Last Week in Review

Around the Sectors with Alex Nice


Russian metals producers face denting by US tariffs

Arkady Dvorkovich, a deputy prime minister, has conceded that the imposition of a 25% US import tariff on steel imports and 10% tariff on aluminium will hit Russian metal producers, although he claimed that the impact will be more modest than for the EU and China. Russian exported 2.5m tonnes of steel to the US in 2017, around 9% of the total, while aluminium producer Rusal, exports around 10% of its output to the US directly, and the US accounts for 17-19% of overall sales. Russian companies insist they can divert supplies to other markets, however the tariffs could lead to a further growth in surplus global production, which will weigh on revenues, particularly if the EU and China respond with counter measures. For some Russian companies such as Evraz and NLMK, the negative impact may be offset by increased sales for their US subsidiaries.

However, as Julian Lee notes, there is also a potential upside for the Russian economy as the tariffs will push up the price of line piping for the oil and gas industry. 77% of line piping is currently imported and domestic producers are in no position to replace foreign supplies. In Lee’s view, the tariffs are a gift to OPEC and Russia as it will raise the production costs of the US shale industry.

Kommersant reports that Russia retained its position as the second-largest exporter of arms in 2017, selling weaponry worth $15bn, and concluding contracts worth $16bn – among which one of the most notable was the agreement to supply the S-400 air defence system to Turkey, at a cost of $2.5bn. Despite Vladimir Putin’s call to double the value of non-resource exports in the next six years, the government has set a similar export target for 2018. The government has set a similar export target for this year. Given Vladimir Putin’s call last week to double the value of non-resource exports in the next six years, one might have expected the target to have been raised this year, although sanctions and increased international competition cloud the prospects for the sector.

Finally, Vedomosti reports that US agricultural trader Archer Daniels Midland will establish a joint venture in Russia with Aston in Ryazan and Vladimir regions. While the venture is relatively modest at present, it is another sign of Russia’s growing clout in the agricultural sector as all the five largest agricultural traders now have operations in Russia.


Energy Outlook with Nick Trickett


In cold of winter, another gas war heats up

Word that Ukraine’s Naftogaz won a $2.5 billion claim against Gazprom in Stockholm’s arbitration court provided relief to Kyiv. The two companies have been at it ever since Crimea was annexed since Gazprom demand $81.4 billion from Naftogaz. Naftogaz already lucked out winning a key concession via the same arbitration court that forced Gazprom to accept EU market regulations affected transit and supply contracts with Ukraine. Gazprom’s contractual mandates that consumers pay penalties for not taking enough of its gas suffered a heavy blow.

Kyiv’s relief was short-lived, however. Gazprom immediately used the only leverage is had remaining in the situation: cold weather. The Russian gas monopolist moved to cut all supplies to Ukraine and ignore the court’s ruling, going as far as to exclude the Donbass from calculations of exports. Naftogaz is closing its office in Moscow as Germany has called on Naftogaz to resolve the dispute. Ukraine, meanwhile, is scrambling to make sure it can provide enough heat to its people.

The situation has been folded into a generally correct narrative of Russia’s attempts to use gas supplies to Europe as a political tool. In particular, the Nord Stream II expansion has received scrutiny since it would enable Gazprom to completely avoid transit through Ukraine and deprive Kyiv of desperately needed budget revenues in the form of fees. Gazprom’s extreme decision to basically rip up contracts and burn its reputation over the court’s ruling has not dampened enthusiasm for Nord Stream II in Germany, but reflects how much leverage the company has lost.

From a fantastic report from the Oxford Institute for Energy Studies, it’s evident that Gazprom is facing an increasingly competitive market. Even though the company has ramped up supplies to Europe and increased its market share, the current surplus of LNG production creates openings for outsider competitors on a price basis, the company has had to begin decoupling from its oil-indexed contracts and faces pressure from rising oil prices, and its prices on the German market basically mirror European spot trade prices for gas. If it avoids transit through Ukraine, it will be more closely tethered to more transparent markets increasingly interconnected and able to manage shutoffs (an extreme event). Burning political capital with its latest stunt will also only encourage European states to accelerate investments into alternate energy sources or LNG. Ukraine is suffering lost revenues today. Russia will suffer the consequences tomorrow.


Word on the Street with Anna Nadibaidze


This week in Telegram gossip…

Putin’s address to the Federal Assembly certainly sounded belligerent. The message was clearly not aimed merely at the Federal Assembly, but the United States. And to the Russian electorate, who “is ready to forgive anything for these rockets,” says @seryikardinal.

The address, in combination with the ridiculous televised debates between other candidates, have led to lower turnout predictions, as people just don’t see the point of voting. The overall mood among people is dissatisfaction with a corrupt system, something that can’t be changed it by voting. Now the presidential administration’s hope for high turnout lies only with the army, bureaucrats, government corporations and the state service, argues @russica2.

Putin’s emphasis on the role of the central bank in his address reveals Nabiullina’s influence in the political and economic system. @mislinemisliinterprets this as a de facto transfer of power over government to Nabiullina and expects an even stricter ‘cleaning’ of the banking sector (last week Alzhan Bank got its license revoked).

A source told @russica2 that regional governors and businessmen are growing nervous about the costs for all of Putin’s promises outlined in his speech. Nobody understands where the money will come from and many fear important changes, with some already planning to leave Russia (by acquiring Cypriot citizenship, for example).

Channel One (the main TV channel) is planning to broadcast the movie Crimeaduring the ‘day of silence’, when campaigning in the media is forbidden. Very clever – not showing Putin, but events associated with him. Also, the Kremlin is planning a huge rally in honor of Putin’s victory on Manezhnaya Square on the night of March 18-19: the perfect way to legitimate the results of the election, says @kaktovottak.


Politics and Regions with Chris Jarmas


We’ve hit the homestretch

Russia is an authoritarian country and Vladimir Putin will win the election on March 18 – likely by a wide margin. But elections are stressful times for any regime, and Putin’s is no exception. We’ve hit the homestretch in the campaign season and this week was full of surprises, even if the election won’t be.

First, Communist Party candidate Pavel Grudinin was revealed on Monday to have stashed over a million dollars in Swiss bank accounts, assets he kept hidden from Russia’s Central Election Committee. When high-profile figures are exposed like this in Russia, it’s typically not because Lady Justice has dealt a blind and evenhanded verdict. Thus, our first question of the week: who knifed Grudinin?

Second, as we reported yesterday, according to government-backed VTsIOM polling, Putin’s rating fell sharply, especially, though not exclusively, in Moscow and Saint Petersburg. In cities over one-million residents, Putin’s rating fell by a surprising 12 percent – from 69.7 percent on January 10 to 57.1 percent on February 18. Meanwhile, the number of undecided voters and voters pulling for Grudinin increased (though one should note this poll was conducted before Grudinin’s Swiss accounts were uncovered). It’s been tough for the Kremlin to find a positive narrative that sticks this month, and the Kremlin has been regurgitating stale rhetoric from the 2012 campaign sprinkled in with nuclear saber-rattling. Perhaps worse for Putin, between the loss of dozens, or possibly hundreds, of Russian “Wagner” mercenaries in Syria to Tuesday’s An-26 crash which killed 39 soldiers on board, the news out of Syria keeps getting worse. This comes despite Putin’s multiple declarations of victory. Without fresh polling on the war – the latest Levada numbers from September suggest an ambivalent-at-best public attitude – it’s tough to say how much this news is affecting Putin’s rating. So, our second question: is Putin’s dip in rating merely a blip or are we seeing cracks forming in the “Crimea consensus,” one already eroded by years of economic trouble?

Third, and this comes as no surprise, the battle for turnout is reaching new highs (lows?) with each passing day. Vedomosti has put together an excellent gallery of the authorities’ best efforts to get Russians to take part in a lifeless and ritualistic election. The highlights: the Central Election Commission is blasting out texts reminding voters about the election, store receipts are slipping in reminders, and even Aeroflot’s website is telling travelers that they don’t need to be home to make their golos heard! Without a doubt, though, my favorite trick is the mobilization of social-media influencers and Instagram stars to get the word out – thus confirming that Russia’s election has all the fraud of Fyre Festival minus Ja Rule.


Weekly Wrap-Up with Aaron Schwartzbaum


Some notes from the swamp

Earlier this week, I had the opportunity to attend an event on Russia’s economyat the Atlantic Council. Speaking at the event were Sergei Aleksashenko, Elizaveta Osetinskaya (founder of The Bell), and Anders Aslund. Though a series of rambling question-comments from the crowd made me want to immediately evacuate DC (if not planet Earth altogether), the red mist has since lifted and I’d like to share some notes I took.

Aleksashenko was insightful as always. First, he outlined why Russia’s economy did better in its most recent downturn than in 2008. Among the causes were the knock-on growth effects of a massive State Armament Program (SAP), as well as solid agriculture sector performance that cushioned the contraction. He also had praise for the Bank of Russia’s decision to free float the ruble which I found notable given his frequent criticism of the institution. Turning to impediments to growth, he outlined three short-term and three long-term factors. In the former group are high interest rates (effective borrowing rates are about 10% versus the key rate of 7.5%), sustained fiscal austerity, and the state’s footprint in the banking sector, which like high interest rates, squeezes lending activity. In the long-term, Russia faces a difficult investment climate, the actual impact of sanctions (oil production may begin to decrease after 2020 because of delayed investments), and a demographic crunch that will reduce the ratio of workers to retirees.

I got to ask Aleksashenko two questions, on the risks of a consumer credit bubble, and on the reliability of Rosstat data. Regarding the former, he said the risks are overstated. Though lending is indeed growing, a lot of that activity is in mortgage refinancing and therefore less risky. On Rosstat, he said that the data is reliable overall with two exceptions: household income (perhaps part of the reason for recent methodological shenanigans, along with politics) and investment.

Osetinskaya, meanwhile, had great color on Russia’s startup scene and entrepreneurial climate, which she called decidedly mixed. On one hand, she noted a spate of sales of large private companies (see retailer Magnate) to state-affiliated, if not their outright nationalization. However, Osetinskaya expressed optimism about a growing young entrepreneurial class in Russia, which exists despite an often hostile environment and Kremlin confusion over what to do with small and medium enterprises (SMEs).


 

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