Top of the Pops
Today, I didn't do a long analytic section due to time constraints. Still working out the right balance but I will do one tomorrow and hope to be done with what's a longer essay reflecting on the reception of events in Afghanistan here in London and Europe as well.
One of the regime's favorite talking heads, Vladimir Solovyov, spoke with Russian ambassador to Afghanistan Dmitry Zhirnov on air. Zhirnov contends that the Taliban have invited Russia to participate in the country's economic development, including the development of its extractive sector. The interview comes just as the Ministry of Defense has committed four transport planes to evacuate over 500 Russian, Belarusian, Kyrgyz, Uzbek, Tajik, and Ukrainian nationals. In Zhirnov's telling, the Taliban simply lack other options. Media outlets keep running stories about how China is going to develop lithium deposits, but that's effectively nonsense. If it was easy to do, buyers felt they could trust it, the mines themselves didn't have a host of operational issues, and the Taliban or local authorities could be trusted not to skim huge sums, it would have happened in the last 20 years. Setting aside the obvious propaganda nonsense – Zhirnov tries to argue that immigrants coming to Russia have it better than the US, which, man . . . – it caught my eye because it seems fairly evident that no one wants to risk participation if it carries with it sanctions risks on top of the clear impediments to economic activity. We don't even know what the Taliban in power really looks like yet. Dushanbe has made clear that any government has to include ethnic Tajiks if it is to be recognized by Tajikistan and also denied sending aid to the Panjshir valley to support the small anti-Taliban resistance that remains. Afghanistan isn't Central Africa. Russian mercenaries can't jump in and take contracts to extract resources as easily, nor would their activity be welcome from a security standpoint. Too many risks. Interesting to see Moscow's information machine position itself as indispensable domestically ahead of Duma elections when everyone knows it's simply not true. Never was during the conflict. After the US finishes leaving, it'll be a Wild West scramble between Russia and other intelligence agencies trying to make sure they know what's happening.
What's going on?
- Unsurprisingly, internal migration last year was the lowest it had been since 2011. 3.5 million Russians, mostly working age, moved between regions in 2020. What's interesting from the data is that neither Moscow nor St. Petersburg were actually in the top-10 for inflows. Instead, the list goes as follows: Sevastopol', Leningradskaya oblast', Kaliningradskaya oblast', Adygeya, Moskovskaya oblast', Krasnodarsky krai, Tyumen'skaya oblast', Ingushetia, Crimea, and Kaluzhskaya oblast'. The point? People wanted more space if they could afford it and the uneven effects of the pandemic on the economy changed somewhat the usual rush into cities. It makes tons of sense when you stop to think about it. Spending on services fell for most of last year, real incomes fell too, and those who could afford to buy either bought where they were or wanted places outside of cities with easy access. It's unclear if this new dynamic will persist. Costs of living are clearly altering worker and consumer preferences, especially coming out of this crisis with no expectation of a new stimulus and as yet not much evidence that real income growth will continue. 2.4 million of these internal migrants are working age people, 700,000 were kids, the rest were pensioners. Northern regions accounted for the worst population losses as usual per these metrics. This is an important trend to watch, especially if more second tier cities try to anchor high-end service jobs taking advantage of remote working arrangements and lower costs of living.
- New Central Bank data shows that the price inflation squeezing manufacturers and industry appears to be easing. Retail saw its most significant decline compared to other sub-sectors. On its face value-added output seems to be in a better place, in line with the annual inflatin trends that tick downwards over the summer. The following is based on the net balance in % of respondents expecting price increases:
Light Blue = Everything combined Red = extractive sector Black = value-added production Blue = transport and storage Yellow = retail Green = services
Rosstat data had already noted a slowdown in the rate of producer price increases in July. But it's not necessarily all good news. Rosstat's data recent releases point to an accumulation of signs that industrial production is stagnating. On its face, a lot has to do with low base effects wearing off to the point that now output is underperforming expectations. If we use March just before the national lockdowns in April 2020 as the reference point for monthly growth rates, output is actually still over 15% lower than it was March 2020 as of the July data. The rate of the slowdown suggests that it may just barely recover to the same level by year's end if that. I'm skeptical because of the fiscal pullback and timing of the new stimulus spending used to buy votes. Most of that money is going to go to food or debt-servicing and unpaid bills I suspect. 15.8% of the population owe microlenders who charge exorbitant rates to borrow, sometimes hundreds of percent. The situation is also worsened by the reopening of travel, which is moving more consumer spending into services in place of manufactured goods. Long story short, I don't think the Russian economy is showing evidence that this year's growth is actually shared. If we believe that Russia's economy has now sustainably surpassed its pre-crisis size, industrial output should probably be higher than it then was, real wages should safely be beating inflation, we wouldn't expect social transfers like pensions to have actually lagged inflation a few months this year given the influx of revenues, and so on. That growth can only be explained by surging prices for exports to my eye, and perhaps wealth accrued from housing though that wouldn't boost consumption. Quite the opposite in fact.
3. The Ministry of Defense signed 500 billion rubles' ($6.75 billion) worth of contracts at the Armiy-2021 expo on Tuesday, primarily for drones, hypersonic weapons, and the modernization of platforms such as the Tu-95MC strategic bomber into the Tu-95MCM. More important than the systems is the manner of payment. These purchases appear to be financed via credits processed through state banks like Promsvyazbank. Neither the 2021 nor 2022 budgets provide funds to cover the purchases. Normally the scheme would entail returning future budgetary resources assigned to any given project or use to the banks as repayment. The defense sector has a long track record of piling up bad debts that have to continually be restructured. Some view this as Moscow learning the lessons of the late Soviet Union and avoiding an excessive buildup that can't be sustained via the budget, and there's truth to that. However, the practice is more akin to opting for significant systemic credit and liquidity risks in the event of nonpayment or non-restructuring in the banking sector in place of the national budget. For semi-relevant context, Russia's external debt has only risen about 1.5 trillion rubles ($20.2 billion) this year and has reached a whopping . . . 20.4 trillion rubles ($275.6 billion). That's about 20% of ruble-denominated GDP. It's funny to see the enforcement of discipline in the defense sector through restraint because it just builds up fragility. Even weirder is that more of these acquisitions are supposed to be financed using profits collected from civilian production and sales. In practical terms, the state is giving significantly preferential credit conditions to defense manufacturers it can't allow to fail and telling them to compete with civilian manufacturers who, as we've seen today, don't exactly have a strong demand environment. And all because of the refusal to spend just a bit more using the state budget in order to build up better capacities and sustain more demand.
4. In another legal blow to the "Nord Stream as geopolitical grand corruption" thesis, Gazprom failed to overturn 2019 revisions to the EU's gas directive to NS2. The Düsseldorf regional supreme court rejected their claims brought against Germany's federal grid agency. The decision, it should be noted, can be appealed and there are two other pending challenges. To top it off, gas flows from Russia via Poland to Germany are now back at 80%+ normal levels. The timing is, of course conspicuous politically but market machinations, turnaround times for a series of delayed repair works and concerns after the fire at Novy Urengoy are all just as likely culprits. If appeals render different decisions, we might have to more closely consider how that came to be. Still, it also gets rather difficult conjecturing that any given decisions is a result of corruption and everyone becomes a legal scholar, a psychologist, and counter-intelligence agent once they don't like an outcome. The market terms of Ukrainian transit continue to matter. Gazprom's doing so well because of a broader natural gas market squeeze – export prices are 30% higher than the company's own projections for the year. They may have withheld output to influence that, but given they've built their capex plans around a lower price level and have lucked out on being a "dividend aristocrat" on the market, hard to see just how much of the delivery slowdown via the Yamal pipeline was planned. The episode also reflects the full effect of surges of growth off of low bases from 2020 and difficulties accelerating energy transitions that require a host of energy-intensive inputs that have not yet been "greened."
COVID Status Report
19,630 new cases and a record 820 deaths were recorded in the last day. It's helpful to visualize the state of the vaccination campaign since it suggests that any decline in the case rate has more to do with exposure to the Delta variant than public health interventions. The pace of vaccinations has fallen significantly at the same time that under 30% of the population is fully vaccinated. Green is total doses, blue is single-dose recipients, black is fully vaccinated:
That's a really bad trend going into the election, and a huge concern for if/when other variants arise. Still waiting for the mortality data to reflect what experts have started briefing i.e. a fall in mortality is on the way. The case fatality rate from World in Data is nearly .5% higher today than it was a month ago, which suggests that the decline in cases is exaggerated barring some shift in which age cohorts are being exposed. If we track this with what the production recovery tells us, 'normalcy' for the economy may be pretty near and it won't look nearly as great as the topline growth figures do so far.
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