12 min read

Vac to the Future

Vaccine nationalism is an oil market story
Vac to the Future

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Oil prices have proven surprisingly stable in response to the latest hiccups in Washington over passing stimulus as Chuck Schumer appears to be toothless, West Virginia Senator Joe Manchin has no intention of signing off on demand-side stimulus at the scale needed, and the Democratic Party isn’t even brave enough to say outright they’ll pass a senate bill using budget reconciliation, let alone kill the filibuster. Strong demand in India — the world’s no. 2 growth market of the last half decade — has calmed some fears, and there appears to be confidence that OPEC+ supply management is working. That should spell good news for Russia:

The trouble, of course, is that Russia’s shifting fiscal regime necessitates a considerable increase in the net tax burden for consumption and incomes in the economy over time. The % figures for oil & gas revenues’ share of the budget also understate their impact significantly since the sector generates the largest amount of domestic intermediate demand that translates into other sectors’ VAT receipts and corporate taxes. So if oil shoots up, still a bit iffy — Brent now has the 2021 Brent price settling at $55 a barrel — there are knock-on effects raising non-oil & gas tax receipts that mask the extent of the economy’s dependence on the sector, even if it doesn’t actually contribute as much GDP directly or even account for its old share of budget revenues. Past price increases didn’t lift growth. When oil rallied above $80 a barrel in late 2018, there was a short-run boost but the Russian economy was slowing down again just months later with prices more than $10-15 a barrel higher on average. A price rally is a necessary precondition for any Russian economic recovery towards (stagnant) growth, but isn’t sufficient by itself. Natural resources are still supposed to finance the development of other industries for domestic consumption and export, but the former will only weakly recover in 2021 and the latter is impossible if every major export good is grabbed by a state-owned or backed company that isn’t allowed to fail and doesn’t face sufficient competitive pressures. And oil prices above $50 a barrel eventually help US output, even with the limited impact a Biden ban on fracking on Federal lands has.

What’s going on?

  1. Seems that MinFin wants to crack down on better off Russians (or else those living on the border) from being able to bring back as much from the EU for personal use without paying customs duties. Currently the law stipulates that no duty is levied if the person returning is bring less than €500 worth of goods/under 25 kilograms of goods (as long you aren’t taking a plane). The new proposal stipulates that this only applies to crossing EAEU borders once a month, after which duties are levied if on brings anything over €50 back with the weight cap at 10 kilograms. The Eurasian Economic Commission has pushed forward its own proposed normative act in parallel. In effect, people will be paying 30% of the value of what they’re bringing back over the established limit in duties. It won’t make a big difference for very many people, but it’s really an excuse to levy a tax that appears to target the rich but is likelier to pose problems for people living in border regions next to countries during intermittent periods of product shortages. In the end, it’s likely fairly marginal, but they clearly want to increase their revenues in any way they can think of without upsetting too many people.

  2. The latest Rosstat figures show a 2.9% decline for industrial production in 2020. That’s not as bad as MinEkonomiki feared (4.1%), and tracks in line with the structural intermediate demand impact of deeper OPEC+ cuts:

    Title: Index of industrial production (% against the avg. month in 2017)

    Red = general volume Blue = trend w/ seasonal factors Black = trend

    The recovery in late 2020 looks better than it was. Manufacturers focused on topping up supplies of prepared production from orders earlier in the year, so the rise in output reflected internal ‘catch-up’ production that’s largely been exhausted. Making matters worse, the rise in output is completely divorced from notable declines in business outlooks per surveys. So really, what we’re seeing is that the budget and procurement cycle drives more of the end output volume than one might expect. Without a broader consumer recovery and improved expectations from businesses, the upward trend is likely to be more muted for 1-2Q.

  3. Tomorrow, deputy ministers from Azerbaijan and Armenia are coming to Moscow to open talks for the construction and financing of a rail corridor through the southern Caucasus linking Derbent to Yerevan via Baku, some of the territories acquired in last year’s war, and Nakhchivan:

    It’s expected that RZhD will lead the project (though it won’t build and finance it alone) and that the route will be used to transport resources, energy supplies, and agricultural goods. It’s the first concrete sign that Russia has a a longer-term plan to “lock in” its gains from intervention in the first place. But upon closer scrutiny, it’s a route that’s likely to lose RZhD money or at least make little compared to more lucrative investments to be made elsewhere. In short, it’s probably a new liability that will have to be partially underwritten by Russia’s federal budget and be exposed to Russia’s rail tariff regime. I can’t imagine Yerevan or Baku have a problem with that or see a significant loss of their own sovereignty in the event, but it will create a pressure point for Baku over EAEU trade regulations and rules given Nakhchivan.

  4. In response to the rise in domestic wholesale benzine prices, oil companies are expected to cut their exports via European ports by 34% in February to bring prices down for Russian consumers. MinEnergo pressured oil companies to step up and temporarily cede market share in Europe where demand outlooks are more negative thanks to the EU’s lagging vaccine rollout. Companies will eat some losses for their profits unless the companies get to keep the investment surcharges for the returned excise taxes on oil. Basically, the policy response is to reduce firms’ profitability in the short-run to bring domestic inflation under control while preserving market share in China. It makes a lot of sense, but even compared to a few years ago when infrastructure issues regarding capacity for the redirection of traditionally Europe-bound crude flows first emerged, it’s increasingly the case that Russia will have an easier time sacrificing on the European market to make these kinds of adjustments. If European demand begins falling for good later this year, one has to wonder where Ural blend ends up trading and at what discount.

COVID Status Report

Daily cases fell to 18,241 with the death toll at 564. The decline further bolsters the feeling that Russia’s begun turning a corner in terms of getting the virus under control since most of the observed decline this time came from the regions and not Moscow:

Red = Russia Black = Moscow Blue = Russia w/o Moscow

Estimates from the Center of Economic Research see the infection rate halving headed into spring. Moscow and Sakhalin oblasts have joined Bashkiria in stating their readiness to try issuing COVID passports. As infections decline, it could ironically become a more salient issue as different regions assess their own recoveries. Kyrgyzstan is now negotiating with the Russian government over the localization of the production of Sputnik-V vaccines in the country, a nice boost for Russia’s vaccine diplomacy in Central Asia. It’s expected that Kyrgyzstan needs about 5 million doses to meet its needs. On the whole, things domestically seem to be quieting down as capacity overruns diminish and the official tallies show success reining in the spread of the virus. Moscow just opened up flights for Finland, Vietnam, Qatar, and India. Hopefully all the success they’ve had respectively sticks. I suspect some of the declining figures also reflect pressure to make things look better than they are, but don’t doubt the underlying trends are true.

Vac Attack

The International Chamber of Commerce commissioned a study to showcase the effects of vaccine nationalism, and boy, does it come with a hefty price tag: $9.2 trillion per their estimates. But the report makes a startlingly big case assumption to arrive at that number — no vaccinations take place in emerging markets and developing countries. Not only does that somehow skip over countries like Russia and China producing their own vaccines and using them, but it does a considerable disservice to the question of how differential recoveries affect politics, political economy, and the bottom lines of firms trying to navigate this economic shock. And all the same, the Chamber’s report is still worth grappling with when trying to consider the escalating costs of inaction, poorly timed action, improperly coordinated action, and the lack of international cooperation. The last point is particularly concerning given Russia’s own policy bugaboos, pride, and mistakes.

Responding to the lagging vaccination rates and a fight with UK pharmaceutical firm AstraZeneca, the EU is now threatening to impose export controls on COVID vaccines to ensure more supply is available for domestic purposes among member states. It’s a touchy subject for the UK given that Pfizer vaccines are produced in Belgium, and the latest landmine to dodge in UK-EU relations. It couldn’t have happened in a stupider, more unproductive manner either. No export control talk is coming out of the US, but the question there is whether Biden’s use of the Defense Production Act to allow the Federal government to coordinate supply chains and production of Moderna and Pfizer vaccines can make a large dent. It takes a little time to sort out the kinks and figure out where production bottlenecks really are happening. Russia doesn’t even centralize its vaccination data so it can hide just how far behind Moscow as on the rollout coming into this year. China’s vaccine push fell flat as its lack of transparency, under-performance for its rollout, and turn towards an information war approach against the US/Europe overrode any potential ‘soft power’ gains.

Rand’s figures about losses from vaccine nationalism are still daunting:

Here’s the unstated problem for Russia with a recovery whereby somewhere in the range of $1-1.5 trillion of economic activity is being lost due to an uncoordinated vaccine response: virtually all of the growth markets for oil consumption are emerging markets and developing economies, with that balance mirrored, if in different terms, by outlooks for LNG. Consider the following:

My measure of global economic intensity is reversed to the usual one — I prefer to show how much economic output is derived per barrel of oil consumed — but as we can see, the relative output per barrel in 2010 constant dollar terms increased about 32% between 2000 and 2019. At the same time, non-OECD economies overtook OECD economies around 2013-2014 in terms of net oil consumption and their share of global GDP hit 37% by 2019 (largely thanks to China, followed by the lesser BRICS). But we can see a hitch in GDP data post global financial crisis. It corresponds neatly to the emerging market slowdown of the last decade. Export-led growth was responsible for most of the 2000s oil boom. By 2013, UNCTAD was already warning that growth gains of export-led growth were ending and a transition towards balanced growth i.e. the promotion of domestic consumption in emerging markets and a reduced reliance on foreign financing to underwrite expansions of economic activity was needed:

China was the main culprit, and it’s gone a long way towards rebalancing towards domestic consumption since then, even if its supply side policy bias has hindered the adjustment process and created a massive systemic risk in the country’s real estate sector. These countries lacking the capacity to manufacture their own vaccines, or else to manufacture them at adequate scale are frequently the most exposed to trade shocks and economic slowdowns in trade partners’ economies because they either run a persistent current account surplus to maintain their economic model i.e. produce more than they consume or else run trade deficits because of where they sit on global value chains more than as a result of the underlying strength of their consumer economies. There are exceptions like Brazil, India, and South Africa that rely more on domestic consumption for their growth. Ironically, vaccine rollouts actually help the exporting emerging markets less because the goods trade hasn’t taken as large a hit and will ultimately strongly follow China’s consumer economy. It’s Brazil, India, South Africa, and similar economies that benefit far more since it would help restore domestic services and consumption to a greater degree.

This fundamental imbalance in terms of who ‘wins’ among the countries now struggling to secure vaccines or logistically ramp up vaccination outside of the OECD is going to have a significant impact on the structure of the energy demand recovery/evolution in the next few years. The shift in US trade policy under Trump, particularly against China, slammed merchandise exporters and even weighed on oil demand. But Biden’s trade policy isn’t a shift in substance, but rather style, execution, and policy focus. He’s already signed a Buy American executive order as part of his reshoring manufacturing jobs spiel, and no one expects the administration to change the initial Trump trade deals with China while it moves instead to focus on pressuring Beijing to conduct structural reforms. At the same time, the EU, US, and Japan are all begging Taiwan to increase its semiconductor output to match growing demand for electric vehicles and related technologies. So trade policy headwinds suggest that trade tensions with China aren’t going anywhere, developed economies are beginning to and politicize supply chains for key inputs and attempt to foster a wave of investment into new capacity domestically and in political partners like Taiwan, and that export-led economies face strains in trying to meet China’s growing consumer demand while maintaining their relationships with OECD members of political significance (depending on their economic and security needs).

Post-COVID, the exporting economies are going to have to orient more of their exports to the Chinese market no matter what Washington or Brussels do. That suggests slowing trade growth, a growing regionalization of trade, and more pressure on China to bear the adjustment costs of a current account deficit. Fights over vaccine access can recreate or worsen, depending on what happens this year, regional disparities between economies and powers stuck trying to avoid choosing sides as economic relations become more securitized. All of that is capital B bad for oil demand, even if one takes the rosiest estimates about the impacts of working from home, the collapse of public transit in many places, and more. And it’s unfortunately the case that export-led growth, which was already reaching the limits of its potential post-GFC, will not be a large global growth driver across many emerging market economies.

Though this crisis is a novel demand crisis — we’ve never seen a demand shock the likes of this in contemporary capitalism shared so broadly across so much of the world — it reflects the lessons of Charles Kindleberger and proponents of hegemonic stability theory. A shared threat in the form of a virus does not breed a unified response because the pain it causes is not distributed evenly. Only by having a leading state with the political, economic, industrial, and diplomatic resources and, perhaps more importantly, credibility to lead a global response and bear more of the cost could these types of contradictions be resolved and managed. But Russia got the multipolar world it wanted in the wake of the Global Financial Crisis. China in particular has assumed its place as the world’s no. 2, international institutions do not reflect the economic and political weight of national economies, and transactionalism has a overtaken a growing swathe of economic policymaking as countries try to thread the needle between cooperation, beggaring thy neighbor — OECD members do this primarily through currency devaluations and monetary policy now — and bringing jobs home. Moscow’s attempts to challenge the structure of Trans-Atlantic institutions have really bitten it now. Without coordination led by the United States in the West, no other power has proven capable of taking on the mantle of leadership in this crisis, lest we forget that it was China’s dissembling and shoddy public health response in the first place that caused this whole mess.

Vaccine nationalism is a symptom of a much deeper problem within the international system, one defined by states struggling to insulate themselves from the worst effects of globalization, to reduce their exposure to global financial and trade imbalances, to acquire more sovereignty over policy choices that are often made for them in a rules-based regime riddled with contradictions and problems. It also may well end up accelerating the energy transition despite the welfare losses and lower energy prices it initially causes. Moscow planners need a new framework to make sense of things. Recovery arcs may be increasingly national in nature rather than shared, but flows of capital, technological changes, investors and political preferences aren’t. Going green is the new jobs bill. The question is how to finance it, regulate it, and maintain national gains and protections in a transition that will significantly constrain national policymakers’ ability to chart their own course. Moscow can’t escape that.

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