September 28, 2022
Birthday party must go on!
Optimistic forecast
Tight budget
Logistics is not easy
Big and poor
Too dangerous to be Medvedev’s friend
Good business
Just a fact
Birthday party must go on!
The pause that arose after the announcement of the results of the “referendums” in the occupied territories of Ukraine was unexpected - the experts were counting on the “Crimean” speed of decision-making in the Kremlin to annex another part of the neighboring country. In 2014, the legal formalization of the annexation of Crimea was completed on the second day after the “referendum.” This time, the Kremlin decided to pause and is not announcing a timeline for when Vladimir Putin will sign the necessary law.
The delay in procedures is due to personal problems of the Russian President, who has been in a state of heightened tension recently and decided to relax a bit before an essential political performance. Most likely, the annexation will be completed next week and will be a gift to the Russian dictator for his 70th birthday: The chambers of the Russian Parliament have scheduled extraordinary sessions for October 3 and 4.
Although the annexation will be presented to the Russian population as a victory, it will not mean the end of hostilities, Kremlin spokesman Dmitry Peskov said bluntly:
At the very least, what I can tell you with absolute precision is that you know that not all the territory of the Donetsk People’s Republic has yet been liberated. We are talking about territory that is within the borders of 2014. Therefore, at the very least, the entire territory of the Donetsk People’s Republic must be liberated.
I will repeat my earlier hypothesis: The problem of ending the war today is a logical mousetrap for Vladimir Putin. The end of the war must necessarily involve the end of hostilities, which can either result from Ukraine’s crushing victory and the Russian army’s flight from the occupied territories or result in Ukraine’s capitulation and the signing of Minsk-3. Today, the realism of both scenarios seems extremely low, hence...
Optimistic forecast
Speaking in the State Duma, Maxim Reshetnikov, the head of the Ministry of Economic Development, said that the Russian authorities are aware that the sanctions against Russia will be long-term. The government, he said, will keep the anti-crisis agenda next year but also intends to focus on the medium-term tasks of adapting the economy. The Ministry’s budget forecast looks very optimistic regarding the decline and the timing of the transition to the growth phase.
The lower point of the Russian economy’s decline will be passed in the 4th quarter of this year. At the end of 2022, we expect the GDP to decrease by 2.9%. Investment decline is likely to be in the 2% range. Unemployment at the year’s end is likely up to 4.5%. Inflation will slow to 12.4% at year-end after peaking at 17.8% in April.
A series of sector strategy sessions led by the Prime Minister took place. A scenario of accelerated adaptation of the economy was prepared on their basis. It assumes that the economy will overcome recession in 2024, and then the economic growth will resume at the expense of domestic demand.
The socio-economic development forecast is based on a scenario of continuing such accelerated adaptation. It assumes that the economy will decline by 0.8% in 2023, mainly because of the high base of the first quarter of 2022 and the decline in net exports between 2024 and 2025. GDP will grow at an average rate of 2.6% due to domestic consumer and investment demand growth.
Tight budget
The Russian government has submitted the draft 2023 budget to the State Duma. While the package of documents is not in the public domain, we can only analyze the general characteristics of the budget, which turned out to be unexpected: The government persuaded Putin to agree to “freeze” next year’s spending at the current year’s level, despite high inflation. Most likely, Minfin “sold” the President the idea that all indexations took place this year when decisions were made in the spring to increase spending by 22%. I note that the relevant amendments to the budget law were not considered and approved by parliament, but when did that stop Vladimir Putin?
Logistics is not easy
Restructuring logistics routes for container shipments following the imposition of sanctions and the refusal of major shipping companies to work with Russia is challenging.
The traditional route for containers going to Russia went through the Baltic Sea: Cargo from Asia came to the Netherlands and Germany for all of Europe, including the Russian market. This arrangement allowed exporters to save on transportation costs: The volume of shipments to Russia was insufficient to load a separate ship. Accordingly, containers were transported across the country by rail, which was very convenient for Russian Railways regarding load distribution across its network.
After the invasion of Ukraine, container shipments via the Baltic Sea virtually ceased, and Russian companies began to take alternative routes: Via the Mediterranean Sea and Turkey or directly to ports in the Far East. The second option is much faster and cheaper, so it is not surprising that exporters chose this option. And then there was a problem for Russian Railways, for which the Far Eastern ports were the primary recipients of exported coal transported in open gondola cars. And transporting containers requires platforms, which Russian exporters send to the Far East in insignificant quantities. As a result, the ports are jammed with incoming containers that Russian Railways cannot take out.
In a challenging situation, Russian Railways decided to use the semi-cars that arrived with coal to transport containers to the West and offered the importing companies a 20% discount for such transportation. However, this option did not suit the owners of railcars—coal transport companies are interested in the earliest-possible return of railcars to the coal mining locations in Siberia. And using their gondola cars for transportation of containers, first of all, delays their shipment from ports—loading of gondola cars with containers takes 16(!) times longer than loading platforms. Second, the cars are shipped somewhere in the European part of the country, where they will have to be sent backward.
Arkady Korostelev, the head of FESCO, said the peak of cargo flow occurred in the summer months and that the territory of the Vladivostok commercial seaport, managed by the group, has a record number of containers—over 30,000 TEU.
Big and poor
The law of Hegel’s philosophy about the transition from quantity to quality turned an unexpected side for the Russian farmers: The record grain harvest—expectations of Vladimir Putin were 140 million tons in dry weight—turned out to be poor quality. As a result, wheat prices in the country have dropped, and the Ministry of Agriculture is considering ensuring the export of a considerable volume of feed grain.
According to the Ministry of Agriculture, prices for third-class wheat on the domestic market by September 21 were 17.1% lower than a year earlier: for fourth-class wheat, lower by 17.5%, to 11.8 rubles; for feed wheat, lower by 23.6%.
Deputy Agriculture Minister Oksana Lut estimated that grain exports from Russia this year could be as much as 60 million tons; last year, it was 38 million tons.
Too dangerous to be Medvedev’s friend
The Ostankinskiy Court in Moscow sentenced the former Chairman of the Board of Directors of Medpolymerprom Group, U.S. citizen Gene (Yevgeny) Spector, to three-and-a-half years in a strict regime colony for mediation in giving a bribe to Anastasia Alexeeva, former assistant to former Russian Deputy Prime Minister Arkady Dvorkovich. According to the court verdict, the fixed size was 4 million rubles. The Deputy Prime Minister’s aide was able to vacation in Thailand and the Dominican Republic for free by assisting in the promotion of medicines.
Spector fully pleaded guilty and made a deal with the investigation; his case was considered in a particular order—without examining evidence. In June 2021, the Ostankinsky Court sentenced Spector to four years in a strict-regime colony with a similar fine. Still, after consideration of the sentence in the appeal and cassation instances, his case was sent for a new trial.
Alexeeva does not plead guilty to the charges; the investigation is completed, and the court considers the case.
So far, there is no information that Deputy Prime Minister Dvorkovich, the current head of FIDE, also received the reward. Still, we must remember, Dvorkovich was an essential element of (then) President Medvedev’s economic team. Two others, billionaire Ziyavuddin Magomedov and former minister Mikhail Abyzov are in jail waiting for the court trial.
Good business
The Afghan government has concluded a trade agreement with Russia. According to acting Afghan Minister of Trade and Industry Haji Nooruddin Azizi, Russia will supply the country with about 1 million tons of gasoline, 1 million tons of diesel fuel, 500,000 tons of liquified petroleum gas (LPG), and 2 million tons of wheat annually. In addition, he said that Russia offered the Taliban a discount compared to average world prices for raw materials. The agreement will be valid for an indefinite trial period. After that trial period, the parties will have to sign a contract for a more extended length if they are satisfied with the outcome.
On the one hand, this deal can be seen as insurance for the Russian government in case Western sanctions tighten: 1 million tons of gasoline is 22.5% of its exports in 2022.1 On the other hand, it could be the Kremlin's payment to the Taliban for its promise not to invade Central Asia and further into Russia.
Just a fact
Anastasia Davydova, the Secretary General of the Russian Olympic Committee and a five-time Olympic champion has left the country and notified her employees that she has no plans to return to Russia, the head coach of the Russian national synchronized swimming team, Tatiana Pokrovskaya, said.
Yesterday our staff received a letter from Anastasia via e-mail, in which she informed us about her departure from Russia. She did not give reasons for her decision, only saying that she had no plans to return. Everyone decides on his own. It is a complicated and strange time. Everyone decides for himself what to do... Anastasia...decided to leave. Some would say she ran away.
Davydova has won gold medals at three consecutive Summer Olympics: In Athens in 2004, Beijing in 2008, and London in 2012. She is also a 13-time world champion. After her sports career ended, Davydova was the first female Vice President of the Russian Olympic Committee, and since May 2014, she has been the organization’s General Secretary.
Sakhalin Oblast Governor Valery Limarenko said that since September 16, the Sakhalin-1 project, where ExxonMobil was the operator, had stopped producing gas. A month after the war started, ExxonMobil withdrew its employees from Russia, leading to a complete halt in oil production (last year’s production was 220,000 barrels a day), but gas production was still going on.
After the mobilization started, Muscovites switched to a savings behavior model and cut back on going to restaurants. According to the company Focus Technologies, last week, the traffic in the capital’s restaurants was 17% lower than the week before and 27% lower year-on-year, while restaurateurs’ revenues decreased by 18%.
After the mobilization started, Russians wishing to leave the country faced a shortage of air tickets for international flights, which increased in price five to 10 times. It soon became apparent that an alternative option was to fly to a Russian city as close to the border as possible and then travel outside Russia by car or bus.
In a market economy, when demand exceeds supply, prices rise. Airline reservation systems are set up so that the price increases when fewer seats are available on a flight. Over the past week, tickets to Murmansk, which is only 8 km from the border with Norway, Omsk, Orsk, and Chelyabinsk (from 10 km to 150 km to the border with Kazakhstan) have increased in price three to seven times; to Ulan-Ude, 230 km to the border with Mongolia, 2.5 times, often for a flight that leaves in a few days.
This deal could help the Lukashenko regime, which could not export petroleum products to Europe after sanctions were imposed.