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COP26 has been an interesting follow, not least because of US Senator Joe Manchin's inexplicable demand for a CBO score and assurances about the effects of the large stimulus bill now being discussed on the economy. Given the bill's got the single greatest spend on climate-related initiatives in US history, would have been nice if they could have just passed it with less commotion but Democrats being Democrats, that didn't happen. But Biden still went to Glasgow intending to assert America's return as a force for coordination and good on matters of climate, aided by a new US-EU deal to crack down on "dirty steel," he also laid down a gauntlet claiming Russia and China didn't show up on climate commitments:

Mark Galeotti wrote a great piece for The Moscow Times arguing that Putin's noticeable shift on climate policies in the last 2 years showcase the weaknesses and strengths of the political system he has built and maintained. WhileI agree that hitting Putin on the nose in public for lagging on climate policy is likelier to encourage a defensive response, the matter comes down largely to fiscal, political, and business interests that go beyond any diplomatic language or entreaty. Putin's climate point man, Ruslan Edel'geriev, is quite clear that getting off the "oil needle" as it's called in Russia is unavoidable. Oil has been the fiscal and financial glue of how Putinism rebuilt the state, but it's not just oil to worry about. Any significant decline in coal demand will cost the Kremlin countless votes in the regions that have been relied upon to offset the urban middle class, seen as a political liability more often than not since 2011. Energy consumption among residential, commercial, and industrial consumers is still subsidized, though at decently lower levels than seen during the 2000s. As the EU seeks to establish a system of regulations on trade intended to punish exporters of energy-intensive production failing to keep pace with the pace of change, Russian firms know full well that even a much softened, further defanged version of those regulations in China where exporters are far more reliant on European (and American) consumption than Russia will end up costing them as well.

At the same time, there's little cost or reason for western leaders to go easy on Russia in climate talks. Domestic businesses with proposals allowing them to sidestep future trade partnerships – I'm thinking here of domestically producing hydrogen, for instance – also lobby western leaders. Trump's victory in Michigan, Ohio, Pennsylvania, and Wisconsin in 2016 reflected, in part, his staunch commitment to a protectionist trade message that resonated with older, sometimes more socially conservative union voters and their families. Biden's own approach to climate policy and steadfast adherence to the tariff framework inherited from Trump, even if amended, speaks to the power of lobby politics and fears that his own party lost because it abandoned a core voting bloc. Writing about what this or that elected official or state leader says in public makes sense. We have ready access as analysts. But these are ultimately about coalitions, backroom dealings, what people say round kitchen tables, and insecurities about different regimes, whether they be democratic or authoritarian, and their capacity to either hold onto power or keep winning elections while doing some good for the planet too. I don't think Putin's flirtation with climate policies is fleeting. His survival is now bound up in coming up with some sort of Russian sonderweg to decarbonize balancing national interests, great power ambitions, and domestic elite needs. The manner by which Putin arrived at his conclusions matters a great deal, and is most certainly evidence of the mix of centralization and personalism in the Russian political system. But let's imagine he hadn't – the sheer weight of the pressure points on core elite and public interests as well as regional governments would necessitate a response.

The worst part of offering any analysis on these developments over the last 18 months is that we simply lack any historical comparison to draw upon to make sense of how economic events feed into political events and vice versa. There is no analog in human history where we shut down so much consumption and shifted production so rapidly only to open it up again. One can conceive of most major economic disruptions we're seeing as a global bullwhip experiment, so-named for the effect witnessed when variations in consumption from retailers travel upstream through the supply chain to producers because these variations in orders among retailers are greater than the variation in sales. If there is a global wave of deflation next year – we've already seen coal prices roughly halve thanks to rising Chinese output – there'll be yet more pandemonium. Banks are betting on oil prices continuing to rise, but as much 1 million barrels a day of oil demand by the end of this year could come from fuel switching away from natural gas. That demand will evaporate in the spring. Rising natural gas prices affect agricultural firms' decisions about fertilizers and so on. We're still in the middle of a bullwhip. It's a problem Russia's economy is quite ill-suited to manage because of the persistent slack, underutilization of capacity and resources, and economic model in the absence of growth. Russia's hydrocarbon dependence and global efforts to reduce hydrocarbon consumption and emissions, however, will endure.

Hot Take

Russian Railways has announced its interest in a trans-Afghan rail route linking Russia and Central Asia to south Asian markets. A subsidiary is now ready to work out a partnership with Uzbekistan's national rail operator for that segment of any project, with the hope of arranging a trilateral meeting between Uzbek and Russian authorities and their Taliban counterparts in Kabul. Good news it that Pakistan and Afghanistan already have a pre-existing memorandum of agreement on the framework of such a project. These stories suggest Moscow is really in the lurch over how to handle the fallout in Afghanistan, which was undoubtedly part of the internal discussion in the White House acknowledging a likely humanitarian crisis. Over half the population might go hungry this winter as a result of food shortages and economic disruptions. Weapons contracts to Kazakhstan and Uzbekistan have been accelerated because of the possibility of security incidents. There's no way they can reasonably pull off building a rail route with a partner government they don't legally recognize or else declare terrorists on top of simply not knowing how security for the route would work and the insane construction costs due to the topography of Afghanistan. Part of the waste of US resources in the conflict was precisely on how these factors piled up forcing aid agencies and NGOs to beg for more and more military support since none wanted to take any risks. In short, Moscow doesn't know what to do aside from plus up its security presence and these improvisations sound more like China's Belt and Road agreements to agree that rarely get very far. This isn't great for a great power, but at least they're active diplomatically and looking for ways to funnel resources in.

Quick Hits

Rostec is getting 22.5 billion rubles of budget funds to head the first stages of the digitalization of Russia's prison system for 380 prisons and work camps. The new tech rolls out facial recognition for inmates and prison staff as well as what appear to be programs and equipment intended to process and analyze behavior in real-time to see if inmates are up to something or else if the staff are torturing them. I imagine they're adapting the kinds of approaches casinos use to assess customer behavior (and card counting).

Banks are lobbying the Duma and Central Bank to exempt credit cards from collecctive limits on the issuance of unsecured debt per existing regulations, but neither support the move for now. The current legal framework is expected to pass into law by December 1. It's not surprising banks want to lift regulations as much as possible – they're tasked with being profitable in an economy whose consumption isn't growing very much and is increasingly financed by borrowing.

The Urals Metals and Mining Company (UGMK), owned by Iskander Makhmudov and Andrei Bokarev, has acquired 100% of gold miner GV Gold owned by management from Lanta-Bank and American investment giant Blackrock. Gold has risen in importance for the Russian extractive sector during COVID as last year's financial pandemonium setup increased output and sales of gold abroad as well as reforms to streamline export licenses for future projects.

Measures freezing input costs for state construction contracts have been extended as an anti-inflation measure intended to reduce pressure on construction of housing and other socially pressing investments. The policy allows firms to compensate increases in costs with a change in conditions on the contract. Right now the big idea is to allow 50% of the final cost to be paid as an advance as a means of reducing price increases subject to commodity market fluctuations.

The Gaidar Institute also found positive indicators in October among manfacturers despite consecutive months of negative responses from surveys:

At stake, however, is the actual capacity available. Output capacity and personnel levels fell towards their 2008-2009 crisis lows without any stimulus bill of comparable size – last year's spending was driven largely through credit subsidies that inflat the % of GDP directly "spent" as seen through worsening household balance sheets.

Yesterday at a meeting about problems in the defense sector led by Putin in Sochi, Putin announced 1 trillion rubles' worth of acquisitions for S-300s, S-400s, and S-500s by 2027 in response to the increase in NATO activity in Eastern Europe and the Black Sea. Defense firm debts will be managed in part through the expected increases in spending and there's clearly an operating assumption that spending must increase in response to perceived threats.

In a positive development for Russia's supply chains and consumers, the government and Duma are amending existing customs law and requirements to ease the delivery of goods from foreign online retailers to warehouses in Russia. The aim goes two ways, however, since these procedures also help Russian e-commerce retailers expand abroad more easily by reducing overhead for internal distribution across borders.

COVID Status Report

39,008 new cases and a new record 1,178 deaths were reported today. The non-working days appear to be dragging down cases a bit and we'll see how that trend holds up over the next week. Things are bad enough that Defense Minister Sergei Shoigu has ordered 100 military medics be deployed to Tula region to provide capacity support to handle the intake of critical cases. Vaccine dose rates didn't maintain their gains from when the soft lockdown was announced:

Doses administered per 100 people

Digital COVID passes are on their way to help manage infections in the weeks or months ahead. Mishustin's busy projecting calm as the government prepares to increase the relative annoyance of not being vaccinated. But the national healthcare system is struggling mightily at the moment, and I wouldn't be surprised if more military personnel were deployed as surge capacity to get over the worst of the hospitalizations as the peak of the current wave has probably passed or else will pass soon based on what I've seen from interviews in recent days.

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