Top of the Pops
Yesterday, prime minister Mikhail Mishustin signed off on a conceptual roadmap for Russia's electric vehicle (EV) through 2030. The plan in its broad strokes would aim to have EVs account for 15% of the vehicle market, build over 8,500 regular charging stations, and over 5,500 fast-charging stations by 2030 in the balanced scenario policy scenario. Reaching these targets has been costed at 591 billion rubles ($7.99 billion), 80% would be drawn from non-budgetary sources. For instance, 47.6 billion rubles ($644 million) would be drawn from the National Welfare Fund. As usual, the primary stimuli the concept offers will be tax exemptions or subsidies – discounted credit, exemptions from transport tax, and discounts or breaks on leasing costs all figure prominently. Here are the annual production targets in the balanced scenario:
Russia's foray into electric vehicles will be a test case for the capacity of Russian. policymakers to defy gravity. Russia's light vehicle market has grown since 2014 and even grew during COVID, but these purchases are increasingly debt-financed, the range of choice has shrunk as incomes have fallen, and EVs differ from internal combustion engine vehicles in one key respect: they require even more semiconductors. There are going to be some serious international supply chain crunches in the years ahead and we're seeing the US start getting into the business of subsidizing manufacturing capacity, the senate's looking at another industrial policy bill, the EU wants in on some of the action, and so on. Everyone's far too dependent on Taiwan's ability to produce semiconductors. Green policies often require industrial policies. Industries starting up on a market generally need strong demand to stick around long enough to bring down costs through learning, improving productivity, and so on. I'm curious to see how this concept evolves and is linked with its other component parts. Russian industrial policy is far more successful when it comes to making weapons without foreign help than consumer goods usually.
What's going on?
- In the latest adaptation to classifying more and more, the Ministry of Defense has worked out a government decree to create a separate registry for intellectual property and research from the defense sector. The idea is to include things that might not qualify as "state secrets" but have functional use for those in service or else in the field. MoD's initiative comes after changes last December to the civil code determining exclusive ownership rights for any IP developed in the course of a state contract. Regardless of the formal text, the political implication is clear – the state wants more levers to control private sector access to and ownership of IP that might be of use to the state. That's why they want this new registry, which pointedly is intended to prevent the circulation of production secrets specifically. From the perspective of information security, this all makes a lot of sense. Where it's perhaps more concerning is that much of the production know-how being protected can't be commercialized anyway and comes out of Soviet-era discoveries and investments. If Moscow is serious about pivoting defense manufacturers into civilian production as a means of reducing imports of tech and consumer goods, it makes very little sense to wall off the IP to production when these firms have every political incentive to claim any given piece of knowledge is dual-use in some capacity to try to capture markets. Basically, they're undermining the potential to commercialize the strongest part of the national research base, especially since there are often ways to build up civilian applications out of military hardware. This proposed change isn't drastic, but fits into a longer trend and should be judged on the merits of how it can be abused informally rather than used formally.
- Good news for Albert Avdolyan and the Elgin coal field in Yakutia – he's getting a private railroad to the Sea of Okhotsk and a guarantee from RZhD that they'll ship his product via the Baikal-Amur Mainline (BAM). They estimate the 500 km line will cost just 97 billion rubles ($1.3 billion), which seems low but given new forms of cost control like prison labor, may not be far off the mark. The route is intended to have an annual capacity of 30 million tons running to the port of Chumikan. Presumably Avdolyan or his friends will own the port as well. It's expected to take 5 years to build and pay back the cost in 7 years' time. Consider the timing. That would mean Avdolyan's route only comes to market. by 2026 and the investment doesn't break even till 2033. That's a huge bet on coal, especially now that Sweden's Hybrit has successfully launched the manufacture of "green" steel without the use of coking coal at a cost of around $1 billion. As coal declines as a power source and its other material uses begin to be greened, the relative value of Elgin will decline. Russia's refusal to cut coal production would be the main reason it succeeds, though I'm quite curious what their financials assume the price of coal will be. The other relevant political economy aspect is the privatization of public goods. By itself, that's nothing new in Russia. However, RZhD's struggles to deliver on time for BAM and the Transsiberian route, even while cargoes rise and improvements have been delivered, gave Avdolyan the excuse to say "I'll do it." The more that type of solution is used, the harder it is for RZhD to actually meet mandates even with its decent budget and state backing cause private actors accrue claims on the network. They demand delivery guarantees or then have a reason to lobby for tariff changes and so on.
- As the elections come, the relative chaos over the position of the KPRF, the recent announcements of a 10,000 ruble payout to pensioners and 15,000 ruble payout to military servicemen, and United Russia's low ratings invite loads of scrutiny. There's a Dukes of Hazard quality to whatever Sergei Kirienko and the other political technologists in the Kremlin are cooking up. "How are the boys gonna make it out of this one!?" is definitely the vibe. Novaya Gazeta ran a great piece with data journalist Aleksandr Bogachev that shows just how tenuous the situation is at the municipal level:
United Russia controls 76% of municipal deputy seats – about 147,000 out of 188,000 – while polling below 30% nationally. They are the majority in every region, with countless deputies acting as representatives for local adminstrative resources seized by verticals of power or local interests and nothing like a real shared UR platform. In 77% of municipal races, the data showed you could win with 200 or fewer votes. The lesson is two-fold: it's really only a divided opposition holding UR's grip together and local administrative resources are resilient regardless of national polling numbers or moods. There's still plenty of room for surprise with a UR victory.
4. Unfortunately for Russians and the growth rate, lenders are reportedly increasing their collection rates from debtors. They collected 311 billion rubles ($4.2 billion) in H1 2021, a 14% increase year-on-year. The increase has been aided by improving collection rates for overdue debts on lines of credit that have been secured at banks. The problem, of course, is that a large portion of the debt increase since last year came from less creditworthy borrowers who couldn't secure their credits, making it far more difficult to collect. It's also unclear what the picture looks like for microloans and the equivalent payday loan schemes you'd see in Russia for people who are a bit desperate. None of the figures cited are big enough to cause a huge stir in macro data, but they do indicate trends. Implicitly, it looks like more people are now trying to renegotiate terms and conditions after losing incomes or missing payments and the rate of real income increases aren't keeping pace with debts owed (yet). Wages definitely look better due to labor shortages, but incomes include a wider range of sources of cash and there isn't enough consumption data to support the thesis that real wage increases are driving the economy forward. It's exports that are. I'd watch for more stories about this in the months ahead.
COVID Status Report
18,833 cases and 794 deaths were officially recorded in the last day. Cases are clearly declining, if slowly, though we don't well know the relative level of infection and I'm still waiting on more excess mortality releases from Rosstat. The R rate from official data shows Russia's been under 1 for weeks:
Kremlin spokesman Dmitry Peskov made it clear to the press that there are currently no plans for additional payments to households. They'll buy some votes, but nothing more laboring under the expectation that the economy has recovered adequately. There's reason to believe something's a little off. A year ago, HeadHunter data showed 14 openings per unemployed person in the "young" labor pool – think 18-29 though definitions vary. Now it's more like 7 with seven people applying per opening. Companies are creating more jobs for young people. That's a good thing in isolation, however it in times like these, you tend to see productivity gains from people working themselves to death in order to not lose work rather than from investment or "real" efficiency gains changing internal processes. Russians can't reliably quit cause there's little reason to believe the demand surge earlier this year would sustain more jobs into the future. Companies hire when there's demand for their services. If they retained people and the best of the post-crisis growth is behind them, not much incentive to expand. I'd also wager a fair bit of hiring in some industries is replacing migrant labor that might not have been formalized. That leads to more positive official data and a far murkier and uncertain picture in reality. Young people want more flexibility than they had pre-pandemic and firms are struggling cause said flexiblity makes it harder to retain and train someone longer term for productivity gains. Wage increases are probably happening now due to demography and societal preferences changing without the overall context for demand. Businesses want to hire people on the cheap and train them up. That's getting harder and, perversely, can increase the demand for experienced labor in some contexts. There are parallels to the US or UK, for instance, but I think something else is going on.
Hurry Up Offense
The Intergovernmental Panel on Climate Change's report from earlier this month was intended to be a wakeup call for faster, smarter, and achievable climate action. The working group's findings testing the scientific rigor of the connection between human activity and the warming of the climate is damning. They visualized it quite well, and while this may be old hat, it's still vital to remind ourselves of just how visible the difference is when you posit a null case without human activity:
We can see the radical departure from "natural" norms and the urgency of action quite clearly. The group's models support a pretty much linear relationship between the increase in CO2 levels and global warming:
As we know, however, emissions decreases don't create linear climactic effects in reverse. The residual effects of climate change – rising oceanic temperatures, shifting rainy seasons, increased likelihoods of drought, desertification, and more – outlast the removal of any given ton of carbon. I often fall into the trap of thinking in terms of emissions as a balance sheet between assets and liabilities, as if one ton here and another there can cancel out. They do not. The liabilities posed by residual emissions compound, hence the need to act as fast as possible without losing our heads.
I started reflecting a bit more on this dynamic because of the issue of time horizons. When do certain fossil fuels cease to be utilized and what happens to the systems built on hydrocarbon extraction, taxation, and wealth on that time horizon? Natural gas politics were back in the news since Angela Merkel made her final trek to Moscow and then Kyiv. There was the usual fanfare – Merkel said sanctions would be used if Russia threatened Ukrainian natural gas transit, her assurances were weak, yadda yadda. This was more interesting:
"In 25 years at the latest, Russian gas won't be exported at all or in small volumes [to Europe] . . . Ukraine should prepare for when Europe will be significantly more independent from gas."
This is a fantastic example of where Ukraine's war for true independence from Moscow and time horizons collide. The lesson of Nord Stream shouldn't have been that Kyiv is entitled to collect transit fees because of its geography and fact that it's a victim. It should have been that hydrocarbon rents in their various forms are fickle and foster fragility whenever it's not boom times or a big enough source of revenues. If your next IMF tranche and macroeconomic stability hinge on USD payments from a pipeline that's been a bed of corruption for 30 years, maybe the issue is systemic and not just about German Ostpolitik. Merkel's 25-year time horizon is, like her approach to the climate, ultimately conservative. The energy transition requires a faster change than that. Europe's import dependence is rising faster than its natural gas demand is falling based on its current path. Where's the ambition? The IEA's Net Zero roadmap lays out a clearer time horizon for when we should hit peak gas politics:
Gas production peaks just before 2030 and then falls pretty steeply. Important to even by 2050, we're still producing natural gas at levels we saw in the mid to late 1980s. Still, when we talk about pipelines buying influence or the geopolitical stakes of transit, there's an incentive to think in terms of urgency. Critics of Nord Stream 2, for instance, rely on the sense that this is a grievous injustice happening today that will allow Russia to act swiftly to Ukraine's detriment. Defenders – I'd not say proponents – of the project are forced to do the same, pointing out how impotent Gazprom has largely been since 2018. The cut in Russian gas deliveries to Europe via the Yamal pipeline triggered the usual handwringing that they were cutting back output so they could ramp it up when Putin met with Merkel and show how necessary NS2 is for European energy security. Of course, these critics neglect to mention the maintenance schedule for Gazprom's gas fields, delayed maintenance from 2020 created a backlog of work for this year, fire actually hit production at Novy Urengoy, and that Ukraine's own GSTO has refused market competitive terms for transit to Gazprom of late. Both sides miss the larger uncertainty – the value of these assets is already starting to depreciate. Even large upwards swings in natural gas prices won't offset the fact that you can no longer count as reliably on future cashflows and the time to cash in your chips and leave the casino is coming sooner and sooner. Whether by market or geopolitical rules, it's past time to plan for a world where transit fees or NS2 don't really matter much. Hydrogen might flow in some quantities via natural gas infrastructure, but it's not the same moneymaker.
No matter when European natural gas demand tanks and how, the cumulative effects of past carbon emissions won't create any 'slack' on the green front. Rather the opposite. There's a snowball effect to overhauling energy systems once you incorporate the costs of externalities like carbon, set more rigorous pollution standards, try to encourage more circularity in energy systems and modes of consumption, and also keep having to deal with the fallout of past climate choices. Merkel delayed those choices as chancellor. She and the German establishment she represented were terrified of debt, labor power, and higher domestic consumption. They rather served their exporters and the bankers working with them by preference. The upcoming German elections are interesting again. The CDU has lost ground, Greens have stagnated, and the SPD is gaining ground. One wonders what the debt and climate politics will look like with a new coalition. Another opportunity to revisit the issue of time horizons. Making predictions is usually foolish. I am pretty confident the pace of change when it comes to climate matters and their geopolitical implications is about to accelerate.
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