September 8, 2022
Kremlin corrupts brains
Back to normal
Devil’s inventiveness
Keep crops inside!
Unlucky lucky man
Comprehensive halt
Mosaic
Kremlin corrupts brains
President Putin’s aide Maxim Oreshkin got into a public argument with Finance Minister Anton Siluanov after the latter said that the Chinese currency’s role in Russia’s international reserves would increase. However, the presidential aide put forward a very original proposal.
“My opinion is obvious: the dollar and the euro should be exchanged for the ruble, but not for other currencies... we need to believe in ourselves first and foremost, rather than look for some kind uncle in the West or the East, who can invest something and then help us... we need to build a system where we primarily depend on ourselves; we invest in ourselves.”
Oreshkin’s statement veiledly supports the idea that the Ministry of Finance’s fiscal reserves (the National Welfare Fund) should be invested in Russian industrial and infrastructure projects, thereby supporting economic growth. This position of the presidential aide should come as no surprise: Vladimir Putin has long been convinced that public investment is the only engine of the economy and that his ministers know best which investments are effective and which are not.
Of course, we can discuss the advantages and disadvantages of this idea. Still, I could not understand how the ruble assets of the Ministry of Finance would become part of international reserves. It seems that being inside the Kremlin corrupts your brains…
Back to normal
The Russian foreign exchange market remains stable regarding currency supply: According to the Moscow Exchange, major exporters sold $20.3 billion in August. If one recalls that since the end-June the dollar exchange rate has bounced back from its low (51 rubles) and stabilized since end-July at around 60-61 rubles, one can assume this was due to a gradual recovery of imports.
Chinese statistics also evidence the recovery of imports: In August, Chinese exports to Russia grew by almost 27% year-on-year. Thus, it is safe to say that Russian importing companies managed to solve problems with logistics and bank payments.
Devil’s inventiveness
The pressure on Alexei Navalny is increasing every day: In addition to regular placement in a punishment cell, the colony administration has placed him in high-security conditions. Here is how the politician wrote about it:
They took me out of my cell to the commission, where the bosses solemnly announced: “It has been established that you do not stop your criminal activities; you commit crimes directly from the places of detention. You communicate with your accomplices through lawyers. Therefore, we abolish the attorney-client privilege in your respect. All incoming and outgoing lawyer’s documents will be subject to a three-day inspection.”
To my surprised question: “Can I specify what terrible extremist crimes I am committing?” I was told: “This is secret information, you are not allowed to know it, and we will not give you the materials of the check. All you need to know is that the attorney-client privilege no longer applies to you.”
Keep crops inside!
According to the Ministry of Agriculture, Russia is preparing for a record harvest. Good weather is favorable for the faster harvesting of crops, except for corn and sunflower. Besides, the year was successful also from the point of view of crop yield, which is 10%-20% above last year’s level for the main crops. As a result, to date, the total harvest of crops amounted to 126.5 million tonnes. The record-breaking year for Russia was 2017, when the grain harvest amounted to 134.1m tonnes.
A good harvest does not mean the Russian authorities will be ready to liberalize the export of agricultural products and lift or soften the existing restrictions. The Kremlin initiated this policy at the beginning of the year, and it resulted in a significant build-up of agricultural stocks: Stocks of wheat and corn by the end of the agrarian year (June 30) had increased by 16% and 25%, respectively, and sunflower by more than three times.
The growth of sunflower stocks resulted from chaotic, impulsive decisions made at the initiative of Vladimir Putin in 2020-2021. After a poor harvest in 2020, sunflower oil prices began to rise rapidly, and the President demanded that they be frozen. This led to a drop in seed processing and sunflower oil production, and an increase in unprocessed seed exports. Although the 2021 crop was good, the government imposed export duties on seeds and sunflower oil. As of April 1, 2022, following the invasion of Ukraine, the government banned sunflower exports. On September 1, this ban was lifted, but export duties remained, 50% for sunflower seeds and 20% for sunflower oil.
This year’s sunflower yield is about 50% higher than last year’s. Russian farmers will not benefit from a good harvest if export restrictions are not eased. On the other hand, the Ministry of Agriculture’s report on the level of food security will undoubtedly make Vladimir Putin happy.
Unlucky lucky man
After President Putin signed the decree on nationalizing the assets of the Sakhalin-2 project, Russian authorities briefly considered who should buy the stake in Shell, which announced its withdrawal from Russia. NOVATEK became the “lucky” one—the government outlined the requirements for a potential buyer so that there were no other bidders. Even Gazprom did not meet the conditions.
However, this purchase did not make NOVATEK’s main shareholder, Leonid Mikhelson, very happy—he quickly realized that the asset would have to be paid the total price with a handsome premium. (There can be no doubt that Shell will not receive the total price: A presidential decree instructs the government to deduct what the government deems are the damages incurred by the outgoing shareholder.) However, the acquisition of 27.5% in the Sakhalin-2 project will not give NOVATEK access to the company’s management; 51% of the shares belong to Gazprom. In addition, 85% of the LNG produced by the Sakhalin-2 project is sold under long-term contracts, and the project shareholders have no claim to them.
In 2006, Gazprom acquired 19.9% of NOVATEK as part of an informal “settlement agreement” when the gas monopoly agreed that NOVATEK would be able to export gas itself—an amendment was made to the law that limited Gazprom’s monopoly to pipeline gas exports. Four years later, Gazprom sold half of this stake to Gazprombank, which re-sold it a year later to Leonid Mikhelson and President Putin’s friend Gennady Timchenko, who had already increased his stake in the company to 23.5%. Gazprombank earned $2 billion from such a simple combination.
Since 2006, Gazprom and NOVATEK have repeatedly attempted to implement joint projects, but all of them, even those endorsed by Vladimir Putin, ended in divorce. I don’t think this project will be an exception.
Comprehensive halt
Dmitry Pankov, CEO of Delo Group, Russia’s largest container shipping operator, confirmed that major European shipping companies continue to refrain from working with Russia. In the Baltic Sea ports and in Murmansk, where European companies have been dominant, container volumes have dropped catastrophically, and he sees no way to improve the situation.
Our predictions about a 90%-95% drop [in container shipments through the Baltic Sea and Murmansk ports] are coming true. We saw such June, July, and the same in August.
At the same time, Pankov said that his company’s work in the Far East and the Black Sea ports has normalized.
... except for the northwest, [the situation] is stabilizing. If initially there was a sharp imbalance between exports and imports, the situation has leveled off. What will happen next is hard to predict... the Far Eastern ports are full of containers, with more cargo than last year... After European container lines left, the niche was occupied by small Chinese carriers.
If we’re talking about the south [Black Sea], we don’t see any volume substitution by new operators there. The same Turkish lines used to run in this direction are still running.
Following the Russian army’s invasion of Ukraine in March and on through July, the volume of container cargo transshipped at Russian ports dropped by 37%.
Mosaic
Aeroflot Group plans to carry about 40 million passengers in 2022, which is 13% less than last year. According to the company’s CEO, Sergey Aleksandrovsky, this is due to a sharp decline in international flights. Aeroflot hopes to maintain the achieved level next year by increasing the number of flights within Russia.
According to the Bank of Russia, the dynamics of financial flows indicate an ongoing contraction of economic activity in Russia. The volume of incoming payments made through the Bank of Russia payment system decreased by 1.0% in August compared to the average level of Q2. However, traditionally (due to seasonal factors), the payment volume should grow this month. Excluding oil production and petroleum products output, the volume of incoming payments fell by 5.4%; the reduction was the same in the outgoing payments.
In July, the mortgage lending market continued to recover: Compared to June, the number of loans issued increased by 40%, and their total volume dropped by 35%. However, almost all loans issued were linked to the government-sponsored subsidized mortgage program—the average loan rate was 6.67%, while the minimum advertised rate for Sberbank and VTB (the two largest Russian banks, accounting for over 70% of the mortgage market) was 9.9%.
Russian coal miners are facing problems with redirecting their export to China: Higher logistics and insurance costs while using ports in the Black and the Baltic seas, combined with the 30% discount requested by Chinese companies, force Russian companies to sell coal with zero profits.
