The Moscow Times is launching a free weekly newsletter – called Russian Money

 

August 9, 2022 Dear MT newsletter subscriber, Ever wanted a clear, concise guide to the top economic and business stories from Russia? Today, The Moscow Times is launching a free weekly newsletter – called Russian Money – to provide you with essential insight on Russia’s economy, business and politics. To do this, we will be partnering with leading Russian independent media outlet The Bell, whose reporters and editors specialize on economics and business. As the country undergoes huge changes amid the war in Ukraine, our aim is to tell you everything you need to know about Russian money: where it’s going, who’s benefiting — and why.

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From the latest corruption case to the consequences from Western sanctions, deep-dive investigations into state companies and the fluctuations of the ruble, Russian Money is your essential companion to the messy intersection of Russian politics and economics. Russian Money will be sent out every Monday. We've included the first newsletter - sent out yesterday - below. You can subscribe by clicking here. Kind regards, The Moscow Times team

Why cozying up to China isn't helping Russia's economy It’s long been clear Moscow is looking to make Beijing an ally in its battle with the West. Above all, the Kremlin wants economic support from its eastern neighbor. But how willing is China to play this role? The first months of the war strongly suggest Beijing will offer some political support, but is unwilling to help out economically. What’s happening When Russian President Vladimir Putin started his war in Ukraine, he was undoubtedly counting on Chinese support. Three weeks before the invasion, Putin met with Chinese leader Xi Jinping in Beijing. U.S. intelligence believes that Xi was the only world leader to be briefed on at least some of Putin’s plans.  In terms of political support, Xi has not disappointed. Beijing has not once condemned Russia’s invasion and Xi Jinping said in June that he fully supports Russia in all questions of security and sovereignty. However, China has refrained from military support — despite talks on the issue, not one piece of Chinese kit has been seen in Ukraine. Will China save Russia from the oil embargo? In January, 54.5% of Russian oil exports (and thus 80% of the country’s oil-and-gas revenues) went to the European Union. By June, according to International Energy Agency figures, Russian oil exports to Europe were down a third amid Western sanctions and the announcement of a phased oil embargo. In such conditions, the only alternative destination for Russian oil is Asia — and that means China. At the height of the uncertainty in March, it looked like Russia’s “pivot to the East” might not work. Major Chinese companies refused to take Russian oil and India made to buy from the Middle East if sanctions wiped out Russian deliveries. But even by April it was clear self-interest had won out: tempted by discounts of up to 30%, China and India were happy to increase orders of Russian oil. According to Norwegian industry consultants Rystad Energy, sales of Russian crude oil to Asia almost completely compensate for European losses. Surprisingly, though, China’s role in this turnaround is minimal — and this is illustrated by a single graph from Bloomberg’s weekly review of Russian oil experts. This chart shows that almost all the growth in Russia’s maritime oil exports to Asia in 2022 (up 43% from late January to late June) is down to India. In January, Russian supplies to India were close to zero (30,000 barrels a day), but by June they were up to 740,000 barrels a day. The same chart shows that deliveries to China actually fell. In January, Russia sold China 820,000 barrels a day. In June it was 740,000. Having said that, these figures are definitive. Firstly, at several times during the war Russian deliveries to China were greater (for example, in May, they reached an average of 1.2 million barrels a day). Secondly, these are only maritime deliveries, and Russia sells roughly the same amount to China (880,000 barrels per day in June) via three pipelines: one Kazakh and two Russian. These have operated at full capacity all summer. Even so, Russia’s oil trade with China is barely increasing. According to Chinese customs statistics, in the first half of 2022, Russian crude oil exports to China were up just 4%, according to Marcel Salikhov, director of economics at the HSE Institute of Energy and Finance. “It’s not much, and it isn’t coming to anyone’s ‘rescue’,” he said. “From the point of view of oil imports from Russia, India is the big ‘savior’.”   Does China comply with sanctions? In a word — yes. As early as day two of the war, China’s biggest state-owned banks began limiting operations with Russia. Subsequently, Chinese state companies abandoned projects involving high-tech exports to Russia from European companies, including the constructions of the Sibur petrochemical plant and the supply of modules for the Arctic LNG-2 project. Consumer electronics manufactures such as Lenovo and Xiaomi have also drastically reduced deliveries to Russia. “Beijing will not touch Russian companies that have fallen under blocking sanctions, it understands America’s red lines perfectly,” said Alexander Gabuev, an expert at the Carnegie Endowment of International Peace. In 2021, China exported $68 billion worth of goods to Russia, compared with more than $1 trillion to the U.S. and EU. Beijing fears that breaching sanctions against Russia could mean that they lose access to these much more valuable Western markets. Is the Chinese yuan replacing the U.S. dollar in Russia? In a situation where funds in dollars or euros can be frozen at any time, the yuan is a natural, albeit exotic, alternative. Since early March, some Russians have started purchasing yuan for currency diversification, according to the Russian Central Bank. After restrictions on dollar and euro transactions were put in place in January, the following three months saw 27.3 billion rubles’ worth of yuan purchased on Russia’s exchanges. Since June, when sanctions were imposed on the National Settlement Depositor, currency diversification has picked up pace. In January and February, yuan-ruble trade on the Moscow Exchange was worth about up to 2 billion rubles a day. By June it was up to 25 billion rubles and in recent weeks the numbers have hit as much as 70 billion rubles. As a result, liquidity in this currency pair is now enough to allow intraday trading, according to Mikhail Rodichkin, a currency trader at Renaissance Capital. In addition, banks are more actively offering deposits in yuan: at the start of March there was only one option, and now there are up to 20, said Igor Alexeyev, senior director of banking ratings at agency Expert PA.  Russian companies are also looking to the yuan to raise funds. Aluminum giant Rusal last month became the first major Russian company to place bonds in the Chinese currency on the domestic market (worth 17.6 billion rubles). The placement was apparently a big success: demand exceeded supply almost threefold. Rusal immediately invited applications for another issue of a similar size. What’s the big picture? The changing economic relationship between Russia and China since the Ukraine invasion is best illustrated by the dynamics of cross-border trade: exports from Russia to China in the first half of the year were up 48% (mostly energy), while imports from China to Russia increased by just 2.1% (mostly in electronics and engineering products). The figures for the war months are even more stark: in June it was +80% and -17% respectively. Why the world should care  Russia and China’s economies complement each other. Russia is a big oil and gas station that needs technology, investment and markets while China is the exact opposite, said Gabuev, an expert at the Carnegie Endowment for International Peace. But there is a clear lack of symmetry in these relationships. China is much stronger, and will only get stronger with time: Russia will either stand still or get weaker.

The mysterious illness of Anatoly Chubais Veteran Russian politician Anatoly Chubais — the only senior official to resign and leave the country since the start of the war — spent several days in intensive care in an Italian hospital last week with a rare autoimmune condition. The symptoms of his illness, combined with the track record of Russia’s secret services, immediately raised suspicions of poisoning. And these rumors were given wings by Chubais’ circle, which gave his illness maximum publicity. However, both the nature of Chubais' relationship with Putin and the circumstances of his departure from Russia cast doubt on the poisoning theory. At the end of July, Chubais, 67, was admitted into intensive care in Sardinia after a diagnosis of Guillain-Barre Syndrome. This is a rare autoimmune condition. “He got it badly, and suddenly lost control of his arms and legs,” said his wife Avdotya Smirnova. The most serious cases can result in full paralysis and even death, but most sufferers make a full recovery. By the middle of last week, the diagnosis was confirmed and Chubais was discharged from hospital Saturday. Guillain-Barre Syndrome causes a partial or total paralysis of the limbs and face, symptoms that immediately evoke associations with Novichok, the toxin used by Russia’s secret services to poison opposition leader Alexei Navalny and other enemies of the regime. And Chubais’ entourage was clearly concerned: his wife, Avdotya Smirnova, sought out maximum publicity. The first news of the politician’s illness, citing Smirnova, was published on Ksenia Sobchak’s Telegram channel, a popular media source with 1.3 million subscribers. At the same time, Sobchak’s news channel “Ostorozhno, Novosti” (1.1 million subscribers) quoted sources who described how “the room where Chubais took ill was examined by specialists in hazmat costumes, and the police interviewed all witnesses.” One of the leading reformers of the Yeltsin era, Chubais is a symbol of Russia’s “systemized liberalism” and has already been the target of one assassination attempt. In 2005, his car was attacked with a homemade bomb and machine gun fire. Chubais escaped unharmed and Vladimir Kvachkov, a notorious Russian nationalist and retired special forces officer, was accused of organizing the hit. Chubais was the only prominent member of Russia’s political elite who resigned his position and left the country after the outbreak of war in February. This was possible due to several factors. Firstly, under Putin, Chubais has never held a political post and for the past 15 years his positions have been little more than sinecures. Secondly, Chubais and Putin have always enjoyed a special relationship (it was Chubais who first gave Putin a role in the presidential administration in 1997 and then he supported Putin’s bid for the presidency in 1999).  The tone of the Kremlin’s comments after Chubais left Russia, and again after news of his illness was calm and did nothing to suggest any conflict with Putin. Chubais himself has never publicly spoken about his attitude toward the war. However, state news agency TASS reported in May that Russian law enforcement was looking for “hidden European accounts” belonging to Chubais and was intending to investigate him for corruption. Why the world should care The theory that Chubais was poisoned on the orders of the Kremlin seems implausible. And it seems likely evidence of this would have emerged by now if this were the case. In addition, there is no obvious reason for the Kremlin to persecute Chubais. In 25 years working with Putin, Chubais never once gave a reason to the Russian leader to suspect his disloyalty and after his departure from Russia he has continued to hold his tongue.

The comeback of Soviet-style elite shops One of the most widely discussed stories in Russia last week was the government’s decision to open exclusive duty free shops in Moscow for diplomats and international organization employees. There’s nothing unique about such shops for diplomats — you can find them in Geneva and New York. However, Russians associate such shops with Soviet-era “Beriozka stores” where foreigners and party bigwigs could buy goods unavailable to ordinary people. The opening of duty free shops for diplomats and employees of international organizations in Moscow and St. Petersburg was first mentioned in a government decree published last week. The Foreign Ministry insisted the idea had been long in preparation (playing down suggestions that it was due to the war). But even if that is true, it’s clear that right now the need is more urgent. As foreign companies leave Russia, many imported goods could disappear from the shelves. Everyone who read the news immediately recalled the same thing: the Soviet chain of Beriozka stores that sold imported goods beyond the reach of ordinary people. Transactions were carried out using foreign currency, which ordinary Soviet citizens, by definition, could not possess (currency trading was a criminal offense), or using special coupons from Vneshposyltorg, an organization the Soviet government used to pay people sent to work abroad. As a result, purchases in Beriozka stores were only accessible to foreigners, overseas-based specialists and the privileged elite — diplomats, party bigwigs and other members of the nomenklatura allowed to travel abroad. Vneshposyltorg coupons were traded on the black market at inflated prices.  One of the most powerful symbols of inequality in the Soviet Union, Beriozka stores were liquidated during perestroika as part of a campaign against privilege. You can read more about the history of Beriozkas in this study by historian Anna Ivanova. The news immediately attracted criticism from all sides. Even nationalists and self-proclaimed patriots were outraged. “What for? It’s a very strange ideological decision. Are Russian citizens not allowed to enter? It smacks of discrimination,” moaned pro-Kremlin TV presenter Vladimir Solovyov on his Telegram channel. Why the world should care Similarities between Putin’s Russia and the Soviet Union should not be exaggerated. Russia does not have a deficit of imported goods. Everything is in order with the population’s access to foreign currency (at present, Russian citizens have more than $80 billion in U.S. dollars and euros) and even after the invasion the government did not attempt to impose anti-market measures (such as price regulation). However, the discussions about Beriozka show just how much Russian society is still absorbed by its Soviet past — something the authorities love to manipulate for propaganda purposes.

Written by Peter Mironenko, translated by Andy Potts and edited by Howard Amos