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 #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.