Top of the Pops
Nikol Pashinyan managed to win in the snap election called after Armenia’s opposition managed to force the matter, taking at least 71 out of 105 seats in parliament with preliminary counts at 54% of the vote. Former president Robert Kocharyan, considered a long-time ally of Putin’s, ended up leading the opposition bloc and was trounced. He has stated that he and the opposition will not recognize the result. “Hundreds of signals from polling stations testifying to organized and planned falsifications serve as a serious reason for lack of trust.” This will drag out. Pashinyan’s victory may trigger a wave of resignations from the Ministry of Foreign Affairs cause the country’s diplomats feel he frequently ignores them. If they were cautioning against taking a deal at the end of the conflict with Russia’s intervention, I’m not sure what they think the outcome would have been. We can also see from the structure of Armenia’s economy that someone like Pashinyan may prove quite useful in navigating what will an incredibly tense set of negotiations over the physical infrastructure and trade linkages following the conclusion of the conflict. They’ve been on hold given the public and elites’ turbulent political response to the nation’s loss. The following are all as % of GDP:
Trade’s share of GDP has been rising since Armenia joined the EAEU and it faces pressures to increase the tax take for its fiscal stability. When you’re a small country surrounded by uneasy or aggressive neighbors and trade flows heavily dictated by political considerations, reaching agreements that allow for something as simple as road crossings to open up matter a great deal. There’s a much larger story here that I’ll try to follow up in the week or two ahead to try and get a handle on how a national leader in the region who presided over a humiliating defeat and significant loss of claimed territory — setting aside the legal complexities of Artsakh — managed to win so convincingly. It’s misleading to say Russia “lost” these elections. Armenians won them by asserting their power to choose their leadership, within the boundaries set by elite politics of course, but a choice all the same. It should, however, be taken as a sign that Moscow’s rigid faith in elite politicking and selectorates isn’t holding up over time. Structural forces, economic and migrational ties, affective attachments, and popular opinion and agency all matter too. The thesis that Russia ‘gained’ from the conflict seems to be falling apart. Almost like notional ‘control’ is far more complicated than the presence of a military base, peacekeepers, or the simulacra of great powerdom.
What’s going on?
Vedomosti dove into the effects of rising metals prices on the broader economy, a phenomenon reaching a crisis point given that metals prices for manufacturers and value-added output rose 19-32.7%. The first economist quoted, Oleg Cherednichenko, first blames pent-up demand, a surge in Chinese demand for production inputs, and speculation before turning to Russian policymakers’ favorite bugbear — easy monetary policy — and only then noting the lack of investment in extraction for a variety of metals and minerals. The easy money narrative refuses to die despite the fact that money has been easy for over a decade now, though a weaker USD driven by large expansion of liquidity does tend to lift demand for emerging markets. But as we’ve seen, it’s developed markets doing most of the heavy lifting this year. What they’re really talking about is fiscal policy and stimulus. Last year’s efforts from China were actually fairly limited compared to 2008-2009 and focuses on boosting exporters who only surged output because of how large the US fiscal response was (Europe’s automatic stabilizers helped, but Europe continues to drastically under-spend on recovery). The effects, however, are actually insane based on Rosstat data. Since November, the lowest price increases on a monthly product basis have been 5-11% with some months registering price rises over 50% for given goods. It used to be that metals accounted for 6-7% of the cost of a new build. That average has risen to 10-12%, and is still rising. Metals are 35-40% of the cost of cars manufactured in Russia, and once contracts turn over, metallurgical firms will demand more money from automakers. Metals account for 65-75% of the cost of rail wagons with the cost of production rising 4-10% monthly since the bull run on metals began. That has spillover effects across the rail network over time as freight operators have to bump up prices to be able to afford buying new capacity. More manual control seems likelier and likelier since the Russian economy is structurally more exposed to commodity price swings than developed markets where services are a larger share of consumption.
The HSE compiled national data counting scientific publications on artificial intelligence as a sort of ‘heat check’ on which scientific communities are doing the most work at the national level. Based on their data, Russia is 17th globally with Saudi Arabia at 18th and fair bit behind for 2016-2020. The following are in 000s:
As we can see, China’s got a big lead on the US, but India actually beats out everyone else behind the US by a fair bit. Quantitative measures of publications are a very clumsy metric — they say nothing about quality, content, or else the intention behind said publications. Russian publications on AI grew 260% over 2011-2015 levels against a global average of 130%. At the current growth rate, it’ll be 7th place by 2025 and only trail India by 2030. But the sort of projection is pretty unhelpful as a measure of the challenge Russia poses, say, for the military application of AI rather than the commercial utilization of AI. As the US is now rediscovering with China, innovation comes from actually making things and putting them to use, not just the basic science research or theoretical publications about applications. We’ll have to see how AI is deployed by businesses, especially since Russia’s research budgets — even with the cash infusion from Putin’s April address —are meager.
Putin tasked United Russia with raising incomes by 2026 at the party conference as the party seeks to carve out an identity as problem-solvers addressing socioeconomic ills ahead of September. What’s interesting, however, is that the injunction to find policy fixes and more to raise incomes is really about ending poverty. Aleksei Kudrin is talking like Bill Clinton when it comes to welfare reform to fight poverty — he wants to stop giving money to people with two homes or apartments, better target support measures, and I’m sure offer tax breaks or something like it. Putin proposed exempting families with two or more children from taxes on earnings from the sale of their home(s) to United Russia as well. These symbolic proposals come as the volume of consumer debts overdue by at least 30 days has started to climb once more — it was 8.4% for May and the Central Bank’s key rate hikes are likely to filter into consumers’ ability to repay what they owe. Ignore the new spending announced. Parceling more money for roads is important, but tells us little about which regions are going to benefit, and the social spending that came up with UR was basically all announced in April. At the same time, Russia’s external debt is now worth just $80 billion, but corporate debt is at $380 billion. Andrei Belousov and the Kremlin are dismissive of any calls to borrow more, but that’s their economic illiteracy at play. The cost of reducing the external debt burden and spending less using borrowing is to force companies and, more importantly, households to borrow without providing much demand stimulus. Incomes may end up rising by 2026, but it won’t be because of any policy initiative currently underway. Worth flagging that both FM Lavrov and Defense Minister Shoigu were put forward for the party list, presumably to try and leach some of their popularity for the party’s gain. It could be an out for Lavrov to retire, but hard to imagine Shoigu would step back from his role in the end. Either way, the presidential administration is clearly desperate to try anything for votes.
Victoria Abramchenko has been tasked with working out a new bill that would punish firms for failing to reduce emissions by 20%. The “Clean Air” project now underway and presumably covered by the new bill applies to 12 industrial centers across Russia rather than being a national program. 500 billion rubles ($6.83 billion) are to be spent over the next 6 years in the 12 participating cities to reduce emissions — the biggest ones participating are Chelyabinsk and Omsk. Emissions quotas are then established for the 12 cities and companies operating there then have to establish plans to meet said quotas. The current approach is pretty stupid insofar as the state is effectively ceding responsibility to business and doing so in a manner that is piecemeal, creates competitive disadvantages for said firms domestically, may encourage more investment into production in areas that aren’t participating, and doesn’t really address the larger problem: Russia needs an investment boom to overhaul its infrastructure and practices. There’ll likely be more to come since they’ve got till October 1 to work out an emissions reduction plan per Putin’s orders, so they can wait till the election is over to bring him bad news. Or they’ll just ignore the deadline without consequence as has become the norm for the economic ministries since Putin and the presidential administration can’t be bothered trying to push these types of issues forward and even Mishustin has punted on deadlines. A national plan is needed, not just moaning about WTO rules in response to carbon adjustment after unilaterally applying an ever expanding array of trade restrictions and preferences for domestic firms that comprise what has been an inefficient, often (not always) ineffective industrial policy.
COVID Status Report
Daily cases stood at 17,738 and deaths at 440 per the Operational Staff data. That’s now 4 days in a row with 17,000+ cases and the week-on-week growth rate for cases is officially above 30%. 90% of the hospital beds at COVID hospitals in St. Petersburg are reportedly full as video footage shows patients stuck waiting on beds in hallways hoping to be seen shortly. Kremlin spokesperson Dmitry Peskov has made it clear that getting re-vaccinated is unavoidable as evidence piles up that the politically convenient bet on herd immunity isn’t working — people infected by prior variants have lost their antibodies and the Sputnik vaccine won’t be adapted to the Indian variant though it appears to be effective thus far. Ural Music Night and Euro-2020 in Sverdlovsk oblast’ have finally been canceled and we’re now seeing similar steps spillover across the country as regions scramble to keep up with the surge of infections without additional support for businesses and budgets forthcoming.
Though not as high, the sudden spike in the rates of increase compared to the last wave have more in common with the first wave in 2020 if we assume the official data doesn’t massively distort the underlying trends. 11 of 85 federal regions now have mandatory vaccination schemes in place as they spread — it’s the only thing regional governments can really do now. The new push to re-vaccinate is one to watch as well since it’ll draw on vaccines that could go to individuals who hadn’t had any shots yet. It’s a logistical nightmare.
Ghost in a Shell Company
Trawling Twitter for things to worry about, I spotted this chart about new oil rigs coming online in the US. It tells a story, in brief, that I think is one of the most important and difficult aspects of how the oil & gas sector will adapt to new political and investor pressures regarding emissions and extractive activities. To simplify, if you’re a publicly owned company with public shareholders on a public exchange you have to answer to, you’re probably pulling back due to the risks:
Privately-owned operators, however, are happy to try and make the current oil price recovery and demand growth expectations work for them. Oil majors — the biggest of the big publicly-traded oil companies — have reacted to the unprecedented surge in shareholder activism and court mandates in Europe to cut emissions by finally getting serious about selling stakes in projects and trying to work out a shift in business model. It’s not just BP or Total we’re talking about. Now it’s Shell, Chevron, and Exxon. But divesting from carbon-emitting assets means selling it to someone, otherwise your company is just writing it down as a dead loss with the added pain of paying to cap wells, manage environmental degradation, and in some cases spend decades financially supporting cleanup and relief efforts for local ecosystems or the land that was leased to be drilled. If companies facing more public scrutiny won’t touch projects that otherwise can still deliver better margins than building what are effectively utilities investments, private players and nationally-owned companies will fill that gap as much as possible.
This distinction and problem can also be seen in light of oil’s impressive equity performance so far this year in line with the broader energy sector. It’s way ahead of most other sectors for YTD returns:
The political consequences are going to be far larger than we can comprehend at the moment because conversations about green investment and decarbonization revolve around questions of democracy. How can we democratize climate action to make investments socially just, effective, and folded into the regulatory, fiscal, and planning power of states beholden to their voters rather than financial interests? As Daniela Gabor noted in this excellent conversation on green finance, the idea of a National Investment Authority (NIA) in the US, and a public green ratings agency for finance:
“[A public ratings agency] is a very powerful example of what happens when you try to design a green standard of sustainable activities without reforming the financial system and scaling back the power of carbon financiers and other vested interests. In broad terms, I would say that there has been a process of diluting the standards of what sustainable activities are, because you can’t take the politics out of identifying sustainable activities. The idea that you will have Democrats and Republicans sitting and happily shaking hands over this narrow set of green activities that we can finance—well, look at Europe, look at the way that BlackRock has been accompanying the European Commission’s work on the sustainable finance taxonomy, and put to rest the idea that you will get some big political compromise.”
A public ratings agency helps price the externalities of carbon-intensive investments by creating an independent public board that can tell any given driller “look, that’s a dirty investment and you can’t live fat off of cheap debt with rates held phenomenally low by the Federal Reserve forever.” Commodity production is heavily affected by the cost of credit — there are lots of costs and investments made before you ever get to extract a barrel of oil and risks once you start extraction. But since we’re not in a world where there’s any serious political momentum internationally to nationalize more of the financial system, at least yet, the individual acts of boards and shareholders or judges on courts are likelier to push away the public companies with the greatest financial capacity to reduce emissions and uphold high standards from extracting more. President Trump’s love affair with ‘American energy dominance’ was a result of lobbying from mid-size companies that hated regulations, not the large companies that benefit from them. After all, the more burdensome the environmental regulations, the fewer companies can afford to enter the market to extract oil & gas in the first place. If anything, we should be concentrating production in as few hands as possible in the West claiming national stakes in public oil companies to ensure a veto on boards for decision-making. And even with something like an NIA and/or public ratings agency in the US, the demand boom for commodities aggressive decarbonization would trigger will still have distributional consequences that are profoundly undemocratic in their implications and effect.
Private capital and national companies are now in a privileged position because they face fewer constraints. Until there are coordinated international efforts to make firms pay for the externalities of their activity, there’ll be holes in legal, regulatory, and financial systems allowing private operators and national firms to slip through. There has been an ever expanding archipelago of offshore extractive resource vehicles for decades, one that traditional super majors have been party to as well. One can conceive of a proliferating array of shell companies headquartered in an offshore haven with a Russian beneficial owner contracting with privately-owned oil service providers from Texas registered in an offshore jurisdiction using a joint venture registered in yet a third or fourth jurisdiction with a pyramid scheme of financial ownership receiving loans and infusions of cash from a third-party firm or funder using yet another offshore vehicle in order to develop deposits in Ghana or Nigeria with support from a local firm, investors, or else the state. The relative transparency of these dealings is diminished because you don’t see the same degree of publicly available oversight or have the opportunity for shareholder revolts as the biggest firms pivot to new revenue streams that will depend on them consuming commodity inputs if they don’t diversify into mining. The national companies can make up for increased costs of credit if there’s some sort of pricing for carbon by using their sovereign governments to provide guarantees, to calm lenders, or else to directly stake money as needed. And topping all of this off, these transactions that have dominated the extractive industrial space for decades will become more pressing because of the intensity of the resource demands of ‘greening’ economies. It may not be oil each time, but the world will also be consuming tens and tens of millions of barrels of oil per day for decades to come. Attempting to reduce the presence of western, publicly-owned firms from these processes reduces the power that activist investors will actually have to shape best practices and force privately-held companies and national companies to keep pace with changes implemented by their competitors.
These labyrinthine transnational constructs will matter a great deal for the future rents to be realized from the Russian energy sector and how external parties play a role facilitating said rents. Russian oil output most likely peaked in 2019 given its fiscal system, the higher initial costs for new production in remote regions, and the limited availability of major new projects domestically. Rosneft’s Vostok Oil soldiers on as the sole significant potential source of output growth in the years ahead. The renewed political power of national firms on oil markets helped the firm out — Rosneft sold a 5% stake in Vostok Oil to commodities trader Vitol and Mercantile & Maritime Energy last week in a deal worth somewhere between €3.5-6 billion. It’s a huge deal. Bank of America estimates the project will end up being worth $115-120 billion once you include the hoped-for LNG capacity associated with it. Since sanctions were first applied, Russia Inc.’s relationship with commodity traders has been an important source of support and means to bypass the worst of sanctions pressures. Glencore’s involvement in Rosneft’s privatization of shares was a prominent example. These are companies that need to physically source cargoes by any means necessary to maintain an edge. The cumulative effect then of these competing green initiatives and trends in the OECD is to amplify the power of private capital and the activities of these intermediary traders to shape markets and provide continued access to the global dollar system/global finance for Russian companies otherwise constrained by de-dollarization, sanctions, and risk premiums when trying to borrow abroad to take advantage of these rents. But what matters most of all here for the ‘democratic’ politics of the energy transition is that they won’t lead to growth, at least in Eurasia. They will make political entrepreneurs outrageously wealthy as they have for a long time. And in political terms, that’s fertile ground for political crisis the longer that inflation remains higher and commodity riches are circulated among an increasingly tight circle of money managers in Russia. Democratic action on climate in the West will lead to autocratic action elsewhere so long as there isn’t a truly internationally coordinated approach to the problem of climate change targeting the rents most rentier states rely upon.
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