskov, director of the Financial Policy Department of the Ministry of Finance, gave an ultra-liberal vision of the future law on digital currencies.

The Ministry of Finance has developed a draft on digital currencies; it is comprehensive, it includes many things (...). But in terms of payments, we instead create a mechanism for business rather than fully build this architecture because it is not entirely clear how this should be regulated, so we allow the business to pay in cryptocurrency with this bill, but what cryptocurrencies will be used, how to negotiate with counterparties, with which countries this will work—we leave it all up to entrepreneurs... they will figure it out and understand what will work and what will not.
When many people deal with the issue, some right solution is found over time than if we were to come up with some solution that wouldn’t work for many people. It will be on the business side to determine how it should function.

This statement came a week after Prime Minister Mikhail Mishustin demanded that by the end of the year there should be developed “a coordinated position on draft federal laws regulating the issue, organization of the issue and circulation of digital currency in Russia in terms of regulation of mining, as well as the use of digital currencies in international payments.”

The discussion of the legislative regulation of cryptocurrencies was active in Russia last fall. Still, an irreconcilable conflict between the Ministry of Finance and the Bank of Russia halted progress on the draft law. The discussion resumed after the imposition of sanctions against Russia and blocking international settlements for the most prominent Russian banks. However, I do not foresee that the search for a compromise will be easy—this is evidenced by the position of the Bank of Russia, voiced by First Deputy Chairman Vladimir Chistyukhin. He said that the regulator feels “very skeptical” about the legalization of private digital money because of the high risks.

Oil is fine

The released statistical data on the work of Russian seaports in August confirmed the continued growth of oil and petroleum product exports—the volume of exports was by 5.4% more than a year ago. Thus, it is safe to say that there are no quantitative restrictions on exporting Russian oil and oil products today. The price of the “compromise” is well understood—the discount to the price of Russian oil relative to the Brent blend was 40% to Brent price in August.

...but not so much with gas

Vladimir Putin is consistently destroying Gazprom’s economy. According to the company, gas production in the first half of September fell by 38%, and exports to Europe and Turkey fell by 64% compared to last year. Of course, in terms of export revenues, Gazprom’s losses are compensated for by the price, which is 8-10 times higher than last year; however, in the medium term, a voluntary withdrawal from the primary market would be a disaster for the company.

(Dis)inflationary fog

Announcing another cut in the key rate, Elvira Nabiullina, Chairman of the Bank of Russia, admitted that the zero-inflation rate in recent months was due to one-time factors whose effect is close to exhaustion and shared a new vision of the near future.

...today’s low inflationary pressure is because of structural adjustment of the economy. Earlier, we said that it predominantly increases inflation. Now we see that the situation is more complicated: Structural adjustment may be accompanied by disinflationary processes. Thus, the effects of sanctions on exports and imports can be both inflationary and disinflationary and can change direction over time.
...structural adjustment of the economy will be accompanied by an acceleration of price growth, despite occasional periods of price adjustment. This is a significant circumstance based on which we forecast inflation above the target next year and which we consider in our monetary policy. As for this year, we lowered our inflation forecast to 11%-13%.

Her word vs. facts

In her presentation, Elvira Nabiullina twice mentioned the growing propensity of Russians to save, which, in her opinion, has become one of the most potent deflationary factors.

The central role in the price correction in the summer months was played by the strengthening of the ruble, the increased propensity of the population to save, and the growing supply of agricultural products…
In the future, the steady inflationary pressure will increase somewhat. Among other things, this could be due to a decrease in the households’ propensity to save. Citizens are now more inclined to save than to spend.

The statement looks strange because it is not supported by data on private savings, which the Bank of Russia publishes.

Just a fact

After Russia banned crab imports from the United States and the European Union, Russian crab miners attempting to increase exports to China have faced logistical constraints: The Russian customs infrastructure in the Far East cannot pass increased export volumes. The export of live crab to China goes through the Kraskino border crossing point, where the queue of cars has grown to 110. Based on the “capacity” of the Russian customs point, this is equivalent to five days of waiting. According to experts, depending on the type of crab and temperature conditions each day of downtime, the decrease in the commodity value of the product can reach 50%.

In 2021, 13,600 tons of live crab were transported through Kraskino; last year, the total exports of live and frozen crab from Russia was 75,000 tons.

Behind the Iron Curtain

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