I invite you to the weekly edition of the latest top 10 information from Russia. Today we have the news on the Turkish blackmail, the German unfulfilled hopes, the falling profits of Russian companies, the oil, and the oil once again, the cooking of frogs and the Sino-Russian love affair, or rather its consequences.
I also included statements from several Russian economists.
I don’t know if this is the best lineup in 2023, but it’s the longest one so far. You be the judge. .
LET’S START!
Number 10 – The Turkish blackmail
The launch of the Turkish gas hub, which allows Russia to supply „blue fuel”, seems to be postponed for the next few years. According to Çağrı Erhan, a member of the Turkish President’s Security and Foreign Policy Council, Ankara will need Russian funds and investment to complete the project. The Russian government and experts are surprised by this turn of events. The production and transport capacity of the created system has been mostly prepared. What remains is to establish logistics chains, which requires less investment, they say.
However, according to Çagra Erhan, most of his country’s economic priorities have changed recently due to the dramatic consequences of the massive earthquake. Therefore, the gas hub, although financially beneficial for Ankara, has a low priority in post-earthquake investments. In fact, a high-ranking Turkish official formulated something of an ultimatum to Moscow: if Russia now can invest in the project, welcome! If not, we put it off until better time …
Last year, Ankara asked Moscow for a 25% discount on imported gas, and also demanded a postponement of the repayment of part of the debt for previously supplied energy resources. Now, the Turkish side has another argument to negotiate further benefits. Given Gazprom’s dire situation and Moscow’s particular interest in the gas hub project, Ankara can negotiate additional concessions from Russia.
Number 9 – Germany’s problems with Kazakh oil
According to Bloomberg, Kazakhstan may not find enough gas to supply Germany via the Druzhba pipeline. According to the agency, Kazakh producers are afraid that this new export channel will ultimately be less profitable for them than other directions.
Since the end of February, oil production in Kazakhstan has been decreasing by about 100,000 barrels a day. barrels due to unscheduled maintenance on the Tengiz field. As a result, the volume of deliveries to Europe fell sharply. As the national oil operator KazTransOil recently admitted in a report, in the first quarter of 2023, 40,000 tons of pipeline oil will be delivered to Germany, which is almost 90% less than originally planned.
Let us recall that last year Kazakhstan significantly increased oil supplies, bypassing the Russian Federation, exporting 1.8 million tons (36,000 barrels per day). Compared to 2021, this number increased by 638,000 tones.
Now Kazakhstan cannot find additional volumes to increase supplies to Germany. Under pressure from the German government, it intended to deliver oil via the Druzhba oil pipeline, by not removing supplies to other destinations, but rather increasing production. But now the situation has changed. Deliveries came only at the end of February and in very small quantities. Moreover, Kazakhstan was forced to disclose the transit route through the port in the Leningrad Oblast in Ust-Luga (from where Kazakh oil was transported by tankers to Germany).
This puts the German refinery PCK Schwedt in an increasingly difficult situation. Thanks to the agreement between Poland and Germany of December 2022, crude oil from Naftoport from Gdańsk was to flow to the PCK refinery in Schwedt. Part of the agreement was the obligation of the Germans to expropriate the Russian company Rosneft. However, the Germans did not keep their commitments, counting on increased supplies from Astana.
To this end, Brandenburg State Finance Minister Christian Görke went on a business trip to Astana, the capital of Kazakhstan, and held talks with, among others, Kazakh Energy Minister Bolat Aktschulatov. Until recently, Görke assured Deutsche Welle of the possibility of importing Kazakh oil through the Russian Druzhba oil pipeline, even in quantities reaching 5-7 million tons per year.
It seems that the Germans got the short end of the stick and will be forced to fulfill their promises towards Poland.
Number 8 – Another IMF forecast for Russia, another transformation.
IMF Managing Director Kristalina Georgieva told CNN’s Poppy Harlow that Russia’s economic outlook beyond 2023 looks „pretty devastating.”
„If we take into account our medium-term forecasts, it looks like the Russian economy will contract by at least 7%” Georgieva predicted in an interview broadcast on Wednesday.
As CNN recalls, in January the IMF predicted that the Russian economy would grow by 0.3% this year and by 2.1% next year. This was much more optimistic than recent forecasts by both the World Bank and the Organization for Economic Co-operation and Development (OECD). Economists from these groups forecast a contraction of 3.3% and 5.6% respectively.
Recall that after the IMF statements in January, Jeffrey Sonnenfeld, a professor of the Management Faculty at Yale University (he reads news from Russia, yep!) wrote that „the IMF fell asleep at the headquarters” and repeats Russian propaganda.
For her part, IMF head Georgieva told CNN that Russia’s economy will ultimately suffer from the departure of worker force and the cutting off of the access to technology, as well as the sanctions against its huge energy industry.
“This year and last year, Russia managed to divert part of its oil sales outside the European Union markets. However, this will not have a lasting impact on the Russian economy,” Georgieva said.
Following recent bans on imports of Russian oil and petroleum products by sea, Moscow’s finances have shown signs of a slump. CNN reported on Monday the Russian government announced a budget deficit of 2.58 trillion rubles ($34 billion) in January and February, compared with surplus of 415 billion rubles ($5.5 billion) over the same period in 2022. According to this data, oil and gas revenues fell by 46% year-on-year. Let us recall that the budget gap in the cash register system exceeds USD 50 billion, and the data of the Russian Ministry of Finance are only estimates.
Number 7 – Expensive gifts for the Women’s Day in Russia
Year-on-year right before Women’s Day, the prices of all goods customary to be presented to beautiful Russian ladies are increasing. While Russians count the money in their wallets, various departments and organizations report which categories of traditional gift items have gone up in price.
- First, the prices of foreign travel increased. According to Rosstat, travel to Turkey became 107% more expensive this year compared to 2022.
- A traditional gift in the form of perfume or beauty products will also be punishing. The prices of these products increased by 35%.
- The cost of chocolates and other sweets increased by 20%
- The least expensive for men will be a gift in the form of a Chinese plush toy. Its value increased by only 5%.
Number 6 – The authorities disclosed the number of pensioners and their benefits.
The number of pensioners registered with the Social Benefits Fund in 2022 decreased by 232,000. people, after an earlier decrease of 970 thousand. during the pandemic. Their pensions average 20.7 thousand rubles ($270). The peculiarity of this year is the large outflow of working pensioners.
As of January 1, 2023, the number of pensioners registered with the Social Fund of Russia (SFR – created because of the merger of the Pension Fund and the Social Insurance Fund) amounted to 41.78 million people. The pensions are, apart from the war expenses, the main cost for the Russian budget in 2023.
Number 5 – The decrease in the business revenue in 2022 according to Rosstat
Russian enterprises in 2022 earned 13% less than a year earlier, despite high inflation. The best dynamics were shown by companies related to public expenditure in the construction and rail freight transport industries. The worst were recorded in fishing and wholesale trade.
Enterprises earned 25.93 trillion rubles (US$340 billion) in 2022, compared to 29.66 trillion rubles (US$389 billion) in 2021.
Rosstat provides indicators in current prices, i.e., without considering inflation (in 2022 it was slightly less than 12%). In relative terms, the net business result in 2022 corresponds to 17.1% of GDP compared to 21.9% of GDP in 2021.
The largest decrease in the financial balance in 2022 was recorded in the fishing and the fish farming industry (especially in the Kaliningrad and Arkhangelsk oblasts), as well as in the wholesale trade, which also includes gas trade (Penzanska oblast, St. Petersburg). Net profits in these industries fell by 42.3% and 29%, respectively. The oil and gas production sector also fell sharply, by 21.4%.
This contradicts the statements of the Kremlin, which claims that commodities companies achieved record profits in 2022 and in 2023 they will be able to help balance the state budget through higher taxes and fees.
The highest rates of increase in the net profit and loss ratio in 2022 were shown by companies dealing with construction (most noticeably – in Chechnya and Buryatia) and rail freight transport (Moscow) – by 2.3 and 2.7 times, respectively, as well as catering enterprises (regions Bryansk and Volgograd) working for the needs of the army – almost twice.
Number 4 – USA is seeking the transport of Russian oil.
The Joe Biden administration has urged major commodity traders not to be afraid of contracts with supplies of Russian oil sold under the price cap.
According to The Financial Times, representatives of the US Treasury Department met with managers of the largest international trading companies Trafigura and Gunvor. Part of the talks were conducted during the CERAWeek energy conference, which took place this week in Houston. „The Americans have been actively urging us to resume oil deliveries,” company officials said.
Such actions have two goals: on the one hand, to limit the Kremlin’s income from the sale of energy carriers, and on the other hand, not to hinder the further flow of increasingly cheaper Russian oil to the market. Increasing the liquidity, especially of crude Russian oil, is to protect the world markets against a deficit that could lead to an uncontrolled increase in the price of a barrel. The duality and ambiguity of the task makes these activities difficult to implement. It is necessary to agree on a reduction in the price ceiling for Russian oil, which is discussed in point 3.
Number 3 – Reduction of the price of the oil cap
By the end of March, the countries of the „Big Seven” (G7) will revise the cap on the price of Russian oil. This was announced at the international energy conference CERAWeek in Houston by Elizabeth Rosenberg, Assistant to the Head of the US Treasury for Combating Terrorist Financing and Financial Crimes.
Most industry experts believe the cap price will be set at $50 a barrel. As of December 5, 2022, it is approximately $60. In America, the operation of the mechanism is assessed positively. According to the US president’s energy security adviser Amos Hochstein, „the process is ongoing, and that’s the beauty of it: Russian oil and petroleum products are being sold below the set milestone.”
In fact, we are now talking about a routine procedure, since the task of changing the price cap is written in the regulations of the European Union, and the frequency is set for bi-monthly. This is also nothing new because the White House has always said: the purpose of the sanctions is to reduce Russia’s income, not to create a shortage in the commodity market, says Artem Deev, head of AMarkets’ Russian analytics department. In his opinion, the marginal price will be adjusted to USD 50 per barrel or lower.
“For the Russian economy, this decision will have consequences,” argues Deev. First, we will have to reduce oil production as it will become unprofitable in some fields (the profitability level can be around $40, add transportation and insurance to that – it turns out to be only $50 per barrel). The previous officially announced reduction in production by 500 thousand barrels per day will not be limited to this: an even larger cut will be required – to 1 million barrels per day. As a result, the amount of revenues to the budget of the oil extraction tax (mining tax) and other fees will decrease.”
And most importantly, lowering the cost of export supplies will lead to a further reduction of the treasury’s revenues from oil and gas, which have already collapsed by half compared to last year. So far, the Ministry of Finance has been able to offset them by selling the yuan and gold, but at this rate the reserves will dry up faster and will not even last for one and a half or two years as previously assumed. According to Deev, by the end of the year the budget deficit, which amounted to 2.6 trillion rubles (USD 34 billion) only in the period January-February (with a plan for the whole year of 2.9 trillion rubles – USD 39 billion), may quickly exceed 5 trillion (USD 67 billion). billion USD), which will force the government to reduce budget expenditure. There will certainly be new initiatives in order to strengthen the fiscal burden on businesses, which will spell out at the household level as rising fuel prices and another round of inflation.
Alexey Fedorov, an analyst at TeleTrade, is of a similar opinion. According to him, the shortfall in the state treasury may amount to 9 trillion rubles – 118 billion USD (6% of GDP). The Ministry of Finance will have to take several unpleasant steps at the once – borrow against high interest rates, use funds from the National Welfare Fund, eventually reduce the social payments and, together with the Central Bank, weaken the ruble exchange rate.
2nd place – Russia cannot find buyers for millions of barrels of diesel fuel.
Despite discounts of up to a third of world prices, diesel fuel of Russian origin is piling up in tankers that drift helplessly in the ocean waiting for buyers. By March 5th, 44 million barrels of diesel oil were „stuck” on ships converted into floating storages, Bloomberg reports, citing Kpler data,
After the introduction of the embargo, the amount of unsold fuel jumped fourfold and reached record values. Even during the pandemic, tankers held only half as many “extra” petroleum products.
Russia continues to ship diesel from ports, „knowing there’s nowhere else to plug it in,” says Mark Williams, an analyst at Wood Mackenzie. If unsold volumes continue to grow, the diesel exports will most likely have to be reduced rapidly.
According to Wood Mackenzie, starting in the second quarter, Russian refineries could reduce oil refining by 1 million barrels a day. Currently, the cost of Russian diesel shipped from the Baltic Sea port of Primorsk has fallen by 35% since the beginning of the year.
As I wrote, finding demand in Asia is not easy. India and China have their own refinery network and are not interested in Russian products. The Russians will be forced to increase discounts exceeding 50% of the value of products in order to attract the market. However, this calls into question the sense of oil refining in Russia.
Ranked #1 – Russian budget in February.
At the beginning of 2022, export payments to the Russian Federation were made mainly in dollars and euros. However, already in 2023, the yuan is slowly becoming an alternative currency. The share of settlements in yuan in 2022 increased from 0.5% to 16%. (increase by32 times). Although settlements for exports in dollars and euros (called toxic by RF) fell by the end of 2022, they remain in first place at the beginning of 2023 – at 48%. The ruble, positioned in second place, accounted for 34% of transactions. The yuan 16% occupied 3rd place and 2% goes to other currencies. The share of the dollar and euro in imports fell from 65% at the beginning of 2022 to 46% at the end of the year and remains in first place. Ruble transactions fell from 29% to 27%, and the share of payments in yuan rose from 4% to a record 23%. The share of other currencies is 4%.
One of the factors contributing to the increase in the share of the yuan in Russian foreign trade is the uncertainty of payments in euros and dollars, as most Russian banks are sanctioned.
As there are no other better alternatives, the restructuring of the Russian currency market in favor of the dominance of the Chinese yuan will continue this year.
Russian economists believe that further growth of the yuan will lead to economic dependence on the PRC with an imbalance of the yuan/ruble pair. In such a situation, the stronger party will inevitably begin to dictate its rules. If we add to this the forecasts I presented some time ago, which show that imports of goods from China in 2023 will exceed 50% (in 2022 it was 44%), and exports may reach 40%, then a new Russian government will soon be elected not in Moscow but in Beijing.
This is another argument to end the war and start negotiating peace as soon as possible, but in the Kremlin, rational arguments are not popular presently.
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