By Ben Aris, Intellinews, 9/30/22

The Kremlin is preparing for a protracted conflict and putting the Russian economy on a war footing. Details from the draft 2023-2025 budget show that spending on the Russian army this year will amount to almost RUB5 trillion ($86.2bn), up from the RUB3.5 trillion originally planned. In subsequent years spending will also exceed forecasts.

The extra spending is to cover the surge of troops being sent to Ukraine following Russian President Vladimir Putin’s partial mobilisation order on September 21.

According to some estimates, 300,000 draftees will cost the Russian federal budget RUB1.3 trillion per year. This is slightly less than the budget’s surplus in the first half of this year. The salary of a contract soldier sent to Ukraine is RUB250,000. One contractor will cost the Ministry of Defence RUB373,000 a month, if contractors and other expenses are taken into account, and 300,000 would be RUB112bn a month.

“Mobilisation spending will put a new burden on the federal budget, where this year, according to the Ministry of Finance, the deficit will be RUB1.7 trillion, and next year it will increase to RUB3 trillion (2% of GDP),” BCS GM said in a note.

Initially, RUB3.5 trillion was included in the 2022 budget, some details of which were released in the middle of September, under the “national defence” item, but that spending has now been dramatically increased.

At the same time, the Kremlin is increasing expenditures on the police, apparently fearing opposition protests, report independent journalists Farida Rustamova and Maxim Tovkaylo in a substack post on Putin’s escalation of the war.

According to expert calculations, Russia will spend at least RUB7.7 trillion on the war in Ukraine and the reconstruction of the annexed territories in 2022-2025.

​​War spending is likely to lift the breakeven oil price for the budget to $97 per barrel in 2022 vs $60 per barrel in 2021, says BCS GM.

“Oil and gas revenues have been the main support for the Russian economy in 1H22; however, since 2H22, the situation changed as sanctions pressure on Russian energy exports increased. Concurrently, the ruble strengthening also reduced the domestic currency value of oil and gas revenues. A combination of these forces together with higher budget spending increased the breakeven oil price for 2022 to $100 per barrel (last seen in 2014),” BCS GM said in a note.

In addition, the Ministry of Finance has ordered a 10% cut in expenditure across the board of non-protected items, excluding key payments like pensions.

The government surprised with an unexpected announcement in September that it was raising tariffs for households on energy, water and heat up to 9% early from December 1, instead of the scheduled mid-2023 increase within 4%. The move is especially sensitive for poorer Russians including pensioners.

And the business lobby protested loudly after the finance ministry increased the obligatory social payments as a way to raise taxes and revenues. Russia’s largest business lobby, RSPP, issued an unusually stark statement complaining about “surprising amendments to the system of social insurance payments which contradict earlier agreement [between large businesses and the state]”.

From 2023, the government plans to increase the base for calculating social insurance premiums. The single cap on fully contributory salaries will rise to RUB1.92mn. against the RUB1.57mn contribution planned before tough sanctions were imposed.

The maximum value of the base for calculating insurance premiums, which employers will begin to pay in a single payment from 2023, will be RUB1.917mn from January 1, 2023. This follows from the draft budget of the Social Fund, which RBC got acquainted with.

From 2023, Russia will merge the Pension Fund (PFR) and the Social Insurance Fund (FSS) into a single Social Fund. In addition to administrative changes, the merger involves a new model for paying insurance premiums: from 2023, all employers will pay both pension contributions and payments for social and medical insurance in the same amount (30% of the wage fund), but in the form of a single payment and based on the availability of a single base.

As long as the employee’s cumulative total salary within a year does not exceed the base, companies pay the full tariff (30%) from it, and if the amount of earnings is higher, the tariff is reduced to a preferential rate of 15.1%. Thus the higher the marginal value of the base, the longer the full insurance premiums for the employee are transferred.

Russia’s budget deficit will stand at 0.9% of the gross domestic product (GDP), or RUB1.313 trillion, in 2022, according to the draft budget for 2023-2025 seen by PRIME on September 23.

Russia’s budget deficit will amount to 2% of GDP or around RUB3 trillion in 2023, Prime Minister Mikhail Mishustin said on September 20 at a meeting of the government’s budget commission.

In a speech in early September, Putin said there would be no deficit this year.

Budget revenue will amount to RUB27.693 trillion, including RUB11.666 trillion of oil and gas and RUB16 trillion of non-oil and gas income, while spending will be RUB29 trillion, according to the new draft budget that will be sent to the Duma for approval before the end of this year.

In 2023, budget revenue is expected to be more than RUB26.1 trillion and spending to hit RUB29.056 trillion.

The finance ministry plans to borrow RUB1.747 trillion through OFZ government bonds in 2023, RUB1.938 trillion in 2024 and RUB2 trillion in 2025 – less than half of the annual borrowing plans of preceding years.

The finance ministry’s moves are designed to head off problems further down the road. Although Russia’s economy has been doing better than expected and its balance sheet looks strong, the structure of the government’s revenues contains some large weaknesses.

“While on the surface Russia’s fiscal accounts appear strong, with debt-to-GDP at about 17% and a fiscal deficit of 2% in 2022, they hide important vulnerabilities due to Russia’s reliance on oil and gas revenues. Energy extraction and export taxes account for more than 40% of total federal budget revenues. Without them, Russia’s federal budget would have been in persistently large deficits over the last decade,” Institute of International Finance (IIF) said in a note.

Russia has been enjoying very large inflows from oil and gas exports after the war pushed the prices of both commodities up to record levels.

Russia’s current account was still well in surplus in August. According to the preliminary estimate of the Russian central bank, the surplus was $16.5bn in August. The surplus was clearly smaller compared to the peak readings of recent months, but still at a historically high level. In January-August, a surplus of around $180bn was accumulated – more than double the previous record. This year, the surplus has also varied exceptionally widely from month to month.

“However, fiscal dynamics are even more critical for Russia’s ability to wage the war on Ukraine. Due to the high commodity prices and the seasonally low government spending, Russia ran a fiscal surplus of RUB1.3 trillion during 1H2022. However, a combination of the ruble strengthening, sharply lower gas exports, as well as somewhat higher expenditure pushed the federal budget into substantial deficits in July – August. While expenditures picked up markedly in July, the trend did not continue into August, so we will be closely watching the developments into the end of the year,” IIF said.

Even though Russia initially budgeted a fiscal surplus of 1.1% of GDP this year, IIF expects it to reach a deficit of about 2-3% in 2022. With Russia already cutting off the gas supply to Europe and oil prices stabilising, pressure on Russia’s fiscal accounts will continue to mount.

“For now, Russia can finance higher spending from the National Wealth Fund (NWF), currently at about 8% of GDP or $200bn, and domestic MinFin bond (OFZ) issuance,” says IIF. “However, up to 40% of the NWF appears to be already committed to anti-crisis measures, and close to $35bn allegedly frozen alongside the Bank of Russia reserves.” The finance ministry restarted OFZ issuance in September, which had been temporarily cancelled due to market volatility. The first auctions were heavily oversubscribed, given the limited investment opportunities for domestic banks flush with liquidity. Russia’s financial sector is dominated by public banks (accounting for more than two-thirds of total assets) with room to increase their holdings.

“The financial system has largely recovered from the March liquidity shock, and the structural liquidity surplus of the banking system vis-à-vis the Bank of Russia is back at RUB2.8 trillion ($47bn), which should allow banks to absorb significant additional issuance,” says IIF.

But the government is well aware that things will get tough soon. The medium-term budget for 2023 and beyond assumes a 25% reduction in oil and gas revenues by 2025 and a fall in oil prices to about $60 per barrel.

As a result of the sharp decrease in oil and gas revenues, the government is considering bringing back the fiscal rule that requires saving all oil and gas revenues above a certain Urals price cut-off point, reports IIF.

“We believe the authorities are overly optimistic expecting other revenues to fully compensate for the loss of oil and gas inflows, thus allowing government spending to stay flat in nominal terms. The government will need to find spending cuts of at least 10-15% during this period to keep the deficits in the 2-3% range,” says IIF. The finance ministry has already ordered 10% spending cuts, but it remains to be seen if they can be implemented.

In response to the combined oil price drop and sanctions shock in 2014, Russia implemented expenditure cuts on a par with most of the IMF crisis programmes.

Link here.

Moon of Alabama gives his analysis of the Crimea bridge attack here and also discusses the possible implications of the faltering Starlink system in Ukraine.

The most recent reporting from RT states that auto traffic is currently moving on the side of the Kerch bridge that is undamaged and rail service is expected to be back online this evening. Putin has ordered enhanced security in and around the bridge:

Russian President Vladimir Putin issued a new order on Saturday demanding the Russian Federal Security Service (FSB) enhance security of “the Kerch Strait transport corridor.” This comes after the Crimean Bridge was damaged in a truck explosion early on Saturday.

At least three people are believed to have died as a result of the truck explosion on the bridge. Additional ferry service is to be started to make up for the one side of the bridge that is closed to auto traffic due to damage. It is uncertain at this time how long it will take to repair.

By Michael Hudson, Naked Capitalism, 9/30/22

Michael Hudson is a research professor of Economics at University of Missouri, Kansas City, and a research associate at the Levy Economics Institute of Bard College. His latest book is The Destiny of Civilization.

The reaction to the sabotage of three of the four Nord Stream 1 and 2 pipelines in four places on Monday, September 26, has focused on speculations about who did it and whether NATO will make a serious attempt to discover the answer. Yet instead of panic, there has been a great sigh of diplomatic relief, even calm. Disabling these pipelines ends the uncertainty and worries on the part of US/NATO diplomats that nearly reached a crisis proportion the previous week, when large demonstrations took place in Germany calling for the sanctions to end and to commission Nord Stream 2 to resolve energy shortage.

The German public was coming to understand what it meant that their steel companies, fertilizer companies, glass companies and toilet-paper companies were shutting down. These companies were forecasting that they would have to go out of business entirely – or shift operations to the United States – if Germany did not withdraw from the trade and currency sanctions against Russia and permit gas and oil imports to resume, and presumably to fall back from their astronomical eight to tenfold increase.

Yet State Department hawk Victoria Nuland already had stated in January that “one way or another Nord Stream 2 will not move forward” if Russia responded to NATO/Ukrainian accelerated military attacks on the Russian-speaking eastern oblasts. President Biden backed up U.S. insistence on February 7, promising that “there will be no longer a Nord Stream 2. We will bring an end to it. … I promise you, we will be able to do it.”

Most observers simply assumed that these statements reflected the obvious fact that German politicians were fully in the US/NATO pocket. They held fast in refusing to authorize Nord Stream 2, and Canada soon seized the Siemens dynamos needed to send gas through Nord Stream 1. That seemed to settle matters until German industry – and a rising number of voters – finally began to calculate just what blocking Russian gas would mean for Germany’s industrial firm. 

Germany’s willingness to self-impose an economic depression was wavering – although not its politicians or the EU bureaucracy. If German policymakers were to put German business interests and living standards first, NATO’s common sanctions and New Cold War front would be broken. Italy and France might follow suit. That nightmare of European diplomatic independence made it urgent to take the anti-Russian sanctions out of the hands of democratic politics and settle matters by sabotaging the two pipelines. Despite being an act of violence, it has restored calm to international diplomatic relations between U.S. and German politicians. 

There is no more uncertainty about whether or not Europe will break away from U.S. New Cold War aims by restoring mutual trade and investment with Russia. That option is now out. The threat of Europe beaking away from the US/NATO trade and financial sanctions against Russia has been solved, seemingly for the foreseeable future, as Russia has announced that as the gas pressure falls in three of the four pipelines, the infusion of salt water will irreversibly corrode the pipes. (Tagesspiegel, September 28.) 

Where do the euro and dollar go from here?

Looking at how this trade “solution” will reshape the relationship between the U.S. dollar and the euro, one can understand why the seemingly obvious consequences of Germany, Italy and other European economies severing trade ties with Russia have not been discussed openly. The “sanctions debate” has been solved by a German and indeed Europe-wide economic crash. To Europe, the next decade will be a disaster. There may be recriminations against the price paid for letting its trade diplomacy be dictated by NATO, but there is nothing that it can do about it. Nobody (yet) expects it to join the Shanghai Cooperation Organization. What is expected is for its living standards to plunge.

Germany’s industrial exports were the major factor supporting the euro’s exchange rate. The great attraction to Germany in moving from the deutsche mark to the euro would avoid its export surplus from pushing up the D-mark’s exchange rate to a point where German products would be priced out of world markets. Expanding the currency to include Greece, Italy, Portugal, Spain and other countries running balance-of-payments deficit would prevent the currency from soaring. And that would protect the competitiveness of German industry.

After its introduction in 1999 at $1.12, the euro did indeed sink to $0.85 by July 2001, but recovered and indeed rose to $1.58 in April 2008. It has been drifting down steadily since then, and since February of this year the sanctions have driven the euro’s exchange rate below parity with the dollar to $0.97 this week. The major factor has been rising prices for imported gas and oil, and products such as aluminum and fertilizer requiring heavy energy inputs for their production. And as the euro’s exchange rate declines against the dollar, the cost of carrying its US-dollar debt – the normal condition for affiliates of U.S. multinationals – will rise, squeezing their profits.

This is not the kind of depression that “automatic stabilizers” can work “the magic of the marketplace” to restore economic balance. Energy dependency is structural. And the eurozone’s own economic rules limit its budget deficits to just 3% of GDP. This prevents its national governments supporting the economic by deficit spending. Higher energy and food prices – and dollar-debt service – will leave much less income to be spent on goods and services. 

It seems curious that the U.S. stock market soared – 500 points for the Dow Jones Industrial Average on Wednesday. Maybe it was simply the Plunge Protection Team intervening to try and reassure the world that everything was going to be all right. But economic reality raised its ugly head on Thursday, and the stock market gave back its phantom gains.

It is true that the end of German industrial competition with United States is ended on trade account. But on capital account, depreciation of the euro will reduce the value of U.S. investments in Europe and the dollar-value of any profits that these investments may still earn as the European economy shrinks. So reported earnings by U.S. multinationals will fall.

As a final kicker, Pepe Escobar pointed out on September 28 that “Germany is contractually obligated to purchase at least 40 billion cubic meters of Russian gas a year until 2030. … Gazprom is legally entitled to get paid even without shipping gas. That’s the spirit of a long-term contract. … Berlin does not get all the gas it needs but still needs to pay.” It looks like a long court battle before money will change hands – but Germany’s ability to pay will be steadily weakening.

For that matter, the ability of many countries’ ability to pay already is reaching the breaking point.

The effect of U.S. sanctions and New Cold War outside of Europe

International raw materials are still priced mainly in dollars, so the dollar’s rising exchange rate will raise import prices proportionally for most countries. This exchange-rate problem is intensified by the US/NATO sanctions forcing up world prices for gas, oil and grain. Many European and Global South countries already have reached the limit of their ability to service their dollar-denominated debts, and are still coping with the Covid pandemic. They cannot afford to import the energy and food that they need to live if they have to pay their foreign debts. The world economy is now exceeding its debt limits, so something has to give.

On Tuesday, September 27 when news of the Nord Stream gas attacks became known, U.S. Secretary of State Antony Blinken shed crocodile tears and said that attacking Russian pipelines was “in no one’s interest.” But if that really were the case, no one would have attacked the gas lines.

I have no doubt that U.S. strategists have a game plan for how to proceed from here, and to do so that indeed is in what the neocons claim to be in the U.S. interest – that of maintaining a unipolar neoliberalized and financialized global economy for as long as they can. 

They have long had a plan for countries that are unable to their foreign debts. The IMF will lend them the money, conditional upon the debtor country raising the foreign exchange to repay the (increasingly expensive) dollar loans by privatizing what remains of their public domain, natural-resource patrimony and other assets, mainly to U.S. financial investors and their allies.

Will it work? Or will debtor countries band together and work out ways to restore the seemingly lost world of affordable oil and gas prices, fertilizer prices, grain and other food prices, and metals or raw materials supplied by Russia, China and their allied Eurasian neighbors? 

That is the next great worry for U.S. global strategists. It seems less easy to solve than was done by the sabotage of Nord Stream 1 and 2. But the solution seems to be the usual U.S. approach: something military in nature, new color revolutions. The aim is to gain the same power over Global South and Eurasian countries that American diplomacy wielded over Germany and other European countries via NATO.

Unless an institutional alternative is created to the IMF, World Bank, International Court, World Trade Organization and the numerous UN agencies now biased by U.S. diplomats and their proxies, the coming decades will see the U.S. economic strategy of financial and military dominance unfold as Washington has planned.

The problem is that its plans for how the Ukraine war and anti-Russian sanctions have worked out so far have been just the reverse of what was announced. That may give some hope for the world’s future. The opposition and even contempt by U.S. diplomats to other countries acting in their own economic interest and social values is so strong that they are unwilling to think through just how these countries might develop their own alternative to the U.S. world plan.

The question is thus how successfully these other countries may develop their alternative new economic order, and how they can protect themselves from the fate that Europe has just imposed upon itself for the next decade.

RT.com, 10/8/22

The bridge was closed earlier after a fuel tank caught fire

The bridge that connects the Crimean Peninsula with mainland Russia has been damaged by a truck bombing, the National Anti-Terrorism Committee said on Saturday.

Officials said that the blast, which occurred shortly after 6am local time, caused a partial collapse of the road on the vehicle section. It also triggered a blaze on a freight train on the parallel rail section, with seven fuel tanks catching fire. 

“The arch above the shipping section of the bridge has not been damaged,” the committee added.

An unverified video appears to show the moment of the blast.

https://t.me/kommersant/40806?embed=1

A video from the scene that was posted on social media appears to show the fuel tank fire and the damage to the road.

https://t.me/bbbreaking/137596?embed=1

Nikolay Lukashenko, the acting regional transport minister, told reporters that the authorities are considering launching a ferry service.

The 19-kilometer (11.8 mile) bridge, which runs across the Kerch Strait and connects Crimea with mainland Russia, consists of a railway section and a vehicle section. It became fully operational in 2020.

By Anatoly Antonov, The National Interest, 9/8/22

Anatoly Antonov is the Russian ambassador to the United States.

As Henry Kissinger wrote in 2014, “The demonization of Vladimir Putin is not a policy; it is an alibi for the absence of one.”

I have commenced my work on this article for two reasons. Firstly, this October will mark sixty years since the Cuban Missile Crisis when the USSR and the United States were on the verge of a nuclear conflict. This is an occasion to look closer at the foreign policy lessons that the two great powers have learned from that dramatic time. I believe that any American will see eye-to-eye with me that we must not allow the explosive situation of the 1960s to repeat. It is important that not only Russia and the United States, but also other nuclear states, confirmed in a common statement that a nuclear war cannot be won and must never be fought.

Secondly, we are witnessing a surge of concern from the international community and U.S. experts about the possibility of a nuclear conflict between Moscow and Washington. This issue has become even more acute in recent days when senior officials of the U.S. administration began sending us direct signals warning against the use of nuclear weapons in the Russian special military operation in Ukraine. Moreover, threats against us have started to be heard from the official establishment.

Princeton University has even made predictions that millions of Americans and Russians would perish in the exchange of nuclear strikes. Sometimes it feels like we are returning to the years of McCarthyism in this issue. One hardly can forget former U.S. secretary of defense James Forrestal who jumped out of the window yelling “the Russians are coming.”

The U.S. media is abounding in publications by pseudo-experts who are ignorant of history and misinterpret the current state of affairs. They erroneously compare today’s situation with the Cuban Missile Crisis.

The statements by certain politicians and the media that U.S.-Russian relations are living through an unprecedented crisis may well be accepted. Let me remind you that just a couple of years ago we talked about a difficult stage in the bilateral dialogue. However, no one could have even imagined that it would come to such a perilous point. Everything created over many years of hard work, including political, economic, cultural, scientific, and educational ties, has been written off to the dustbin of history.

We see a deplorable, deserted picture in arms control. The ABM and INF treaties have sunk into oblivion. The Open Skies Treaty has virtually ceased to exist. The New START Treaty is approaching the end of its duration and, as we have repeatedly said, is not fully implemented by the American side. The NPT is experiencing serious shocks. No one can foretell what will happen next.

I have to remind readers that all of this is a result of U.S. policy. Let me elaborate on my point. Washington withdrew from the treaties in order to gain security advantages, especially in confronting Russia. It is in a constant search for opportunities to achieve global military dominance.

Over previous decades, the NATO military machine has approached Russia’s borders in several “waves”—where a powerful striking fist was raised over my Motherland. How should we have reacted? We warned our colleagues that such steps were counterproductive, increased the risk of an arms race, and we could not ignore the aggravating threats along the perimeter of the Russian boundaries, especially our western boundaries. I remember long-hour gatherings at NATO headquarters where I had to participate repeatedly in discussions on the harmfulness of global missile defense, the importance of respecting international commitments on strategic stability, and the danger of deploying shorter- and intermediate-range missiles in Europe. Russian exhortations turned out to be in vain.

The last straw that broke the camel’s back was NATO’s attempt to launch the military-technical exploitation of Ukraine and cultivate in Kiev a regime desiring to wage a bloody war against Russia.

Today our country is accused of all sins. They claim that we have unleashed an armed conflict in Europe. I have to wonder: what did the United States do to ensure the implementation of the Minsk agreements? Why did Washington keep silent for eight years and not pull Kiev up when Ukrainians and Russians were killed in Donbas?! How could it ignore the terrible tragedy in Odessa when several dozen people were burned alive?! Where were the international humanitarian institutions?! Why did the administration prioritizing human rights allow such crimes?! We have repeatedly asked American politicians these questions. Nothing but beautiful slogans were the answer. Ukraine has continued to be pitted against Russia.

Today it is obvious that the United States is directly involved in the military actions of the Kiev regime. Washington is openly building up the supply of lethal weapons to Ukraine and provides it with intelligence. They jointly plan military operations against the Russian Armed Forces. Ukrainians are being trained to use NATO military hardware in a fight.

It feels like Russia is being tested to see how long it will remain patient and refrain from responding to blatantly adversarial actions and attacks. In fact, Washington is pushing the situation towards a direct confrontation of the major nuclear powers fraught with unpredictable consequences.

U.S. officials continue to escalate the situation, intimidating the American and international public with sham Russian “nuclear threats.” Such rhetoric twists the statements of the Russian leadership.

I would like to stress that there has been no change in the conditions when our country would use nuclear weapons. In this regard, we continue to strictly adhere to the 2014 Military Doctrine and 2020 Basic Principles of State Policy on Nuclear Deterrence. Moscow has never mentioned an expansive interpretation of these documents which can be found in the public domain.

We are not threatening anyone. But we confirm that, as President Vladimir Putin said on September 21, Russia is ready to defend its sovereignty, territorial integrity, and our people with all weapon systems we have. What is so aggressive about this statement? What is unacceptable? Would the United States not do the same if faced with an existential threat?

I would like to add that certain American politicians are under a delusion if they think that our readiness to defend our territory does not apply to Crimea or to territories that may become part of Russia on the basis of a free expression of popular will.

I would like to warn American military planners about the fallacy of their assumptions that a limited nuclear conflict is possible. They apparently hope that the United States would be able to take cover behind the ocean if such a conflict happens in Europe with British and French nuclear weapons. I would stress that this is an extremely dangerous “experiment.” It is safe to assume that any use of nuclear weapons could quickly lead to an escalation of a local or regional conflict into a global one.

I want to believe that, despite all the difficulties, we and the Americans have not yet approached a dangerous threshold of falling into the abyss of nuclear conflict. It is important to stop threatening us.

Today, it is difficult to predict how far Washington is ready to go in exacerbating relations with Russia. Will the U.S. ruling circles be able to give up their plans aimed at wearing out our country with the prospect of its dismemberment?

The recent Shanghai Cooperation Organization summit and the high-level week of the 77th UN General Assembly session have proved that a considerable part of the planet is not satisfied with the world order that was created after the collapse of the Soviet Union. We are witnessing the majority of the global community trying to find ways to establish an equitable system of international relations which would have neither first- nor second-tier states. We firmly support such a world order based on international law, the UN Charter, and the principle of the indivisibility of security.