Top of the Pops
Today there’ll be no long column and things run shorter because my parents and grandmother just got to London and it’ll the first time in about 15 months I’ve seen my parents, longer for my grandmother. I’ll be running errands and trying to minimize the inevitable detritus that builds up from spending all your time at home for most of the last 8 months.
I don’t have any insights into the shooting in Kazan’ that has left 11 dead and tens injured. The immediate response from the Kremlin has been a call to examine how to best tighten regulations around civilian gun ownership. The one thing I’ll note here closer to the main themes of this newsletter is that MinPrirody is now looking to make the owners of metallurgical factories and agribusinesses create “liquidation” funds to address the most ecologically damaging assets they’ve built that are either now disused or found to be in such flagrant violation of ecological standards as to be liquidated by law. Since commodities prices are riding high, what’s basically happening is that the regulatory pressure to improve ecological outcomes will rise for non-emissions concerns. That’s a good thing for green(er) politics, but seems like another excuse to force firms to set aside capital at all times that won’t be invested into more productive capacity that could be done in a green(er) manner since these regulations create new opportunities for raiding. After all, Gazprom was able to acquire ownership of Sakhalin LNG using environmental concerns the company did not care about at all. Compliance costs are the issue here, and it’s yet another area where a little more fiscal support from the state to improve the quality of production and capacity to meet environmental standards that should also be strengthened would go a long way.
What’s going on?
The White House is looking to weaken the Federal Anti-Monopoly Service’s (FAS) ability to blacklist counter-parties who’ve won and executed state contracts. In the current framework, companies can be blacklisted for unintentional outcomes — technical mistakes, for instance — as well as evidence of plans to basically take state money and run or else avoiding responsibility to deliver. Companies are put on the blacklist when a court rules on the conditions under which they breached a contract after the Federal Anti-Monopoly Service internally reviews a case and launches proceedings from what I understand (a confusing situation surely designed to undermine the efficacy of the legislation in the first place). The new proposal weakens this further — FAS can’t blacklist firms for unintentional outcomes nor will firms be blacklisted unless claims made about its bad faith are proven legally. Further, firms will now be able to appeal their inclusion on the list before the trial if, for instance, the current owners didn't own the firm at the time the contract was signed and works begun. The current system benefits state firms fulfilling these contracts since a blacklisted firm loses both the contract and any financial support scheme helping to pay for it, which ends up hurting smaller private contractors more. What’s crazy about this reform is that the current system is actually punitively structured since guilt doesn’t really have to be proven so any interested party within the regime can pick winners more easily. But the only proposal out there to build on the relaxation of standards would be to replace the blacklist with a ratings system to create incentives to meet contracts properly, which one can reliably predict would be co-opted by larger firms and state enterprises as well. This is cosmetic and indicative of how impossible it’s become for MinFin to do much about efficiency for procurement. I’m not in the weeds on this and it takes a day usually to wrap one’s head around any given set of Russian regs for these things, but the overall story is pretty clear.
Russian commentators — generalizing here based on the broad acceptance of neoliberal economic shibboleths — are now convinced that we’re on course for an inflationary explosion because commodities prices are shooting up to 40-year highs ‘driven by central banks.’ I have my own pet theories as to why Russians seem so keen on this narrative, much of which has to do with the role of monetary policy in a closed economic system like that in the USSR and the post-collapse inflation since Financial-Industrial Groups were effectively printing their own money:
In the last 12 months, commodities prices have increased a record 62%, but to suggest it’s a result of monetary policy is short-sighted. The cost of credit is one of the most important inputs for commodities production when justifying an investment decision, and easy monetary policy makes credit cheaper. Further, policy has broadly been relatively easy since 2008-2009, yet the commodity cycle went through a trough and easy money that piled into shale was disinflationary for oil. Easy monetary policy doesn’t translate into greater demand unless that money reaches those likeliest to spend. The uptick in prices reflects the problems of market structure as a result of the poor, imbalanced recovery from the last crisis globally as well as the lack of investment into new supply for the main physical inputs necessary for EV expansion, green(er) energy, and goods demand that’ll benefit from more redistributive policy frameworks in the US (and to a lesser extent, OECD broadly). The surge in commodities prices is a huge problem for emerging markets, but one that can be mediated by economic growth. That’s obviously not an option for Russia, hence the projection I think. Just odd to think that easy money has that big an impact on end demand for commodities when it’s actually fiscal policy, and weirder still when it comes to foodstuffs since people can only eat so much more. The inflationary shock is likelier to ease after 4-6 quarters than not, I think, as supply adjusts to demand and investment into greenfield metals & minerals capacity ramps up.
Aleksandr Dolgov wrote a good op-ed for VTimes today on the rare use of concessions to develop more airports across Russia in line with the 2017 national transport development strategy. Lack of passengers is the basic problem for regional transport infrastructure in remote parts of the country that aren’t densely populated, which scares off private investors since airports are high-risk without reliable passenger flows. The airport built at Novy Urengoi in 2018 was the first ever built via concession. Concessions are designed to provide some form of guaranteed returns and conditions to private investors to reduce risk, but one of the problems for other types of infrastructure where concessions have been used is that in many cases, the state has effectively provided a 100% guarantee regardless of how the contract is executed. A few years back, I wrote a piece about how MinEkonomiki, MinFin, and FAS were literally at loggerheads in court arguing over whether these 100% guaranteed projects were legally concessions or legally procurements. Rail concessions, for instance, are narrow in their construction because the state sets the tariffs the operator can charge. The unstated problem in Dolgov’s piece is that, within limits, the state has to allow operators to set some price levels to be able to profit off of high-risk investments. As someone who saw the insanity of the Skyway privatization in Chicago over time, I’m not suggesting giving investors free rein. Russia’s stuck with the challenge of size and underpopulation. They massively skew the economic rationale for various investments and mandate the use of subsidies in many cases. But if the regime’s intent now is to increase investment levels using private capital and that which has accumulated to SOEs and the largest firms, only a change in incentives can do that. Those incentives are likelier to increase costs, and therefore domestic price inflation unless the state intends to spend more to hand over key infrastructure while covering all the losses.
The head of United Russia Andrei Turchak just signed a cooperation agreement with the Union of Donbas Volunteers (DSS) setting up coordinated activities for all elections, including the September Duma elections. Aleksandr Borodai, leader of the DSS, might end up running as a UR candidate for the Duma this year. The short and sweet angle here is that UR is making use of the 500,000 residents of Donbas with Russian passports as a voting bloc to boost its chances for September and avoid any surprises. Though figures were still high, it’s worth noting the drop in public expectations that Putin’s federal address would change things for them between January 2020 and April 2021. Given how meager the spending announcements were and the fact that many of these support payments won’t go out until the summer, it’s all hands on deck for engineering September results through other means. If you want an idea of just how desperate they are, the Duma is now looking at a law that would ban lawyers from bringing phones with them when meeting with clients held in labor colonies.
COVID Status Report
8,115 new cases and 329 deaths reported for the last day. The shooting in Kazan’ today overtook most of the usual COVID updates in importance, but Levada had a good tidbit worth considering. 49% of Russians supported the decision to suspend flights to Turkey, but interestingly only 44% think that the suspension was actually on epidemiological grounds:
Red = pandemic-related causes Dark Blue = political causes, hope to punish Turkey for supporting Ukraine Grey = hard to say Light Blue = other reason
I shouldn’t have been so hasty to assume that the main drivers were political as was the case for much of the coverage, but it seems that’s the narrative that loads of Russians went with, probably overlapping with those wondering why Egypt is now safe for Russian tourists. Now that Putin is more actively communicating that the public needs to get tested for COVID more often and get vaccinated, we’ll see if there’s anything else rolled out in Moscow to further regional efforts. It goes to show that it’s all the Kremlin can do if it refuses to spend money, and that moral suasion lacks power when you’ve trained society to distrust media outlets and downplay the scale of the public health challenge and threat.
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