The Bell, 5/22/22

Hello! This week our top story is on what recently released financial data reveals about Russia’s rapidly growing dependency on oil, as well as a collapse in VAT revenue and how China is coming to Moscow’s rescue. We also look at the new owner of McDonald’s in Russia after the U.S. fast food chain decided to leave the country.

Data exposes VAT collapse, oil dependency and rising military spending

It’s not easy to assess the effect of the “special military operation” in Ukraine on the Russian economy. But one thing is clear: Russia is more dependent than ever on revenue from oil exports. This was starkly visible in April’s budget figures: oil and gas revenues increased, while everything else fell sharply. Judging by the latest data on Chinese purchases of Russian oil, this is a trend that is likely to continue – but there are limits to the rewards of Russia’s much-vaunted “pivot to the East”.

What’s happening?

The Finance Ministry’s budget data (the stats for April were published on May 17) offer a window on to how the Russian economy has been affected by the fighting in Ukraine:

Revenues from non-oil and gas sources (VAT, personal income tax, etc) in April fell 18 percent year-on-year to 1.01 trillion rubles ($17 billion)
Oil and gas export revenue, however, continued to rise despite Western sanctions. Amid high oil prices, oil and gas revenues were 1.8 trillion rubles in April compared with 1.2 trillion the month before.
Russia is increasingly financially dependent on revenues from energy exports. When compared with April 2021, the share of oil and gas in state revenue has doubled. The share was 63 percent in April and 48 percent for the first four months of 2022. Last year, the share was equivalent to 36 percent of Russian revenue, and in 2020 it was 28 percent.
However, not even record oil profits could keep the budget in surplus. The budget saw its first monthly deficit of 2022 in April – 262.3 billion rubles. Finance Minister Anton Siluanov has estimated there will be a deficit of 1.6 trillion rubles this year.
Collapse in VAT

One of the most striking details in the Finance Ministry figures (excluding a rise in military expenditure) was the collapse of VAT revenue. Together with the mineral extraction tax, it’s one of the two main tax contributors to Russia’s coffers, accounting for about a third of total revenues.

In April 2022, domestic VAT raised just 192 billion rubles – that’s less than half the equivalent figure from April 2021. VAT fees on imported goods in April 2022 were down about a third.

Domestic VAT payments have been impacted by the contraction in purchasing power that began in March, and the mass exodus of foreign businesses. “In April, the revenues of the overwhelming majority of companies in Russia took a hit. This didn’t merely affect those who ceased operations in Russia, but also those who continued to work but lost clients and profits,” said Andrei Grachev, head of tax practice at Birch Legal.

The fall in VAT fees on imported goods is due to a combination of fewer imports and the strengthening of the ruble, a Finance Ministry representative told The Bell.

Last week The Economist compiled trade statistics for Russia and eight of its biggest partners (the largest EU countries, China, Japan, U.S. and South Korea). These account for almost 60 percent of Russian imports and more than 40 percent of its exports. The data showed the value of Russian imports fell 44 percent, while exports increased by 8 percent.

Rising military expenses

Expenditure on “national defense” increased almost 130 percent last month to 630 billion. This includes the cost of the armed forces, mobilization, training, nuclear weapons and more. In April, Russia was spending 21 billion rubles a day on its military needs.

However, Russia’s true military expenditure is always higher than the official figures because it does not include funding for “peaceful items” like vehicles and defense industry subsidies.

China will help – at a price

Russia’s growing dependency on energy export revenues looks even more precarious as the European Union moves toward an embargo on Russian oil. If the EU does finally reach a deal on an embargo, Russia will become increasingly dependent on Chinese buyers – who understand the situation perfectly and are already dictating terms.

Since the start of the fighting in Ukraine, major Chinese companies have been cautious about purchasing Russian oil, preferring not to sign new contracts. All the growth in Russian sales to China came from small Chinese oil refineries – not big state companies. But this week brought several indications that China is ramping up its purchases of Russian oil.

Reuters last week wrote about “quiet” but record-breaking increases in Russian oil sales to Chinese companies. China is set to import an average of 1.1 million barrels per day of Russian seaborne oil in May (compared with 750,000 barrels per day in April and a daily average of 800,000 through 2021).
The leading customers are not small refineries but major Chinese state corporations — Unipec and Zhenhua Oil, a unit of China’s defense conglomerate Norinco.
Chinese imports began to rise in April, Bloomberg reported. And China is not only interested in oil. According to Chinese customs statistics, April saw purchases of Russian oil, LPG and coal increase by 75 percent to $6.4 billion.
China is also considering buying cheap Russian oil for its strategic reserves, according to Bloomberg. Officials are apparently discussing this issue – with little involvement from the oil companies. China does not disclose the size of its reserves, but Bloomberg estimated it has space for about 60 million barrels.
However, Chinese companies may not be willing to risk secondary sanctions from the U.S. forever. And, even now, Russia is being forced into big discounts. According to Reuters, “Chinese” spot prices for a barrel of Urals crude are currently less than $70 — significantly cheaper than the price at which Russian oil is being sold in Europe.

Why the world should care: Even if the EU oil embargo never happens, it’s clear Europe is planning to move away from Russian oil. And that means Russia finds itself in an awkward position: dependent on oil and gas revenues from a single customer that is not shy about exploiting its position.

A new owner for Russian McDonald’s

The new owner of McDonald’s – after the U.S. fast food company departed the Russian market amid the “special military operation” – is a Siberian businessman, Alexander Govor. The former co-owner of coal mining company Yuzhkuzbassugol, Govor was forced to sell-up in the mid-2000s after two accidents killed 148 miners. Now, Govor owns an oil refinery in his native Kemerovo region and his son, who has worked for his father’s other businesses for many years, is a deputy in the local parliament from the ruling United Russia party.

• McDonald’s announced its exit from Russia on Monday, confirming speculation that it would sell its 850 restaurants (which employ 62,000 people).  
• Four days later, McDonald’s said that its Russian restaurants would be purchased by Govor’s GiD company. The company already has experience operating the McDonald’s franchise (in March 2022 it was operating 25 McDonald’s branches in the Siberian cities of Novosibirsk, Berdsk, Tomsk, Kemerovo, Barnaul and Krasnoyarsk).
• Govor, 61, was born in the south-western Siberian city of Novokuznetsk in Kemerovo region, famous for its coal production. He started out as a miner and by 1997 had risen to the position of general director of one of the biggest local mines (operated by state-owned mining outfit Kuznetskugol). In 2000, Govor and two other managers transferred their shares to a new company, Yuzhkuzbassugol, in a murky deal typical of Russian business at that time. The state company was declared bankrupt and 50 percent of the shares in the new company went to the directors of Kuznetsugol (director Vladimir Lavrik, Govor, and banker Yuri Kushnerov). A further 50 percent was acquired by leading metals holding Evraz, of which billionaire Roman Abramovich later became a majority shareholder.
• In the mid-200s Evraz entered talks with Lavrik, Kushnerov and Govor to purchase their stake, but they did not reach an agreement. Then, in the spring of 2007, there were two serious accidents at Yuzhkuzbassugol mines in quick succession. On March 19, a methane explosion killed 110 people at the Ulyanovskaya mine, then, on May 24, 38 people died at the Yubileynaya mine. At Ulyanovskaya, the director of the mine and several senior managers were found guilty of safety violations. 
• After the explosions, veteran Kemerovo region governor Aman Tuleyev, announced he would insist on a change of ownership. On the same day, Evraz said it would buy out the 50 percent stake held by Lavrik, Govor and Kushnerov. The deal valued the partners’ shares at $871 million.
• The families of the miners killed at Ulyanovskaya were awarded 1 million rubles in compensation. But relatives later complained that they had received just 800,000 rubles and that the remaining money was deducted to buy “Italian coffins.” 
• Govor invested his pay-out in petrochemicals: together with Kushnerov he set up Neftekhimservis, which built a refinery in the Kemerovo region. In 2021, Neftekhimservis generated revenues in excess of $1.3 billion. It also owns the Park Inn by Radisson hotel and the Grand Medica chain of private clinics in Novokuznetsk.
• Govor’s son, Roman, worked at the Yubileynaya mine then took on various roles in his father’s companies. In 2018, he was elected a deputy of Kemerovo’s legislative assembly for United Russia. At the start of March, Govor Jnr published a video in support of the “special military operation” on Instagram, accompanied with the comment: “We’ve put up with it for too long… I call on all of us to come together and get through this difficult time! We have lived under sanctions for so long, and we will continue to survive!” 
• Govor senior also has links to United Russia. In 2007 he and Sergei Neverov, then a United Russia parliamentary deputy and later secretary to the party’s general council, established a charitable fund in support of mountaineering. In 2006, Govor and Neverov were part of a group of 16 climbers from Kemerovo region to travel to Tanzania to plant the region’s flag and leave a piece of coal on the summit of Mount Kilimanjaro.

By John V. Walsh, Antiwar, 5/22/22

A week ago we noted that a May 11 New York Times news article, documented that all was not going well for the US in Ukraine and that a companion opinion piece hinted that a shift in direction might be in order.

Now on May 19, “THE EDITORIAL BOARD,” the full Magisterium of the Times, has moved from hints to a clarion call for a change in direction in an editorial uninformatively titled, “The War Is Getting Complicated, and America Isn’t Ready.” From atop the Opinion page the Editorial board has declared that “total victory” over Russia is not possible and that Ukraine will have to negotiate a peace in a way that reflects a “realistic assessment” and the “limits” of US commitment. The Times serves as one the main shapers of public opinion for the Elite and so its pronouncements are not to be overlooked lightly.

Ukrainians will have to adjust to US “limits” and make sacrifices for newfound US realism

The Times May editorial dictum contain the following key passages:

“In March, this board argued that the message from the United States and its allies to Ukrainians and Russians alike must be: No matter how long it takes, Ukraine will be free. …”

“That goal cannot shift, but in the end, it is still not in America’s best interest to plunge into an all-out war with Russia, even if a negotiated peace may require Ukraine to make some hard decisions (emphasis, jw).”

To ensure that there is no ambiguity, the editorial declares that:

“A decisive military victory for Ukraine over Russia, in which Ukraine regains all the territory Russia has seized since 2014, is not a realistic goal. … Russia remains too strong…”

To make cerain that President Biden and the Ukrainians understand what they should do, the EDITORIAL BOARD goes on to say:

“… Mr. Biden should also make clear to President Volodymyr Zelensky and his people that there is a limit to how far the United States and NATO will go to confront Russia, and limits to the arms, money and political support they can muster. It is imperative that the Ukrainian government’s decisions be based on a realistic assessment of its means and how much more destruction Ukraine can sustain (emphasis, jw).”

As Volodymyr Zelensky reads those words, he must surely begin to sweat. The voice of his masters is telling him that he and Ukraine will have to make some sacrifices for the US to save face. As he contemplates his options, his thoughts must surely run back to February, 2014, and the US backed Maidan coup that culminated in the hasty exit of President Yanukovych from his office, his country and almost from this earth.

Ukraine is a proxy war that is all too dangerous

In the eyes of the Times editorial writers, the war has become a US proxy war against Russia using Ukrainians as cannon fodder – and it is careening out of control:

“The current moment is a messy one in this conflict, which may explain President Biden and his cabinet’s reluctance to put down clear goal posts.”

“The United States and NATO are already deeply involved, militarily and economically. Unrealistic expectations could draw them ever deeper into a costly, drawn-out war..”

“Recent bellicose statements from Washington – President Biden’s assertion that Mr. Putin ‘cannot remain in power,’ Defense Secretary Lloyd Austin’s comment that Russia must be ‘weakened’ and the pledge by the House speaker, Nancy Pelosi, that the United States would support Ukraine ‘until victory is won’ – may be rousing proclamations of support, but they do not bring negotiations any closer.”

While the Times dismisses these statements as “rousing proclamations,” it is all too clear that for the neocons in charge of US foreign policy, the goal has always been a proxy war to bring down Russia. This has not become a proxy war; it has always been a proxy war. The neocons operate by the Wolfowitz Doctrine, enunciated in 1992, soon after the end of Cold War 1.0, by the necoconservative Paul Wolfowitz, then Under Secretary of Defense:

“We endeavor to prevent any hostile power from dominating a region whose resources would, under consolidated control, be sufficient to generate global power.”

“We must maintain the mechanism for deterring potential competitors from even aspiring to a larger regional or global power.”

Clearly if Russia is “too strong” to be defeated in Ukraine, it is too strong to be brought down as a superpower.

The Times has shifted Its opinion from March to May. What Has Changed?

First of all, Russia has handled the situation unexpectedly well compared to dire predictions from the West.

President Putin’s support exceeds 80%.

165 of 195 nations, including India and China with 35% of the world’s population, have refused to join the sanctions against Russia, leaving the US, not Russia, relatively isolated in the world.

The ruble, which Biden said would be “rubble” has not only returned to its pre-February levels but is valued at a 2 year high, today at 59 rubles to the dollar compared to 150 in March.

Russia is expecting a bumper harvest and the world is eager for its wheat and fertilizer, oil and gas all of which provide substantial revenue.

The EU has largely succumbed to Russia’s demand to be paid for gas in rubles. Treasury Secretary Yellin is warning the suicidal Europeans that an embargo of Russian oil will further damage the economies of the West.

Russian forces are making slow but steady progress across southern and eastern Ukraine after winning in Mariupol, the biggest battle of the war so far, and a demoralizing defeat for Ukraine.

In the US inflation, which was already high before the Ukraine crisis, has been driven even higher and reached over 8% with the Fed scrambling to control it with higher interest rates. Partly as a result of this, the stock market has come close to bear territory. As the war progresses, many have joined Ben Bernanke, former Fed Chair, in predicting a period of high unemployment, high inflation and low growth – the dread stagflation.

Domestically, there are signs of deterioration in support of the war. Most strikingly, 57 House Republicans and 11 Senate Republicans voted against the latest package of weaponry to Ukraine, bundled with considerable pork and hidden bonanzas for the war profiteers. (Strikingly no Democrat, not a single one, not even the most “progressive” voted against pouring fuel on the fire of war raging in Ukraine. But that is another story.)

And while US public opinion remains in favor of US involvement in Ukraine there are signs of slippage. For example, Pew reports that those feeling the US is not doing enough declined from March to May. As more stagflation takes hold with gas and food prices growing and voices like those of Tucker Carlson and Rand Paul pointing out the connection between the inflation and the war, discontent is certain to grow.

The NYT editorial signals alarm over the insane goal of the neoconservatives.

There is a note of panic in this appeal to Biden to find a negotiated solution now. The U.S. and Russia are the world’s major nuclear powers with thousands of nuclear missiles on Launch On Warning, aka Hair Trigger Alert. At moments of high tension, the possibilities of Accidental Nuclear Armageddon are all too real.

Alarm is warranted and panic is understandable.

But will the neocons in charge give up and move in a reasonable and peaceful direction as the Times editorial demands? This is a fantasy of the first order. As one commenter observed, the warhawks like Nuland, Blinken, and Sullivan have no reverse gear. They always double down. And they are now in control of the foreign policy of the Biden administration, the Democratic Party and most of the Republican Party. They do not serve the interests of humanity nor do they serve the interests of the American people. They are in reality traitors to this country. They must be exposed, discredited and pushed aside. Our survival depends on it.

John V. Walsh, until recently a professor of physiology and neuroscience at the University of Massachusetts Chan Medical School, has written on issues of peace and health care for Asia Times, San Francisco Chronicle, EastBayTimes/San Jose Mercury News, LA Progressive, Antiwar.com, CounterPunch, and others.

By Serhiy Guz, Open Democracy, 5/20/22

“With one letter [our employer] sent us away, and our dialogue turned into a monologue,” says Anton Gorb, a trade union representative at Ukraine’s largest private postal service, New Post.

Gorb is currently serving in Ukraine’s armed forces as the country fights against the Russian invasion. But he still represents his union members’ interests, and manages to find time to speak to me about how Ukraine’s wartime labour legislation is affecting people in the country.

“We are not going to give up, we are trying to win something back, but our relationship with our employer can no longer be restored,” Gorb says.

In March, the Ukrainian parliament passed wartime legislation that severely curtailed the ability of trade unions to represent their members, introduced ‘suspension of employment’ (meaning employees are not fired, but their work and wages are suspended) and gave employers the right to unilaterally suspend collective agreements.

This, Gorb explains, is what happened at New Post (Nova Poshta), once a flagship for good working relations between Ukrainian unions and management.

But beyond this temporary measure, a group of Ukrainian MPs and officials are now aiming to further ‘liberalise’ and ‘de-Sovietise’ the country’s labour laws. Under a draft law, people who work in small and medium-sized firms – those which have up to 250 employees – would, in effect, be removed from the country’s existing labour laws and covered by individual contracts negotiated with their employer. More than 70% of the Ukrainian workforce would be affected by this change…

Read the full article here.

I think it’s inaccurate to say that the US is against globalization. They just want globalization on their terms. – Natylie

By Wang Qi, Global Times, 5/20/22

A day before US President Joe Biden’s Asia trip, a 25-pronged joint statement was finalized at the BRICS foreign ministers’ meeting Thursday night Beijing time, which includes consensus on increasing the role of emerging economies in inclusive global governance, support for Russia-Ukraine negotiations, counterterrorism and arms control, as well as the possible BRICS expansion.

Chinese State Councilor and Foreign Minister Wang Yi summarized the BRICS’ common position at the “cordial and pragmatic” meeting into four aspects: including upholding the multilateralism, promoting common development, strengthening solidarity and cooperation. Chinese experts viewed the meeting and consensus it reached as the voice of a wide range of developing countries, offsetting the negative impact of some countries’ efforts to reverse globalization and form political blocs. 

Wang chaired the meeting on Thursday via video link. South African Minister of International Relations and Cooperation Naledi Pandor, Brazilian Foreign Minister Carlos Franca, Russian Foreign Minister Sergey Lavrov, and Indian External Affairs Minister Subrahmanyam Jaishankar attended the meeting.

Based on the joint statement, ministers reaffirmed their commitment to making global governance more representative and democratic, and to increase the participation of emerging markets and developing countries in global decision-making. 

China and Russia reaffirmed the importance they attach to the status and role of Brazil, India and South Africa in international affairs and support their aspiration to play a greater role in the United Nations.

Unlike in the past when BRICS meetings placed more emphasis on economic development and cooperation, ministers have confirmed consensus over multiple issues related to security. For instance, they expressed support for Russia-Ukraine negotiations, stressed the UN should continue to play a core coordinating role in combating terrorism in all its forms, calling for the early adoption of the Comprehensive Convention on Terrorism. 

Ministers also called for strengthening international arms control, disarmament and non-proliferation systems, especially the need to observe and strengthen the Biological Weapon Convention, including through the adoption of a legally binding protocol that involves an efficient verification mechanism. 

Voices from developing countries are often dismissed by the West, which feels it represents the whole international community, Wang Yiwei, director of the Institute of International Affairs at the Renmin University of China, told the Global Times on Sunday. 

He noted that after the Russia-Ukraine conflict, the world is facing the danger of further confrontation, division and even nuclear war. BRICS shares such security concerns as representatives of developing countries. Russia, a BRICS member, is subject to economic sanctions imposed by the US and the West. 

The United States does not speak for the majority of the world, but BRICS speaks for the large group of developing countries and emerging economies, and none of them has imposed sanctions on Russia, said Wang “The US cannot rely on the threat of sanctions to force other countries to help it achieve its goals.”  

The US wants to isolate Russia and spark a cold warlike confrontation. At the same time, Washington reorganizes its alliance system in Asia by visiting Japan and South Korea, excluding China and BRICS countries from the high-tech industrial chain, pushing the world to deviate from the process of globalization.  

China put forward global security initiatives in April this year. “BRICS is not only a platform for advocating, but also for implementing. It is quite possible that BRICS countries will jointly provide some security-related public goods in the future,” Wang said.   

“The BRICS mechanism is bearing more comprehensive functions and assuming more responsibilities, and injects more stability and certainty to counter the US-led turbulence,” a Beijing-based international affairs expert told the Global Times on the condition of anonymity. 

The BRICS foreign ministers’ meeting was held against the backdrop of Biden’s Asia roadshow which aims to divide the region. “Biden’s visit is in contrast to BRICS, an epochal mechanism for promoting sustainable world development, with the US’ plan for geopolitical confrontation, thus giving the world, especially developing countries, a clearer understanding,” the expert said. 

BRICS is the most emblematic mechanism for representing the interests and propositions of emerging economies and developing countries, which have a strong desire to ensure that their interests are not infringed in times of turbulence and transformation, the expert said. 

BRICS aims to promote sound, positive and security concepts through mutual benefits and inclusiveness. It is not like the US to undermine the economic and sustainable development of the world’s emerging economies by creating bloc-political confrontation in a hegemonic posture.

The BRICS mechanism provides developing countries with a proper alternative to the crisis-creating, disruptive, anti-globalization agenda of the United States, and its expansion is inevitable, the expert said.

When Vladimir Putin took over the Russian presidency in 2000, he inherited a nation that was having trouble carrying out the most basic functions of a state.  Putin found himself presiding over a multitude of crises:  rampant crime, a major mortality crisis, a decrepit military, and an economy that had been devastated by Shock Therapy and corrupt schemes to sell off Soviet era assets to a small group of ruthless and well-connected bandits who became the oligarchs. As a result, Russians had experienced massive poverty, bouts of hyperinflation, collapsed savings, and the irregular payment of wages and pensions.

During his first term in office, one of Putin’s top priorities was to increase state revenues.  This meant he had to get Russians to pay taxes.  The tax system was complicated, oligarchs resorted to a myriad of schemes – legal and illegal – to evade obligations while the majority of Russians were too poor to pay excessive taxes.  First, he implemented a reduced, flat tax of 13 percent for most Russians and a reduced corporate tax rate.  Second, he presented the oligarchs with his famous deal: in order to keep their ill-gotten gains, they had to pay taxes and stay out of politics.  The latter requirement effectively stripped them of being oligarchs and rendered them merely super-rich. 

These policies worked and the state began to have more money in its coffers. It helped that the price of oil was high in those years and Russia invested in improving its oil infrastructure. Putin also implemented a land code that allowed for the buying and selling of residential property.  Since many Russians had been given deeds of ownership to the apartments they lived in during the 90’s, they could now sell them as assets. 

Another priority for Putin was to pay off all of Russia’s sovereign debt. By 2003, Moscow paid off its debt to the IMF and by 2006 it paid off the Paris Club. Today, Russia has very little sovereign debt and continues to pay what it owes on foreign bonds, despite roadblocks being thrown up by the west. 

By 2007-2008, Russia was seeing an average annual GDP growth rate of 7 percent.  Many Russians wanted the Kremlin to use the extra income it was getting from oil sales to increase spending.  But Putin and his advisers knew that the price of oil could vacillate and they needed a plan for years when the price would be low and income for the budget would decrease.  A reserve fund was established and billions of rubles were saved. 

Between 2001 and 2010, the poverty rate was cut from 35 percent to 10  percent while the size of the middle class expanded from 30 percent to 60 percent, driven by wage growth and an increase in the availability of more productive jobs. However, though Russia has universal health care and education, public spending on the welfare state is stingy compared to the EU average.

Russia’s Response to the 2014 Sanctions

Putin has prioritized stability and many Russians, given their history of constant upheavals over the past 100 plus years, especially the collapse of the 90’s, largely agree with that priority.  Keeping taxes low so that the citizenry doesn’t become motivated to ask too many probing questions about where its money is going, along with a low unemployment rate, has comprised a large part of the Kremlin’s strategy for maintaining stability, especially in the face of stagnating incomes since 2014.

Over the past 8 years, the unemployment rate has been between 4.6 percent and 6.0 percent. In March of this year, the unemployment rate was 4.1 percent and is expected to be around 5.3 percent for the end of Quarter 1 due to most western companies leaving the country and other effects of the extreme sanctions levied by the US/EU since February.

The import substitution policies that were enabled by the counter-sanctions the Putin government imposed on western food imports in 2014 has led to Russia becoming self-sufficient in food and the top exporter of wheat.  Just prior to the counter-sanctions, according to the UN, Russia was already in the top 3 of producers of many fruits and vegetables as well as potatoes and poultry. By 2015, the Russian government was providing federal budget funding and legal/regulatory frameworks and facilitating loans to support import substitution.  In 2017, Putin announced a public goal of becoming the world’s top producer of organic produce.  Legislation creating official organic standards and labeling and certification procedures was signed in 2018.

During that period, it also began to diversify its trade relations, mainly with China, India, Vietnam, Turkey and Latin America.  China is now Russia’s largest trading partner and the Russian-led Eurasian Economic Union (EEU) is a major partner in China’s Belt and Road Initiative.  The EEU also has a free trade agreement with Iran.

Russia’s Response to the 2022 Sanctions

According to University of Birmingham professor Richard Connolly in his book, Russia’s Response to Sanctions, as of 2018, Russia’s economy could be roughly divided into four sectors. The first is Sector A, comprised of highly profitable companies that are competitive on the global market such as fossil fuel companies, agricultural conglomerates, some defense manufacturers, and companies involved in commodities.  The state plays an important role in these companies either through ownership stakes (e.g. Gazprom and Rosneft) or via strong personal ties between the political class and the owners (e.g. Lukoil).

When it comes to commodities, Russia’s role in the global economy cannot be understated and fossil fuels is only a part of it.  Russia is the #1 exporter of gas, #2 exporter of oil, #3 exporter of coal, #1 producer of enriched uranium, a key exporter of all three components of fertilizer, #2 exporter of sunflower/safflower oil, the #1 exporter of wheat, and a major exporter of aluminum, steel, and various metals needed for electronics and airplane manufacturing.

Second is Sector B which consists of companies that mostly provide domestic goods and services, such as auto manufacturing, shipbuilding, and fossil fuel equipment.  Businesses in this sector don’t always produce a consistent profit and are not typically competitive globally. They are dependent upon the revenue produced by Sector A.  Pensioners and government workers are also included here. It’s estimated that sectors A and B combined account for around 70 percent of the Russian economy.

Third is Sector C, which is the sector comprised of companies that rely on their ability to make a profit and are more likely to encourage competition and innovation. These include large construction companies, retail and business services, various small and medium sized businesses in retail, transportation, business support, and communication technology.

Fourth is Sector D which is Russia’s financial system.  It consists mostly of large state-owned or influenced banks that provide a wide range of services and credit mostly to sectors A and B. Russia’s financial sector is relatively small compared to other middle-income countries.

Russia’s Economic Support Measures After Post-Invasion Sanctions

Russia’s political class certainly realized that major economic sanctions from the west would result from its invasion of Ukraine as both the Biden administration and various European leaders had warned.  However, it appears that the freeze of nearly half of Russia’s foreign currency reserves, consisting of dollars and euros, took the Kremlin by surprise.  

In addition, western companies fled or suspended operations in droves in the weeks after the invasion. In response, the Russian Central Bank (CBR) enacted several emergency measures that included closing the Russian stock market for weeks, increasing the interest rate to 20 percent to counter inflation (it has now been lowered to 14 percent), and capital controls, among others.

The Kremlin has also passed more than one tranche of government bills to provide support to individuals and businesses.  The first package included the allowance for pensions and the minimum wage to be increased.  It also provided for various methods of increasing the domestic supply of medications including export restrictions and pausing inspections on businesses through the end of the year.

Subsequent bills have included extended government support for families with children under the age of 16, the restructuring of regional government debt, and providing loans from the federal budget to support regional economic development.

A policy allowing for parallel imports, or a gray market, was also announced earlier this month.  Products listed for parallel import mostly consisted of western automobiles and their component parts such as tires, metals, tools, electronics, and seat belts. This was likely motivated by the 79 percent drop in automobile sales and the simultaneous rise of 31 percent for auto parts in April. 

Inflation is high for big ticket items while the price of food is starting to stabilize and grocery stores are reportedly well stocked.  A recent shortage of sugar has now abated thanks to sugar imports from Brazil, but there have been reports of shortages of feminine hygiene products, paper and disposable gloves.  Energy consumption is holding up as well as consumer spending in bars, cafes and restaurants.

Russia still has high revenues, approximating $1 billion a day, coming in from energy exports due to high prices. Despite tough talk from the EU about a ban on Russian oil this year, Hungary’s concern for the potential catastrophic effects on its economy has forced the idea onto the back burner. Again, despite tough rhetoric rejecting Russia’s gas-for-rubles scheme, five countries have now agreed to open up the necessary accounts with Gazprom, including Germany, Austria, Italy, Hungary, and Slovakia.

Russia is also enjoying a record trade surplus as exports have increased by 8 percent and imports (mostly from the west) have decreased by 44 percent  And, according to Bloomberg, as of May 11^th, the ruble was the world’s best performing currency this year.

As for the long-term effect of western businesses leaving Russia, it was just announced that Russian businessman Alexander Govor is set to buy all 850 McDonalds’ restaurants in the country and will operate them under a new name. According to ABC News: “Govor, a licensee since 2015, has also agreed to retain McDonald’s 62,000 Russian employees for at least two years on equivalent terms. Govor also agreed to pay the salaries of McDonald’s corporate employees until the sale closes.”

This is not to suggest that the Russian economy doesn’t still face significant challenges. There is a projected loss in economic growth of 10.4 percent this year, supply chain issues are expected to hit early next year, personal and business savings have dropped, and unemployment has edged up. But clearly the objective of collapsing the Russian economy has failed and for largely the same reasons that I have outlined in previous writings about the western sanctions of 2014.

This is the result of western countries having no substantive understanding of Russia and rather than learn from past mistakes in prognosticating the effect of their policies, they seem to revel in continuing on with their ignorance. Though Russia does have significant problems such as corruption, lower productivity, and a smaller financial sector than many other middle-income countries, it clearly would not be able to show the wherewithal it has if it were merely a kleptocracy or a gas station posing as a country.