Top of the Pops
Navalny’s team has moved up protest activity to coincide with Putin’s expected address to the nation in an increasingly desperate play to generate some political momentum for later this year. Navalny has reportedly been moved from prison to a local hospital for treatment and Vladimir Milov, a high profile member of Navalny’s team, just announced he’s leaving Russia for Europe to avoid arrest. It’s clear that the regime’s successfully targeted and disrupted, if not dismembered, much of the Navalny network and Wednesday’s protest is a last ditch attempt to maintain political relevance. The question is how they can manage to not only generate the physical support protesting on the street, but a political narrative to sustain their efforts through September. Recent Levada polling on public attitudes about Putin’s successes and failures as a leader points to the store of political capital he retains and the salience of the economy as the regime tries to climb out of the hole its dug for itself since 2014-2015 and through COVID due to its economic policy program:
Left = achievement Middle = failure Right = balance
Putin’s biggest successes rattled off the top — increasing the nation’s military strength and capabilities, resolving the Chechnya problem, and defeating terrorism. But among the leading categories seen as a success, his net rating for raising standards of living is -18 as it is for defeating corruption. The latter was the primary prism through which Navalny’s team decided refracted their various efforts. There’s no part of Russian life untouched by its effects. But it’s the former that terrifies the leadership so long as inflation keeps ticking up and there’s no real growth recovery in sight — returning to pre-COVID trend is untenable politically without ever escalating repression. Milov has been the one consistently messaging on the economy and there’s a moral and political need to center Navalny’s own treatment and political repression in the upcoming protest, but I think the bigger test will be whether there’s enough organizational capability and energy to deliver a message on the economy in the months ahead as United Russia, A Just Russia, the KPRF, and LDPR sort out party lists, their relative degrees of “systematicity” or outsider status (mostly the case for the KPRF but potentially for candidates in single mandate seat candidates as well), and more to lock up outcomes for September.
What’s going on?
Now that the political pressure’s on to drive up investment levels, businesses and state outlets are re-selling the campaign to establish a “unified investment map” to standardize investment across Russia’s regions. The push for a shared digital platform, transparent information, and more are boilerplate and nothing new. What’s telling is the timing. In practical terms, the only way to truly “unify” regional investment climates is to significantly expand the center’s control over each region, both in terms of direct political power and the power to distribute rents. Mishustin needs a breakthrough no this front if Putin’s calls to increase investment levels (without a big break for consumer demand…) are to come to pass. But political bandwidth is an issue. Immediately after the Biden administration offered a summit with Putin and sanctioned US financial firms trading Russian sovereign debt on primary markets, they consciously leaked the possibility of further sanctions escalating to target secondary markets, akin to overt economic war on Russia. The political incentive based on Moscow’s responses to sanctions pressures to date is to tighten control over rents to improve outcomes, which means further increasing SOEs’ role in delivering key economic targets rather than fostering an investment breakthrough for SMEs. Mishustin has to balance both imperatives after Putin’s address. We have no idea what they’re cooking up in “the bunker,” but suffice to say that the rhetoric from business appears to be aping the “investment as mobilization” discourse that Putin launched when he held that roundtable with business leaders. Mobilization, however, tends to reduce the quality of investment and worsen the regional investment climate if the scope for real institutional and political independence is further narrowed — Tatarstan is perhaps the best case of a region that’s managed to be more business friendly than most of the country leveraging both.
The Russian Union of Industrialists and Entrepreneurs polled members to get a snapshot of what they perceived to be the biggest stories of 2020. The relative hierarchy on a % basis that emerges challenges the narrative of recovery driven by state action, which reinforces the risks of banking recovery on external demand at the same time the country appears to be heading into a third COVID wave:
On its face, there’s little reason to scrutinize why the anti-crisis measures, vaccine development, and plan for economic recovery rank 5th, 8th, and 9th respectively. The methodology of the questions is unclear. But what I take from it is that only half of the RUIE’s members saw a significant impact from the anti-crisis measures and barely more than a third see the the recovery plan that emerged as having a large impact. It’s kind of shocking the exchange rate cut ranks higher than the crisis plan, but that also goes to show that businesses may well have a built up exhaustion from excessively tight monetary policy without any real fiscal stimulus for demand as well as years of practice navigating crises. From these figures, the address on Wednesday is all the more important given the relatively light touch the state took last year and the additional urgency of Navalny’s team scrambling to protest as he nears death without proper medical care. The question is what the price of calm and vote totals looks like so long as policy is set with a focus on stability over growth.
Wood Mackenzie projections now warn that if the world keeps to Paris Agreement targets, oil demand will peak in 2024. That’s not the base case, which entails continued demand increases into the early 2030s, but it’s another blow to OPEC+’s renewed optimism that a rise in output later this year will be matched by demand recovery. The following covers their forecasts in billions of tons — blue is base case and red is the Paris scenario:
What’s crucial here is that even in the base case scenario, demand matches 2019 sometime in 2022-2023 with some recovery uncertainty that could drag that into 2024 case depending. There’s the added uncertainty of how fast EV demand lifts in the next few years — some see a faster growth arc than the market assumed coming into 2020 or else by late last year. The million dollar question is when declines in marginal OECD demand outstrip growth elsewhere above 2019 levels. There’s a consistent thesis held by oil bulls that the systematic underinvestment in upstream projects since 2014-2015 was building to massive price spike. Parking aside the problems with the claim — technology/shale drillers deflated costs, lowering the price needed to justify investment for future projects and reducing the net cost of investment in proportion to the amount of output achieved — EVs are far more viable now and we should expect some sort of spending program to build out capacity in the US soon. Higher prices will accelerate fuel switching and reinforce the fiscal multiplier effect of state spending on EV infrastructure and supply chains. Even industry holdouts whose traditional core business portfolios are built n upstream investment and equity valuations are wise, if cautiously, to the reality that old base cases aren’t cutting it. Moscow and Riyadh can only get so far with OPEC+ selling a different story before this dynamic catches up to them and unlike Saudi Arabia, Russia’s incapable of significantly increasing output.
The EAEU’s odd pivot to reduce tariff preferences for imports from developing countries appears set to worsen price inflation for meat. The Commission cut the list of developing countries for which a 25% tariff “discount” is applied in half, with the expected effect of a 2.3% price increase for meat products. Paraguay accounts for nearly 18% of Russia’s meat imports, but the Russia market accounts for 30.3% of Paraguay’s exports — a likely unintended consequence that will undoubtedly harm Russia’s reputation with Latin American exporters affected by the new rule changes. Russian importers will try and source alternatives from states that are still on the discount list, which is where the prices will likeliest be bid up. The policy isn’t a huge blow to consumers. A 2.3% further price increase would not be too noticeable as a result of overall price increase levels, but will further strain household budgets until real income levels rise again. Still, the long-term business case for the EAEU decision seems clearer now — they’re likely hoping to re-shore some imported production onto member state markets by reducing their competitive advantage and taking advantage of the weaker ruble. The aggregate effect, however, is to initially reduce income levels by raising costs until more domestic production plugs the gap and, generally, direct subsidies and cheap credit are used to mask or reduce the price differential. This start started with a large drop in food imports — meat alone fell by more than half. The data’s a bit noisy so I’d wait till we get clean April data, but that trend suggests the Commission was actually using the fall in incomes to accelerate these efforts since the comparative price increase effect is diminished as Russians can afford fewer and fewer imports. These stories are very “in the weeds” but reveal a parallel dynamic to the effect of austerity: just as austerity intensifies dependence on and the role of the state in the economy, the more incomes fall after initial subsidy gains have been made for food production, the easier it is to justify further protectionism even if it marginally increases costs.
COVID Status Report
8,589 new cases and 346 deaths reported. The decision to limit flights to Turkey is undoubtedly paying health dividends as cases are shooting up, but given that flights are still running from Moscow to Istanbul, one wonders how long that’ll hold. But the reality is sinking in that the vaccination campaign is not delivering what it needs to and the Kent strain from the UK already accounts for 10+% of all cases. That could hit 50% in a month and it’s a huge problem for the authorities. Hospitalizations in Moscow, the most vaccinated city, are ticking up again:
A third wave does appear to be developing, no matter the doubts cast by the Operational Staff and topline infection data from the last few weeks. Sputnik is fine against the British strain, but found to be less effective against the South African variant that’s also beginning to circulate in Russia. Buckle up. The data will downplay it for political purposes and it won’t necessarily overwhelm hospitals again, but a third wave will end up harming the consumer recovery and points to the need to not read too much into industrial recovery levels when they’re heavily supported by exporting industries and SOEs.
Lobbying the Boss
Novatek CEO Leonid Mikhelson has reportedly convinced Putin that Novatek’s acquisition of Gazprom’s natural gas reserves in the Tambei cluster on the Yamal peninsula would better support future development. Mikhelson wants to pay in cash and shares. It’s a matter of a long-running standoff between Mikhelson and Gazprom CEO Alexi Miller, whose business strategy since Novatek won the right to export LNG and developed Yamal LNG has been to leverage its relatively dominant position owning and accessing licensing for natural gas reserves as a bargaining chip in the hopes of eventually forcing Novatek to source its gas for future project expansions, thus delivering Gazprom a share of the post-2013 LNG rents. It’s been a rare source of consolation given the company’s broad failure to significantly increase LNG export capacity, challenged of course by the negative impact that LNG exports end up having on Gazprom’s pipeline price negotiations. A few weeks ago, Gazprom edged out Novatek for the license to the Bovanenko gas field on Yamal, which may well have given Mikhelson cause to ask for a favor to balance it out.
The episode isn’t so much a change as indicative of the problem and dynamic intensifying because of the effects of changing external demand expectations for oil & gas. State-owned companies and public firms with close ties to the regime need to lock in their access to rents, but LNG offers fewer rents compared to oil and is a negligible part of the country’s total exports in absolute nominal monetary terms. The LHS on the following is billions USD and RHS is cubic meters to show physical volumes of natural gas exports pulled from CBR data:
LNG’s share is tiny, even when the physical volume rises with earnings. It’s no secret that natural gas has always delivered less in the way of foreign currency export earnings than oil, but it’s overmatched the greater fiscal and macroeconomic firepower oil provides via domestic subsidization and supply for industry. What’s quite telling here, however, is that LNG’s relatively small share of the country’s net exports — note that this isn’t the trade balance — suggests the rising opportunity costs of the approach Moscow has taken to sector development. Billions in state spending for Arctic development that has precious little economic value today, high rates of asset depreciation mandating continuous investments and spending, and is mostly speculating on the economic potential unlocked by climate change were needed to get Novatek to from the money for Yamal LNG to begin with. Gazprom’s development model depended on stealing plant from western firms and then getting partners to help work out capacity expansion (the case for Sakhalin). In both cases, state support ends up backstopping investment. Worse, the state is dead-set on expanding Arctic investment — an additional 19.5 billion rubles ($255.68 million) through 2024 were tossed out last year to support developing the “Arctic zone” and Yuri Trutnev touts the 30,000 jobs supported by the program. He leaves out that these jobs are effectively permanently subsidized, unless the profits accruing to SOEs and parastatals are high enough to improve the long-term fiscal balance or unwind state support. LNG is a perfect example of this confluence of personalist lobbying, profit-making projects underwritten by state spending, and the risks posed by large state support programs built around rent-providing extractive industries.
Putin’s withdrawal from economic policymaking upon his return to the presidency in 2012 has been a consistent and observed through-line for Putins 3.0 and 4.0, a reflection of his exhaustion with his role, self-confidence that the gains of the 2000s are enough, and faith that the system of interest groups and technocrats could handle most of the big economic decisions without his input unless strictly necessary. The pitfalls of the COVID response during 2020 reflect the extent to which this approach is unsustainable if the regime is serious about resetting the economy. Mikhelson’s renewed entreaties to acquire the estimated 7.3 trillion cubic meters of recoverable gas reserves at Tambei come when the iron is still hot enough to win concessions. This is a political fight to win access to state resources to profit off of the expected continued increase in Asian LNG demand set to grow, but at a slower pace:
LNG volumes are unlikely to make a large difference for incremental growth in the EU assuming NS2 is, one fine day, completed:
As the door on growth has closed in Europe, the pressure to realize rents elsewhere has increase. But the more that the demand growth forecast compresses towards stagnation and, eventually, decline, the more pressure there’ll be to resolve arguments between Mikhelson, Miller, Sechin, and others over control of what will ultimately be depreciating economic and political assets. As the rents to be realized diminish and the cost of extracting and maintaining them rise, Putin can’t be the manager at the top floor of the C-suite who never sees anyone unless it’s urgent. Tambei is a great example. Gazprom’s already launching the initial consultation and project works to build the Power of Siberia 2 pipeline through Mongolia to increase piped gas volumes to China. The gas fields in Yamal-Nenets are sourcing the gas and if a 50 bcm pipeline is completed serving a Chinese market with diminishing demand growth expectations as Beijing faces more domestic and international pressure from the US to achieve peak emissions by 2025, then Mikhelson’s gamble looks a bit foolish. Exporters can’t fudge economic data and expectations the same way the regime increasingly seems intent on doing domestically. As external demand expectations fall, there are three options for firms like Novatek to keep ahead of the energy transition: engineer more domestic demand (requires an end to austerity and feasible with emissions targets and Gazprom), build a safer ‘moat’ to capture value-added production and hope that existing state support is enough to stay competitive, or enter new sectors (undoubtedly with state support). All three options are functions of state policy, and that policy is increasingly at odds with the implicit mandates given to MinFin and the Central Bank. Mishustin may be the guy charged with creating growth out of nothing, but everyone knows to lobby Putin if it’s an important matter. The failures to expand LNG output from 2006-2014 are now haunting Moscow policymakers. Only one person in the Kremlin can shock the organs of state into a new policy paradigm, and even then, his powers are limited by the institutional chaos of the political system and its economic institutions. Expect the lobbying to intensify this year and next during the global recovery, if only to get while the getting’s good. The Boss might not like it, but he’s got to involve himself in the mundane more than he has for much of the last 8 years.
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