Research & Insights #7

Decarbonization. The Intergovernmental Panel on Climate Change (IPCC) released a new report on Monday, August 9. It shows a faster than expected rise in temperatures and the long-term effects of increased CO2 in the air. In Russia, the government and the majority of citizens are becoming increasingly concerned about climate change. According to the Ministry of Natural Resources and Environment, the rate of warming in the country is 2.8 times higher than the global average. Vladimir Putin has recently said that climate change is partly responsible for recent forest fires and floods. Warming is also causing the permafrost, which covers 65% of Russia’s landmass, to melt, threatening buildings, roads and infrastructure. However, it should be kept in mind that warming could also bring positive effects. Recent studies (here and here) estimate that millions of square kilometers of land will become habitable and arable as a result. An ice-free Arctic could also turn the polar seas into a new Mediterranean.

US Sanctions. The Biden administration has imposed, Belaruskali, and companies with ties to President Alexander Lukashenko. This is not the first time the US has targeted a major producer of raw materials critical to the global market. Notably, Russian aluminum giant, Rusal, spent about a year under similar sanctions in 2018, sending the industry reeling all around the world. Despite these measures, there are several reasons to believe that the price of potash will not increase. First, Belaruskali exports potash primarily to China, India and Brazil. Second, given the close economic ties between Belarus and Russia, the company could simply export the product to its neighbour to be re-exported from there. Finally, American and Russian potash producers seem to be able to increase their output to compensate for the decline in Belarusian exports. Potash has no substitute and is a necessary nutrient for healthy food crops.

Dedollarization. August 4, 2021 marked the 50th anniversary of the end of the Bretton Woods System. The end of this monetary system meant that the value of the dollar was no longer based on the gold counterparty it offered, but on the confidence that people placed in it. This fiat currency system allowed the United States and the rest of the world to enjoy five decades of tremendous economic growth, coupled with an explosion of inequality, unprecedented levels of debt and trade imbalances between countries never seen before. On the occasion of this anniversary, the Russian Foreign Ministry said that it is reasonable for Russia to continue to reduce the share of the dollar in its international currency reserves and that uncontrolled dollar printing is a global problem. He considers a thorough review of the international monetary system is necessary and that a growing number of countries will reach similar conclusions in the near future.

Justice. A Russian court has found American investor, Michael Calvey, guilty of embezzlement. This decision comes at the end of a long legal process that has shaken the international business community in the country. The Moscow court judge said that Mr. Calvey and six of his colleagues from Baring Vostok, one of the largest investors in Russia, had swindled a Russian bank for $ 34 million. Mr. Calvey has always claimed his innocence and his supporters say the investigation was conducted without evidence by a politically connected rival as part of a business dispute. Astute observers said the case demonstrated the need to reform the Russian legal system, which is routinely abused in commercial disputes or to pressure rivals into divesting assets. Putin’s spokesman, Dmitry Peskov said last month that while the Kremlin was closely monitoring the verdict, the treatment of a foreign businessman “cannot have a major influence” on the general investment climate in the country.

Research & Insights #6

Inflation. On 23 July 2021, Russia’s central bank decided to increase the key rate by 1%, to 6.50% per annum. Inflation reached 6.5% year-on-year in June, according to the Federal Statistics Service (Rosstat), well above the central bank’s target of 4%. This dynamic is due to a faster-than-expected economic recovery, a shortage of labour in a wide range of industries, disruptions in production and supply chains, a surge in global commodity markets and a weaker rouble. With more than 60% of the population spending about half their income on foodprice increases are a particularly sensitive issue for political authorities. According to the estimates of the Bank of Russia, the Russian economy reached its pre-pandemic level in the second quarter of 2021 and is expected to reach a GDP growth of 4-4.5% in 2021.The Bank of Russia Board of Directors will hold its next rate review meeting on 10 September 2021.

Oil & Gas. Russia continues to diversify its economy and is not, as Joe Biden just announced, a country with only “nuclear weapons and oil wells and nothing else”. The share of the oil and gas industry in the economy fell to 15% in 2020, down from 19.2% in 2019 and 21.1% in 2018, according to the first assessment published by the Federal Statistics Service (Rosstat). For comparison, the share of oil and gas makes 50% of Saudi GDP, 14% of Norway’s GDP and 8% of U.S. GDP. These figures must of course be mitigated by lower hydrocarbon prices in 2020. The perception in Russia is that oil and gas account for about half of Russia’s GDP, but this is more likely due to the fact that fossil fuel exports account for about 50-60% of all Russian exports, Oleg Shibanov, professor of finance at the New Economic School in Russia, told Russian media outlet RBC.

Nord Stream 2. On July 21, US and Germany reached an agreement on Nord Stream 2. Joe Biden said that the project was 99% complete, and it was impossible to stop its construction. According to the U.S. State Department, the Russians are trying to use the pipeline as a “geopolitical weapon” against Europe and are aiming for “aggression against Ukraine”. To which Dmitry Medvedev replied that “if Germany depends on Russian gas supplies, then Russia depends on market prices and export volumes“. Matthias Warnig, president of Nord Stream 2 AG, said he expects construction of the project to be completed by the end of August and hopes to have it operational by the end of the year. The pipeline will deliver gas to Europe from the vast Bovanenkovo natural gas field on Russia’s northern Yamal Peninsula, which contains gas reserves of some 4.9 trillion cubic meters.

History. On July 12, Vladimir Putin published his essay: “On the historical unity of Russians and Ukrainians“.To summarize it in a few words, the Russian president began by stating that Russians and Ukrainians are a “unified people” and that their recent history is a “misfortune and a tragedy”. For him, “modern Ukraine is entirely the product of the Soviet era”. Then he added that the two countries are “natural complementary economic partners” and that “Ukraine used to possess great potential, which included powerful infrastructure, gas transportation system, advanced shipbuilding, aviation, rocket and instrument engineering industries…”. He finally warned the Ukrainian elites not to turn the country into anti-Russia by integrating NATO and by being a tool in someone else’s hands to fight against [Russia]. “The true sovereignty of Ukraine is possible only in partnership with Russia”.