Reports of massive Russian air strikes tonight on Kiev are starting to come out. This follows blasts reported from last night, including on the city’s main rail station and near the Ministry of Defense. I will keep readers posted as I learn more.

More Sanctions Fallout

A report from Antiwar.com details that the world’s two largest shipping lines are halting transport to and from Russia.  Exemptions are in place for food, medicine, and humanitarian goods. FedEx and UPS will halt also deliveries;

The Danish container shipping giant Maersk announced that it was temporarily suspending shipments to all Russian ports, although it is allowing exemptions for foodstuffs, medical, and humanitarian goods.

“As the stability and safety of our operations is already being directly and indirectly impacted by sanctions, new Maersk bookings to and from Russia will be temporarily suspended, with exception of foodstuffs, medical and humanitarian supplies,” Maersk said in a statement.

The Swiss-based Mediterranean Shipping Company (MSC) also announced Tuesday that it was stopping cargo booking for inbound and outbound shipments for Russia. MSC said the ban applies to “all access areas including Baltics, Black Sea, and Far East Russia.” MSC will also allow exemptions for food, medical, and humanitarian goods.

The suspensions mean Russia is now cut off from a significant chunk of the world’s shipping capacity. Maersk alone owns and charters over 700 ships and accounts for 17 percent of the globe’s merchant container fleet.

US mail carriers UPS and FedEx have also announced that they are suspending deliveries to Russia.

Boeing has announced it is suspending maintenance of its jets in Russia.

Gazprom, meanwhile, is paving the way for its biggest gas deal yet with China. And, in one of its measures to counter the effect of western sanctions, the Central Bank of Russia has ordered the Russian stock market to remain closed for a fourth straight day.

UN General Assembly resolution condemning Russia’s invasion of Ukraine

 A UN General Assembly vote on a nonbinding resolution to condemn Russia for its invasion of Ukraine and to reverse its recognition of the DPR and LPR saw 141 vote in favor, 5 against, and 35 abstentions.

Russia, Belarus, Syria, North Korea and Eritrea opposed the resolution; China, India, Iran, Iraq, Vietnam, Mongolia, Venezuela, Cuba, Nicaragua, South Africa, and Kazakhstan were among those abstaining.

Russia Releases First Casualty Figures

Earlier today, the Russian Ministry of Defense released for the first time since the military intervention began on 2/24, casualty figures.  On the Russian side: 498 dead and 1597 wounded.  On the Ukrainian side: 2870 dead, 3700 injured, and 572 taken prisoner.  Again, all of these figures are from the Russian Defense Ministry.

Ukrainian Refugees; Evacuation of OSCE Monitors

Democracy Now! is reporting that, according to UN figures, over 800,000 refugees have fled Ukraine to the west over the past week:

The U.N. says some 836,000 people have fled Ukraine in the week since the invasion started, in what “looks set to become Europe’s largest refugee crisis this century.” Poland says more than 450,000 people have crossed its border.

Meanwhile, Russia’s National Defense Control Center has announced that it has evacuated over 140,000 from Ukraine, including 40,000 children – these are most likely from the Donbas region. 

As of yesterday, most OSCE SMM monitors had evacuated the Donbas area through Russia with those in Kherson (northwest of Crimea) – which is now reported to have been captured by Russian forces – were sheltering in place.  Today the OSCE reported the death of one of its SMM members from shelling in Kharkiv yesterday.

Western Punishment of Russian Athletes and Culture

The International Olympic Committee is recommending that athletes from Russia and Belarus be banned from competing in all international sports.

The Guardian has reported on various cancelations and suspensions of Russian art and culture throughout the west, including ballet and symphony.  The Glasgow Film Festival in Scotland announced Russian films would be withdrawn.  Dostoevsky has even been purportedly banned in Italian venues. Russian cats are not free of the Russophobic frenzy and have actually been banned from cat show competitions.

Pentagon Agrees to Not Push WWIII

On a positive note, the Pentagon is showing some signs of sanity by canceling a previously scheduled test launch of its Minuteman III ICBM missile so as not to risk an escalation with Russia based on misunderstanding. According to ABC News:

“In an effort to demonstrate we have no intention in engaging in any actions that can be misunderstood, or misconstrued, the Secretary of Defense has directed that our Minuteman-III intercontinental ballistic missile test launch scheduled for this week to be postponed,” said [Pentagon spokesman John] Kirby.

Also, further talks are supposed to occur on Thursday between Russia and Ukraine but there is wrangling over the venue.  I will provide an update on what happens if they actually take place.

By Ben Aris, Intellinews, 3/01/22

Two years ago I wrote a piece entitled “A history of Russian crises”. Time to update it.

“Russia has crises regularly. They happen for a variety of reasons: poor regulations, the lack of institutional checks and balances, rank corruption, heavy debt, no money in reserve, shallow capital markets, weak banking sectors and external shocks. And they cause havoc when they happen,” the article opened.

Now we can add “invasion of other countries” to that list of causes. The attack on Ukraine on February 24 has caused the biggest crisis since the August 17, 1998 meltdown of the Russian financial sector. However, this crisis will do less damage than that one.

The ruble has lost a third of its value in just the last few days and the market capitalisation of the Russian stock market has been halved, with the RTS index falling from its peak of 1,900 in October just before the military posturing around Ukraine started to 935 now. In 1998 the ruble lost 75% of its value and the RTS index fell from circa 600 at its peak in October 1997 to a mere 38 a year later.

The Russian economy is much stronger today than then. Its gross international reserves (GIR) are an order of magnitude bigger. Russia is running a triple surplus of trade, current account and federal budget. Its bank sector has been cleaned up and is profitable and well capitalised. Unemployment is at post-Soviet lows and inflation, and while higher than comfortable, it is still in single digits (for now). Russia is in a much better state to weather this storm than at the end of the 1990s, when that crisis wiped out the entire top tier of the Russian banking system and plunged the country back into economic chaos. No wonder the Russians hate the 1990s so much.

However, the real pain on the Russian economy this time is the nature of the sanctions that have just been imposed. While the macroeconomic, banking sector and stock market indicators are not as bad as in 1998, the big difference is these sanctions are designed to permanently hobble Russia’s economic development.

Thanks to the fiscal fortress that Russian President Vladimir Putin has built in an attempt to sanction-proof the economy (the success of which is now in question after the EU unexpectedly imposed sanctions on the Central Bank of Russia’s gross international reserves (GIR) on February 27), Russia has been running an austerity budget that has kept its growth potential to only 2% when it should be more than double this amount.

Russia was condemned to underperform the global economic growth before the sanctions, but now it will fall even further behind as its growth potential has been even further reduced. Putin has doomed Russia to slowly end up as at best “a raw materials appendage to China,” for as long as this sanctions regime remains.

1998 crash and recovery

The 1998 crash was a disaster, especially for the normal people that once again saw their life savings evaporate overnight. But it also reset the economy and laid the groundwork for a rapid recovery.

Putin took over in 2000 and pushed through a radical set of reforms such as rewriting the labour code, setting realistic flat income tax rates that are still in place today (with a few tweaks such as those to VAT) and he began to raise public wages by 10% a year over the next decade.

Most importantly, what academics Barry Ickes and Clifford Gaddy had dubbed “the virtual economy” was destroyed – a system where business was done almost entirely on barter. The collapse in the value of the ruble forced a re-monetarisation of the economy that allowed the bank sector to work again, and tax revenues began to pour into the federal coffers.

As ruble-denominated labour wages were slashed by three quarters, oil companies that earned dollars on the international markets became cash cows overnight and primed the pump. The oil companies invested more in just 1999 than they had collectively over the previous decade. And their business only got better after the oil prices began their inexorable climb to a peak of $150 per barrel over the next five years.

Having cleared out the oligarch banks – the so-called “Financial Industrial Groups” – the banks that were left were mostly more commercially minded and flourished as they rushed to tap the international capital markets where they could “borrow long and cheap overseas, but lend short and expensive at home.” Banks like Russky Standart, a POS retail specialist that pioneered the unsecured lending business, boomed.

None of these conditions exist this time round, with the exception of more profitable oil companies. The collapse of the ruble this week will lead to high inflation. The CBR imposed an emergency 20% rate hike on February 28 that will take years to unwind and will stifle growth. The SWIFT sanctions and the US ban on US investors buying any new Russian Ministry of Finance ruble-denominated OFZ treasury bills will cut Russia off from the international capital markets.

Instead of booming during a bounce-back, Russia’s economy under this sanctions regime is doomed to sub-par growth for years to come. Putin’s fiscal fortress is probably strong enough to prevent a crisis in the short term, but the sanctions will stymie Russia’s long-term growth prospects and could condemn the country to a Latin America in the 1970s-style stagnation over the long term…

…In this crash the ruble has lost 30% of its value in just the last few days, putting this crisis on a par with earlier crises but not quite as bad as in 2014. That is due to the huge reserves the central bank has built up and also the much greater confidence in the regulator; in 2014 CBR Governor Elvira Nabiullina was seen as green and untested, but today she is seen as a titan amongst central bankers and the “most conservative governor in the world.”

The impact on unemployment is likely to be very small. Joblessness spiked in 2020 due to the lockdown as people literally couldn’t go to work, but it rapidly recovered as the coronavirus (COVID-19) restrictions came off in the autumn of that year. Currently unemployment is back at its post-Soviet lows of 4.3% as of December 2021. How far it rises from here will depend on the severity of the recession that will almost certainly begin now.

Inflation will also rise. Inflation is currently 8.7% as of January this year and was rising all last year, despite an aggressive string of rate hikes: March (25bp), April (50bp), June (50bp), July (100bp), September (25bp), October (75bp), December (100bp), January (100bp) and February (1,500bp).

The CBR’s emergency doubling of overnight rates on February 28 will curb the further rise but the 30% devaluation will feed through into more inflation over the next six-nine months. However, in the previous crisis the CBR said it was pleasantly surprised as the devaluation-driving inflationary effects were surprisingly mild and fed through more quickly than expected. However, in those crises the economic bounce-back was also better than anticipated. Again just how bad the inflation problem gets will depend on the depth and duration of the coming recession.

The banking sector has been largely undamaged, although not unaffected, in each crisis since the disaster in 1998, which wiped out the entire top tier, but there is moderate danger of a banking crisis this time round. As bne IntelliNews reported, there is a dangerous mismatch between the state-owned banks dollar liabilities and their dollar assets: in short, the big state-owned banks don’t have enough dollars on hand to meet demand if withdrawals soar – and demand is soaring after the US effectively cut both Sber and VTB Bank off from using dollars. On balance it seems the CBR has enough dollars to cover the shortfall if needed, but the story highlights how painful the SWIFT sanctions are proving to be.

From the macro-economic point of view this crisis is actually milder than the previous ones, or at least on a par, even slightly better than that of 2014. But there is one big difference: Putin’s decision condemns Russia to sub-par growth in the long term, as he has destroyed what little confidence domestic business has in the future of Russia.

The noughties boom was driven, and was gathering momentum, because Russian business was returning its flight capital to the Motherland, confident in the future. Russia’s development does not depend on foreign direct investment (FDI) or access to the capital markets. It depends on persuading its own businessmen to build and invest into the economy.

Those businessmen were nervous before. Now they will simply not invest in Russia any more, as it has no future. Russia cannot grow strongly unless its domestic businessmen participate, and following this crisis they will not. 

The previous crises of 1998, 2008 and 2014 were not Russia’s fault. They were due respectively to a currency crisis in Asia, the US failure to manage its mortgage markets and OPEC’s decision to flood the markets with crude. This crisis is entirely and exclusively of Putin’s own making. The biggest long-term consequence of this crisis is Putin will have destroyed what little confidence his own businessmen have in his leadership. Indeed, a few of Russia’s business elite have already come out and publicly criticised the invasion of Ukraine, including Rusal owner Oleg Deripaska, Alfa group founder Mikhail Fridman and Kremlin insider Anatoly Chubais.

Prominent businesses have told bne IntelliNews in the past that they built up big businesses that have made them rich, but they have stopped there. “Why risk borrowing when that could mean I could lose control of my business? I am already rich. I don’t see the point of risking what I already have,” one medium-sized successful businessman told bne IntelliNews.

The Kremlin has tried to force domestic businesses to invest into Russia with laws that penalise companies who don’t repatriate the ownership of their companies. It is also in the process of passing a law that will penalise unsanctioned companies from doing business with sanctioned ones that will end up infecting the whole economy. But the only way to get businessmen to invest into Russia is to create a conducive investment climate. But as long as Putin emphasises security over capitalism that will never happen. Inflows of the domestic capital belonging to “minigarch” and other successful businessmen from offshore havens to Russia remain miniscule.

There were reports this morning of an imminent attack in Kiev that would target the SBU, which is the Ukrainian intelligence service.  According to TASS news agency, the Russian Ministry of Defense stated:

“In order to thwart informational attacks against Russia, [Russian forces] will strike technological objects of the SBU and the 72nd Main PSO Center in Kiev. We urge Ukrainian citizens involved by Ukrainian nationalists in provocations against Russia, as well as Kiev residents living near relay stations, to leave their homes,” the Ministry said.

Increased attacks in Kiev would be consistent with RT reports from yesterday stating Russia had warned residents of the capital to evacuate and that a corridor for safe passage out of the city was open.  The Kiev mayor Vitaly Klitschko in recent days had said the city was encircled but later backtracked on that statement.  An Asia Times report, citing European intelligence officials, suggested that Russia has been making progress on its plan to encircle major cities, like Kiev, and then give an ultimatum of talks or an attack.

A TV tower in Kiev has also purportedly been bombed by Russian forces today leading to the end of local television channel broadcasting.

Lots of people had a scare with Clint Ehrlich’s Sitrep 5, but it was later reported that Poland will not be sending fighter jets to Ukraine and NATO Secretary Jens Stoltenberg reiterated NATO would not be participating in any fighting.

Sanctions

There are a slew of western companies divesting from and stopping business exchange with Russia.  These include Shell, following the example of BP, exiting its joint venture with Gazprom worth about $3 billion.  BMW is ending shipments of automobiles to Russia, and Apple will do the same for its electronics.

However, there are a significant number of countries that are declining to sanction Russia:  China and India (2 most populous countries of the world), Mexico and Brazil (I’m not aware yet of any Latin American country agreeing to sanctions so far, but feel free to correct me if there are), no countries in Africa or Middle East that I’m aware of either.  Additionally, the countries on/abutting the European continent that are declining are:  Georgia, Moldova and Turkey.

Media Suppression

Russia’s communications regulator has confirmed that independent radio station Echo Moskovy and independent television station TV Rain have been taken off  the air.  Interfax News is reporting that both will be appealing those decisions.

Russian Public Opinion

State-sponsored polling in recent days indicates that Russians generally support Putin’s military operation in Ukraine so far and support for the Russian president has increased:

VICOM:  “Most Russians (68%) have spoken in support of the Russian special military operation in Ukraine, while 22% said they do not support it, according to a poll conducted by the Russian Public Opinion Research Center (VCIOM) obtained by Interfax on Monday.”

FOM:    Putin’s approval rating has risen from 60% on 2/20 to 71% on 2/27 (survey by FOM)

Again, these polls are state sponsored so some skepticism may be warranted.  However, it’s not unusual to see a rally-around-the-flag jump in support for a wartime leader, especially at the beginning of military engagement.