Top of the Pops
It turns out the gas explosion offshore in Azerbaijan was a mud volcano. I just missed the announcement before sending this out yesterday. So close, SOCAR I guess.
OPEC+ has officially failed to come to any agreement so we’re stuck with existing cuts until April 2022 until someone blinks. Talks were called off yesterday with no date set to pick them up again. We’re now facing the biggest ‘breakpoint’ for the market since Saudi Arabia called Russia’s bluff in March of last year. Whereas 2020 and the first few months of 2021 were all about demand uncertainty, it’s the imposition of supply uncertainty through producer restraint that’s now the problem. The EIA now forecasts that oil demand will average 97.7 million barrels per day for 2021 — the entirety of the gap with 2019 consumption will stem from lower jet fuel demand since international travel is taking and will take a long time to recover, especially with the US not signaling anything close to border normalization for now:
Even marginal output gains ahead of travel normalization could trigger another large stock build and tank the price. Though the UK is a relatively small market for oil demand, pure electric vehicle (EV) sales here now account for 11% of the market matching diesel’s share. In Europe broadly, plug-in electrics accounted for 16% of automotive sales in May. While still a tiny share of the market, Ford’s sales of EVs and hybrids was up 117% in June. EV sales in China were up 220% year-on-year for May, from a relatively low base but climbing fast. EVs only accounted for 4.6% of global sales in 2020, but even at a market penetration level of 10-15% globally, you’d begin to see more significant shifts in products demand at the regional level and slide of road fuel demand into structural decline since demand on developed markets has already peaked overall. Sales are minimal in India, the world’s leading demand growth market after China in recent years, but even there we’re seeing a new corporate push and political pressure to speed up the electrification of urban and near-urban road transport. Brent Crude has climbed past $77 a barrel and hit three-year highs. The longer this drags on, the likelier one of the ‘oil hawks’ like Sechin calls for another production ramp up. If that happens, or anyone else does the same, 2022 prices may end up looking lower than expected going into this summer.
What’s going on?
After telling the government to adopt a “take or pay” contracting system for shipments of coal to the East in his role as secretary of the presidential commission for the energy sector, Igor Sechin is now asking the government not to ignore other sectors’ needs. The prioritization of coal is creating risks for oil firms (read: Rosneft) trying to export more oil via the rail network, which in theory is another supply chain bottleneck story. It’s likelier that Sechin’s shifted on the issue because there won’t be mechanisms put in place to allow users to pay for priority, effectively privileging oil firms with better margins than coal miners though the rise in coal prices would undercut that difference a fair bit. The dispute goes back to March when Putin ordered that coal exports from the Kuzbass be increased from 53 to 68 million tons by 2024 — Russian Railways and coalers were supposed to work out long-term contracts to provide price and revenue stability to manage the increase using take-or-pay clauses or else an analog arrangement. That swiftly fell through because of the lack of clarity about the ‘balance’ of responsibility to meet contractual obligations, disagreements over linking supply contracts to capacity investment stipulations, and other business concerns. Sechin’s more recent letter from mid-June asserts that the non-system that’s slowly coming together risks the fundamental functioning of goods markets in Russia, a hefty charge given the solution he backed in March was expressly designed to construct a sort of market ‘bubble’ within which SOEs and coal mining firms could operate. At the end of 2020, Rosneft and other oil firms managed to close long-term capacity contracts for shipments in exchange for discounts. These discounts become an indirect (and relatively ineffectual) means of cost and price control, but they inevitably rob RZhD of profits which then increases pressure on the federal budget and reserves to finance modernization and capacity work or else wring out more from existing spending. They then reinforce the problem by forcing companies to compete over capacity that could have been expanded.
The budget rule designed to decouple the ruble’s exchange rate from the oil price has kicked back in with MinFin spending more to buy foreign currencies and intervene in the exchange rate. The ministry spent 222 billion rubles (about $3 billion) in June and is expected to spend 296 billion rubles (about $4 billion) in July in accordance with the rule. LHS is the difference between the price at which the rules takes effect and the current oil price while the RHS is the purchase or sale of current on the open market:
Blue = $/bbl Red = US$ billions
The budget rule has a lot to do with why geopolitical risks became the primary market mover for daily to weekly or monthly fluctuations in the exchange rate. ING estimates that the oil price recovery will boost the balance of payments surplus by about $10 billion from $55 to $65 billion. That inflow will have to be ‘sterilized’ with more currency interventions — they could reach $33 billion for the year. According to Dmitry Dolgin, that figure could be reduced by $3-5 billion if the government manages to invest an analogous amount from the National Welfare Fund in 2021-2023. But economic recovery in the second half of the year could pressure the balance of payments and create some currency risks because of the size of MinFin’s purchases. Last Friday, it looked like a surge in demand for rubles linked to Rosneft’s dividend payments was enough to pressure the ruble 1.7% downwards against the US dollar for the week. Currency risks are highly concentrated in Russia’s largest exporters, particularly ones that convert foreign currency earnings into ruble dividends. However, prolonged economic fallout from the current wave of the virus will probably undermine some of the expected import gains from higher oil prices.
Pollock exporters in the Far East are straining from the sales lost as a result of China’s import restrictions on Russian fish due to COVID health and safety concerns. The Association of Pollock Fishers (ADM) has sent a request to deputy director Konstantina Savenkova of Rossel’khoznador to streamline the paperwork necessary to export fish in the first place so that the excess catch going to waste and not sold in China can more easily be sold onto other markets. Russia is terrible at border compliance for exports, a system that has remained by design as a means of extracting administrative rents and, these days, making it easier to cut export flows in hopes of addressing domestic shortages. Based off the World Bank data, the 2019 world average time necessary to comply with border export requirements was 52.9 hours. In Russia, it was 66. It was 20.7 in China, 7.48 in the EU, and just 1.5 in the US. As a result of this self-imposed bottleneck, ADM warns that there’s an overload of refrigeration capacity in Vladivostok — one of the world’s biggest transit ports for illegal fishing operations — and Kamchatka. The All-Russian Association of Fisheries (VARPE) notes that this year, as much as 459,000 tons of Pacific salmon will be caught in the Far East amid the pressure on the refrigeration market. The refrigeration backlog is also a function of supply chain problems. Containers from Busan or Vladivostok shipping Russian fish cost $150-200 per ton, or about 10-15% of the market value of the product. ADM hopes to simplify the paperwork to target transit to Indonesia, Vietnam, and Thailand via South Korea. This long-winded saga dates back to October when the restrictions first appeared, and it goes to show the pitfalls of the Far East’s heavy dependence on export industries in a pinch.
For the first 5 months of this year, pharmacy sales in terms of physical turnover fell 14.9% year-on-year as more and more Russians prefer to order online. That’s 2.25 billion physical units sold. For comparison, turnover rose 4.8% in annualized terms for Jan.-May 2020 to 2.65 billion units. DSM Group’s Sergei Shulyak makes clear that consumers’ spending power continues to decline — last year Russians prioritized purchasing medicines that were prescribed by doctors and foregoing other pharmaceuticals that weren’t strictly necessary. Even that balance might be worsening now, though part of the story would be the decline in other seasonal viruses like the flu due to the unintended positive consequences of anti-COVID public health measures. Pharmacies are also noticing that Russians have begun to replace purchases of large quantities of cheap generics with purchases of fewer pills from the choicest brands known and trusted to be effective. Online sales grew 62% last year and it’s expected this year will show huge growth again. Stories like these tend to be useful leading indicators about household finances and the haphazard state of Russia’s ongoing import substitution efforts for medications, particularly since Putin just signed into law that firms can legally make medication using pirated patents to encourage more industrial espionage and entrepreneurship to steal know-how where possible. E-commerce platforms provide a chance to quickly search for trusted brands and, perhaps just as importantly, reduce the time people spend in public with others who might be sick. Even if Russians distrust vaccines, virtually everyone knows someone who got sick at this point and it’s hard to imagine that there isn’t some level of health anxiety working in tandem with the growth of e-commerce platforms given the new wave. Overall, incomes don’t appear to be rising. Rather things are getting worse.
COVID Status Report
23,378 new cases and yet another record 737 deaths were recorded in the last day. That’s the first time more than 700 deaths have been recorded in a single day. Authorities are now working out authorizing people to fly after they show their vaccination certificates. By my quick count, 27 regions now have some forms of restrictions in place but they’re all over the map in terms of strength and effectiveness — in Boronezh oblast’ you can’t go on business trips unvaccinated (that’s it) whereas in Bashkiria, you need proof of vaccination or immunity to go to museums, movie theaters, libraries, attend university classes in person, or else got to large restaurants or cafes (negative tests also work in the last case). Bizarrely, the German government has slackened quarantine and travel requirements for travelers from Russia to reduce the total amount of time spent in quarantine down to 5 days should they show negative tests. If vaccinated with an EU-approved vaccine — not Sputnik — it’s even easier. At least vaccinations are still picking up pace with about 16% of the population having received at least one dose. Delta variant has been vicious, appearing at just a few cases in mid to late May and becoming completely dominant by June 28:
The UK is now testing the effects of opening up travel and ending all mandated restrictions with cases rising. Thankfully we’re about a week or 10ish days away here from hitting 70% of the population with at least 1 dose, but ending masking reqs is a huge risk. Russia’s tourism sector will be suffering a lot longer I’m afraid.
Zombie Mobilizations and Other Maladies
The new National Security Strategy as prompted a bevy of responses to what is, fundamentally, a paranoid document showcasing the depths of strategic navel-gazing that have taken root among Moscow’s hawkish security elites, their minders and allies, and the political establishment more broadly. The obvious takeaway still bears repeating. There is now no room for accommodation and cooperation with the West in any meaningful sense, only selective concordats or relaxations of tension in a standoff that has taken on an existential and increasingly dangerous character. As Dmitri Trenin and others have noted, the introduction of Soviet-era terminology — the “mobilizational preparedness of the economy” in this case — indicate a new bunker mentality that paints the contemporary constellation of political, economic, demographic, ecological, and technological trends and forces as threats. I first wanted to flag a few smaller things I thought were curious, and then move onto to my larger point: the class interests of the Russian political system and its economy are foundational to the most bellicose and fatalistic components of this strategy document, indicating a crisis of wealth creation and distribution as much as a profoundly Darwinian and Hobbesian account of sovereignty in a war of all against all.
I was quickly struck by the persistence of the assertion of multipolarity from the outset because of its implications for Russian state power and wealth:
“The modern world is undergoing a period of transformation. The increase in the quantity of centers of world economic and political development, the strengthening of the positions of new global and regional leader-countries brings changes to the structure of world order the formation of new architecture, rules, and principles of the world system.”
COVID has shattered the prior supposition of an increasingly multipolar world, a point Putin rather gleefully made at his 2019 December mega press conference when he claimed that China’s economy had overtaken that of the US. Stunning failures and regional divisions between vaccination campaigns, however, reveal a world where in the next few years ahead, the gap between developed economies and developing economies may well grow since higher commodity prices trigger higher relative levels of inflation in countries that lack the same levels of monetary sovereignty and are taking longer to either recover or else protect their populations from infection. US growth in 2021 may end up beating China’s GDP growth and there’s a great deal of uncertainty ahead depending on its further spending plans. If the world order as it currently exists poses myriad threats and challenges as this document suggests, it is remarkable that the Moscow establishment are incapable of accepting a de facto emergent bipolar world system divided between the US and China and dotted with financial, industrial, and extractive ‘peripheries’ because of the persistent decline of Europe as a geopolitically relevant driver of global power relations since 2008, with the exception of particular regulatory initiatives. Multipolarity as it was intended is dead. There is yet no language to take its place. Later on:
“In conditions of stagnation and recession [for] the leading economies of the world, the decline of the stability of the world currency-financial system, and the ever-greater spread the exacerbation of the fight for access to markets and resources leads to the practice of using instruments of unscrupulous competition, and protectionist measures and sanctions, in this case in the financial and trade spheres.”
It goes on to note the open pressure exerted on Russia as though the West were trying to steal its resources, but just those few lines are incredibly revealing. The stagnation it mentions is due to a host of things but there are two ‘easy’ culprits — global economic imbalances within and between classes in countries that have concentrated too much wealth in the hands of a narrow class of asset owners and the deflationary economic paradigm that guided western economic orthodoxy (and now Russian orthodoxy) for over 40 years and is only now unraveling. Both of these driving forces lower growth, and with that inflation. Yet the entirety of the regime’s economic raison d’être is its ability to horde resources and assets for those politically connected, politically able, or else for the state to call upon in a crisis. No one disputes the lessons learned (or not) about systemic risk and instability from the Global Financial Crisis, yet the Federal Reserve, the ECB, the People’s Bank of China, and their peer central banks have done a remarkable job managing the COVID crisis. The most recent Federal Reserve stability report acknowledges the potential risks of rising interest rates linked to higher inflation in emerging markets including Russia pose to the US financial system, but the real worry is China. That Moscow remains silent on the financial risks that have built up within China and their global implications as more capital flows in and out due to a slow process of liberalization is quite telling. There isn’t actually any notional vision of where the global economy is headed, only catchphrases to win internal debates.
Flipping through later, the bits about the mobilizational potential of the economy are by far the most important things to look at in light of laying a wide array of socioeconomic goals intended to give Russians a decent life. We shouldn’t read this document as a strategy document. In actual fact, it contains precious little for us to intimate what decisions Moscow might take in response to any given situation or to proactively manage its biggest security threats that differs from prior conceptions. The rhetoric of economic mobilization has now entered into the official lexicon as a matter of the class interests of the individuals and blocs internally debating policy from political roles, heading key political or private institutions and firms, or else trying to read the room and use the general direction of travel — the securitization of everything — to achieve personal or policy ends. As I’ve written extensively, the absence of growth since 2013 fosters an extreme environment where economic profit and personal gain aren’t won by building profitable firms or engaging in productive economic activity. With politically irrelevant exceptions like restaurants or retailers, you have to find ways to get resources out of the state to grow or get paid. Rentiers rely on the presence of some sort of threat or galvanizing political or economic mission to justify the largesse of the state. That class of rentiers has evolved considerably since 2011, but 2013 is most useful to ‘periodicize’ the evolution of Russian political economy.
Sam Greene has written about the re-emergence of ‘estates’ in Russia in terms of social groupings distinct from class because they aren’t defined by their relationship to the means of production taking from Simon Kordonsky’s work. They instead provide service to the state and are awarded status in return. I find that framing quite limiting in light of documents like this one, which posit a political need to leverage and operate the means of production at the state’s convenience, yes, but also in an effective manner faced with various external and internal limitations. The state is not some solid edifice with definite shape here. Some individuals are able to capture component parts of the state or its “daughter companies” for themselves. Heading a firm like Rosneft, Gazprom, Novatek, Alrosa, or Almaz-Antey conveys huge personal power over the means of production even if they officially or practically belong to the state. Timothy Frye’s framework of the “legal dualism” of Russian property rights — the fact that some rights, particularly those less salient for political power, are decently protected whereas those that intersect with political necessity aren’t — lends itself to a further extension of that logic in light of Russia’s version of rentier state capitalism. The country’s uneven and combined economic development as a resource and capital exporter, to borrow a bit liberally from Trotsky, shaped a class of economic actors and interests from disparate sectors, all of whom were tasked with accruing and managing external rents — petrodollars and the like — mobilizing domestic rents — the defense sector and its post-2016 push into civilian production come to mind — or distributing and redistributing rents and credit — the state banks, largest private banks, and development institutions. This ‘dualism’ is embedded into which parts of the Russian economy are most integrated into global value chains and fiscally valuable, mostly its resource extraction and metallurgical firms, those that are politically distinct from global value chains for security reasons in the defense sector, and the Russian banks that can build up financial links internationally to shuttle money across borders and generate access to financial markets outside of London, Frankfurt, or New York. The political importance of a given sector ends up determining the extent to which political intervention and control is necessary, with some sectors safely in the hands of private operators and others formally held by the state. But internationally vital sectors are never left alone because of their salience for foreign policy and influence. Exporters, bankers, generals, and spooks share enough mutual interests to form a coherent coalition as various estates.
So what happens when an ‘estate’ of minders successfully lobby their personal interests to reshape institutional and normative assumptions for policymaking? They look a lot more like an economic class performing acts of proprietorship over key assets or sectors than an estate serving their lords. Within some limits, we can safely say the class of rentiers benefiting from the pursuit of autarky have seized dominant influence, if not power, over key decision-making institutions and fora to its own benefit. The inclusion of a wide range of economic concerns into the national security strategy all point to deep-seated fears stemming from the post-Crimea sanctions regime. The US has successfully exploited the power of the dollar system in the global economy to alter the economic preferences and possibilities for Russian investors and firms. That it did so in conditions of stagnation for the Russian economy doubles the incentive to construct a reactive security paradigm that creates rents and calls for the creation or reconstitution of new political and economic institutions and practices to manage the Russian economy’s exposure to forces like inflation, commodity prices, or the loss of access to strategic technologies. Mobilization requires political control and influence. Political control and influence in a system where property rights are contingent, formal institutions are generally weak, and political entrepreneurship is constantly encouraged generate graft and rent-seeking as a form of political or economic insurance policy. Once you securitize an industry or set of transactions, they either cannot fail lest they be perceived to be a breach of national security or they receive more resources. Opposition and paranoia about the West are good for business in today’s Russia given the dominance of the nation’s strategic sectors over its economic life. Strategy documents confirm that reality. We’re not just witnessing the ‘closing’ of the elite Russian mind when it comes to the West. We’re watching a regime reinvent the political foundations of wealth management and redistribution amid economic decline in real time. Mobilization is also about raising investment levels, as I’ve written at length about. That’ll be the true test of Moscow’s obsessive hunt for security and stability as it generates more insecurity and instability along the way.
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