Top of the Pops
In a step towards air quality concern, MinEnergo has come out swinging against proposals from Rostec subsidiary “RT-Invest” to build 25 power stations powered by communal waste. The ministry wants to cut that number in half and more importantly identifies that capacity supply agreements — basically a transfer of money to investors via a slight markup on wholesale electricity prices — don’t make sense for these projects. Municipal waste mismanagement has been one of the most persistent drivers of local protest and discontent, and you can imagine that the new obsession with carbon emissions write-offs using the nation’s forests via the ‘rental’ of forest land for carbon credits could theoretically allow a company to claim an incinerator generating heat and power using waste is ‘recycling’ said waste. If you look at the topline waste generation and utilization data available via the Rosstat portal, things have plateaued for a while now. The following is in millions of tons. Note that Rosstat specifically identifies this as production and consumption waste:
RT-Invest is already building plants near Moscow and Kazan’ planned to come onstream in 2023 at a cost of 180 billion rubles ($2.42 billion) with a planned capacity of 355 MWH capable of burning 3.35 million tons of hard waste annually. But Victoria Abramchenko is against the proposed expansion of incineration capacity for the obvious reason that she’s been tasked with handling reforms to the municipal waste system across the country. Failure falls on her head. Abramchenko’s point is spot on. Why the hell does Russia, a country rich in natural gas, hydropower capabilities, and nuclear power capabilities, need electricity that will be more expensive via the price markups from the capacity supply agreements as well as the insider dealing used to kick regional budgetary funds to municipal waste transporters and managers? No one knows what to make of the financing proposals. RT-Invest has offered up 5 different ideas and MinPrirody and MinEkonomiki referred Vedomosti to MinPromTorg while no one thinks energy consumers should foot the bill. Landfills in 32 regions are expected to fill up by 2024. Rostec wants some rents in exchange for helping handle the problem given the air quality and local pollution protests held back in 2019. What a mess.
What’s going on?
We’re now seeing the front-end of a bump in inequality to come as the number of apartments in Moscow sold at auction after bankruptcy proceedings rose 33% for 1Q vs. 1Q 2020, worth noting since the bankruptcy moratoria was only urged by Putin on March 25 last year. Pair this with the expected surge in business bankruptcies by the fall since the most cases take 5-7 months and the moratoria were lifted in January and there’s a fair bit of visible pain yet to come, even with the worst contained. Applications to buy apartments at auctions post-bankruptcy rose 20.7% year-on-year for 1Q. Realtors estimate that you can land a whopping 30% discount on the price for a property if you grab it at auction, which would leave the price nearer to where they were this time last year pre-mortgage subsidy. The Constitutional Court just ruled that the ban on seizure of debtors’ homes isn’t unconditional — if you live in a really expensive place and go broke, plaintiffs can seize it, sell it, use some of that money to help you move into a smaller, cheaper place, and pocket the rest to help cover what you owe them. As of a few weeks ago, personal bankruptcy procedures were up 80% year-on-year as efforts continue to make legal recourse to bankruptcy more widely accessible. 40,600 people applied for it in 1Q. These issues aren’t affecting a ‘critical mass’ of people given the regime’s political priorities, but it places yet more pressure on the limited social spending boost announced on April 21 to provide the political release valve intended by curators and fixers in Moscow. The scramble to further simplify bankruptcy procedures for businesses from MinEkonomiki is also trying to get ahead of Central Bank rate hikes as many predict business bankruptcies will rise with them. Reading tea leaves from the dailies, policymakers know it’s a potential time bomb and there’s limited coordination of the policy approaches to fix it.
The residents of industrial parks increased investment into infrastructure back to 2016-2017 nominal levels in 2020, but don’t hold your breath about the volume of spending. It was 120 billion rubles ($1.61 billion). Investment into production, on the other hand, fell from 40 billion rubles to 24 billion ($322.56 million). The following is all noted in blns rubles:
Beige-Green = into production Orange = into infrastructure
These stats are atrocious when you factor in the inflation rate for ruble-denominated expenditures based on the topline figure for the economy. It’s highly imperfect given the variation of costs don’t track neatly, but 120 billion rubles in 2020 comes in lower than the inflation-adjusted 87 billion rubles from 2014 (would be 127 billion in 2020 assuming perfect conformity to CPI, with PPI running slightly lower but at analogous levels linearly). These parks are spread across 66 regions, but just 16 account for 90% — presumably there’s a huge degree of concentration around Moscow and St. Petersburg with other 2nd tier cities lagging behind them. Russian-domiciled firms accounted for 90% of residents, but just 45% of investments. Foreign investors accounted for 55%. The latter figure likely includes a fair number of Russian firms that registered in Cyprus or elsewhere offshore. Still, foreign automotive manufacturers and similar producers facing limited competition from Russia’s domestic firms invested more whereas Russian firms take their cues from state support. It’s the “you earn on profits, we earn on costs” conundrum in new form at the same time the real level of industrial investment into these parks was lower than it was in 2014, likely worsened by the tepid demand-side support from state stimulus.
Putin came to a decision between Leonid Mikhelson and Aleksei Miller, handing Novatek control of 2 of 4 large gas fields in the Yamal-Nenets Autonomous Okrug. The move gives Novatek a much larger resource base to expand LNG production without being stuck paying Gazprom to source gas. Putin’s technical fix was to limit the bids at auction on the fields to firms that have functioning LNG capacity on the peninsula, which is only Novatek. It’s a small blow to Gazprom, which generally is the default winner on these bids unless a competitor finds a field associated with an oil project or near other investments. Rosneft’s used that approach in Eastern Siberia. The Neitinskoye and Arcticheskoye fields contain an estimated 413 billion cubic meters of reserves, which are expected to provide feedstock for capacity expansions at Yamal LNG and the future proposed Obsky LNG trains. The decision came alongside a business meeting between Putin and heads of the largest French firms operating in Russia, led by Novatek partner Total — yesterday Total announced it had acquired a 10% share of Novatek’s LNG transshipment subsidiary Arctic Transshipment LLC. My takeaway is that Novatek’s ability to maintain working relationships with international partners despite the attendant sanctions risks — Novatek is included under sectoral sanctions from the US and EU — gives it an edge over Gazprom in these disputes, particularly since Novatek’s the only firm proving it can push new LNG projects ahead since sanctions picked up post-2016. There are more gas fields left to sell and raise cash for the budget, but as demand growth slows globally, remaining reserves are less and less useful.
The government is reportedly considering a temporary ban on the export of buckwheat and buckwheat groats to curb price inflation for the most basic foodstuff that poor Russians depend on. Price increases in the range of 7.5-15% were a possibility based on requests from suppliers to the retail chain “Verny”. Retailer “Komandor” is looking at raising buckwheat prices 10-15%. The strategy of negotiating price caps among producers to then cap the price for retailers buying wholesale can’t manage inflation so long as there are distributors and consumers buying at rates that weren’t fixed with the retail chains and export price increases make selling domestically less attractive. The new export ban proposal is a reaction to a surge in exports late last year — a quarter of all domestic production was sold for export (220,000 tons) mostly to China, Japan, and FSU countries. Record production levels last year, therefore, had no downward impact on domestic prices. Any ban risks grower interest in planting more buckwheat since it can grow in short-season climates and a ban on groat exports last year had little effect on prices in the end. These measures are becoming farcical since at every turn, they end up discouraging capacity investment. An easier way to drive down prices would be to use budget resources to procure supplies at a negotiated rate in relation to the export price or else to directly compensate producers the difference between the export price and the negotiated price. Similar arrangements exist for some products, but ultimately, these controls are an attempt to avoid subsidies that end up creating more political demand for subsidization by driving down investment. For social context, every seventh Russian reports seeing relative price increases of 30% compared to last year’s spending levels — stopping insane buckwheat price increases is absolutely vital to prevent an increase in the poverty level, which has become the most important aim of social policy ahead of the September elections. This latest approach doesn’t seem well suited to achieve that.
COVID Status Report
Yesterday 9,284 new cases and 364 deaths were reported. The uptick came from Moscow where there’s growing concern that vaccinations aren’t keeping pace with the potential increase in the case load to come. Kremlin spokesman Dmitry Peskov denies the validity of reports from Bloomberg and other sources that a 3rd wave has begun, the position held by Rospotrebnadzor for now. Rosstat is still working out its mortality data linked to COVID, which comes just after the conscious choice to delay the release of real income data till after Putin’s address on the 21st. If the long-running fear has been the expansion of the South African and UK variants of the virus in Russia, the new panic scenario is that something akin to what’s happening in India (and the assumed variants related to it) happens without a resumption of restrictions and acceleration of the vaccination campaign. The earlier flight limits to Turkey — they still run flights to Istanbul, which I believe gives people a way around it — were well-timed to get ahead of the explosion of cases in Turkey. What’s weird, though, is that Russia agreed last week to restart direct flights to Egypt — an alternative resort destination for Russians — despite growing evidence of a 3rd wave in Egypt bad enough that they cut the school-year short. The government’s warning cases may skyrocket in the days ahead. The restrictions to Turkey made public health sense. The decision to negotiate access for holidays in Egypt doesn’t given the state of its vaccination efforts at the moment.
Zarif don’t like it
Early this week, speculation erupted after the leak of a taped 3-hour conversation from Iranian foreign minister Mohammad Javad Zarif. In it, he complained not only of the Iranian Revolutionary Guard’s dominance setting policy — a classic feint as he’s complained of his own irrelevance from policy before in order to secure more influence — but also of Russia’s desire to sabotage the agreement because it sought to lose if Iran were to normalize ties with the West. President Rouhani covered Zarif’s back by focusing on the fact that the statements were intended to be confidential and stolen rather than castigating Zarif personally for sowing discord. While the commentariat and analysts assess who benefits in Iran from the leak, the intention behind it seems obvious given the recent meetings between American and Iranian officials in Vienna. It was an olive branch to the Biden administration that allows the president to paint a re-entry into the JCPOA and slow normalization of political relations as part of Russia (and China) policy.
The Biden administration reacted a few days later to the leak with an AP story hinting at internal discussions intended to rollback of the worst of the Trump era sanctions that are inconsistent with the JCPOA in place prior to May 2018. I’m not an Iran expert and won’t speak to the particulars of the IRGC’s role in setting Iranian policy, but Zarif’s gesture was met with another that carves out a little more space for diplomacy to work despite the unstated consensus among most of the senior Congressional and Senate leadership in Washington that any return to the deal should widen the scope of what the JCPOA covered. I’ve always been skeptical that a return to the deal was politically feasible in the US due to domestic factors as well as the quiet preferences of European partners, but this is the rare positive development in US foreign policy concerning Iran not seen for years now. If talks do proceed further, that’ll add more psychological downward pressure on oil prices despite the fact that Iranian export levels haven’t dropped off as much as official data reflects by using ‘ghost’ tankers, transshipment at sea, and other convenient means to disguise ports of origin. The 25-year agreement with China was largely pro forma. Concrete commitments weren’t agreed. Had they truly been, ending the JCPOA might prove nigh impossible with the political backlash it’d have caused. The information would have leaked out. You can’t keep that much money moving a secret.
The reaction to these developments in the Russian press — or lack thereof — points to the odd ambiguity the regime now seems to have to any restoration of the deal since Trump’s unilateral withdrawal from the JCPOA in 2018 ended up providing a source of leverage for Moscow. It didn’t care and was happy to keep working with everyone in the region while hoping against hope that no radical military escalation took place in Syria. Writing for Regnum, Aleksandr Belov writes with stunningly incoherent confidence that thanks to Biden, Russia’s now the main player in the Middle East. Kommersant focused on the meeting between Biden’s National Security Advisor and Slenderman clone Jake Sullivan and his Israeli counterpart Meir Ben-Shabbat, an IDF veteran who led Israeli strategy and talks for the Abraham Accords for Benjamin Netanyahu’s bid to freeze US policy in place under Trump. In typical reassurance talks, the US committed to ensure security against Iranian drone and missile capabilities. Deputy speaker from the Federation Council Konstantin Kosachev went off on Biden’s address to Congress on Facebook, criticizing the racism and extremism of American society and the circle of liars and opportunists trying to trap Biden into pursuing US dominance which is sure to collapse, of course. Deputy foreign minister Andrei Rudenko met with the Iranian ambassador Kazem Jalali yesterday, likely to straighten out the story so that Iranian officials could assure their Russian counterparts the leak was intended to help keep the US at the table. All of this goes to say that there’s no reason to suspect Russia was ever against the deal. After all, it’s oil companies saw tens of billions in future investment opportunities if they could reach acceptable terms with the Iranian state. But if the US actually re-enters the deal, it threatens Russia’s role as the “partner of second resort” it’s been trading on. LHS is millions of tons, RHS is US$ blns:
If we take seriously MinEnergo’s warning that oil production likely peaked in 2019 and without large fiscal reform efforts, it won’t be matched, then Russia’s in a significant bind. It’s crude exports likely peaked in volume in 2015 and the relative value of the refined products it continues to export has declined since 2018, now worsened by COVID shock and expansion of refining capacity in China and on grown demand markets in the Asia-Pacific broadly. It came out late yesterday that the investors interested in acquiring a 1% equity stake of Aramco are Chinese, precisely who is still unclear. Count it as yet one more knock on Rosneft’s market power in China and a leading indicator about Russia’s commercial and political relevance to the Middle East, aside from its continued courtship of MENA investment into its agricultural sector to increase grain exports.
The expansion of Russia’s military and commercial footprint in the Middle East has a nominally geopolitical and economic cause — Syria was highly salient and the current Kremlin leadership are terrified of a repeat of 1986, whereby Saudi Arabia floods the oil market to their detriment — but has also served as a broad territory for policy entrepreneurship intended to curry favor without much of a coordinated plan. It’s not just ‘status’ that the Russian state acquires by being involved in conflicts it’s ultimately unable to resolve. Syria is perhaps the most flagrant example of an over-estimation of Russian capabilities given the pursuit of ‘respect’. Iran organized the National Defense Force in Syria with tens upon tens of thousands of fighters recruited, fighters coordinating with other militias that had to actually had to hold much of the ground Russia was bombing. It also generates rents for domestic interest groups. That’s why you have Wagner mercenaries go to Syria and get annihilated by the US Airforce without any complaint from the Ministry of Defense. It’s why Sber is particularly keen on expanding its operations in Dubai and Abu Dhabi. It’s why Rosneft approached the Qatar Investment Authority to grease its share privatization efforts in 2016 intended to plug a budget hole that could have been filled by borrowing ruble-denominated bonds instead. It’s why miscalculated gambles on Khaftar in Libya and the acquisition of an oil terminal in Lebanon and a natural gas pipeline from Iraqi Kurdistan are seen as proof of influence rather than a normal state of affairs in a region that uses foreign capital and capitals for domestic ends as much as they’re “used.”
These rents require openings, fissures, the kinds of desperate situations that often arise when the US pursues policy in an ad hoc, militaristic fashion either without concern for major allies or else at the behest of regional partners, namely Saudi Arabia and Israel. At the same time, there needs to be some sort of political salience to the oil market to justify the kind of ‘geopolitical weightiness’ afforded to the Middle East that helps Russia project the image of a self-confident power. Both of these fade from view the more the administration does to try and undo the damage to US foreign policy done by the Trump administration and leans into climate diplomacy. As Russia’s relative oil export levels fall and the relative value of its refined product earnings fall, the pool of domestic rents organized through the budget fall as well. The increase in non-oil & gas revenues doesn’t change the problem because of how embedded the sector is in structuring the price and demand environment for industrial services, parts of the construction sector, regional infrastructure investment, and even social contribution budgets regionally. Put another way, increasing the tax burden on the rest of the economy when it’s still dependent on the energy sector for much of the business cycle and has spent 8 consecutive years in survival mode does not create more rents without an increase in investment. Labor’s share of national income has actually risen in recent years, but that’s happening as real incomes are falling and less and less is spent to create new production. As Russian oil output enters decline, that leaves it even more vulnerable to production levels and political risks in the Middle East.
Any relaxation of sanctions on the Iranian oil sector won’t just provide a foreign outlet for Russian oil firms to invest and cultivate new rents. Chinese firms, American and European firms far better at emissions management would jump at cheap onshore production. Of course, these things also hinge on Iranian authorities and their decision-making process, but I suspect that they have no intention of throwing in with Moscow should that day come. Zarif’s leak speaks to the greatest weakness of Russian foreign policy — it’s a direct extension of domestic political economy. Framing foreign policy successes in opposition to a belligerent Washington is a far simpler task than doing so when the US appears to be a responsible stakeholder. And so long as Russian firms face sanctions constraints and reputational counterparty risks, capital from China, India, Japan, South Korea, the US, and Europe will have a far easier time swooping in to secure what hydrocarbon spoils are for sale in the Middle East while charting their own courses to reach net zero, a process that steadily diminishes the value of the rents left to be extracted from the region. Moscow is caught in a vicious cycle of dependence as a result of domestic policy failures more than its foreign policy choices. The only route to ease the former, however, is to change course on the latter. That’s not happening. Peace and stability don’t really benefit Moscow when it comes to the Middle East much anymore. Investments the regime most needs are still going ahead for now. A Russian foreign policy built on opportunistic “extraction” of geopolitical value was a perfect foil for Trump’s own version of the same. It wasn’t for Obama’s approach, nor is it necessarily for Biden’s despite the persistent risk of military escalation in the region. The rents are too damn low.
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