Today news in are about the excess of lawyers, the disappearing of iPhones, the hole in the Russian treasury, the Mir cards and the decline in oil revenues. There will also be a surprising forecast by the Russian finance minister.
LET’S START!
Number 10 – Lack of workforce.
A week ago we wrote about the record unemployment in Russia. We have more data on this topic today. In the fourth quarter of 2022, there was an average of 2.5 vacancies for every unemployed Russian. This is the highest result since 2005. The demand for labor in the fourth quarter decreased by 17.6% in annual terms. However, the number of unemployed registered in official unemployment offices decreased even more – by 32.3% (as it turns out, it is mostly men who deregister, I wonder why?). As a result, the labor market in recent years has seen the largest gap between supply and demand. Kremlin media say that the reason for such good data lies in the exit of foreign companies. There is no mention of the war. There is a shortage of workers in the production sectors, in trade, transport and logistics, in mining, construction, medicine, pharmaceuticals, the sports industry and the service sector. The most dramatic situation is in the IT market, where wages have fallen by about 10-15% due to the exodus of Western companies. New Russian businessmen are not as generous as their predecessors, and the number of vacancies continues to grow. What is observed on the market is an excess of lawyers, financiers and accountants, as well as specialists in the field of personnel management. On average, there are 5 to 8 active CVs per one vacancy in these fields.
Number 9 – EU trade with Russia.
Trade between the European Union and Russia has fallen significantly since the barbaric attack on Ukraine and this fall escalated in recent months, the EU’s statistical office (Eurostat) announced on Friday. According to statistics, Russia’s share of EU imports fell to 4.3% from 9.5% between February and December 2022. Over the same period, Russia’s share of EU exports fell to 2% from 4%. The EU’s trade deficit with Russia peaked at €18.2 billion in March 2022 before gradually decreasing to €6 billion in December 2022. Imports from Russia fell by 53% to €10.3 billion over the period from EUR 21.8 billion. The largest decrease was recorded for coal (to 22% in 2022 from 45% a year earlier), natural gas (to 21% from 36 %), fertilizers (to 22% from 29 %) , iron and steel (to 10 % from 16 %). Currently, Russia is becoming a marginal trading partner for the EU and further declines in trade are expected in 2023. This trend and current data make it easier to overcome the resistance of Russian allies in the EU and weaken the still active Russian lobby in many countries.
Number 8 – Mir in Cuba?
Cuba is preparing to introduce the Russian payment system Mir, which will make it easier for tourists from Russia to travel to the country, Christina Leon Iznaga, a tourism adviser at the Cuban embassy in Russia, told Interfax. „In Cuba, work is underway to launch the Mir payment system, which will make it easier for Russian tourists to pay for services, buy gifts and souvenirs with a card,” she said. According to her, it is very important for Cuba to create conditions for the Russians, because this tourist market is of great importance for the republic. Previously, Cuban authorities reported that they had failed to launch the Mir payment system by the end of 2022 due to technical problems. The start of card service was postponed many times. Will it succeed this time? We’ll find out soon. Let me remind you that after problems with Chinese Union Pay cards, Mir cards are accepted, apart from Russia, only in a few former Russian republics.
Number 7 – Fuel subsidies are falling.
The payment from the Russian budget to oil companies for maintaining lower fuel prices (fuel silencer) in February 2023 amounted to 108.7 billion rubles ($ 1.4 billion), while in February 2022 it amounted to 113.8 billion rubles ( USD 1.5 billion). In January-February 2023, these payments amounted to only 156.6 billion rubles (US$2.1 billion) compared to 198.8 billion rubles (US$2.6 billion) in the corresponding period of the previous year. Payments from the Russian budget to oil companies for a fuel silencer in 2022 amounted to 2.16 trillion rubles ($28.5 billion). In 2021, the corresponding payments amounted to 674.5 billion rubles (8 billion USD). In 2020, due to market conditions, we had a unique reverse situation – oil companies paid 356.6 billion rubles ($4.7 billion) to the budget. The oil product suppression mechanism has been operating in Russia since 2019. It is calculated on the basis of the difference between the export value of fuel and the official domestic price. If this difference is positive and export becomes more profitable than deliveries to the domestic market, the state pays oil companies, if the difference is negative, fuel companies pay to the state budget. There are more and more voices to suspend or amend the act on subsidies for oil companies.
Number 6 – Problems of industrial companies
The Gaidar Institute (IEP) has published the results of surveys of industrial enterprises on the consequences of suspending the supply of import components and the withdrawal of Western manufacturers from the Russian Federation. The most common problem indicated was the increase in costs – 64%. From February 2022, companies were forced to raise prices. The second place on the list of problems was given to the lack of alternative suppliers and producers – 53%. In third place were problems with imports, the industry placed a strong change in technological chains caused by the lack of Western components – 38%. „Not all Western supplies can be painlessly replaced with Russian or Chinese counterparts,” the IEP believes. Currently, machines from China account for 65% of imports.
Number 5 – Drop in oil volume due to technological problems
Russia’s oil production could fall by 20% by 2030 if Russian companies dependent on Western oil field services and imported equipment do not develop their own services, a Russian Yakov & Partners report says. The main problem is the withdrawal of the „big four for oil services” (Halliburton, Schlumberger, Baker Hughes and Weatherford). These companies announced in 2022 the suspension of operations in Russia. Some of them have decided to sell their Russian assets to local management, which still operates independently without the support of global companies and access to technological resources. In the context of the tightening of sanctions, it is indisputable that the activities of other Western companies will be stopped, which poses a risk of limiting drilling operations and the investment opportunities of independent oil services (small and medium-sized companies) are severely limited: they cannot compete on equal technological terms with the market leaders. According to the Russians, in order to sustain production, the drilling area must be maintained at the current level, i.e. up to 28 million meters annually until 2030, and the number of wells drilled should increase from 11.1K to 16.1K. This will require a significant increase in the fleet of drilling rigs. Russia presently has about 1.5 thousand units, of which about 40% are obsolete. Therefore, in order to maintain and increase the rate of drilling, the equipment will have to be updated quickly. Otherwise, there is a risk of further degradation. Currently, companies from „unfriendly” Western countries account for only 15% of the drilling market in the RF, but they provide the most complex types of services, such as on the shelf as well as in the extraction of hard-to-reach oil.
In particular, 52% of the hydraulic fracturing technology market (fracking) is occupied by companies from „unfriendly” countries, and the share of Russian equipment is less than 1%. In equipment for the shelf production, the dependence on imported technologies reaches 80%. “Supplies from China can only compensate for some types of high-tech equipment. However, the use of Chinese equipment does not achieve the necessary accuracy and efficiency, and Chinese substitutes for the very hydraulic fracturing fleets do not match the efficiency of the latest generation Western models,” says Andrey Streltsov, partner at Yakov & Partners. According to him, it may take years to adapt Chinese equipment and technology to Russian realities.
Number 4 – Decrease in gas production
In January 2023, natural gas production in Russia fell by 10.7% year-on-year to 62.7 bcm, according to statistics from the Ministry of Energy. Most of the decrease (~18.4 %) fell to Gazprom. In January 2023, the company extracted 40.7 bcm (in the same period in 2022 – 49.9 bcm). The company did not yet publish statistics on the extraction data. In January-December 2022, Russia reduced gas production by 13.3% year on year. According to Rosstat data, this figure was 522 bcm. With spring approaching soon, the Russian gas blackmail is considered to be over. Gas reserves in underground storage in Europe is now at 61%, which is 22% more than the average for the past five years, according to the GIE. The current level of US inventories is 46%, which is 15% higher than the average of the last five years.
Number 3 – In Russia, iPhones are getting more expensive, shortages threaten
Foreign intermediaries began to refuse massive shipments of iPhones to Russia for parallel imports. As a result, some models of smartphones in the middle and premium segments may disappear from Russian shelves. One of the retailers opined about this possibility. It is caused by the US sanctions imposed in February, prohibiting the import of electronics over $ 300. According to experts, the restrictions will also apply to smartphones manufactured in third countries. According to the sanctions of February 24, 2023, Russians cannot purchase any devices over USD 300, which use US intellectual property in at least 25%. Other smartphones, including Android, are also blocked. According to Viedomosti’s calculations, if the American ban was to be implemented in full, about a quarter of currently available electronics would disappear from Russia. In addition, the Americans threaten to impose secondary sanctions on countries that will contribute to sanctions evasion, including Armenia and Kazakhstan. The first effect that we are observing is an increase in the prices of the devices on Russian market.
Number 2 – Decline in raw material revenues
Russia’s oil and gas revenues fell by almost half year-on-year in February. According to the Russians, the tax revenue the country collects from the sale of oil and gas fell by 46 percent in February to 521 billion rubles ($6.91 billion) compared to the previous year (971 billion rubles $13 billion). According to Bloomberg estimates, two-thirds of the country’s energy tax revenue in February came from sales of Russian crude oil and petroleum products, which fell 48% to $381 billion ($4.8 billion). Note that oil and gas revenues totaled 425.5 billion rubles (5.6 billion) in January. Which means the situation in February is a bit better than in January. But the embargo on products that will come into effect in March worsens the forecasts for the coming months. Without a strong recovery in China and an increase in prices, Russian oil companies will face a very difficult situation.
Number 1 – Russian budget in February
We have the federal budget cash figures for the entire month of February. It was executed with a deficit of 4 trillion rubles ($52.8 billion). The amount of revenue was 1.4 trillion rubles ($18 billion) and the expenses – 5.4 trillion rubles ($71.3 billion), according to data from the state portal „Electronic Budget”. According to the portal’s operational data, most of the expenses in January-February 2023 were spent on social policy, national economy and defence. At the same time, the Ministry of Finance forecasts a deficit of 2.9 trillion rubles (38.3 billion USD), or 2% of GDP, by the end of this year. Thus, the deficit at the end of the month exceeds the annual plan by 1.1 trillion ($14.5 billion). The increase in the deficit at the beginning of the year is primarily due to a decrease in revenues from oil and gas caused by the low average price of the Urals, said Olga Belenkaya, head of the macroeconomic analysis department at FG Finam. The estimates of the Ministry of Finance are expected on March 6. According to Finance Minister Antony Silunov, the tax revenues of the Russian budget for the period January-February 2023 will exceed 5 trillion rubles (US$66 billion) in accrual terms. A month ago, the ministry estimated revenues for January at 1.356 trillion rubles (US$19 billion). The minister’s words would mean that in February, revenues reached a historical record of 3.6 trillion rubles (47.5 billion USD), which means a 268% increase m/m. It is hard to imagine such a scenario also due to the halving of raw material revenues. Due to the absurdity of such a change, it should be expected that the ministry will propose a correction of revenues for January, while keeping the details secret. We’ll find out in a few days. Nevertheless, there are voices about the possible resignation of the minister. If you persevered to the end, a hot request to leave a like so I know how many people read me. Comments are welcome, as well as cultural polemics. If you like the combination, please buy a coffee for Kremlinka or me.
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