By John Helmer, Website, 4/1/24

The electric war, which in its first phase commenced in September [3] 2022, has now entered its second and final phase – final, that is, for the Ukraine.

This is strategic; war has never been fought like this in Europe. The US and NATO general staffs and politicians have been taken by complete surprise. “The Ukrainians are building Maginot and Siegfried lines according to the instructions of their foreign advisers,” according to a Moscow analyst, “as if the Russian offensive will be men, artillery and tanks running across the landscape towards Kiev. But they won’t have to. The offensive against Ukrainian electricity cannot be stopped at these lines.”

Without effective defence for its power generating plants, distribution hubs, and grid lines, the Kiev regime’s power is being stopped across the country; the major Novorussian cities in the east – Odessa, Kharkov, Dniepropetrovsk – are being blacked out and their populations forced to evacuate; the warmaking resupplies of the NATO allies are being cut off at borders which are now exposed to reversal of electricity surges threatening the plants and grids of southern Poland, Romania and Moldova. Even European and American money for President Vladimir Zelensky’s regime needs electricity to move. 

“The Russian General Staff is thinking electrically,” comments a NATO veteran and expert in applying electrical engineering to war. “The way the strikes are unfolding causes the Ukrainians to perform at lot of switching. Anyone who knows anything about high-voltage switching understands that the more it’s done, the greater the likelihood there is of some kind of fault occurring, including surges or transients [4], occurring. So, leaving enough power on today so the Ukrainians can throw switches tomorrow may be part of the plan.”

“Even if the French/NATO plan a deployment in the Ukraine, what will they be deploying to?” the military engineer adds. “If the current Russian plan of attack is causing swings of 300+ volts, it’s not even safe to plug in a cell phone. We can safely assume that all manner of appliances and other expensive electrical or electronic equipment has been destroyed in the affected areas. Indeed, even if the power engineers manage to get the power back on, millions of light fixtures, especially the electronic/LED variety, are burned out. Diagnostic equipment (medical and technical), process instruments, programmable logic controllers, power supplies, inverters, frequency drives, bank machines, computerized checkout, refrigeration equipment, are burned up”

“Who knows what’s happening there. It must be chaos, and if it isn’t, it will be soon.”

The Russian General Staff doesn’t telegraph its punches. The daily Ministry of Defense operations briefing – blocked for many US and allied audiences – concentrates on the five combat groups, Western, Southern, Eastern, Centre, and Dniepr;  and their operational directions along the Donbass line of contact; at present, they are Kupyansk, Donetsk, Avdeyevka, South Donetsk, and Kherson.

Last Friday, for example, the briefing began almost nonchalantly [5]: “Tonight [March 29], the Armed Forces of the Russian Federation launched a group strike with high-precision long-range air, sea and land-based weapons, including aeroballistic hypersonic Kinzhal missiles, as well as unmanned aerial vehicles, at energy facilities and air defence of the Armed Forces of Ukraine. The objectives of the strike have been achieved. All objects are affected.”  

The next day, March 30, petroleum and fuel oil storages, which have been dispersed to shield them from attack and are necessary to power the emergency generators, were destroyed in the Poltava region [6]. On Sunday, March 31, the targeting of gas storage and gas production around Lvov was also reported by the Defense Ministry in Moscow. “The Russian Aerospace Forces carried out a group strike with high-precision weapons on the facilities of energy infrastructure and the gas-producing industry of Ukraine. As a result of the strike, the work of the defense industry enterprises for the manufacture and repair of weapons, military equipment and ammunition was disrupted. All targets of the strike have been achieved. The objects are affected.”

The detailed targeting of the electric war campaign can be found in the Russian military bloggers who compile their reports and maps from a range of Russian and Ukrainian sources, including videoclips from residents in the targeted cities.

The westward extension of the missile and drone targeting has included Khmelnitsky, Rivne and Burshtyn, around the Galician capital of Lvov, in this map and summary from Militarist for March 29 [7].  

MAP OF RUSSIAN STRIKES AGAINST UKRAINE POWER PLANT TARGETS, MARCH 29

Source: https://t.me/infantmilitario/123071 [7]

“Ukraine is moving towards a truly definitive energy crisis”, Militarist reported on March 30. “In the east and west, thermal power plants are being eliminated one by one by completely demolishing the main turbine and generator sections. Dams also began to collapse from south to north. It is expected that all dams and thermal power plants will be put out of operation in the near future. The Ukrainian military industry will be destroyed both by direct attacks and by the energy crisis. The possibility of NATO-supported domestic production and maintenance will also be excluded. Thus, the logistics infrastructure in the rear may not be able to cope with events at the front.”

The Russian ordnance used is overwhelming; this is corroborated by Ukrainian reports. Tactically, drones are launched in swarms, the first wave to identify and activate the air defence missile and artillery systems around the electricity targets; in the second wave drones and missiles strike their targets. According to Ukrainian data, in just two days from March 22 to 24, 208 missiles and unmanned aerial vehicles (UAVs) were fired at the country’s energy facilities [9]….

By Ben Aris, Intellinews, 3/4/24

The pressure of the war in Ukraine has forced the Kremlin to push through a raft of long overdue reforms as its struggles to raise more revenues for the budget, increase the efficiency of the economy and keep the people happy.

Despite Russia’s reputation for crony capitalism and greedy oligarchs, since about 2014 when sanctions were first imposed on Russia after the annexation of the Crimea, the Kremlin has been trying to revamp the economy with some success.

Now the economy is under pressure again as the weight of funding a major full scale war weighs on the federal budget which has pushed the government into improving things further. After two years of fighting, the economy is doing well and grew by 3.6% in 2023, making Russia the fastest growing of any of the G8 wealthy nations.

Russia’s reform programme has been encapsulated in the 12 National Projects that were launched in 2019 and are designed to deal with some of Russia’s biggest social problems and improve the quality of life of the population. With presidential elections looming, Putin announced a National Projects 2.0 update with a raft of new initiatives during his state of the nation speech on February 29 that include swaths of new affordable housing and a renewed push on poverty reduction, amongst other things.

The clash with the West and the extreme sanctions on Russia has had the unintended consequence of focusing the Kremlin on pushing through more effective reforms. After two years of reengineering the economy for war, the Kremlin has now turned its mind back to making sure the population is happy and has the leeway to return to the topic of the national projects.

Wake up call

It seems that Russia only makes deep structural reforms when it is in trouble. Russia boomed in the noughties when growth was running at around 6% a year and the size of the economy doubled in that decade. Russia began to feel like a normal country, until it all started to go wrong. In 2013 annual growth dropped to zero despite the fact oil prices were still over $100 per barrel; the petrodollar-driven catch-up was over and that economic model was exhausted.

The problems came to a head when Russia’s budget was missing RUB2 trillion ($31bn) in 2016 leaving the Finance Ministry scrambling to find more cash and failing. The federal government still had large foreign exchange reserves, but many of Russia’s regions are teetering on the edge of collapse and a major debt crisis was looming.

In the end the Kremlin was saved when it “privatised” 19.5% in oil major Rosneft to Glencore and Qatar in a surprise deal, which later transpired to actually be a bail out loan by Qatar’s sovereign wealth fund.

The 2016 budget crisis coupled with the threat of more sanctions was a wakeup call that spurred the Kremlin into action. The reform process began with the so-called May decrees signed by President Vladimir Putin in May 2012 that imposed a heavy social spending plan on Russia’s regions to improve the lives of the average Russian.

With the economy in the middle of a four-year recession and relations with the West rapidly decaying, the government turned its full attention to solving some of its long-standing problems. Putin cracked down on corruption in government with his deoffshorisation program in 2014 that banned government officials from holding offshore bank accounts or assets, that widened into a general anti-corruption drive that resulted in a big reshuffle of the regional administration in 2016. In parallel the government launched a big offensive to reduce the size of the shadow economy and reduce grey payments of wages that grew into a revolutionary overhaul of the tax system starting in 2018 and led by Mikhail Mishustin, who was later appointed Prime Minister in 2020. Mishustin introduced a new and highly efficient tax IT system that put all records and payments online and stamped out the legion of tax scams such as the “fly by night” companies that would accumulate tax obligations but then declare bankruptcy the day before tax payments became due. In two years, Mishustin increased the government’s tax take by 20% while the tax burden only increased by 2% in the same period.

Banking sector clean up

Similar reforms to clean up the banking sector were launched in 2013 when Elvia Nabiullina took over as governor of the Central Bank of Russia (CBR). She began closing three banks a week and kept that up for about five years at the same time imposing stricter regulation and reporting requirements on the survivors. Nabiullina’s reforms came to a head in 2017 when she closed several of the so-called Garden Ring banks, some of the largest privately owned commercial banks in the sector, and almost sparked a major financial crisis in the process.

I turned out later that the Garden Ring Banks were compromised by cross ownership and guilty of milking their pension fund assets to fuel side investments in things like real estate. The CBR took most of them over as well as cleaning out the state-owned banking deposit insurance agency (DIA), which was also rife with corruption. From the major commercial banks, only Alfa Bank, owned by oligarch Mikhail Fridman survived the cull, which left the banking sector a lot healthier, more transparent, and well capitalised. The banking reform came to an end before the war in Ukraine started, allowing it to weather the shock the start of war caused and quickly recovered by the summer of 2022.

Plan K

Between 2014 and 2018 the reforms dealt with big and obvious issues such as rampant corruption in the regional administration and commercial banks, but starting in 2016 there was an effort to codify more fundamental root and branch reforms for the whole country.

That task was given to the former Finance Minister Alexey Kudrin, who’s claim to fame is to set up the National Reserve Fund that is now the National Welfare Fund (NWF), Russia’s rainy day fund to cover budget deficits in difficult years, and successfully ring fenced hundreds of billions of dollars from the avarice of corrupt Duma deputies.

Based on Putin’s May decrees, Kudrin worked out a comprehensive program, dubbed Plan K, that deal with some of Russia’s biggest social problems such as eradicating poverty and doubling the amount of affordable housing. It took another two years, but this plan was eventually enshrined in the 12 National Projects that were launched in 2019 and remain the government’s official reform programme.

It’s tempting to believe that all these changes were part of Putin’s grand plan to confront the west over Ukraine’s fate and prepare Russia for the inevitable economic war that would start with the West.

Kudrin was sacked as Finance Minister in September 2011 after he objected to Putin’s order to divert the greater part of state spending from investment to modernising the military as Russia began to rearm to get ready for war.

The other piece of the puzzle is around the same time the CBR began to accumulate large amounts of foreign exchange into a cash pile that would eventually reach $600bn as well as pay down most of its external debt. Russia had a debt-to-GDP ratio of 12.4% in 2020, by far the lowest of any major economy in the world, which is expected to rise of 18.1% this year as a result of the war. Putin sanction-proofed the economy by building a Fiscal Fortress that was ready by 2021.

It was only then the Kremlin went on the offense, starting with Russian Foreign Minister Sergei Lavrov’s ““new rules of the game” speech in February 2020 when he told the West Russia would no long tolerate Western sanctions dished out with one hand and seeking big business deals taken with the other. That culminated with the massing of Russian troops on Ukraine’s border in the autumn of 2021 and a eight-point list of demands issued by Russian Ministry of Foreign Affairs in December that were the precursors to the current war.

New National Projects

The Kremlin is back at the drawing board to continue improving the health of the Russian economy by updating the 12 National Projects, during his state of the nation speech on February 21.

Budget reform: Putin proposed to extend the budget planning from the current three years to six to improve the long-term planning of the state finances. The current three-year planning period and the use of the so-called budget rule to siphon off excess oil and gas revenues to the National Welfare Fund (NWF) has been highly successful.

Progressive taxes: the first thing that Putin did on taking office in 2000 was introduce flat income (13%) and corporate (24%) taxes that brought some order to Yeltsin’s chaos and put the government’s funding back into the black. The Kremlin has been extremely reluctant to raise taxes, but now after more than two decades Putin is finally suggesting that the rich pay and big business carry a bigger share of the load and pay more taxes.

Industrial production: Putin called for the state and private companies to invest more into the production of key goods, that Russia should make for itself. He said that importing somethings was ok, but Russia should expand its production of things like consumer goods, pharmaceuticals, equipment, lathes and motor vehicles, as well as opening 100 new technology parks.

Capital markets: To pay for the investments, Putin set ambitious targets to expand the capital markets. Putin called for accelerated and simplified IPO for Russia’s high-tech companies and the capitalization of the capital market should double by 2030 to 66% of GDP, Putin added. He also called for more than doubling public and private investment in research and development to 2% of GDP by 2030.

Housing: A key element of the projects is the construction of new affordable housing, and during his speech Putin boasted that new residential construction had expanded by 1.5 times in 2023, beating all Soviet records. The government has been promoting the sector’s development with generous subsidised mortgages that have led to a boom in construction.

Family project: A program to support families with lots of children that also a disproportionally represented amongst Russia’s poorest families, as well encourage higher birth rates.

Long and Active Life project: A programme to extend life expectancy in Russia to at least 78 years by 2030, with ambitions to reach over 80 years in the future. Federal projects targeting major health concerns such as cardiovascular and oncological diseases, as well as diabetes are included in the plan.

Russia’s Youth project: A programme to nurture the younger generation’s aspirations, successes and life values, which Putin said are crucial to the country’s sovereignty and historical continuity.

Human Resources project: A programme that focuses on professional development, education, and training, aiming to equip Russia’s growing younger generation with the skills needed for the 21st-century economy.

Data Economy project: With a budget of over RUB700bn ($7.6bn) for the next six years, this programme aims to integrate digital platforms across various social and economic sectors.

How much of this will be implemented. In the past Russia has been famous for having lots of good ideas, but always falling down on the implementation. The 1990s were marred by the chaos of the Yeltsin administration. In the noughties companies began to invest and focus on profitability, especially after oligarch Mikhail Khodorkovsky started a widely adopted fad of improving corporate governance.

The first serious systematic reforms like the changes to the banking sector and tax system only really began in the following decade, but the more general reforms enshrined in the National Projects have not been a success.

And Russia has some serious obstacle to overcome. While Russian are very good at things like tech – Russian internet giant Yandex is a world class company and still the most valuable the company in Europe even after its market capitalisation was halved after the war started – but on things like precision tools and electronics, Russia remains hopeless far behind the other advanced economies and heavily dependent on imports.

Progress has also been made on rooting out corruption and improving the rule of law, but Putin’s increasingly repressive political system works against more progress as people and companies remain vulnerable to the whims of the state.

As Ian Bremmer, the founder of the Eurasia Group, argued in his book The J curve, in the early stages of a country’s transformation the stability an authoritarian government brings allows for more rapid economic development as the president can simply order things to happen. However, despite the chaotic confusion and debate of democracies, the freedoms that comes with it allows for greater innovation and risk taking that ultimate leads to a higher level of prosperity that autocracies can’t achieve. What remains to be seen is where Russia lies on this curve.

YouTube link here.

The Bell, 3/8/24

Russia launches new campaign to bring business back home

It emerged this week that the government has begun drawing up a list of “economically significant organizations” as part of its campaign to bring big companies fully under Russian jurisdiction. Those on the list will have the right to ditch any foreign holdings through which they hold assets. After a decade of trying, it looks like the Ukraine war and Western sanctions mean that the Kremlin will finally achieve its long sought-after “deoffshorization.”

What’s going on?

On March 1, the government approved a list of economically significant organizations (ESO). After a legal process in Moscow, the companies on the list will be given a whole series of exceptional powers, including the ability to restrict the rights of foreigners, and withhold certain information.

To be on the list, companies must meet two criteria: they must be large (defined as having annual revenue over 75 billion rubles ($820 million), assets of more than 150 billion rubles, or more than 4,000 employees); and they must be more than 50% owned by Russian beneficiaries via holding companies registered in so-called “unfriendly” countries (these are nations – mostly in the West – that have been deemed hostile by the Kremlin). There are estimated to be more than 100 companies in Russia that meet these criteria. 

So far, there are six companies on the list. Three of them – Alfa Bank, insurance company Alfastrakhovaniye, and retailer X5 Group – own or manage assets on behalf of investment conglomerate Alfa Group. Billionaire Mikhail Fridman, one of Alfa Group’s main shareholders, spent years gradually transferring his Russian assets to the West. However, after the full-scale invasion of Ukraine, he was hit with Western sanctions.

The other three companies are high-end supermarket chain Azbuka Vkusa (41.1% owned by billionaire Roman Abramovich and his partners), fertilizer manufacturer Akron (owned by billionaire Vyacheslav Kantor) and mining company Razrez Arshanovsky. 

This is likely just the start. According to state-owned news agency TASS, Tinkoff Bank, owned by Vladimir Potanin, Russia’s wealthiest man, has applied to join the list. And newspaper Kommersant claims two dozen more companies are interested in being included. These include agricultural company Rusagro, real estate company Cian, online marketplace Ozon, and online job portal HeadHunter. Cian, Ozon and HeadHunter are all companies that are – or were – listed on foreign stock exchanges.

For a more detailed understanding of how the law will work, see here.

What does being on the list mean?

Being designated an ESO means that, under a law passed in August, the Russian government can bring a case to the Moscow Arbitration Court to suspend the rights of the foreign owners in that company. Officially, these restrictions can be kept in force until Dec. 31, 2024. In reality, it’s clear that they will continue to operate until the end of the war in Ukraine, and the lifting of Western sanctions.

When the Moscow Arbitration Court suspends the rights of a foreign owner, all shares of the Russian company in question are transferred to the Russian entity. Then, they are redistributed among the existing beneficiaries in proportion to their stake – but, crucially, only under Russian jurisdiction. Russian beneficiaries are obliged to take direct ownership of their shares. And the rights of foreign beneficiaries will be limited: for example, their dividends will be paid into Type-C (escrow) accounts from which it is almost impossible to withdraw cash. 

If foreign shareholders do not take up their shares in Russia, their shares will be transferred to the Russian company’s balance as a treasury stake. Technically, this is a temporary measure, and, unlike ordinary treasury shares, the company is not required to redeem them.

Foreign owners will be faced with a choice. If they decide they don’t want to move their ownership to Russian jurisdiction, they also have the option of applying for compensation based on the market value of their shares. However, once again, the compensation will be paid into Type-C (escrow) accounts, where it is very difficult to access.

Less transparency

Companies on the list are also able to greatly reduce the amount of information about themselves they make public. This means less transparency, which complicates life for investors – but also for Western officials looking to apply sanctions.

Less transparency is a growing trend in Russian business. The Central Bank recently called on banks not to publicize information about interactions with foreign partners, and international payment mechanisms. Apparently, the regulator is seeking to minimize the risk of sanctions. Banks were also advised to warn their clients engaged in foreign economic activity “not to allow public dissemination of information” about their foreign counterparts.

While a lack of transparency might make it harder for the West to impose sanctions, it will cause problems in Russia. For example, President Vladimir Putin has promised to double the capitalization of the Russian stock exchange over the coming six years – but less corporate transparency will make this a much harder goal to achieve.

What is the goal?

The main aim of the law and the ESO list appear to be to ensure that major Russian businesses are brought entirely under Russian jurisdiction. At the same time, they enable companies to resume dividend payments to Russian shareholders that were interrupted by sanctions. It also reduces the sanctions risks for Russian shareholders, and protects Russian assets from being seized by Western countries.

Prior to the war, registering an offshore holding was necessary for Russian companies to increase their capitalization, and protect owners and shareholders from political pressure. But the war has turned everything on its head. For years, the Kremlin tried unsuccessfully to achieve “de-offshorization” – thanks to the war, it now appears on the brink of doing so.

Why the world should care

This attempt to bring Russian companies fully under Russian jurisdiction is the latest development in the economic battle with the West: as Western countries seek to enforce sanctions, Russia tries to circumvent them. It’s no surprise Russian owners are keen to take part – they want their dividends. But the significance of all this is even greater: it puts Russian business firmly, and comprehensively, in the Kremlin’s pocket.

Data suggests 90% of Western companies remain in Russia

According to calculations published Thursday by the Kyiv School of Economics, of the 3,756 foreign companies working in Russia before the full-scale invasion of Ukraine in 2022, only 372 have fully exited the Russian market. This is partly because companies that leave lose half the market value of their assets. Despite the opportunity to distribute assets among loyal businessmen, the Kremlin shows no sign of reducing the obstacles for foreign companies.

As someone who publicly condemned my own government for flouting due process and justifying torture in the aftermath of 9/11 when many Americans were understandably angry and scared, I’m not applying double standards when I condemn the behavior displayed by Russian authorities toward the Crocus City Hall terror suspects. Although these men are likely the right guys associated with the heinous crime in question, they have not had a trial with due process. This kind of behavior is unethical and counterproductive as a practice or policy, regardless of how repugnant the alleged crime is. No police department in the world in infallible and there’s always the possibility of having the wrong person in custody. When subjected to torture, the recipient will tell you what you want to hear to make the pain stop, so obtaining accurate and useful information was clearly not the priority in this situation. as I’ve seen some people whose analysis I’ve respected in the past try to argue

Putin is a lawyer and, though he gets no credit for it in the west, his government made a lot of progress in his earlier terms in laying the foundation of the rule of law in Russia, including improving due process rights. He knows better. Apparently, he’s letting emotion supersede reason on this issue when it comes to individuals accused of terrorism. – Natylie

Moscow Times, 3/26/24

Russian Human Rights Commissioner Tatiana Moskalkova has criticized the alleged violent detention of the four suspected gunmen in last week’s deadly attack on a Moscow concert hall, state media reported Tuesday.

“Despite the drastic nature of detaining criminals and no criminal punishment stipulated for actions that inflict harm during detention, it’s absolutely inadmissible to use torture against detainees and accused persons,” Moskalkova told reporters.

“Any procedural operational actions must be carried out in accordance with the law,” the state-run TASS news agency quoted her as saying.

Russian authorities detained 11 people in connection with Friday’s attack, which saw four camouflaged gunmen storm into Crocus City Hall, open fire indiscriminately and set the building ablaze, killing at least 139 people.

Unverified graphic footage of the suspects’ interrogations published on social media led some observers to conclude that the men were tortured by law enforcement.

Footage of the four main suspects’ detention appeared to show one getting his ear cut off and forced into his mouth, while another was shown with an electric device attached to his genitals. A third suspect appeared in court with cuts and bruises on his face and a fourth was brought into the courtroom unconscious on a medical gurney.

Reuters said it was able to verify that the four men in the detention footage were the same as those who appeared in court on Sunday.

The Kremlin on Monday declined to comment on the alleged torture of the suspected shooters.

Moscow’s Basmanny District Court has ordered seven suspects to be placed in custody until May 22 to await trial on terrorism charges. An eighth suspect is expected in court as soon as Tuesday, according to TASS.

Islamic State jihadists have said several times since Friday that they were responsible, and IS-affiliated media channels have published graphic bodycam footage from the gunmen inside the venue.

President Vladimir Putin for the first time on Monday acknowledged the role of “radical Islamists” in the attack but still linked them to Ukraine, which denied the accusations as absurd.

Moskalkova previously expressed disapproval of the recorded beating of a Russian teenager under arrest for burning the Quran by Chechen leader Ramzan Kadyrov’s son.

The teenager, Nikita Zhuravel, was this year sentenced to 3.5 years in jail.

No investigation was conducted into Zhuravel’s beating in detention by Adam Kadyrov.