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Surplus to Requirements

Surplus to Requirements

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Russia's economic authorities are on the case now building the system to divorce the Russian market from global inflationary pressures first leaked to the press from Belousov's efforts in June. To get anywhere, you need to get buy-in from Anton Siluanov and the Ministry of Finance, Reshetnikov and MinEkonomiki, and the once-more relevant Maxim Oreshkin stashed away as an aide to Putin onboard. The consensus that's emerged is straightforward – tax the windfall profits that exporters realize when global price levels rise and redistribute them to the domestic population. They dodged a bit of a bullet insofar as the original ideas kicking around entailed more in the way of export curbs, additional duties, and the like. It'd be more effective to just tax the profits realized for redistributive purposes and it seems like that's the route they're going. Reshetnikov and Oreshkin keep banging on about easy monetary policy and monetary emissions as the causal mechanism they're fighting against and, as always, it makes very little sense. Oreshkin's own comment "you print dollars, everything in the world gets more expensive" was laughable since it was US stimulus that held up the global economy during the worst of it in 2020 and continued to do so into 2021. Look at US reverse repurchase agreement activity now pushing liquidity into the system, a crucial mechanism the antiquated "printing money" is partially trying to wrap its head around:

These activities support lending operations among banks, financial institutions, and businesses in the real economy. Their use in 2016-2017 had no appreciable impact on inflation levels in Russia, nor did commodity prices spike. The "printing" image is wrong. We're talking about credit creation, liquidity provision, balance sheets and the countless transactions on a daily basis linked to the value of equities or else secured using shares and so on. If you're a Russian exporter, you want the US to ease for longer and Congress to authorize a huge infrastructure bill. That's how you get your demand, your foreign currency earnings, and arbitrage against ruble-denominated costs. The new thinking about taxing them to pay out to households suffering from inflation is a decent principle. But it's going to hit investment into output depending on how they qualify windfall profits. I don't think they can isolate an economy as open as Russia's now is from global price levels, but they're sure as hell going to try. It is completely illogical to obsess about budget surpluses on the one hand and then turn around and bemoan the growth of private borrowing to finance consumption in the current economic context. Here's a long-read posted on the site last night reflecting more on the situation.


What's going on?

Data is always a problem when making sense of things like quality of life, demographic trends, and the 'reality' of governance in most Russians' daily lives. Igor Bukhtiyarov from the Ministry of Health recently noted that the rate at which Russians register cancer diagnoses as a result of workplace hazards and health risks is very low for Europe despite the country's large population. It's not because Russia's so great at stopping cancer:

Red = population in millions Black = number of cases

Yet 13-15% of Russia's workforce work in difficult conditions, unsurprising given potential risks in the extractive sector and military and military-industrial contexts. That only 27 cases happened from 2013-2018 is a damning indictment of local and regional governance. On the one hand, industrial accidents have been trending down for years, but by the same token, improvements to various public health measures often come at the cost of regional doctors and hospitals re-labeling causes of death and related medical facts to paint a better picture for both regional governors and Moscow in hopes that their budgets won't be cut or else may be increased. Bukhtiyarov openly admits the figure shouldn't be 27 over 5 years, but more like 10-12,000 annually. It's stories like these that blow up the demography bugbears annoyed, understandably, about the uninformed and fatalistic pronouncements of western generalists auditioning for a government job. National data hides worlds of pain, immiseration, and triumph in the face of broken systems.  

Academics, experts, and members of the Russian Academy of Sciences sent a letter to prime minister Mikhail Mishustin contesting official data that claims mortality rose by 481,000 people from May 2020 to April 2021. Per their calculations, the figure is more like 835,000. That's about an additional 0.6% of Russia's population dead before we even get to the third wave and the elevated excess mortality data from July-August. We shouldn't forget the systemic failures of the American political and healthcare systems in the face of the pandemic, but at least we know that official data reliably describes the extent of the catastrophe. When all is said and done, it is possible that nearly 1% of Russia's population if not more will have died from the cumulative effects of the pandemic assuming the 835,000 figure is more on the nose and new variants add new wrinkles. We can talk about human lives like they're interchangeably expendable – recruiters or conscription can meet targets, there's still PhDs around, and so on. That kind of a shock leave scars. It is doing so across the globe. We shouldn't assume that suddenly people turn on the regime because of a problem they don't necessarily blame the regime for, but people don't forget when systems fail them and their loved ones.

The federal budget's on course to return surpluses for 2022-2023 as Moscow planners shape up their return to stagnation. According to the Ministry of Finance, the budget should return surpluse of about 1% of GDP in 2022 and 0.3% of GDP in 2023. The current oil price context makes it a lot easier to follow plans laid out from the 2019 budget consolidation agenda without significantly altering borrowing plans or changing the existing budget rule to finance the National Welfare Fund. What's worth considering, however, is how much these budget projections depend on relatively rosy GDP growth forecasts from MinEkonomik. Export growth and earnings provide more relative tax revenues than domestic demand-led growth in many contexts given the dominance of resource exports in the export basket and federal tax system. So MinFin's goals are obtainable without strong growth in 2022-2023 and the 1.6 trillion ruble draw from the NWF can also be adjusted depending on oil prices to avoid additional borrowing. The growth of the insurance market will also provide a source for longer-term investments played right – forecasts right now from KPMG expect the market to grow from its current 1.5 trillion rubles ($20.55 billion) to 2.3 trillion rubles ($31.51 billion) by 2024.

Budget normalization news is well-timed in light of the growing evidence that the economy is headed back to stagnation, making any GDP growth above 4% this year largely a result of external stimulus and base effects. Setting aside a failed OFZ auction due to technical difficulties, MinFin's good news is bad news for the real economy. One can quickly infer from recent statements that the "optimal" policy response to COVID was one that would return the economy to its pre-crisis growth path. That defaults to export-led stagnation, all the more concerning for Moscow's central bank watching since the People's Bank of China (PBoC) isn't going to stimulate lending and business activity via monetary policy. Though exports to China are up this year, commodities demand will most heavily be affected by further US spending and China's economic policies in the short-term. The regime's playbook calls for dependence on others to do the spending. There's no big stimulus on the horizon save a US bill now getting whacked by Joe Manchin, and they blame monetary policy in place of fiscal policy and various real economy imbalances and shocks to avoid acknowledging this fact.

The securitization and 'nationalization' of Russia's economy can take some funny forms. In a bid to win some more state contracts and deepen its role across the economy, Andrei Belousov and Rostec are proposing to only use a national clearing and billing platform for airfares and ban the use of foreign intermediaries. Without a clearing platform, consumers and tour agents are stuck buying tickets direct from airlines instead of being able to access aggregate sales through third-party vendors. The angle here is that the platform in use that dominates international travel is the Billing and Settlement Plan created and managed by the International Air Transport Association (IATA). Rostec's aim seems to be to capture the international market and using its lobbying power, regulate the market to force foreign airlines and vendors to use its platform. The other existing platform – the CBBT – works fine, but as of 2018 only accounted for 16% of airfare transactions. Regional airlines use it, not the big international carriers, and direct sales via aircarrier websites often dominate sales. Red Wings sells 60% of its tickets via its own site, for instance. On the one hand, this is a relatively innocuous development and not a particularly profitable line of business. The Federal Anti-Monopoly Service (FAS) estimates that CBBT earned about 8 billion rubles in 2017 at a commission of about 185 rubles per fare. Rostec won't be swimming in cash after a ban is put in place assuming it happens.

What seems likelier is that Rostec's board and allies recognize the strategic value of controlling platforms for these types of transactions. We shouldn't catastrophize the intelligence role of data collection given that even Russian security services are aware of resourcing limitations and the value of meta-data vs. personalized data, but that is undoubtedly part of the gambit. It would make it easier to track individuals required to list their names, travel documents, and credit cards when booking to enter the country if they have to use a national portal for which it's easy to construct data collection infrastructure. Plus there's the emotional component as well. There probably are some paranoid enough in the Karaganovite line of thinking that international institutions can't be trusted at all and pose a vulnerability. The proposal parallels a decision from Rosaviatsiya allowing firms leasing planes to set binding agreements for the leasees that any planes delivered after December 31, 2022 be registered in the air transport registry. The aim is to once again improve the state of data collection, oversight, and state capacity to manage the sector at a time when they're hoping to push through more civilian aircraft procurements from Russian manufacturers. CBBT would have a monopoly once the ban takes place. Apparently it's a lot cheaper than IATA's platform on a commission basis.

Price control measures aimed at taming inflation risk massive distortions for Russia's downstream oil sector. Shell is warning the 60% of filling stations that are independently owned risk bankruptcy because of the loss of profit margins. Shell has 411 stations on a market with over 23,000 in total. Since the start of the year, wholesale benzine prices are 20-30% higher depending on region and distributor whereas retail prices have only risen 3-6%. According to Shell's Russian head of retail, Vitaliy Maslov, their stations have generated a 1.5 ruble loss for every liter of benzine sold the last 8 months. Turns out that pressuring retailers into restraining price increases in the face of much larger wholesale price inflation isn't great for business. Since 60% of the retail market isn't vertically integrated, which means they can only earn off of retail margins. They can't transfer costs between arms of the business, offer their own dealers discounts, or take a hit from the generally good margins on extraction or refining margins that correspond more readily to wholesale price levels. The Russian approach to damage control around inflation exacerbates the underlying political logic of state capitalist price and output management in the Russian context. Consolidation takes place horizontally to squeeze margins out of scale and integration makes more sense vertically as prices are subject to different kinds of policy levers at different stages of the value chain. I suspect independents that go under will be bought by refiners and the bigger players like Rosneft already squeezing the competition by discounting prices at their own dealers.

The government has asserted for the last month that without the price measures, retail prices for benzine would have risen 30%. That may be true, but that's how markets work. Things have gotten bad enough that independent retailers are asking FAS to help them resolve the massive gap between wholesale and retail prices. Prices have finally fallen slightly as seasonal demand has peaked, but there's nothing to be done till after the elections anyway. In the end, market power and functions are distorted by the political power of state firms and the largest, vertically-integrated firms that can absorb losses in one functional area without too much risk. It's a system that is quite malleable at managing unexpected shocks like the inflation surge, but quite brittle insofar as it tends to deepen consolidation over time regardless of declared policy interventions. The more powerful SOEs and the largest firms become, the more power they have to distort what the state wishes, not just execute the state's wishes. That's a long-term trend running back to 2010-2011 in the Russian economy and one that the new pivot towards supply-side inflation controls may end up worsening.


Near and Far Abroad

The bill to keep Belarus afloat just went up as has the ostensible political cost for Lukashenko – an additional tranche of $3 billion in credits from Moscow to sustain Minsk's finances in the face of escalating sanctions and promises of deeper economic integration by 2027. Despite all the hot air around the IMF tranche of $1 billion that went to the Belarusian government, the SDR allocation to the Central Bank only goes so far addressing currency shortfalls in the face of mounting debt. The Ministry of Finance in Moscow was quite clear in its communications before today that it was happy to help so long as greater integration was on the table. The reports out today profile 28 union programs that were discussed, but the truth widely acknowledged is that true integration in the form of uniform tax codes, energy pricing regulations, and more would shatter the illusion of "two sovereigns" within one economy. What's changed is the degree of desperation and limited room to maneuver in Belarus. We can see that Belarus' growth tracks pretty perfectly with Russia as it is on top of the Euro area's stagnation. The following is GDP per capita in PPP 2017 constant prices:

It's a great rendering of the incoherence of Russia as an economic power. Belarus' exports have, with the exception of more recent IT gains, been maintained at the expense of Russian subsidies and energy pricing agreements. In other words, what are effectively financial transfers from Moscow have played a crucial role in allowing Belarus to run up its exports. The real cash cows from those exports aren't Russian consumers, they're consumers in the EU. The lesson here is that Belarus' economy is already "integrated" insofar as more complete legal integration would paper over what is already a structural reality looking at balances of payments. Moscow's oil sector tax manevuer on top of its stagnant economic policy coincided almost perfectly with Belarus' path to stagnation. Russia can't create a shared zone of growth so long as it's obsessive about budget and current account surpluses, and the haphazard development options available to Belarus encourage the same kind of accumulation policymaking. Legal and political integration always gets gummed up by Lukashenko, but the structure of the Union State's economy prevails.


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