Research & Insights #19

Foreign debt. Russia is getting closer to a potential default on its foreign currency debt. The Ministry of Finance recently stated that it was forced to make payments in rubles to holders of dollar-denominated bonds. For the first time, the attempt to settle the US$649.2 million payment was rejected by a US financial institution on orders from Washington. Russia has a total of 15 international bonds outstanding, with a face value of about US$40 billion. Moscow managed to secure several foreign currency coupon payments on its Eurobonds before Washington stopped the transactions. According to international rating agencies, Russia has a 30-day grace period to make the dollar payment. The Kremlin has rejected the idea of a default by the country, saying that Russia has the necessary funds and is ready to pay its debt. Indeed, Moscow has described the blocking of payments as a failure of the West to meet its financial obligations to Russia. According to the Kremlin spokesman, the freezing of foreign exchange reserves in February was an attempt to push it into an “artificial default”.

Domestic Politics. Some 83% of Russians approve of Vladimir Putin’s actions, gaining twelve points compared to February, according to a survey published on 31 March by the independent Russian institute Levada. This is the first poll since the beginning of the offensive in Ukraine that has not been carried out by pro-government institutes. Only 15% of Russians say they do not approve of the president’s actions (-12% in one month) and 2% have no opinion. Among respondents who support the actions of the Russian Armed Forces in Ukraine, the dominant opinions are that Russia launched a “special operation” to: protect the Russian-speaking population and civilians in Donbass (43%); prevent an attack on Russia (25%); get rid of nationalists and bring order (21%). Vladimir Putin justified Russia’s military offensive against its Ukrainian neighbour by accusing it of having orchestrated a genocide of Russian speakers, and of serving as a springboard for NATO, an existential threat to Russia. Since the beginning of the conflict, Russia has banned some of the largest social networks (Facebook, Twitter, Instagram, TikTok) accused of having a Russophobic line.

Dedollarization. One of the main counter-sanctions taken by Russia against the West was to order, on March 23, that Russian gas exports be paid for in rubles. In fact, the system now allows buyers to pay in the contract currency which is then changed into rubles by Gazprombank. “It is obvious that – even if this is currently a distant prospect – we will come to some new system – different from the Bretton Woods system,” Peskov said.The West’s sanctions on Russia, he said, had “accelerated the erosion of confidence in the dollar and euro.”The Kremlin wants a new system to replace the contours of the Bretton Woods financial architecture established by Western powers in 1944. The government spokesman said the West’s decision to freeze US$300 billion in central bank reserves was a “robbery” that had already accelerated the move away from using the US dollar and the euro as global reserve currencies. The decision to impose payment in rubles has boosted the Russian currency, which fell to record lows after the February 24 invasion, but has since recovered.

Russia-India relationship. Since Russia’s military intervention in Ukraine and subsequent Western sanctions, India has purchased at least 13 million barrels of Russian crude oil, benefiting from deep discounts. By comparison, India had imported in 2021 about 16 million barrels for the whole of last year, according to data compiled by Reuters. Russia is India’s largest supplier of defence equipment, despite increased purchases from the United States over the past decade. Defence analysts say Russian supplies are more cost-competitive and vital to India, which faces a superior Chinese military. As a result of the sanctions, Russia has offered a US$35 per barrel cut from price levels prior to the start of the war in Ukraine to the world’s third largest oil importer and consumer. Indian Oil Corp, the country’s largest crude refiner, has the option to buy up to 2 million tons, or about 15 million barrels, of Urals-grade crude oil from Russia’s Rosneft this year. India and Russia are also trying to work out a rupee and ruble payment mechanism to maintain their trade.

Research & Insights #18

Central Bank. On February 28, the United States and its European allies froze the assets of the Russian Central Bank following the Russian military intervention in Ukraine. Half of the Central Bank’s assets held in the form of foreign exchange reserves and gold (US$300 billion) are now unusable, according to the Russian finance minister.The West has removed one of the means Moscow had to support its currency. In a few days, it lost about 40% of its value against the US dollar. In response, the Russian authorities have taken a number of measures designed to encourage the government, businesses and households to buy or hold rubles and to discourage them from buying or holding foreign currency.The Central Bank of Russia has more than doubled interest rates to 20% and capped the amount of funds that can be converted into foreign currency for individuals (US$10,000).Commodity exporters are now required to convert 80% of their revenues into rubles. The main Russian stock market (MOEX) has been closed since February 25. Russia’s finance minister said the country would meet its debt obligations, but would issue ruble payments until Western countries released its foreign currency reserves.

SWIFT.  Since March 12, seven Russian banks have been disconnected from SWIFT. The communication system, launched in 1973, serves as a neutral platform for banks to communicate financial transfers, transactions and exchanges. The sanctioned banks are VTB, Rossiya, Otkritie, Novikombank, Promsvyazbank, Sovcombank and the state development bank VEB. From now on, they will be severely restricted in their ability to do business outside Russia. However, it is unlikely that this sanction will lead to the collapse of the Russian economy. These banks operate primarily in Russia, where they receive most of their profits and where most of their customers are located.In addition, Sberbank and Gazprombank are not on the list. These two banks play a key role in European energy supplies, as they handle most of the payments for oil and gas exports. In general, Russians distrust the banking system and over 90% of the Russian population keeps at least part of their savings in cash (often in foreign currency). It is estimated that 40% of commercial transactions in the country are still conducted in cash.

Oil & Gas. The United States announced a total ban on imports of Russian oil, gas and coal. The news sent the global price of oil soaring, with Brent crude reaching US$127.98 a barrel, up more than 50 percent from the beginning of the year. The UK says it will phase out Russian oil by the end of the year. From Russia’s perspective, these two countries account for 8% and 2% of its oil exports respectively. As far as Europe is concerned, it will be much more difficult to do without Russian raw materials. Russian oil represents 25% of European imports and gas 40%. Despite this, EU leaders agreed to “end our dependence on Russian gas, oil and coal imports as soon as possible” by increasing LNG imports from other markets, developing a European hydrogen market, improving energy efficiency and accelerating investment in renewable energy. In concrete terms, this means that Europeans will have to pay more for their energy and that they will have to reopen coal-fired power plants. In France, the taboo of “energy sobriety” is beginning to be promoted more and more to encourage consumers to reduce their energy demand.

Visa & Mastercard. Both American companies have suspended their operations in Russia since March 10. All cards using these payment systems previously issued by Russian banks will continue to operate in Russia as before, but it will not be possible to use them abroad. In addition, cross-border transactions will not be available, including payments for purchases in foreign online stores. This measure is expected to accelerate the adoption by Russian banks of Mir cards. This Russian payment solution is accepted in a handful of countries, including Turkey, Vietnam, Armenia, Belarus, Kazakhstan and Kyrgyzstan. Mir said it has already seen a sharp increase in demand for its cards after sanctions were imposed on Russian banks. According to Central Bank of Russia, more than half of Russians already had a Mir card by September 2021, accounting for 32 percent of all transactions. The Chinese company, UnionPay, is also emerging as an alternative payment solution for Russian citizens in this new environment. Western sanctions are helping to consolidate Russia’s move away from their transaction systems to Chinese providers seeking to expand their presence around the world.

Research & Insights #17 – Special Ukraine

Ukraine Crisis. Russia has recognized the independence of the Lugansk and Donetsk People’s Republics (DPR and LPR) and concluded with them agreements on friendship, cooperation and assistance. While the Western media warned that Russia’s invasion of Ukraine “could happen at any time,” Putin’s announcement surprised many as it represents an intermediate stage to a full-blown war that no one wants. The Russian president demanded that Ukraine immediately halt all hostilities in Donbass, stressing that otherwise “the Ukrainian ruling regime will be wholly and entirely responsible for the possible continuation of the bloodshed,”. Russia announced that it would send “peacekeeping forces” to the regions to ensure stability and security. This is the first time Russia has officially admitted to sending regular army troops to the separatist regions. In the coming days, it will become clear exactly what territory the two republics claim, and military action could intensify if their claims are extended.

Economic sanctions. Sanctions are very likely to be imposed on Russia by the West. US Secretary of State Antony Blinken said the US would respond to Putin’s decision with a “firm response.” What is not clear is the extent of these future sanctions. Russia’s place in the supply of raw materials is so important that strong Western sanctions could send energy prices soaring. Many Western players are engaged with the country and would be affected by such a policy. These include BP, Shell and ExxonMobil, as well as commodity traders such as Glencore, Vitol and Trafigura. Recall that in 2018, US sanctions against Deripaska and its aluminium companies, Rusal and En+, sent metal markets soaring and significantly disrupted supply chains. Covering 40% of Europe’s gas needs, Russia could retaliate by reducing its supply. A sudden rise in energy prices could quickly lead to higher inflation and higher interest rates in Western economies.

Domestic Politics. recent poll conducted by the independent Levada Center reveals three interesting facts about Russians’ opinions on the rising tensions in Ukraine. The first is that most Russians do not want a war with their Ukrainian neighbour. Currently the fear of a world war is abnormally high. The second point is that the majority of Russians think that the US and NATO are responsible for the tensions in the Donbass region. Only 4% think that Russia is to blame. They see the clashes in Ukraine as a proxy war with US-backed forces. Finally, the third point that is paradoxical, is that 80% of Russians consider America as a “friend”, and only 3% as an “enemy”. The Russians view the round of peace negotiations since the meeting between Putin and Biden in Geneva in June 2021 in a very positive light. The discussions between the leaders themselves and between their delegations have improved the attitude of Russians towards Europeans and the United States.

History. Fifteen years ago, Vladimir Putin gave his famous speech on his vision of international relations at the Munich Security Conference (read the text). He denounced American unilateralism and the importance of taking into account the growing economic and political influence of China and India. He said: “I consider that the unipolar model is not only unacceptable but also impossible in today’s world. The model itself is flawed because at its basis there is and can be no moral foundations for modern civilization. There is no reason to doubt that the economic potential of the new centers of global economic growth will inevitably be converted into political influence and will strengthen multipolarity”. Today, there are no more G8 or regular Russia-EU summits. Between Russia and the West, there are no longer any illusions or mutual trust but only sanctions that are accumulating. What has not changed, however, is Russia’s desire to maintain its independence in foreign policy, much to the frustration of the Americans.

Why the Ukraine Crisis Is the West’s Fault

On September 2014, political scientist John Mearsheimer published an article in Foreign Affairs entitled: “Why the Ukraine Crisis Is the West’s Fault”. As tensions between Russians and NATO once again hit the headlines, it is striking in retrospect how accurate John Mearsheimer’s analysis was. If you want to get the big picture on this conflict without getting lost in the detail, then you should read his article or watch his lecture. Professor at the University of Chicago since 1982, John Mearsheimer analyzes international relations through the lens of the realism school of thought. He was one of the strongest opponents of the 2003 Iraq War before it happened.

Research & Insights #16

Covid. A study called the National Anxiety Index for the year 2021 was recently published. It measures and classifies the phobias of Russians based on media and social network analysis. In 2020, the main source of anxiety that kept people awake was the fear of catching Covid. In 2021, it is now the measures taken to fight the spread of the virus that is a source of concern. In other words, Russians are now more worried about the widespread use of the QR code system and mandatory vaccination than about catching the virus. Moscow has made Covid-19 vaccination mandatory for employees in a wide range of public-facing positions, including food service and transportation. Workers who refuse run the risk of being fired from their jobs without pay. Despite the recommendations of the authorities, only a little more than half of the country’s population has received a vaccination. It is interesting to note that the same level of scepticism towards government measures can be observed in many countries of the former Soviet Union such as Belarus, Ukraine, Kazakhstan, Serbia and Georgia.

Kazakhstan. On January 2, demonstrations broke out in several Kazakh cities. A few days later, they degenerated into mass riots and government buildings were ransacked in several cities. The ensuing violence left many people injured and deaths were also reported. Officially, 164 people were killed and nearly 6,000 were arrested. At the request of the Kazakh president, Russia deployed peacekeepers as part of the Collective Security Treaty Organization (CSTO). According to Kazakh authorities, law and order was restored in all regions of the country on January 7. Independent for over 30 years, the country has maintained close relations with Russia (they are part of the Eurasian Economic Union) and developed friendly relations with a wide range of countries in the West, the Middle East and Asia. The Russian president warned that Moscow would not tolerate “color revolutions” in the former USSR. This refers to the revolts orchestrated, according to the Kremlin, by the West in former Soviet republics since the 2000s.

Digitalization. Russia continues to digitize its economy with the State development of a digital platform called “Unified Biometric System” (UBS). The idea is to digitize all information concerning Russian residents. This digital registry will make it possible to identify a person remotely by his or her biometric data (facial or voice recognition). Initially, the unified biometric system will serve banks and financial organizations, and then it will be used in healthcare (telemedicine), distance learning, e-commerce, retail, public and municipal services, etc. The large-scale implementation of the biometric system will provide an essential infrastructure for the development of the country’s digital economy. UBS was launched at the initiative of the Ministry of Digital Sciences, the Bank of Russia and Rostelecom, as part of the national program of digital economy.

Russia-USA relationship. The situation in Ukraine is still not resolved. Talks between Russia and NATO took place “again” on January 12 in Brussels. They discussed Ukraine and the expansion of NATO to the east. The Russians do not want to concede anything about the integration of Ukraine into the military organization. They are keeping up the pressure by conducting military exercises in the regions of Voronezh, Belgorod, Bryansk and Smolensk, near the Ukrainian border. Around 3,000 soldiers took part in these exercises. The West and Kiev have recently spread allegations about a potential Russian invasion of Ukraine. Kremlin spokesman Dmitry Peskov called the allegations “empty and unfounded” and a ploy to raise tensions, stressing that Russia poses no threat to anyone. Russia won’t be intimidated by ‘crippling’ sanctions, the Russian Ambassador to the US said.

Research & Insights #15

Inflation. On December 17, the Bank of Russia raised its key interest rates by 1% to 8.50%. As a reminder, Russian monetary policy aims to maintain inflation at around 4% per year.Inflation appears to be caused by supply-side constraints in a number of sectors. There are disruptions in production and logistics chains, labor shortages and structural changes in the labor market caused by the pandemic. The unemployment rate has dropped to a record low, while vacancies are at a record high. In 2021, GDP is estimated to grow 4.5% based on current trends in the Russian and global economies. In order to modernize its financial system, the Bank of Russia is preparing to issue its own digital ruble. It would not be surprising if, like China, Russia banned the use of crypto currencies, perceived as a threat to its financial stability. According to the Central Bank, the annual volume of cryptocurrency transactions carried out by Russians is about US$5 billion.

Demography. At his annual press conference, Vladimir Putin discussed the decrease in life expectancy due to the Covid-19 pandemic. The average age for death has dropped from 71.5 last year to 70.1 this year. After a one-year vaccination campaign, only 45% of Russian adults are vaccinated. The Russian president stressed that population growth remains one of the main challenges facing the country. Russia’s population of 146 million is not enough to fill the country’s sprawling territory, which covers more than 17 million square kilometers, he said. The country has recorded its largest annual population decline in 15 years. In January, Rosstat, the official government statistics service, disclosed that the number of people living in the country dropped by 510,000 in just 12 months. The main reasons for the decline are the Covid-19 pandemic, falling birth rate, and lower immigration.

Russia-China Relationship. On December 15, Vladimir Putin and Chinese President Xi Jinping held their second virtual meeting of the year. Both countries have common interests in establishing a new shared international financial framework. Since the financial crisis of 2008, they have been trying to reduce their financial dependence on the United States with some interesting results. In 2015, about 90% of trade between Russia and China was paid in dollars. In 2020, the share of trade paid in dollars between the two Eurasian giants was only 46%. According to the Chinese president, trade between China and Russia has already exceeded US$100 billion for the first time in the first three quarters of the year. Washington regularly uses its financial architecture as a foreign policy tool by imposing sanctions on its adversaries. The Russians and the Chinese continue to develop alternative transaction systems in order not to be dependent on SWIFT.

NATO. Russia recently presented its “red lines” to NATO and the United States. In short, the Russians want NATO not to integrate Ukraine, they want the military alliance to seek permission to deploy troops in the former communist countries of Europe, and finally, they want NATO to cease military exercises near its borders. “The US is placing rockets on our doorstep… How would the US react if we delivered rockets near their borders with Canada or Mexico?” Vladimir Putin said. Western officials are likely to reject almost all of their demands. They consider the Eastern European states to be sovereign and free to choose their own defense policy. However, they want to calm the situation and give priority to the diplomatic dialogue initiated by Moscow. In the event of an invasion of Ukraine, the Americans have indicated that they would use economic sanctions rather than military action. Vladimir Putin said the US and Russia have agreed to meet in January in Geneva for security talks that are expected to include Ukraine.

Research & Insights #14

Gazprom. The Russian company announced a record quarterly net profit of US $7.8 billion for the third quarter, thanks to high natural gas prices.The company expects even higher profits for the final three months of the year. “Obviously, the price of our supplies to Europe will be significantly higher in the fourth quarter, which will have a positive impact on the full-year results,” said Gazprom Deputy Chief Executive in a statement.Companies linked to the state gas giant have taken control of VKontakte, the largest Russian social media platform. The latter has just launched a video sharing platform (Yappy), considered as a Russian TikTok. The service is based on sharing short vertical video clips of up to 60 seconds. Alexei Miller, chief executive of Gazprom, who is also chair of Sogaz, described VK as a “promising investment”, the Interfax news agency reported. 

Russia-US relationship. Vladimir Putin and Joe Biden spoke for two hours by video conference on December 7.  The discussion took place in a context of tension around the Ukrainian issue. Russia is accused of preparing for an invasion of Ukraine, while Western media announced the possibility of major sanctions against Russia. For the Russian government spokesman, information about the disconnection of the country from the SWIFT banking network is just part of “information hysteria“. The Kremlin said the call between Putin and Biden was “frank” and “businesslike”.According to Putin, the Ukrainian crisis was the result of Kyiv’s “destructive behavior” and NATO’s “dangerous attempts to take over Ukrainian territory and grow its military potential on the Russian frontier”. He also reiterated his call for legal guarantees to prevent NATO from expanding eastward or deploying weapons systems in potentially hostile countries bordering Russia.

Climate Change. Russia has vetoed a UN Security Council resolution calling climate change a threat to international peace and security. The vote ends years of efforts to make global warming a central part of the decision-making process of the UN’s most powerful body. The proposal called for “incorporating information on the security implications of climate change” into the council’s conflict management strategies, and into peacekeeping operations and political missions. 113 countries supported the resolution, including 12 of the 15 members of the Council. However, India and Russia voted against while China abstained.As part of the resolution, the UN secretary-general was urged to incorporate climate-related security risks into conflict prevention efforts, and to report on how to address those risks in specific hotspots. Adding climate change to the Security Council’s purview would only deepen the global divisions that were highlighted by last month’s climate talks in Glasgow, Scotland, opponents said.

History. Thirty years ago, the Soviet Union ceased to exist as a “subject of international law and geopolitical reality”. Founded in 1922 by the Communist Party, the Soviet Union entered a systemic crisis in the 1980s.Large segments of the population were disillusioned with the dogmas of the officially professed communist ideology, and the country was falling behind Western countries in economic and technological development. Political reforms during the perestroika years only exacerbated existing contradictions. ForVladimir Putin, “the collapse of the USSR was the biggest tragedy of the twentieth century”. According to a survey conducted by the Levada Center in 2020, 65% of Russians said they regretted the collapse of the Soviet Union. 75% of the population also consider the Soviet era the greatest in Russian history. Over the past ten years, the level of nostalgia for the Soviet past has been gradually growing in Russia.

Research & Insights #13

Financial Transactions. Russia’s national payment system, Mir accounts for about 25% of all card transactions in the country today. Released in 2015 by the Bank of Russia and the National Payment Card System, this cashless solution was introduced in a market historically dominated by US international payment systems, Visa and Mastercard. The creation of a national payment system was prompted by US restrictions imposed on several Russian banks following the Ukrainian crisis. Its use is now mandatory for pensioners, civil servants, public sector employees and anyone receiving state payments such as social welfare. It is estimated that in 2020, the share of cashless payments in total retail sales exceeded 70% in the country. Russia’s disconnection from Western payment systems may be painful, but the country can manage such sanctions at the national level by switching entirely to Mir, said Vicktor Dostov, Chairman of the Association of Electronic Money and Money Transfer Market Participants.

Artificial Intelligence. Vladimir Putin gave a speech at AI Journey 2021 during which he reaffirmed the importance of artificial intelligence. He considers that access to data is essential for Russia to be competitive in this field and that two principles must be respected in this regard. First, it is essential to establish an effective mechanism for anonymization and storage of data that is clear and understandable to the public. Second, the state must guarantee access to databases for all players in the sector, in order to promote competition and avoid the establishment of a data monopoly. If the authorities understand the importance of new technologies, they are also aware of the anxiety they can create among the general public. A recent example is the presentation of Meta by Mark Zuckerberg. It is interesting to note that support of these new technologies is usually accompanied by the promotion of conservative values in Russia. Paradoxical though it may seem, to be leaders in artificial intelligence, what is needed is a humane environment, like in a family where parents pass on important moral values to their children and, of course, at school, Vladimir Putin said.

Militarisation of Space. On November 15, Russia fired a missile at one of its defective satellites called Tselina-D, in orbit since 1982. This exercise was primarily military since obsolete satellites eventually return naturally to the atmosphere where they are destroyed. With this type of demonstration, the Russians showed their ability to destroy a satellite from Earth, which is strategic at a time when the communication systems we use daily depend on satellites. Previously, such tests in space have been conducted by the United States, China and India, said the Russian Ministry of Defence. Russian officials are also seeking to encourage other powers to finally begin negotiations on a space treaty at the Conference on Disarmament. For now, space is essentially framed by political commitments and the few existing rules are difficult to enforce. Not surprisingly, the North Atlantic Council has condemned the recent test as “irresponsible behaviour” that undermines the rules-based international order.

Nord Stream 2. The US imposed new “symbolic sanctions” on a ship (Transadria) involved in the construction of the Nord Stream 2 gas pipeline. The Biden administration is looking to exert more pressure on Russia without antagonizing Germany. These new sanctions against Nord Stream 2 are the latest in a series of US measures that have significantly slowed the construction and operation of the pipeline. On November 16, it was revealed that certification of the pipeline would be postponed for several months after the German regulator asked the Swiss-based Nord Stream 2 consortium to create a subsidiary under German law. According to Russian Foreign Minister Sergei Lavrov, Western countries “led by the Americans” are imposing politically motivated unilateral restrictions on everything, “for any reason or no reason.” 

Research & Insights #12

Artificial Intelligence. Russia’s leading technology companies adopted a Code of Ethics in the field of artificial intelligence (AI) in Moscow on October 26. It establishes general ethical principles and standards of conduct to guide those involved in activities using AI for civilian purposes. Since 2019, and the adoption of the National Development Strategy, AI has been one of the main priorities of the Russian state, which aims to catch up technologically and financially. Unlike China or the United States, where AI is presented as a Promethean technology, in Russia it seems to be seen more as a way to ensure the country’s sovereignty. To remain in the top five AI powers in the world, the country is banking on its human capital. Indeed, mathematics and programming are key to mastering this domain. Russia is also one of the few countries, thanks to its relative isolation, to have developed its own platforms with complete ecosystems, like Yandex or Mail.ru.

Russiagate. U.S. Attorney John Durham is making progress in his investigation into the origins of the FBI’s probe into Russian interference in the 2016 presidential campaign. He has charged Igor Danchenko with five counts of lying to the FBI. Danchenko was the primary source of the infamous “Steele dossier” containing false allegations of conspiracy and cooperation between Trump’s presidential campaign and the Russian government. The document defined the narrative of the media and Democrats during the Trump presidency. It was also “critical evidence” that the FBI submitted to the federal oversight court in late 2016 to obtain a warrant to monitor a Trump campaign aide. As Pulitzer Prize-winning journalist Glenn Greenwald recently pointed out, there has been more contrition about media lies for the Iraq War than there has been for “Russiagate” and the “Steele dossier.” This latest development should further polarize Americans about their trust in the media. Currently, 68% of Democrats versus 11% of Republicans say they have a great deal or fair amount of trust in the media. This difference is frightening.

Labor Market. Labor shortages in low-skilled jobs continue to be a concern for Russian authorities. The closure of borders caused by the COVID-19 pandemic has exacerbated this dynamic by leaving many people without work to return to their home countries. As a reminder, in 2017 the Russian Central Bank for the first time included labor shortage in the list of inflation risks. In 2018, the Ministry of Economic Development in turn admitted that there was “an increasingly evident shortage of labor resources.” In Russia, about half of the economic immigrants come from Central Asia. They usually work in difficult, low-paying jobs in key sectors of the country, such as agriculture, transport and logistics or construction. In 2020, the number of migrants in Russia was about 6 million, compared to about 11 million in normal times. Moscow is trying to ease these tensions on the labor market by facilitating access to work visas for the sectors concerned.

Natural Gas. Russia has indeed increased its gas supplies to Europe via Poland, Belarus and Ukraine, thus bringing down wholesale prices. It must be said that Europe is still worried about having insufficient stocks before the winter. In accordance with President Vladimir Putin’s order, Gazprom started pumping gas to Germany again late on Monday 8 November. Gas stocks were hit by a prolonged winter in 2020 and not sufficiently filled since. Added to this is a reduced supply of renewable energy, such as wind power, due to weather conditions. According to Moscow, the EU has in recent years favored gas purchases on the spot market, subject to price fluctuations, rather than signing long-term contracts with Gazprom. Many commentators accuse Moscow of deliberately pressuring prices in order to speed up the commissioning of the controversial Nord Stream 2 pipeline, which is ready for use but awaiting the green light from the German regulator.

Research & Insight #11

Nord Stream. On 27 October Vladimir Putin ordered Russian gas giant Gazprom to increase gas deliveries to the European Union as soon as Russian reservoirs are filled. He instructed that Gazprom begin “gradual and planned work to increase the volumes of gas in [Gazprom’s] underground reservoirs in Europe” as soon as Russian reservoirs are filled again by November 8. One third of the gas used in Europe comes from Russia. According to Moscow, in recent years the European Union has favored purchasing on the spot market, which is subject to price fluctuation, instead of signing long-term contracts with Gazprom. While Russia says it wants to deliver more gas, it also wants to return to the practice of multi-year agreements. In this respect, Vladimir Putin said on 21 October: “What we are observing now on the energy markets is a manifestation of the very capitalism that does not work“. “As soon as difficulties arise, everyone asks for government intervention,” he said.

Climate Change. The next COP26 summit will be held in Glasgow in early November. Discussions will focus on the speed of the energy transition, i.e., the transition from an economy based on fossil fuels (oil, gas, coal) to green energy (wind, solar, biomass, hydro). Despite the opposition of countries like Australia, it now seems clear that the end of coal use is an explicit objective, to be achieved by 2050. On the other hand, we are witnessing a “comeback” of nuclear energy, recently promoted by Paris and even Tokyo. Nuclear energy is increasingly seen as a way to avoid greenhouse gas emissions, while waiting for more renewable energy to be used. The French president announced in early October the investment of one billion euros in small, state-of-the-art power plants, while the United Kingdom, Russia, India and China also have plans to build or reactivate nuclear power plants.

Covid-19. A series of hygiene restrictions came into effect in Moscow on Thursday, October 28, in order to contain the Covid-19 epidemic that has recently accelerated in Russia. Services considered “non-essential” such as restaurants, clothing stores and gyms will remain closed until November 7. Only places selling medicine, food and basic necessities have been allowed to open, according to the mayor of Moscow. President Vladimir Putin has declared a national holiday from October 30 to November 7, in the hope of slowing down the movement of people and therefore the virus. The vaccination campaign remains laborious because of the mistrust and the wait-and-see attitude of the Russians. The total death toll has now reached more than 233,000 people, making Russia the most bereaved country in Europe. A third of the population is fully immunized, according to the specialized website Gogov. Despite the negative media coverage of Russia’s handling of the crisis, the country has fewer deaths per million people than France, the United Kingdom or the United States.

GDP. The International Monetary Fund (IMF) has improved its forecast for Russia’s GDP growth in 2021 to 4.7% from 4.4% in July, according to the October report. The organization’s experts predict a 4.9% drop in Russia’s unemployment rate in 2021, from 5.8% in 2020. The Russian economy is larger and more resilient than many people think. Analysts like to point out that Russia’s US$1.5 trillion GDP is comparable to Italy’s. It is worth noting that this amount is calculated based on market exchange rates. If purchasing power parity is considered, the figure rises to US$4.1 trillion, making Russia the second largest economy in Europe and the sixth largest in the world. This explains why, despite having a defence budget in dollars that is more than ten times smaller than that of the United States, the country is able to compete in some areas with the most advanced weapons.