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”. 

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