Link here.

By Ben Aris, Intellinews, 8/4/23

Everyone got very excited when the budget numbers for December and January came out and showed huge deficits. New oil sanctions came into effect in both those months and were hailed as a big success, reducing the Kremlin’s income and that this was what sanctions were supposed to do to help end the war soonest.

It hasn’t worked. Revenues did fall heavily in January as Western companies cancelled their Russian oil products orders ahead of the February 5 oil product sanctions. But federal budget revenues surged in June to post a surplus of RUB815bn ($8.6bn) that shaves a trillion rubles off the deficit year to date and puts the overall deficit back under the Ministry of Finance (MinFin) target of 2% of GDP. (chart)

As Chris Weafer and Christof Ruehl, two of the very best experts on Russian oil, told bne IntelliNews in an podcast on oil (worth watching again), the January results were a one off and they expected revenues to pick up again in the rest of the year. Russian Finance Minister Anton Siluanov has said the same thing and is sticking to his forecast for a modest 2% of GDP deficit at the end of the year.

The budget debate is all about numbers so let me give you a brief roundup of the main numbers you need to know.

A 2% of GDP deficit is equivalent to RUB2.9 trillion.

The government already blew past that in the middle of March when the federal budget deficit hit its full year target after the first ten days of March.

There was then a big debate at the end of the first quarter on what the end of year number would actually be with analysts predicting everything from RUB3.3 trillion (Alexander Isakov, head of Russia and CIS macroeconomics at Bloomberg) to RUB12 trillion (Kyiv School of Economics).

More recently Siluanov has become a little more pessimistic and said the deficit could be 2.5% of GDP, or RUB3.6 trillion.

Note that as Russia has some RUB6.8 trillion in the liquid part of the National Welfare Fund (NWF) it can afford to cover the deficit for at least two years just from its rainy-day fund, and that is before it taps the RUB17 trillion of liquidity in the banking sector or simply raises taxes. In an extreme it can also tap the international reserves of $580bn or print money, like the National Bank of Ukraine (NBU) has been doing.

These deficit numbers are all cumulative results, adding up each month’s budget receipts to get the total year to date deficit numbers. However, drilling into the month-on-month numbers a different picture begins to emerge.

The chart shows there was a big fall in January but in the subsequent months the monthly deficit rapidly began to contract (although April was an exception). By May the budget was back in profit, albeit with a tiny RUB13bn surplus for that month.

The big change is that in June the revenues jumped to RUB815bn.

Adding all that up, the budget deficit passed its full year target to top RUB3.3 trillion in May, but since then rising revenues have shaved about RUB1 trillion off the cumulative deficit, bring it back down to RUB2.5 trillion – ie it is now less than 2% of GDP.

And the June revenues of RUB815bn are very big. To put that into context, in good years with high oil prices the budget can make as much as RUB1 trillion in a month (and lose that much in bad months in bad years) but in 2021, the last “normal” year, the budget earned an average of RUB250bn a month and in 2022 the average monthly income was around RUB400bn a month.

So why did revenues jump in June? And will that continue?

The core of Weafer and Ruehl’s argument is that the sanctions did not stop Russia selling oil, just forced it to be sold somewhere else.

Pre-war most of Russia’s oil was sold in Europe. It takes about a week to sail a tanker from the Russian oil ports in the Gulf of Finland to Rotterdam in the Netherlands where the oil goes into the EU’s pipeline system. However, as you must know, now all Russia’s oil goes to Asia instead – mostly China and India. That journey takes about two months.

In January Russia’s oil distribution route was abruptly changed. Revenues stopped as there were no sales after tankers switched from Rotterdam to Asia and it took two months for them to get there before they could unload and get paid. Then they have to steam all the way home again – another two months – before they can pick up more oil and start the journey back.

But once this first cycle has been completed the constant conveyor belt of tankers in Russia’s “ghost fleet” making this round trip means that the oil exports will start to flow again like before. Individual tankers might take a lot longer to get to their destinations (and it costs more) but the overall flow of exported oil volumes becomes the same as before, provided there are enough tankers to carry it, which there are.

And that is exactly what the budget results show us. Revenues collapsed in January as all the tankers set off for Asia, but four months later, when the loop was established, suddenly oil revenues jumped up again as the new customers’ money came pouring in. Moreover, note that last week the discount on Urals to Brent shrank to its lowest level since the war started of about $10, still high compared to the $2 norm pre-war. That is because China and India are paying market rates, minus a bit more than usual for transport.

In other words, Russia has successfully switched its oil trade from Europe to Asia and it now has a smoothly functioning market that can’t be sanctioned and will earn very similar revenues to those it was earning before sanctions. And it did this in only four months – just like Siluanov predicted.

The bottom line is that the oil sanctions have not permanently reduced or capped the Kremlin’s income (other than reducing it a bit thanks to higher transport costs). All sanctions have done is introduce a massive distortion into the business.

What will happen to the budget over the rest of the year? Hard to say as a lot goes into this calculation and it depends heavily on what happens to the price of oil, but with the new OPEC voluntary production cuts prices are likely to stay at the current $85 per barrel and could even go higher.

If oil rises to $100, as the Kingdom of Saudi Arabia (KSA) wants, then the sanctions become more problematic for Russia. Another big hole in the regime is the fact that half of the oil export volumes are being carried by Greek tankers, an EU member, that can do this as technically the oil on board costs less than $60 a barrel and so is not sanctioned at all.

But there is a game to be played here as it depends on where you add in the cost of things like transport and services like insurance. Normally these are added at the start of the journey, where the sanctions cap price is assessed, but you can add them at the end too, where they are not part of the sanctions oil price cap price. As Russia now has its own fleet and insurance companies it can, and is, vigorously playing this game.

This is possible as the gap between the cost of a barrel and the cost of a barrel plus services is still narrow. If the price cap were reduced to say $35, as many have called for, that would create a new headache for the Kremlin, but it is clear that the West is extremely reluctant to strictly enforce the oil price cap sanctions as it fears a self-defeating spike in oil prices more than it wants to punish Russia.

Last thing to say is that June’s RUB815bn of revenues is high as it is due to the first revolution of the new oil transport loop. However, if revenues fall back to the 2022 average of RUB400bn per month Russia will have no deficit at all and even the 2021 level of RUB250bn per month means a deficit on the order of 1% of GDP. At this point it’s looking more likely that the Siluanov will manage to hold the deficit to 2% in total than not, and that the Kremlin will have all the money it wants to spend on the war. The oil sanctions have not worked.

John McCain rolls over in his grave.

RT.com, 8/4/23

Russia was among the world’s five largest economies and the largest in Europe in terms of purchasing power parity (PPP) as of the end of 2022, despite Western sanctions, the latest World Economics report has revealed.

According to estimates based on official country data published by the World Bank and the IMF, Russia’s gross domestic product was $5.51 trillion in PPP terms at the end of last year. The figure is 38% larger than the official estimate of $3.993 trillion, the report noted.

It also showed that the Russian economy was ahead of Germany’s when measured in purchasing-power parity, with the latter’s GDP at $5 trillion.

China topped the list as the world’s biggest economy ($31 trillion), followed by the US, India, and Japan. The top 10 also included Indonesia, Brazil, and Türkiye.

The IMF and World Bank both recently raised their forecasts for the Russian economy, saying GDP would continue to grow despite sanctions, underpinned by strong trade and industrial production, as well as higher-than-expected energy revenues.

According to the World Bank, Russia’s growth is expected to turn positive in 2024, but will remain modest at 1.2%.

The Russian government has maintained a positive outlook for the economy. Prime Minister Mikhail Mishustin has predicted that, by 2024, the Russian economy will be able to overtake developed countries in terms of growth.

Note: the folks over at Russia Matters have taken issue with the main claim in this article. See here.

By Kelly Vlahos, Responsible Statecraft, 8/4/23

The majority of Americans polled do not want to supply more U.S. aid for the war in Ukraine, according to a new survey by CNN/SSRS released today.

According to the data, 55 percent of Americans do not think Congress “should authorize additional funding to support Ukraine in the war with Russia,” while 45 percent said Congress should approve more.

Another 51 percent say the U.S. has “done enough” to “stop Russian actions in Ukraine,” while 48 said Washington has not done enough.

For comparison, according to CNN, 62 percent of Americans polled just after Ukraine was invaded said the U.S. should be doing more.

Not surprisingly, the responses tracked heavily on partisan lines. On the question of Congressional funding, 71 percent of Republicans, 38 percent of Democrats, and 55 percent of independents said no more funding. On the promotion of more aid, it was flipped, with 62 percent of Democrats, 28 percent of Republicans, and 44 percent of independents saying Congress should authorize more. Whether one identified as a “liberal” or “conservative” dictated support for more or less aid respectively.

How this will play out in the expected vote for more Ukraine aid this fall is anyone’s guess, as it will depend on how much and through what kind of package the new funding will be proposed. A handful of Republican lawmakers have already promised a fight, either to stop the aid entirely or to put conditions on it before passing.

This doesn’t mean that Americans aren’t still in favor of assisting the Ukrainians, however. Solid majorities in the CNN/SSRS poll want to share intelligence with Ukraine (63 percent) and offer military training (53 percent). Less than 50 percent want to continue giving Kyiv weapons (43 percent). Only 17 percent want U.S. soldiers on the ground participating in combat with the Ukrainians. [Note: interesting that this poll reflects only about half of what the Newsweek-sponsored poll discussed in a post a few days ago reflected in terms of the number of respondents supporting the sending of US troops to Ukraine. – NB]

The poll also doesn’t bode well for Biden’s handling of major foreign policy issues. Some 53 percent disapprove of how he is handing the war in Ukraine; 56 percent disapprove of how he is handling Russia; and 57 percent disapprove of how he is handling the relationship with China.

By Dominic Sansone, The National Interest, 8/4/23

Dominick Sansone is a Ph.D. student at the Hillsdale College Van Andel Graduate School of Statesmanship. Previously a Fulbright recipient to Bulgaria, his writing on politics in the Black Sea region has been published by The National Interest, the Euromaidan Press, The American Conservative, and RealClear Defense, among other publications. He also previously wrote as a contributing columnist focusing on Russia-China relations at The Epoch Times.

Foreign Affairs magazine published an insightful piece in its most recent issue, titled “An Unwinnable War: Washington Needs an Endgame in Ukraine.” Written by RAND Corporation senior political scientist Samuel Charap, it is well argued and presents a number of reasonable proposals that prioritize a diplomatic end to the Ukraine War. Three examples—the Korean armistice, U.S.-Israeli security arrangements, and the Bosnia Contact Group—are drawn upon in order to suggest a roadmap to ceasing hostilities. [https://www.foreignaffairs.com/ukraine/unwinnable-war-washington-endgame]

A number of responses were subsequently published in Foreign Affairs online. All take aim with Charap’s assessment that neither side currently holds the capabilities to achieve ultimate victory, defined in this context as establishing control over the disputed territory in Ukraine. Rather, they contend that Ukraine’s triumph is simply a matter of providing more—and deadlier—Western weaponry. Each argument also rests upon the assumption of a tottering Putin regime. They all cite the Prigozhin mutiny (it is mentioned a total of six separate times throughout the various responses) as irrefutable evidence of a latent contingent of discontented Russians that can and will eventually be mobilized to topple the current government. [https://www.foreignaffairs.com/responses/should-america-push-ukraine-negotiate-russia-end-war]

The most extreme perspective comes from Dmytro Natalukha, Chair of the Committee for Economic Affairs of the Parliament of Ukraine and a member of the Parliamentary Assembly of the Council of Europe. Natalukha claims that leaving any territory occupied by Russia will allow Moscow to subsequently use that land as a launch pad for future attacks to capture the rest of the country, as he claims it did after the Minsk agreements of 2014 and 2015—although he conveniently ignores the fact that it was both Moscow and Kiev who consistently failed to implement the terms of both the Minsk Protocol and Minsk II. Ukraine, Natalukha argues, must therefore wage war until all occupied land is seized back from Russia. What is more, the return of the eastern oblasts and Crimea must then be followed by forcible regime change in Moscow and the installation of a Western-approved leader. This will ensure that “post-Putin Russia will have the consent of Ukraine.”

“Ukraine and its allies must aim to make Russia less anti-Western. Regardless of what happens at the negotiating table, therefore, Putin cannot remain in power,” states Natalukha. He subsequently believes that the civilized world should reach a consensus on confronting Russian leadership, “as they did on Slobodan Milosevic in Yugoslavia, Saddam Hussein in Iraq, and Bashar al-Assad in Syria”—examples that should make any honest assessor of U.S. foreign policy in the past thirty years since. The final step after total Russian collapse and the installation of a puppet government would then be to demilitarize the country and destroy its state media i.e., its “propaganda machine.”

The ostensibly less severe proposals also support the contention that Russian armed forces will inevitably be crushed under the weight of well-armed Ukrainian resolve. Alina Polyakova and Daniel Fried are firm in the conviction that all that stands in the way of total victory is a lack of F-16s and long-range missiles. Early battlefield successes around Kiev, Kharkiv, and Kherson, are cited as proof of endemic Russian weakness. The authors also believe that, with the requested weaponry, Ukraine would be able to seize territory in the eastern oblasts. This will obstruct Moscow’s land bridge to Crimea, and “force Russia into an untenable position.” But the likelihood of Russian leadership abating rather than escalating its war effort once the naval base at Sevastopol is under threat of sustained artillery fire is a roll of the dice. The consequences of losing that bet could be catastrophic. Nonetheless, Angela Stent also reassures readers that the risks are worth it. She suggests that Moscow’s war machine is buckling under the weight of its own incompetence, while Kiev is on the cusp of turning a strategic corner. Ukrainian forces remain upbeat in a “battle for national survival”; meanwhile, “Russian troop morale is dwindling”—an assessment that by its nature is one of bias and unreliable speculation.

The eventual ouster of Putin is implicitly assumed in each of the arguments. Polyakova and Fried bring up Russian military losses going back nearly two centuries, all the way to the 1853 Crimean War. “Each defeat provoked domestic stress and upheaval,” the implication being that the same fate awaits the current regime upon its defeat in Ukraine. The Prigozhin mutiny is presented as evidence of pervasive “stress in the Russian ruling circles.” Stent also believes that “Putin’s grip on Russia” is weakening. The key to knocking down the Kremlin house of cards is thus “more and better Western weapons.” While any or all of these contentions may be true, no respondent addresses the very real possibility that an individual as equally committed—or perhaps more committed—to the objectives laid out at the beginning of the war might take power in Moscow upon Putin’s (potentially bloody) departure.

But most importantly, all of the responses fail to address the prospect that Kiev’s counteroffensive could fail to achieve its strategic aims even with Western arms. Ukrainian battlefield invincibility is assumed as an indisputable matter of historical necessity. They ignore the fact that Russian armed forces continue to secure important victories, inching their way westward while inflicting heavy Ukrainian casualties. Instead, all of Moscow’s strategic and tactical successes are handwaved away. Polyakova and Fried claim without explanation that the seizure of territory in the “Bahkmut [sic] offensive has deepened [Putin’s] costly mess.”

Nor do they address the fact that Russian armed forces have of late been very successful in destroying and capturing Western equipment, including the much-vaunted Leopard tank and Bradley fighting vehicle. Moscow also retains control of the skies, a situation that a limited number of F-16s without enough pilots who possess the requisite training will not change. Likewise, a longer war defined by increasing escalation favors both the military-industrial capacity of Russia as well as the much larger resource pool of human capital that it can draw from. The only way to counter this latter fact may eventually be for other nations’ military forces to begin engaging in the fight directly. Natalukha would undoubtedly be in favor of such a prospect, and it seems that the other commentators may be as well.

The hate for the Putin regime that seems to undergird the Western foreign policy establishment is very likely genuine and deep-seated; however, its authenticity does not make it a premise upon which to construct a realistic path for bringing the bloodshed in Ukraine to an end. Charap acknowledges this point and proposes that the U.S. form a governmental group to focus on exploring diplomatic pathways to peace. “There is not a single official in the U.S. government whose full-time job is conflict diplomacy,” he rightly laments. What is needed is a “regular channel of communication regarding the war that includes Ukraine, U.S. allies, and Russia.”

This is undoubtedly the correct approach. Negotiations for a sustainable peace are necessary not merely to de-escalate the situation and avoid a potentially larger conflagration, but perhaps most importantly to stop the wanton death and destruction currently befalling the citizens of Ukraine. As impolitic as it may be to currently say, it should also be our desire to stop Russian lives from needlessly being lost as well.

However, the responses to Charap form a litany of excuses for not engaging with Moscow. Something like the Korean armistice is discounted because North Korea does not occupy any of South Korea’s territory; the Israel situation is not feasible because Tel Aviv possesses nuclear weapons; the example of the Balkan Contact Group is inapplicable because one could do business with the Yeltsin administration.

But Charap presents these as cases to draw lessons from, not as exact models to copy. They illustrate how to adapt means in unique situations to reach the same end: a viable peace agreement amid hostile parties that is reached by way of a negotiated settlement.

The issue at the center of the disagreement is that the respondents do not believe that such an end can be reached unless it proceeds from total Ukrainian victory and the destruction of the current Russian regime. The reason for this is presented as a matter of fact: Russia can simply no longer be treated as a real nation-state. As articulated by Stent, any negotiation with Moscow is impossible because they are liars, and an armistice will inevitably be a “temporary solution while Russia regroups and plans its next attack.” Such a conclusion obviously leads the international community to an impasse in which the only way out is through.

Charap replies in kind to the various responses offered to his original piece. The central premise upon which he bases his rebuttal is straightforward: “My critics seem to see diplomacy as a synonym for surrender rather than as an important tool of statecraft.” This is correct, but understanding the argument behind why his critics view a peace settlement as capitulation is even more important. Russia (with Putin as anthropomorphized regression) has broken the rules-based order in a manner that undermines the end of history thesis. The implication of not rectifying this violation would be to implicitly acknowledge that the world is returning to balance of power geopolitics. This is a sin that cannot be forgiven. For that reason, nothing less than a total Russian collapse is an acceptable outcome to the war.