Top of the Pops
Despite the hopes of the most zealous Russia hawks in Washington, Putin and Lukashenko did not end up talking about integration in any formal sense in their direct talks. No breakthrough on that front, which means that the status quo shambles on. That Moscow didn’t press harder likely reflects a lack of appetite more than a lack of leverage, and like all major decisions domestically these days likely comes back to the question of making sure that refrigerators keep winning their battle against TV talk shows, Telegram channels, and YouTubers. To that effect, Levada polling shows that 54% of Russians support the introduction of a ration card program whereby debit cards are issued or some similar mechanism used to provide money to be spent on food:
Red = supports Dark Blue = doesn’t support Cyan = hard to answer
More interesting is the breakdown of why those who oppose it are against the policy:
Descending: association with the past, better to give money, not needed, speculation, won’t solve the problem, need to improve the economy, inconvenient, association with poverty, hard to decide who’s poor, leads to lines and deficits, not enough info, other
The top three categories go to the association with the Soviet past — unclear what the age distribution is, but an interesting question for memory politics — that it’s better t just give cash, or that it’s not needed. The fact that it’s not needed only gets 14% tells you just how universally recognized the food price problem really is. Overall, my takeaway from the breakdown is that there’s an odd risk of policy paralysis because of the lack of a decisive majority public support for the policy. If introducing these ‘food cards’ doesn’t have a wide enough mandate, it doesn’t do what the Kremlin really needs it to: fix public ratings ahead of the elections. The larger the group of people identifying the problem as a structural one for the economy, the worse the political challenge for Moscow’s spin machine. It seems low on its face from this data, but combining categories and a similar dive into what supporters would prefer if offered other options might reveal a different picture.
What’s going on?
Authorities in the government are reportedly considering export restrictions on metals in order to create state reserves of supplies for projects that can be sold at adjusted rates to Russian firms or the state during periods of high commodity prices. This reserve fund could be pared with explicit limits on the export of scrap, iron ore, and low-value metallurgical production, ending the VAT refund for exports of low-value products, and plans to create a semi-planned commodity trading market for firms to sell rebar and similar inputs at a defined domestic price and receive “tickets” to export above a certain quota. Price controls are everything now. While these may not be ‘direct’ control measures of the kind Putin promised to avoid, that they’re being floated is proof that the policy process revolves entirely around controlling the effects of inflation. MinPromTorg appears to be apoplectic with Denis Manturov’s team briefing that these measures would risk the profitability and long-term viability of metallurgical production. It’s a bizarre set of ideas to address the problem — effectively, the sector could be forced to produce an unused surplus it can only sell at a discount, artificially lower the domestic price relative to world price levels, and limit the quantity of production sold abroad. You’re telling companies to spend more on plant to produce at a relative loss compared to export prices. The proximal cause of the latest policy push seems to come from the construction sector, which is now seizing on Wednesday’s announcement that Putin reiterated his desire to see a 50+% increase in annual housing construction by area. Since commodity prices are high, I’m guessing they think it’s fine to make them take a hit. We’re entering new levels of attempted cross-subsidization that end up driving down investment levels without the clear coercive means to mobilize more resources.
Bank of Russia data shows that SME borrowing is returning to pre-crisis indicators (with some caveats). Average loan size in February reached 5.6 million rubles ($74,564) with 42% of loans focused in retail:
LHS — Light Blue = volume of indebtedness (trln rubles) Green = average loan size (mln rubles) RHS — Red = average interest rate (%)
For February, SMEs were extended a combined 117,000 loans worth 658 billion rubles ($8.76 billion). As you can see from the average loan size, there’s clearly a slow and steady recovery of business expectations driving borrowing — my guess is that the spike in December reflects a burst of re-financing and debt consolidation i.e. ‘swapping’ credit and perhaps some borrowing related to the surge in input prices. The thing is that the rising size in average loan size doesn’t seem to track with as large a net increase in the total volume of borrowing as I’d expected, which could just be my surprise but could also reflect SME losses that haven’t been fully realized yet because of moratoria on bankruptcies, leniency for rent in arrears, and similar measures that would only start to become apparent in data this year, likely in summer based on Mishustin’s approach to peeling back support. On the whole, however, there’s not too much evidence of balance sheet scarring for the companies that are still standing. The next hurdle will be managing the demand fallout from a 3rd wave of the virus.
In another bid to low-key increase its share of domestic rents and retain customers, Rosneft is launching “financial supermarkets” for customers to shop for automotive insurance policies, open debit cards with partner banks, take out consumer loans, or apply for mortgages. It’s a smart play setting up a one-stop shop for customers to do a bunch of other things — and probably find a way to. monetize their data to the extent possible given the lack of clarity in Russian law. So far only 35 of Rosneft’s filling stations offer these services, but the real ‘catch’ may actually be the role these platforms can play in less populous regions that are underbanked. The company owns 3,000+ stations across the country. The large volume of micro loans taken out by Russians to finance consumption reflects issues of access to financial institutions in some contexts, not just falling incomes. The popularity of debit card issuance from the pilot sites noted in th writeup caught my eye for that reason. Once Rosneft has a large clearinghouse for these services, it’s hard to imagine it’ll be too long before someone around Sechin suggests that try their hand at insurance or banking more directly. For now, they’ll be content taking a tiny % cut of the action as profit while expanding their customer base. It’d be a funny twist to see the oil companies edge into the banking sector just as banks are forced to look for profit in the real economy, both creating future headaches for the government and presidential administration to mediate.
The continued acceleration of price increases and high annualized inflation — 5.5%+ — has cemented expectations of monetary policy tightening through the rest of the year. For the first time, the CBR will be putting out forward guidance a few years ahead on where it thinks rates will be. The question is how much through 2021. Sber’s forecast of a coming .5% hike came true today — the CBR just announced a 5% key rate. Links between key rate decision-making, state borrowing needs for the budget, and inflation management are complicated by the role of active price interventions. Every additional price control measure further distorts and reduces the efficacy of monetary policy in addressing inflation to the extent that it does. MinFin and MinEnergo just agreed to provide an additional 350 billion rubles ($4.66 billion) in refining subsidies to the oil sector for 2021-2023 to hold down fuel prices. Rate increases at a magnitude of .25-.5% aren’t a huge deal, though higher rates do marginally increase the relative cost of financing deficits, but when government spending is used to repress inflation, this relationship gets really weird really fast. The oil price nudged up Central Bank reserves by $3.2 billion in the last month and as Russian economists have noted, there’s plenty of latitude to stop parking money aside per the budget rule and deploy it across the real economy as needed within the current fiscal framework without raising the non-oil & gas tax burden. Overall, it’s unclear what rate hikes are really supposed to achieve, particularly since real interest rates already react to declining creditworthiness and subsidized loan schema for major consumer spending. There’s enough money for spending needs at current oil price levels, more measures are being taken to repress inflation using fiscal policy instruments, and the Bank of Russia doesn’t have much left in the bag to address inflationary pressures as it gets tougher.
COVID Status Report
There were 8,840 new cases and 398 deaths reported. German Gref and Sber’s research department are now convinced a 3rd wave is unavoidable, but it won’t be as bad as the fall. Thus far, there’s no sign of the strain with multiple mutations found in India where the current wave of infections is disastrous in scale. It’s bad enough that, within bounds, it’s dragging down the oil price price recovery — for context, India accounted for just over 18.7% of global oil demand growth from 2007 pre-GFC to 2019 pre-COVID. Look around for stories, however, and keyword searches are a bit of a blackhole. Some of that is the loss of interest in COVID stories, but you do wonder what the management of the legacy media covering the situation across the country is doing to perceptions — the tiny scale of the social spending package announced works best if people go out and shop. But the lack of a public response and anxiety of avoiding worse hardship during a period of intense economic duress creates problems for insurance markets — insurers look for reasons to refuse payment based on agreement conditions that those insured don’t understand, and the COVID crisis has led to a surge of new policies covering health risks and death due to COVID. The Central Bank analyzed a bunch of refusals and is pressuring insurers to do a better job explaining these plans in a detailed and informative manner. I need to dig around sometime for plan issuance data. It likely tells a much grimmer tale than whatever the Operational Staff is pushing.
A.B.C. (Always Be Climating)
Biden was smart to make sure Russia had a seat at the table for his climate summit yesterday, and Putin launched into his rather wrote comments with a classic shoulder shrug. The constant half-hearted reference to his notes made clear he’d rather be doing something else but this is the cost of “Great Powerdom”:
The diplomatic and policy approach Moscow’s taking to the efforts laid out by Russia is to claim the country’s vast forests as a carbon sink that makes it a ‘net donor’ in terms of future emissions reductions. The estimate is they can account for a net 2 billion ton CO2 reduction through 2050. Since 80% of Russian territory is forested, they claim Russia can offset 20-40% of global carbon emissions. That’s not only shoddy policy thinking, but evidence that Moscow hasn’t grasped the fundamental reality of climate geopolitics: emissions know no sovereignty. You can’t fit carbon dioxide molecules into a Westphalian straitjacket. National accounting of emissions doesn’t make particularly cogent sense because of the extent to which supply global value chains are truly global. Only a country as large and as lopsidedly integrated into world commerce as Russia can convince itself this opening offer will fly. Emissions in China, in Taiwan, in Vietnam, in South Korea, in Japan, in Germany and the other goods exporters of the world are just as important as those of the consumers buying these products when totaling up national emissions levels. The relative balance of production domestically consumed and exported draws emissions into a relational web of transactions that are not circumscribed into any sovereignty. Shipping emissions are perhaps the best example. No one knows which countries should claim them, creating a persistent accounting problem the sector is forced to address transnationally. That’s why corporates pioneered the concepts of Scope 1, 2, 3 emissions to cover direct production/extraction, midstream supply chain emissions from shipments, and the emissions created by end use. Russia’s trying to increase the physical volume of its hydrocarbon exports and you can’t claim ignorance of end consumer use forever as carbon becomes a matter for trade policy on top of domestic commitments.
It’s also completely at odds with the scale of the ambition laid out by Biden, even if his current infrastructure plan fails to match it. Biden wants to halve US emissions by 2030. Climate policy is clearly an afterthought in Russia because of how most green policies threaten the creation and distribution of rents. The policy timeline for major changes often takes years to negotiate, and even then, ends in compromise. Look at oil sector tax reform since 2015. When rattling off sources of emissions based on 2019 EPA estimates, you can see why even a verbal commitment from the White House could shape the market’s assumptions and expectations for federal policy action in the years ahead. Note that it leaves out the ‘other’ categories so this doesn’t add up to 100%:
Transport and industry are the two sectors with the most “exportability” of changes to emissions levels for supply chains — industry and transportation. The former because MNCs can adapt practices from US sites elsewhere (and would face incentive to do so if carbon is priced in a manner that’s transnational in nature) and the latter since it immediately hits oil demand, still the backbone of Russia’s current account surplus, macroeconomic policy, and biggest source of rents. Biden’s plan for electric vehicle adoption specifically includes the following goals:
- 500,000 charging stations by 2030
- Electrify 50,000 diesel-powered transit vehicles and 20% of schoolbuses
- Electrify the federal vehicle fleet
- Throw R&D and trade support money at domestic EV production
- Rebates for private EV purchases
- A cumulative $165 billion for the modernization and decarbonization of existing transit systems
There’s plenty of ink spilled about how these are, by themselves, inadequate and we’ll need to see more of a policy rollout from the EPA and state governments. But consider the stagnation of US oil demand despite rising SUV sales in recent years with cheap oil, the slowdown of Chinese demand growth linked to its slowdown, and the US’ relatively laggard share of renewables for primary energy vs. China. LHS is millions of barrels per day:
Biden’s rhetoric matters, even with the well-documented shortcomings of his current policy proposals. The underlying market trends were already on a positive arc pre-COVID. They’re now China didn’t match his ambition, but committing to start reducing coal demand in 2026 is still a looming problem for Russia’s awkward climate diplomacy. Plans to increase coal exports in Russia’s energy strategy through 2035 rely almost entirely on China shutting down its coal mines without shutting down its coal plants. Even prior to Biden’s pivot to jolt the global community to more comprehensive action, the profitability of hydrocarbon rentierism faced long-term risks. We need to see more out of Washington, but the timelines are accelerating.
Offering up the taiga as a carbon sink to win concessions is unlikely to work. The problem is particularly acute for Russian businesses as green banking standards are disseminated between markets and emissions levels are factored into borrowing costs. In this sense, Russia’s ‘lucky’ that sanctions have killed much of its relationship with international capital markets. That reduces the space for markets to transmit these effects so long as companies shy away from foreign loans — always a small source of business financing in Russia anyway — and can ameliorate investors worries by issuing eurobonds expressly for green purposes abroad. The following timeline, pulled from a great BiS report that I need more time to fully digest, captures the problems Russian firms will face keeping pace with rising green demands that I’m fairly confident will be used to pressure the current account surpluses of dirty exporters without a massive change in macroeconomic orthodoxy:
First, first have to reveal their emissions when applying for a loan to be able to borrow from savers in order to pay workers and invest. They borrow the initial funds on the market and then invest into activity that itself entails emissions externalities. If you imagine this firm has a large amount of pre-existing ‘dirty’ activity or else that their decision to borrow entailed revealing existing and expected externalities from proposed future activity, this process of borrowing to finance current and future operations and investment induces a refinancing shock because the market re-prices the cost of maintaining the externalities induced by the firm over time. The hope is that firms invest into greener and greener output without losing production. The refinancing then sets up more production, which is then brought to market and the earnings are paid back to creditors and savings rolled over into the next round of borrowing and investing. In a nutshell, firms have to figure out their externalities in relation to hiring workers and making investments and decide if ‘revealing’ them is worth it when applying for a loan, otherwise they’re better off trying to survive entirely off reinvesting profits with the hope that they’ll reduce those externalities without sacrificing output. Only a social planning model can achieve these outcomes since the market is incapable of properly assessing the long-run costs of climate inaction without an explicit policy framework. The ecological timeline and effects don’t correspond to timelines for investor returns or necessarily affect any individual person’s investment return the collective effect.
Imagine applying Russia’s rentierist carbon sink model to this financial loop. A Russian firm, likely with privileged access to state bank funding or else with an inside line to state Forest Fund, is effectively asking the market to avoid an upwards repricing from those externalities by saying “look guys, we have claims to this tract of carbon negative land!” Firms in their proposal domestically would scramble to rent land in order to dodge the financing risks. That works in a closed economy where one regulatory regime controlled by one sovereign government determines the cost of the externalities and how they can be redressed. That approach is incompatible with the risks posed by carbon adjustment mechanisms because they will start to affect Russia’s balance of payments, the primary political mechanism used to ensure political stability, and not just its access to international capital markets on which it’s already a persona non grata. Even if carbon taxation is initially only domestic, the countries imposing a system domestically will still consume less of what Russia exports. Putin’s opening ‘bid’ was to tell the West that Russia is happy so long as it can maintain its carbon rents. Biden’s opening bid is to say ‘to hell with them.’ Russian sovereignty can survive a great many things, even in mutated and weakening forms at home. It cannot handle a balance of payments crisis in a system that has reached the point of recycling its current account surplus to finance its deficits through offshore entities held by state banks or using hard currency earnings from its largest exporters to head off ruble volatility, as has been the case since late September:
Claiming the Russian economy will be carbon neutral by 2025 is a useful accounting trick. It can’t hold up the growing financial complications flowing from the failure to address carbon externalities.
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