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Russia’s wealthiest billionaire, Alexei Mordashov, has said in an interview with the FT that he’s ready to do his part per Putin’s request that businesses increase investments or else face higher tax rates. “It’s important to acknowledge that Mr. Putin is the president and leader of our country and he expressed to a great extent what’s on every Russian’s mind.” Business will be core to resolving the inequalities plaguing Russian society. If wishes were fishes, Alyosha. It’s quite telling to see open confirmation of CEOs’ status as money managers. They serve the state first and foremost. More interesting to me are the implications of a new drive to invest from firms like Severstal. The following is US$ blns on the LHS and clearly % on the RHS comparing exports vs. imports, the net balance of FDI, and % current account surplus (or deficit):
These show quarterly balances of payments data starting 1Q 2010. We can actually make out the growth slowdown on the basis of the current account surplus. Though it wasn’t yet a tight squeeze, there was downward pressure on Russia’s export surplus by 2012 when a large banking sector lending expansion and the need to replace Soviet-era plant meant you needed to import a bunch of things to sustain Russian growth. By 2013, that wasn’t feasible for the growth model, even with high oil prices. And with the exception of 1-2Q in 2015 when the collapse in the value of the ruble decimated imports, the size of the current account surplus has corresponded to both oil & gas prices and falling real incomes in Russia, which means falling levels of consumption that sustain the trade surplus. Kremlin macroeconomic management calls for a surplus to keep the fiscal system, the ruble, really the entirety of its logic together. Mordashov owns a company exposed to exports — in his case, steel — and if it’s the exporting firms doing most of the investing into production, what they’re really talking about is expanding their capacity to sell abroad unless incomes and domestic demand recover and grow again. That won’t happen without a change in fiscal policy in the current environment. So really, Mordashov’s line about hearing what Russians want is a bit farcical. They’re going to be selling to foreigners and while that will help some Russians’ incomes, it won’t really touch on domestic demand by itself. The Russian economy is too imbalanced at the moment to make that work.
What’s going on?
Ernst & Young have come out with a report that squarely acknowledges the reality of decarbonization initiatives: they’re a competitive tool that’ll hurt Russian companies. EY’s estimates for the current carbon adjustment proposal from the EU — note that the current proposal indexes the levy applied based on the emissions from the worst performing 10% of firms per sector in a country — expects Russia to realize €15 billion in losses through 2030 in the worst case. The business view per Vedomosti seems to be that Europe, poor in hydrocarbons, is now trying to engineer an unfair competitive advantage after subsidizing renewables for a long time. That may be strictly true, but given that the state in Russia subsidizes hydrocarbon consumption at the expense of competing sources of energy and investment while trying to use subsidies and trade restrictions to develop its industrial base, it’s a rather weak charge. The real reason Russian business is so hesitant is because the expansion of renewable capacity and investment actually entails a significant increase in imports — Europe’s renewables agenda has been embedded into the expansion of its industrial dependence on China and the Chinese market, particularly the case for Germany. The pathological fear of importing greater volumes of finished goods and higher value-added goods while still depending entirely on resource and commodity exports for the stability of the current account redirects what could be energy and interest using the cheapest possible inputs to get started towards yet further rent-seeking via subsidies and the federal budget. If Russia was part of the leading edge of the rise of state capitalism(s) in the 2000s, it’s now shooting itself in the foot as nations seek to expand the power of the state to guide markets for vital ends, in this case the climate crisis.
The IEA’s more bullish oil demand outlook is now paired with a paradox of the energy transition — they’re calling on OPEC to open the taps and make sure that oil prices remain stable as demand rises. In other words, OPEC has rediscovered its market and political power in a world where international publicly-traded oil companies are slowly being forced to divest out of emissions-heavy activities, including oil & gas extraction. The following is all millions of barrels per day. LHS is total and RHS the relative change:
Yellow = demand Black = supply Cyan = change in crude stocks
As the dust has settled on what’s been an incredibly noisy and difficult time statistically to well capture the state of things, it’s clear net demand dropped by 8.6 million barrels per day last year with a drastic worsening of the supply overhang after Russia decided to test Saudi Arabia’s patience in March. The long road to ‘normalization’ is now underway, but we’re at a critical juncture for the supply/demand balance and prices. Now that Brent crude has broken the $70 a barrel barrier — mind you it’s been tempered by the realization that a US return to the Iran deal is, in no way, assured — US shale drillers have maintained discipline, returned profits to shareholders (finally), and could still derail the stability of the market if prices overshoot for too long. But they need to pay Wall Street, and that means that Saudi Arabia and OPEC are effectively pacing the market, likely even if/when demand recovers past 2019 levels sometime next year or early 2023. Petrostates with the lowest production costs, greatest room to increase their exports, and easier access to financing and credit for capacity expansions, decarbonization investments, and similar activities actually matter more during the energy transition’s initial decade(s), not less.
The recent export restrictions and new tariff regime for Russian wheat exports have begun to shift thinking among importers of Russian production. Turkish millers are now looking to build a milling complex in Russia that can process 1,000 tons a day. That way, the tariff and quota restrictions shift since they’d be exporting flour rather than wheat and other grains. But the project only makes sense so long as the current restrictions are held in place since there’s no real opening on the Russian market for Turkish firms to take advantage of. MonDef says construction could take two years, at which the export tariff regime will likely have had to change for exporters to remain as competitive on international markets. It’s a great example of one of the biggest reasons Russia has struggled to leverage its import substitution and localization campaigns into a significant increase in FDI for unsanctioned sectors benefiting from trade protections and other restrictions. This specific project was an ad hoc response to the high levels of food price inflation and Russian policy initiatives pushed through by Mishustin and the cabinet. It won’t be profitable unless policy is predictable and stable, neither of which is ever the case at the best of times, let alone when the government is in crisis mode. Flour prices in southern Russia tend to be the highest in the country because the region’s flour mills are right next to ports, thereby putting them in competition with potential imports and driving up prices since the cost of flour on foreign markets for export is often higher. Domestic consumers then have to bid against foreign importers. Middle Eastern food importers have been looking to deepen investment and trade ties for wheat and other grains in recent years. Whether these types of investments pan out will hinge somewhat on whether Moscow sees the imposition of export duties and restrictions as a snap tool to manage public discontent in perpetuity and doesn’t believe Russian producers can compete against European imports, thus leaving the counter-sanctions regime in place.
MinFin is planning another 1.5 trillion rubles ($20.85 billion) in OFZ issuances now that sanctions banning US banks and financial institutions from taking part on the primary market for Russian sovereign bond issuances. These sanctions pose no real threat to Russia’s ability to borrow since they only target the primary market, but they’ve definitely maintained a chilling effect for non-resident investors. The April Central Bank data showed that non-residents held only 19.5% of all Russian debt, a 6-year low. And remember that the non-resident share has been inflated since early last year by state banks using offshore subsidiaries to foster the impression that Russian sovereign debt remains attractive. The new issuance should push the total external debt load to about 21 trillion rubles. Still no sign that debt servicing is a real problem, at least if the money is actually spent with higher fiscal multipliers coming out of last year’s crisis measures. The catch-22 is always there so long as expropriation of state funds and cost inflation plague hard investments like infrastructure. MinFin has a convenient excuse to not spend, which it’d prefer to anyway, and the facade of anti-corruption and oversight efforts that really just reshuffle who’s able to accuse whom can continue.
COVID Status Report
14,185 new cases were recorded alongside 379 deaths. Cases from the regions account appear to be ticking up more noticeably now per the Operational Staff. Khabarovsk krai has reinstituted remote working and restrictions for the elderly, Buryatia has closed public parks and squares, and Murmansk has limited public transport capacity and is closing restaurants, cafes, and the like at night. The week-on-week % chart was finally put out by RBK again and shows that they appear to have been keeping quiet abut what was happening as long as possible until it was too difficult to hide:
At this point, the authorities and Russian businesses are now stuck doing whatever they can to try and convince Russians to get vaccinated. Vaccine skepticism is a huge problem, one that precedes the current crisis and has its sociological roots in the collapse of state authority and trust during the Soviet period. But where Sam Greene points to the broader sweep of social history, I don’t think it’s unreasonable to link the regime’s systemic disinterest and inability to construct strong, independent institutions as at least a partial cause of the current crisis. Social trust in political expert authority can take decades to rebuild, but it certainly isn’t strengthened by the steady destruction of political competition, an 8 year retreat of direct presidential interest in economic and domestic policy matters, and the steady escalation of pressure on the media space. The refusal to take a decision centrally at the federal level is a massive problem, even if the regime does face constraints on its actions due to public opinion. There’s also reason to believe that vaccine hesitancy can be a moving target — successful vaccination campaigns and limited negative side effects can encourage trust. But that requires a coordinated communication effort from the state, one that was entirely absent until the vaccination campaign began. I’m curious to see what incentives are offered in the weeks ahead as the current wave could explode out of control and further strain the politics of refusing to borrow and spend more.
Decarbonization and the Rentier State
Today’s bit will be a little shorter and bigger picture. I’ve been thinking a bit more lately about the relationship between drives to decarbonize and the state in hopes of finalizing a pitch for a piece for Phenomenal World — almost done narrowing the scope, I swear! — and Daniela Gabor’s work on the ‘Wall Street Consensus’ and role of the state ‘de-risking’ green investments for private finance. They’ve proven to be a really useful guide for what’s missing from the debate among left or left-leaning economists, historians, and more trying now to articulate a political vision for how much we have to mobilize to be able to achieve net zero targets. Here’s a transcript from Gabor’s appearance on Odd Lots for the less nerdy and here’s a link to her fantastic academic paper describing said Wall Street Consensus. In Gabor’s account:
“The derisking state creates a safety net for the holders of development assets, protecting their profits from demand risks attached to infrastructure assets; from political risks attached to policies that would threaten cash flows, including nationalization, higher minimum wages and, critically,climate regulation; and from bond liquidity and currency risks. These risks are transferred to the balance sheet of the state . . .
The [Wall Street Consensus] state de-risks development asset classes for global institutional investors without the embedded autonomy of the developmental state (Evans, 1991). It lacks an autonomous strategic vision, unless ‘more infrastructure’ can be described as such, and has fewer tools to discipline global finance.”
The larger point here is that the de-risking state differs from the traditional developmental state despite sharing its origins because it no longer seeks to support strategic sectors — think of export-led growth protecting steel, shipbuilders, and more from developing countries in the past — with a national development agenda guiding decision-making. Rather the state is attempting to neuter the attendant risks for private capital to invest into development assets, in today’s context green energy and infrastructure, in a manner that protects the interests of global asset owners and capital. Gabor’s intervention into debates about how to pursue decarbonization is incredibly useful because it clarifies the political logic implicitly at play when most observers and analysts, myself included, talk about a green investment and development agenda. Whenever anyone talks about crowding in private capital, we run into a basic problem: the default assumption is that public-private partnerships will manage that process. As we know from countless contexts, once the public bears the risk in these partnerships, the private investors see all the upside because we normally have to pay user fees to utilize said infrastructure. Highway tolls, train fares, you name it.
I’ve used this term before in columns with this general understanding in mind since de-risking takes many forms. A common one is the state guaranteeing demand, ever-present in Russia. Gabor’s definitions also take care to distinguish regulatory de-risking — lowering barriers to investment and market entry or, in the case of green energy, mandating feed-in tariffs to provide immediate returns — from financial de-risking — subsidies, tax breaks, these types of inducements. Russia’s been overrun by both. What I think is rather confusing about the account put forward by Gabor and many others arguing over the structure of ‘green’ stimulus and interventions is the extent to which the existence of classic resource rentier states and their competitive positions and political pressures during the energy transition and amid an emerging new macroeconomic regime in developed markets is absent. In other words, there doesn’t seem to be much scrutiny of “really-existing rentierism” and the differential competitiveness of petrostates and other resource exporters who are crucial to any aggressive green agenda regardless of whether Europe, the US, and others adopt the Wall Street Consensus model or not. And in Russia, the Gulf States, even in China which has a crucial role in the structure of global supply chains for various renewable inputs, the most important energy firms are state-owned and, even when publicly traded on foreign exchanges, still majority controlled by their respective states. Further, a more aggressive green investment agenda is going to seriously squeeze resource availability at a moment when we already have a cyclical upswing in commodity prices due to investment cycles over the last decade, the state of the oil market, and more.
Demand for many base metals and minerals will rise 30% or more in the next decade based on green scenario planning. Lithium demand could increase 14-fold by 2035. Roskill expects cobalt demand to double by 2030. The more you increase the relative spending level on anything green, the greater the supply squeeze. That’s going to fuel a new wave of resource nationalism in emerging markets dealing with balance of payments pressures and higher inflation levels as a result of higher inflation in the United States as it pivots to an economic policy framework seeking to achieve full employment. Even if you somehow embed these green investments into a renewed developmental state framework whereby public goods remain public, are financed by a shared tax burden and state borrowing, and serve common climate goals, the materiality of the energy transition will catch up. What’s perhaps most concerning for Russia and Eurasia is their decline as Petro-powers compared to Saudi Arabia and the Middle East exporters. Declining demand gives OPEC and the classic petrostates with the lowest costs, easiest access to credit, and best relationships with the United States a new lease on life. Russia isn’t one of them, and whenever any analyst talks about low production costs, they aren’t factoring in the structural decline in greenfield oil investments in Russia and terribly designed fiscal system. The push for ‘democratic’ action on climate in the developed world will enable autocracy no matter how it’s pitched. What I worry about is a new crisis of Eurasia and the collapse of the complex web of rents holding together various economies that have failed to diversify or integrate effectively for a variety of reasons, not least Russia’s refusal to absorb regional surpluses and strengthen the power of its consumers instead of focusing so heavily on its exporters and the elites who can generate rents off of foreign policy. Decarbonization may create a small renaissance for rentier states — and a profound degree of pain and repression for the rentiers no longer creating enough rents to share. I’ll return to this in an article soon. Need to find the right language to condense a pitch chock full of implications into a paragraph and get to work from there.
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