Russia

[Crafty_Dog]

The Big Picture
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At the direction of President Vladimir Putin, the Russian State Duma is amending the country’s constitution by limiting the role of the presidency, while making different Russian branches of government more reliant on each other in an attempt to limit disruption and factional competition at the time of an actual succession. But with a constitutional amendment that would allow Putin to run for another two terms, the Kremlin is also trying to delay that inevitable transition as much as possible. 
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Russia's Internal Struggle

The Kremlin’s efforts to extend President Vladimir Putin’s 20-year presidency will enable Moscow to sustain the policies that have seen Russia reclaim its great power status, while postponing the political and socio-economic instability that could result from transitioning to a new leader. Prolonging Putin’s tenure, however, will introduce greater long-term political challenges as he ages and risks a potential health emergency while in office. But even without such a crisis, postponing a succession until 2036 will still set Russia’s political elite up for having to deal with a transition of power at a time when popular pressures will be mounting over severe economic hardships.

A New Constitution, and New Terms for Putin

On March 10, Russia’s legislature approved an amendment that would reset the count of presidential terms served prior to the introduction of the new constitution. The change will enable Putin to stand for reelection in the 2024 presidential elections, increasing his ability to serve two additional six-year terms.

The amendments will be offered for approval in a popular vote (which was initially scheduled for April 22, but has since been indefinitely postponed due to COVID-19 lockdown measures). Approval is legally binding and would immediately alter constitutional provisions. But he Kremlin’s tight containment of opposition activity  — and the fact that a referendum is not technically required to approve the amendments despite the veil of popular endorsement it’d provide — mean that the constitutional changes will pass one way or another.
 
Despite keeping Putin in power for longer, the new constitution will also erect limitations and balances between the different governing bodies of Russia in an effort to reduce the executive power of Putin’s eventual successor. These amendments include a stricter observation of presidential term limits, meaning future Russian presidents will only be able to serve two terms total in their lifetime. They also shift the responsibility for appointing certain cabinet positions — primarily those dealing with Russia’s economy — to the Russian State Duma rather than the presidency, which will maintain the right to appoint security- and foreign policy-related ministries. This separation of responsibilities will force the different branches of government to actively cooperate to access Russia’s resources of power.

What 12 More Years Could Bring

Putin has remained vague about his intentions, though he is widely expected to seek reelection under the new rules. With no clear designated successor, he is likely to seek another term to groom his replacement. If he is unable to find a fitting successor over those four years, there’s a good chance Putin may well run again in 2030.

His likely reelection would foster stability in Russia’s state-led economy, as Moscow focuses on driving domestic growth, diversification and self-sufficiency. Russia’s foreign policy would also continue to revolve around Putin’s goal to reestablish Russia as a great power.

•   As Russian conventional military power has waned, Putin has prioritized Russia’s nuclear capabilities and deterrence abilities while supporting individual allies around the globe with military and financial assistance. 
•   Moscow has already tried to reduce its dependence on the hydrocarbons sector, placing a greater emphasis on the development of high-tech capabilities, with different state-owned entities spearheading efforts to develop quantum computing and artificial intelligence.
•   Putin’s policies will also continue to lead to potential escalations and standoffs in proxy conflicts in Ukraine, Iran and Syria.
Putin’s age and general health over the next twelve years, however, could risk this strategy. At 67, his focus on physical fitness and apparent robust health has enabled him to reach and likely succeed the average life expectancy for Russian men (which is 68). However, the remaining four years of his current term, combined with the prospect of another twelve years in office, would make him 83 years old at the end of a final term — greatly increasing the risk of a health crisis, or even his death, while in office.

Postponing a succession until 2036 will still set Russia’s political elite up for having to deal with a transition of power at a time of severe economic hardships.

Multiple Axes of Transition

Shifting Russia’s next presidential transition to 2036 risks weakening Kremlin leadership at a time when the country is already expected to face significant economic and demographic crises. By about 2035, Russia will begin experiencing the next significant contraction of the size of its working population, exacerbating the imbalance in social spending and economic potential. Around the same time, Russia’s hydrocarbon production is also expected to have dropped significantly. Russia’s Ministry of Energy is projecting as much as a 40 percent drop in production by 2035, which will severely impact Russia’s government revenue and industrial strength. A succession in 2036 could devolve the centralized authority that Putin has commanded, as well as weaken the consensus and institutional cooperation needed to manage these challenges, by unleashing competition between the country’s different commercial-industrial factions, security organizations and political factions.

[Crafty_Dog]

https://www.foxnews.com/world/third-russian-coronavirus-doctor-plummets-from-hospital-window-under-hazy-circumstances-reports-say

[DougMacG]

https://www.bloomberg.com/news/articles/2020-05-14/russians-running-out-of-money-add-pressure-to-end-virus-lockdown?sref=nXmOg68r

Rest of the world mostly hit harder than US, especially places that relied on oil revenues.

[Crafty_Dog]

For Russia, the Future Is North
Stabilizing its Arctic regions is becoming a priority for Moscow.
By: Ekaterina Zolotova

The fall of oil prices and the campaign to manage the coronavirus pandemic have taken a toll on Russian finances, perhaps nowhere more so than in the regions of the Arctic. In the Yamalo-Nenets Autonomous District and the Komi Republic alone, regional revenue fell by 60 percent compared with last year. The Krasnoyarsk Territory and Murmansk Region were also significantly affected. And while this is a sign of hard times to come for the people who live there, these oft-overlooked regions, which are among the biggest oil and natural gas producers for a national economy that relies heavily on oil and natural gas, also affect the financial stability of the country writ large. The Kremlin understands as much and, if push comes to shove, will make it a priority to maintain the economic health of the Arctic regions. But given its budgetary shortfalls, it will struggle to do so.

When the Soviet Union collapsed, the Russia it left behind was a much more “northern” country. It lost the fertile lands of Ukraine and Central Asia, and there was only so far it could expand south into the newly formed countries beneath it. And so the Arctic, which constitutes about 20 percent of Russian territory, has become a space in which Moscow can gain leverage and military and economic power.

Indeed, the region is considered by many to be essential to Russia’s becoming a great power again. For centuries, the Arctic was a liability, a natural border that hindered Russian expansion. Now, as climate change melts the ice and as technological development creates more opportunity, it’s an asset, one that can someday be a hub for trade and military activity. More important to Moscow, it’s a resource to mine. About 41 percent of all the Arctic’s oil and gas resources are located in Russian territory. More than 80 percent of Russia’s gas and about 17 percent of its oil is produced here, accounting for about 10 percent of the country’s gross domestic product and about 25 percent of Russia’s exports, and contributing some 15 percent to the government budget. (The Yamalo-Nenets Autonomous District itself accounts for about 43.5 percent of the total resources of the Arctic.) The region is also a potential source of rare earth elements.
 
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The promise of the Arctic has naturally attracted other countries that are now in direct competition with Russia over its potential benefits, including Denmark, Canada, Norway, Iceland, Sweden and the United States. Even countries that don’t directly border the Arctic – especially those in the Asia-Pacific – are showing interest, since the proposed North Sea trade route would significantly reduce the delivery time between Asia and Europe. To get a leg up on the competition, Russia needs a strong military, economic and commercial foundation. To that end, it has been expanding its military bases and its Arctic Fleet and has slowly begun to construct viable ports for the long term. Year-round, in particular winter, navigation cannot be carried out without a fleet of powerful atomic icebreakers, which need ports and other infrastructure. The government in Moscow knows that if it ever wants to establish such a fleet, it needs to start now.

Which is why the Kremlin wants to strengthen the region’s economy by attracting investments and qualified personnel, and by building infrastructure. Oil extraction, and therefore the expansion of Russian influence, requires a constant influx of skilled labor, modern technologies and infrastructure and, of course, the support of the local population. The collapse of the Soviet system had a huge impact on the development of the Arctic – production in Yakutia-Sakha and Chukotka decreased, some mining centers and industrial settlements were completely abandoned, poverty and unemployment rose, and the reduction in northern benefits accelerated the outflow of the population from the region. Regions like Yamal-Nenets and even Murmansk lost about 20-25 percent of their population.

Moscow knows from the experience in the immediate aftermath of the Soviet Union’s collapse that without financial and tax incentives, it will be difficult to keep a skilled population, capable of supporting economic projects in regions with a climate as harsh as that in the Arctic. In Soviet times, the government factored in the “cost of cold,” so sometimes wages in the Arctic were as much as four times higher than in other regions of the Soviet Union. This is why my grandparents moved from central Russia to Murmansk, and indeed, in the 1970s they could afford much more than people from Moscow. But even today, the region, which sports Russia’s highest per capita incomes, continues to attract labor.

It’s a good thing, too, because job vacancies in the region among resource extraction and industrial construction companies are growing. To stimulate labor inflows, the government has introduced the “northern allowance,” a bonus added on to wages. The size of the bonus depends on the region. For example, in the Chukotka Autonomous District, employees receive a bonus of up to 100 percent of their salaries, whereas in Yamalo-Nenets the bonus is 80 percent. This is why some northern regions like Yamalo-Nenets have the country’s highest level of family welfare. An average family with two children in Yamalo-Nenets in 2019 had almost 90,000 rubles ($1,300) left each month after covering the minimum expenses, compared to 55,000 rubles in Chukotka Autonomous District and 52,000 rubles in Nenets Autonomous District. In the region of Moscow, by contrast, the same family would have had about 40,000 rubles left. Average monthly wages in Chukotka and Yamalo-Nenets are also higher than in Moscow and other regions – 109,300 rubles and 102,100 rubles, respectively, compared to 95,000 rubles in Moscow.
 
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The government is trying to attract skilled workers in other sectors besides energy to come to the Arctic areas. For example, Moscow promised a one-time bonus of up to 3 million rubles for medical workers. In addition, the state is trying to attract investment and entrepreneurs by providing tax benefits and other tax advantages. Support is provided for the construction of ports, such as a zero income tax rate for 10 years or zero value-added tax on services for sea transport of export goods and their icebreaking support.

Because of low oil prices, the OPEC+ production cut and the overall economic slowdown, exploration and mining are on the decline, and there’s less investment flowing into the region. If the situation leads to an erosion of salaries or social benefits, people may begin to gradually leave the region, just as they did in the 1990s. But there are limits to how much financial aid Moscow can offer to prop up life in the Arctic, including for political reasons; already there is infighting within the Ministry of Finance, and there’s discontent in other regions, such as the Caucasus, due to insufficient funding. Even within the Arctic itself there is a rivalry between regions over funding.

To streamline its support policies and minimize dissatisfaction, the Kremlin has been considering optimizing the Arctic space and is striving to create an Arctic federal district. Yet this idea, too, sparked a backlash. The region is very divided in terms of population and wealth, and different regions have different opinions on ideal economic strategies and ecological questions. The indigenous population is dissatisfied with the activities of large Russian energy companies that often cause the destruction of their indigenous environment. Moreover, the ruling United Russia party is not strong in all the Arctic regions. The Kremlin tried to merge the Arkhangelsk Region with the Nenets Autonomous District last month, during the height of the country’s coronavirus outbreak, but was forced to back down in the face of local protests.

The slump in oil prices and the broader economic downturn will damage Russia’s efforts to develop the Arctic. Without financial
incentives and development, critical investment and specialists could even begin to move out of the region. This could put Russia at a disadvantage in the international race for influence in the Arctic. The Kremlin will make significant efforts to prevent this outcome and keep up the pace of economic development in its Arctic regions.

[Crafty_Dog]

Russia Considers a New Economic Model
Moscow’s tone about the future of the economy has changed.
By: Ekaterina Zolotova

The flaws in Russia’s economy might be too deep to gloss over. At an annual civil forum in Moscow on Saturday, Alexei Kudrin, the chairman of Russia’s Accounts Chamber and finance minister from 2000 to 2011, spoke rather pessimistically about the Russian economy. He predicted a drop in economic output this year of 4.5 percent, a significant fall in living standards and that 1 million more people will slide into poverty. It’s no secret that the Russian economy is under serious stress – made worse by the coronavirus pandemic – but Kudrin’s remarks were unusual for a government that has been promoting the rehabilitation of Russia’s economy by 2022. Given the unavoidable economic difficulties ahead, the Kremlin appears to be changing tone and priming the public for more hardship – and potentially a massive economic transformation.

From Bad to Worse

At the forum, Kudrin said Russia needed a new economic model, and it’s hard to argue with that. Oil remains the backbone of the Russian economy. Approximately half its exports are of mineral resources (mostly natural gas and oil), and oil and gas revenues make up about 30 percent  of its federal budget (and that’s excluding tax revenues from oil and gas giants like Rosneft and Gazprom). The pandemic, however, has cratered economic activity, and thus demand for energy, and OPEC+ members including Russia agreed to cap production for the time being. In these circumstances, it is difficult for an economy that depends on energy exports to remain afloat. And even after demand recovers, Kudrin said he believes oil consumption will start to decline from its peak in the next 5-10 years, forcing Russia in the 2030s to shift away from oil exports.

One significant challenge is finding an effective economic model that can ensure Moscow’s continued control of its vast territory and far-flung regions. Today, the Kremlin maintains control using not only the security apparatus and political institutions but also the redistribution of budget revenues between regions. These revenues, however, depend on the oil and gas industry. Beyond its own borders, Moscow has offered neighbors discounted energy in exchange for greater regional influence and security, defending itself and its sphere from encroachment by China in the east, Turkey in the south and Europe in the west. But as the role of oil and gas in the Russian economy declines, the Kremlin will need its new economic model to serve a similar purpose with respect to building and maintaining allied relations with its neighbors.

During his speech at the civil forum, Kudrin suggested that what Russia’s economy needs is “revolutionary deregulation.” He recommended a model he called NEP 2.0 to encourage entrepreneurship, a reference to Lenin’s New Economic Policy of the 1920s following Russia’s Civil War. Under the original NEP, the Soviet Union temporarily turned toward state capitalism and away from extreme centralization – with noticeable success. By 1928, the national income had surpassed prewar levels and the material situation of citizens of all stripes had grown more stable. But when Stalin took power that same year he abandoned the NEP, whose legacy remains controversial in Russia to this day.


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The situation in Russia in 2020 isn’t even close to as bad as it was in 1921, but it’s going to get worse. Kudrin, after touting Russia’s victory over extreme poverty, said COVID-19 would by the end of the year force another 1 million Russians into destitution. In the second quarter of 2020, Russians’ real disposable income fell by more than 8 percent, and it dropped by another 4.8 percent in the third quarter. Leaders in Moscow apparently see the COVID-19 recession as an opportunity to implement transformational change.

A New Model

The Kremlin could, for example, claim that raising living standards and rescuing private small and medium-sized enterprises at this time will be too difficult, given the current extraordinary challenges, and save what’s left of its public funds for future use. Indeed, though Moscow has said it’s prepared to help stimulate the economy, it has been hesitant to pile more stimulus on top of its initial efforts to aid Russian businesses. In this way, it’s leaving the economic recovery in the hands of the Russian people. It believes that the economy will continue to chug along, while the state continues to manage key sectors including much of heavy industry and transport. (During the lockdown, the public sector appeared more stable than the private sector, so state-owned enterprises could also use this as an opportunity to dominate the market even more than they had before.)

Though Russia still has substantial reserves in its national wealth fund – roughly 13 trillion rubles ($170 billion) – it’s not in any hurry to spend them to prop up large Russian corporations. It sees relying on SMEs as a better method of stimulating economic recovery, in part because they don’t require the same level of financial support that large firms do, and in part because individual SME owners can’t challenge the Kremlin the same way powerful oligarchs who control massive Russian corporations can. So by allowing SMEs to take on the bulk of the responsibility for economic recovery, the Kremlin ensures that its own influence in the regions outside of the capital isn’t overrun by other wealthy interests.

Moscow is also using this time – while many countries’ economies are stalled by the pandemic, and while the United States is preoccupied with the presidential transition – as an opportunity to improve relations with the western buffer states and increase its influence among its neighbors. After negotiating a peace deal between Azerbaijan and Armenia over the Nagorno-Karabakh conflict, Russia secured a long-term presence in the South Caucasus by including in the deal a Russian peacekeeping force that will monitor the cease-fire. To its west, Russia saw President Alexander Lukashenko elected to another term in Belarus in August, and since the disputed election, he has been looking to Moscow for even more support and cooperation. Meanwhile, the conflict in eastern Ukraine remains frozen, which suits the Kremlin just fine.

One of Moscow’s key tools of projecting influence in the post-Soviet states is the Eurasian Economic Union. The head of the group’s executive body, the Eurasian Commission, said this week that the bloc was moving into a new phase of integration and ready to build projects worth $200 billion. A long-awaited draft agreement on gas prices and tariffs on gas transport – which will essentially create a common market for natural gas – is expected next year. (Members are still divided on this issue, however, meaning an agreement may be hard to come by. Belarus and Russia will therefore continue to negotiate between themselves while they await a broader deal.) In addition, Russia is spending millions to support external economies, even while its own economy struggles. It provides Kyrgyzstan, for example, millions of dollars’ worth of financial assistance. It is also considering financing the second stage of a project to increase production of hydrocarbons in Uzbekistan and has provided the country with loans worth $650 million. And it has also issued Belarus $1.5 billion in loans.

In the short term, the Russian economy will survive. In the long term, it will need substantial changes. It continues to depend too much on profits from oil and gas exports, which were previously used as an instrument of influence and control for the state. It now needs to look for new tools with which to maintain state power at the lowest possible cost. While the pandemic has presented many countries with enormous challenges, it may also present Russia with an opportunity to conduct an experiment in economic reform. And if the experiment succeeds, it could help the Kremlin fulfill both of its key imperatives: to preserve the unity and power of the state, and strengthen its power within the broader region.

[Crafty_Dog]

https://www.gatestoneinstitute.org/17014/russia-putin-navalny-protests

[Crafty_Dog]

Brief: Competition Over Russia’s Far East
The remote district is quickly becoming more strategically important to Russia – and thus to the region.
By: Geopolitical Futures

Background: The Russian Far East is the largest federal district in Russia and the farthest from Moscow. And because of its energy resources and access to the Pacific Ocean, it is quickly becoming more strategically important to Russia – and thus to the region.

What Happened: Several meetings are worth noting. On Feb. 20, the head of Russia’s Corporation for the Development of the Far East and the Arctic met with India’s ambassador to Russia to discuss regional development. They pledged to continue negotiations over a plan for India to supply the area with coal. A few days earlier, after meeting with Russian Foreign Minister Sergei Lavrov, India’s deputy foreign minister visited the Russian Diplomatic Academy, where he made clear that one of the goals of his trip was to enhance economic cooperation with the Far East. This is in addition to discussions Russia held with India (and Japan) some two weeks ago over economic, investment, scientific and technical cooperation in the region.

Bottom Line: Financial constraints have kept Moscow from developing the Far East as much as it would like. Instead, China is the district’s most important investor and trade partner. China is also, however, a regional competitor of India, which is clearly trying to compete with and undermine the influence of China in the region. To that end, it is finally implementing the “Act Far East” policy Prime Minister Narendra Modi announced in Vladivostok in 2019 – a policy meant in no small part to counterbalance Beijing. As for Russia, developing the Far East, even with foreign partners, generally serves Moscow’s purposes. China is much less happy with the competition.

[Crafty_Dog]

August 4, 2021
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The State of Russian Inflation
Moscow will want a semblance of stability heading into elections.
By: Ekaterina Zolotova
Economic problems accompanied the COVID-19 pandemic, and like the viral outbreak itself, they haven’t really gone away. Perhaps none is more talked about than inflation, which naturally becomes an untenable problem when prices grow so high that people are unable to pay for basic necessities. Take, for example, Russia, which had been struggling for years even before the pandemic.

The good news is that, according to Russia’s Ministry of Economic Development, Russia's gross domestic product increased by 10.1 percent in the second quarter of 2021 compared with the second quarter of 2020 and by 1.5 percent compared with the second quarter of 2019. The jump is due to a rapid recovery of key economic sectors and of the labor market. All the while, Russian inflation was kept in single digits.

The bad news is that this is only a preliminary estimate; more accurate assessments may be less rosy. Increased growth, for example, can be explained by the low baseline the growth started from. As for inflation, Russia has more complex structural criteria that factor into it. And in any case, rising inflation coupled with constantly falling incomes, as is the case in Russia, will create additional pressure on everyday Russians. Moscow, then, is again looking for ways to lower inflation (and solve other challenges) while trying to achieve a semblance of stability before the September elections.

Strategic Changes

Before the Soviet Union fell, its planned economy used fixed state prices for the vast majority of goods and services. Though this all but eliminated monetary inflation, it didn’t do anything to mitigate latent inflation – that is, the periodic shortage of goods. After the union collapsed, Russia lost economic ties to its satellite states, including arable land and productive capital. But more than that, it lost its international standing. So establishing influence in the post-Soviet space and attracting investment in the creation of new production facilities became a priority for Moscow. This required several strategic changes, not least of which was participating in world trade. Participation in the global economy, however, raised domestic prices.

In fact, in the early years of its existence, Russia faced a fairly long period of high inflation. Russia was in a state of political crisis in which it lost control over the money supply in the economy. At the same time, the continuing production declines reduced the volume of commodity supplies. Thus in 1992, annual inflation reached 2,508.85 percent. Moscow got that figure down to 11 percent by 1997 but only through an anti-inflationary exchange rate policy aimed at stabilizing and predicting the exchange rate of the ruble and in part by a contraction in demand.

But the government couldn't tame inflation for long. A financial crisis caused inflation to spike again the next year. Then, in the 2000s, the rise in oil prices on the world market, which led to a sharp increase in the inflow of foreign exchange, started to have an inflationary impact. From 2007 to 2009, oil prices and a lower ruble exchange rate again caused increased inflationary expectations among the population, whose income growth was unsustainable. Only the tight monetary policy of the Bank of Russia made it possible to stabilize the market exchange rate of the ruble. Moscow's tax maneuver in the oil sector also somewhat reduced its dependence on oil prices. And though policies such as these lowered inflation, they also slowed economic growth.

Russian Inflation Since the Fall of the Soviet Union
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Over the past few years, Russia has been able to sustain a “creeping inflation” with which the people and policymakers alike were comfortable, but it too proved unsustainable. The bank’s inflation target on an annualized basis is close to 4 percent. Since 2020, the growth in prices has gone beyond the target. In short, inflation has set record highs over the past five years as the growth of consumer prices in June reached 6.5 percent.

Potentially Unmanageable

The head of the Bank of Russia believes inflation will be a long-term problem, and the government will have to redress it on a number of fronts. First, the Ministry of Economic Development said that inflation was largely imported from the world food markets, since the main channel for inflation in Russia is exports – which is reflected in prices in the domestic market. (For example, a good harvest usually means cheaper wheat, but last year was not usual; prices started to grow because world prices increased. A floating duty on grain exports was introduced to contain price increases in the domestic market.) Although it is not the heaviest hitter in international trade, Russia remains a leader in certain commodity markets and a driver of regional trade. It also manages to maintain its position as a reliable supplier of energy resources to Europe and Asia, mainly due to the availability of infrastructure already in place – infrastructure that gives Moscow certain leverage in political and economic matters. In this regard, the structure of Russia's trade portfolio remains unchanged: Russia exports certain goods – mainly hydrocarbons, raw materials, weapons and foodstuffs – and remains dependent on oil revenue, which comprises a significant part of the budget and the reserve fund.

Second, imports have to be purchased at new prices and transported at new prices. Russia's most important commodity imports are machinery and equipment, the chemical industry, food products and raw materials for their production. Prices of all these goods increased, and despite the Kremlin's introduction of an import substitution policy, this only enhances the influence of international trade processes on the Russian economy. (The rise in prices for container shipments also has an impact on the inflation forecast.) In the first quarter of 2021, the increase in prices for imported products came to 15 percent – the highest ever during this period of inflation targeting by the central bank.

Russia's Elevated Food Costs
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Third, a weakening currency is also a traditional cause of inflation, since the price of imported goods rises. Despite a rise in oil prices, the Russian ruble remains weak – a consequence of import substitution. Expansion of the money supply through mass lending compounds the problem. Personal incomes have been consistently declining for several years, and in the first quarter of 2021, their annual decline accelerated again. Russian citizens seem to be trying to compensate with loans.

It’s worth noting that these problems have long been familiar to Russia. Despite the introduction of so many innovations, the Russian economy has always been inefficient and marked by regional disparities in production. Its labor force is also inefficient compared with other major countries; the output per employee is still several times less than in the U.S. and the EU. The shadow economy and the underdevelopment of the financial market add to inflation expectations.

In sum, the global rise in prices, caused by the wave of global demand, puts pressure on the growth of consumer prices, and this is becoming a problem for Russia primarily because, in contrast to many other countries, Russia will not be able to quickly deal with inflation. Of course, Russia is not in danger of collapse or hyperinflation in the near future. But in a country that has high levels of poverty, that lacks growth in real income, that has households that spend as much as 50 percent of their income on food, and that is a major trading partner for even poorer nations in the region, inflation could be a potentially unmanageable problem.

And so Russia faces a difficult choice: ensure economic growth when inflation rises, or keep inflation low for the people at the expense of growth. Moscow tends to choose whatever is best in the short term, especially during election season. Thus there has been a modest decrease in the prices of some goods, thanks in part to export duties and the floating duty mechanism. But the issue of domestic investment and increasing competitiveness – which must be addressed simultaneously to suppress inflation and to move to sustainable high-quality growth – still remains a painful thorn for those who will shape the country's course after September.

[Crafty_Dog]

   
Brief: Russia Warns of ‘Internal Threats’
Moscow is particularly sensitive to anything that could destabilize the country.
By: Geopolitical Futures
Background: More than most, Russia’s leaders have an imperative to maintain their country’s unity. Russia’s size, multinational demographics, uneven living standards and poorly developed infrastructure make this as difficult as it is urgent. It’s why the Kremlin is so sensitive to potential threats and closely monitors any flashpoint or hotbed of activity that could destabilize society.

What Happened: Speaking at the All-Russian Youth Educational Forum, Russian Defense Minister Sergei Shoigu said internal threats are more dangerous to the country than external ones. Such problems, he argued, could make Russia go the way of Yugoslavia, Libya, Iraq or Syria. Related: Last week, Shoigu alleged that there are propaganda centers located in Warsaw, Riga and Tallinn that are meant to undermine Russia.

Bottom Line: It’s a curious statement: vague in that Shoigu didn’t call out anything in particular by name, but specific enough about internal affairs to pique our curiosity. That it was made at all calls into question the country’s stability, especially if he was trying to head off something in the future.

[Crafty_Dog]

https://washingtontimes-dc.newsmemory.com/?token=37d289b176f81fc626f19de6b26c4a41_6149dd55_6d25b5f&selDate=20210921

[Crafty_Dog]

October 31, 2022
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Good News and Bad News for the Russian Economy
Silver linings can’t paper over nearly irreconcilable costs.
By: Ekaterina Zolotova

Years before the Russian war in Ukraine – in fact, years before Russia was even under sanctions – authorities in Moscow faced criticism from their constituents for “selling” the country’s resources and companies to foreign interests. The concerns were well founded: Foreign chains entered the market, gradually gained popularity and eventually conquered their markets, however niche, oftentimes becoming the largest companies in their respective industries.

Today, many of these companies are leaving, sometimes selling their businesses. The silver lining for Russia is that this allows Russian entrepreneurs to fill the void, even as businesses can skirt sanctions by importing goods from third-party countries. And so, after eight months of war, Russia seems to be adapting to new realities but continues to face logistical difficulties and general uncertainty, as evidenced by slowing production indicators and scrupulous preparation of upcoming federal budgets.

Better Than It Looks

Russian sanctions have been in place since 2014, but rarely did they affect the daily lives of ordinary citizens. The lone exception was agricultural products, which were replaced easily enough by domestic production and imports from Eurasian Economic Union countries. All the while, international companies continued to operate and even open new branches. Still, Moscow took steps to substitute imports of sensitive goods, knowing that the conflict in Donbas – which was largely responsible for the imposition of sanctions in the first place – was unresolved and any intervention in it could lead to tougher sanctions.

But the new sanctions levied after the invasion were much more severe in that they dramatically reduced what Russia could import. (Exports were comparatively less affected. In terms of value, they remain at high levels thanks to rising prices for raw materials and energy resources and to the pivot to Asian markets to offset losses in Europe.) According to preliminary estimates from Russia’s central bank, imports will fall by 32.6-36.5 percent by the end of the year. Meanwhile, foreign businesses took flight. By October, some 317 global companies left the Russian market, the most notable of which included Ikea, McDonald’s and Coca-Cola, which had a fairly large number of employees and some infrastructure and factories in Russia. Almost all major participants in the automotive industry have suspended operations at their production facilities. The disconnection of the SWIFT payment system, ideological disagreements with Moscow and, most important, logistical difficulties with the delivery of goods have called into question the prospect of conducting business in Russia henceforth.

It’s not an ideal situation for Russia, of course, but it’s not as bad as it may sound. For one thing, not all companies completely stopped their activities. Some either reduced investment and marketing programs, or temporarily froze operations until the dust settled. Many of those that have left have been replaced by Russian businesses. For example, Russian companies have replaced departed soft drink makers and restaurants, and Russian clothing brands have even found their way to the market. And naturally, these businesses employ workers the same way the old ones did. The formula for success seems to be to focus on the domestic market, shore up a little money, capitalize on good connections with countries in the post-Soviet space and, as important, be creative.

For another thing, some companies that left the Russian market in 2022 are already returning, even if they must do so under a different name. Reebok, for example, has made its way back under the auspice of a Turkish holding company called FLO Retailing Turkey.

Finally, businesses have created parallel imports and have used them effectively. In fact, after sanctions were imposed there was a marked increase in exports with trade partners in Russia’s near abroad. In the first half of 2022, exports from Armenia to Russia increased by 49 percent compared to the same period last year. Georgia increased trade turnover with Russia by roughly 50 percent while increasing exports to Russia by 11 percent. Imports from Kazakhstan rose by 30 percent. In other words, Russians can still buy an iPhone 14 or spare parts for their cars, and drink Coca-Cola, and fly out of the country using the services of other airlines.

Threats Remain

Even so, Russian industry isn’t out of the woods. In 2020-21 Russia recorded an increase in dependence on imports. The share of imports for non-food consumer goods such as clothes, shoes, appliances, cosmetics, etc. ranged from 40 percent to 90 percent, depending on the industry. (This ignores the fact there are simply no alternatives to some lost imports.) And there has been severe damage caused by the restriction to export products that Russia produces inefficiently: electronics, computers, components for the aerospace industry and other IT products. Even parallel imports cannot offset the damage. For example, because some foreign distributors have stopped cooperating with Russian partners, Russian companies have begun to import microchips through unofficial suppliers, often with poor results: As much as 40 percent of the microchips they receive from China are defective, compared with 2 percent before sanctions. (Anecdotally, this has prevented Russia from introducing a new 100 ruble banknote into circulation because only 20 percent of ATMs can accept them.)

Moreover, new Russian businesses have been unable to recoup all the jobs lost by departing companies, which created work throughout the entire production line, employing drivers, cleaners and so on. Decreased production will magnify these losses. McDonald's accounted for about a quarter of all taxes paid by the food services industry, and its share of local purchases of raw food materials, food products, packaging, and cleaning and detergents once reached as high as 90 percent, thus providing 100,000 jobs at suppliers' enterprises. Enough time has passed since the closing, sale and launch of the restaurant chain under a new brand to create trouble for those who worked directly or indirectly for the chain. Larger, more established companies like Mcdonald's can withstand things like decreased demand, declining real wages due to inflation, and consumer reluctance in the face of uncertainty better than their replacements can.

It’s no surprise, then, that the threat of bankruptcy looms, even if it is not visible in state statistics. Bankruptcy growth rates decreased in January-September 2022 due to a moratorium on bankruptcy, but analysts nonetheless predict a wave of bankruptcies in 2023-24, including among large enterprises and even entire industrial groups. The cause: the general accumulated negative effects of the COVID-19 pandemic, the 2022 sanctions, the departure of an active and solvent population abroad, and the general drop in supply and demand in different markets.

This is reflected in the indicators of economic development. Industrial production decreased by 3.1 percent in September compared to September 2021 – the largest decline in two years. An even bigger decline was seen in manufacturing industries such as coal mining, metal ores, and even oil and natural gas production.


(click to enlarge)

Implications

The implications of Russia’s economic decline are many. One of Moscow’s most urgent geopolitical imperatives is to unify, as best it can, the largest landmass in the world, often redistributing income and subsidizing key industries to do so. The biggest threat to the Kremlin, then, isn’t NATO but the population itself. Russians remember all too well the economic calamity of the 1990s, and the fear of reliving it compels ordinary citizens to stock up on things like buckwheat and toilet paper, and to distrust banks and overreact to everything from a new wave of coronavirus to a possible nuclear attack, which puts even more pressure on the economy, government and infrastructure. According to a survey conducted by the Levada Center, public sentiment has deteriorated sharply. Tension, anger, fear and melancholy are rampant, at levels not seen since 2000.


(click to enlarge)


(click to enlarge)

This means that by the end of the year, the Kremlin will be facing three key challenges: completing a costly military operation that could damage, at least, the reputation of Russian leaders; coping with growing stress among the population and businesses alike; and diversifying exports. Each of these areas requires massive efforts and funding. The Kremlin understands that the Russian economy is entering a period of recession but expects it to be followed by a smooth exit, which will require investment and spending.

In the meantime, it faces the more immediate, more difficult task of planning the next few budgets amid a costly war, struggling businesses, an unhappy population and reduced imports.

There are many questions, and just as many opposing answers, about how to build the future economy. Some have proposed a State Defense Committee to lead all military and economic issues. But with a limited budget and the need to redistribute resources between regions, save bankrupt industries and solve social issues, the militarization of the economy looks like an extremely expensive solution, not to mention the socio-economic consequences inherent in such an enterprise. The Kremlin has no choice but to make sure it has enough funds to overcome all three problems simultaneously. This is no easy thing, and obviously the Kremlin is in no hurry; it’s biding its time, hoping the war in Ukraine tips in its favor. The most dangerous prospect will not be a budget deficit but an imbalance in all three areas, which will create an imbalance in the economy and in society.

[G M]

https://ricochet.com/1214468/finnish-intelligence-officer-explains-the-russian-mindset/

[Crafty_Dog]

Very good find!

[Crafty_Dog]

The Implications of Russia's Bleak Economic Outlook
11 MIN READJan 27, 2023 | 22:27 GMT


Russia's economic struggles are unlikely to alone force political change or de-escalation in Ukraine in the coming year. But medium-term challenges and the country's bleak structural outlook will undermine President Vladimir Putin's authority and complicate Russia's war efforts in Ukraine. A year after launching its war in Ukraine, Russia's economic outlook is bleak, but the risk of an acute crisis remains low. However, Russia's economic situation will likely worsen on Feb. 5, which is when the G-7's price cap on Russia's refined fuel sales will enter force, complementing the price cap on Russian crude that's been in place since Dec. 5. Moscow will likely continue to conceal and manipulate its economic data to avoid panic, which it has done since the start of the Ukraine invasion. But Russia's economy is slated to further contract in 2023 amid falling global prices for oil and gas, which have in recent years constituted approximately 20% of the country's GDP, 60% of its exports and 40% of its government's budget. The impact of Western sanctions and the G-7 price caps is also forcing Russia to sell its hydrocarbon exports at significantly discounted prices, further eating into the country's energy revenues. Russia's primary export-grade crudes, for example, are currently selling at about $40-$45 a barrel, amounting to a 50% discount compared with Brent crude (which is currently about $88 a barrel).

On Dec. 27, Russian First Deputy Prime Minister Andrey Belousov said the government expected Russian GDP to decline by 1% in 2023.
Russia's Economic Development Ministry forecasts a decline of 0.8%, while Russia's central bank forecasts a fall of 2.1%. Such forecasts still tend to be more optimistic than those from outside analysts. The International Monetary fund expects Russia's economy to contract by 3% in 2023, while a Bloomberg poll of economists from December estimates a 2.5% contraction. The chief economist of Alfa Bank, Russia's largest private commercial bank, forecasts a 6.5% contraction next year amid Russia's falling consumer demand, lower investment and loss of export potential.

Russia's economic contraction in 2022 would have been much larger if not for high global commodity prices (many of which Russia exports) in the months following the invasion. Oil prices this year are unlikely to compensate for Russia's falling oil and gas production in 2023 amid Moscow's inability to supply buyers amid a lack of tankers and sanctions. However, China's reopening amid the easing of COVID-19 restrictions and better-than-expected Western economic data will significantly support Moscow. The International Energy Agency estimates Russian oil production to fall around 1.6 million barrels per day (bpd) in 2023, which is a far cry from its pre-war levels of 9.7 million bpd. Russia's own 2023 budget projects a 23% fall in all oil and gas revenues compared with 2022.

On Jan. 11, Russian President Vladimir Putin ordered Deputy Prime Minister and former Energy Minister Alexander Novak to figure out how to prevent the high discounts at which Russian oil is currently being sold on global markets from creating problems for the Russian budget. Russia will soon be forced to offer discounts for its refined products (like diesel) as well. Such price slashes could be even steeper since tanker capacity for Russian refined products is more strained than it is for crude oil, which could force Russia to reduce domestic refining and sell more of its oil as crude. Russia's dependence on a small number of large buyers for its oil, namely China and India, will continue to give those states immense bargaining power over Moscow.

While Russia's economy will continue contracting and its budget deficit will grow, lower inflation and historically low unemployment levels will mitigate economic and political risks for Moscow in the short term. As in 2022, Russia's 2023 economic contraction will probably not significantly undermine political support for Putin, or lead to military production shortfalls that meaningfully affect Russia's ability to continue waging its war in Ukraine. This is largely due to Russia's low unemployment rate, which currently stands at 3.7% (this does not include military personnel, who are considered employed), with only 2.7 million Russians unemployed. With Russia experiencing a labor shortage, workers in the country now face less competition and feel empowered to seek high wages, often found in armaments industries. While this will fuel inflation, Russia will likely keep domestic consumer prices at acceptable levels in 2023; in fact, there are reports the Russian government is concerned about inflation being too low and thereby contributing to the country's demand stagnation. Russia's 2023 federal budget deficit is likely to far exceed the 2% of GDP forecast by the government (which was based on Russian oil selling at around $70 per barrel — well above the $40-$45 a barrel Russia is currently receiving). But Russia's growing deficit is unlikely to precipitate significant near-term economic repercussions for Moscow. This is because prior to the Ukraine invasion, Russia maintained one of the lowest debt-to-GDP ratios in the world among major economies at under 17%, and still has a substantial National Wealth Fund with which to plug the deficit.

Price growth in Russia has been significantly below 3% since September, below the Russian Economic Development ministry's 5.5% target and the Central Bank's 5-7% goal. Russian officials are worried that too slow of price growth will fuel mid- to long-term problems, including reduced output, increased unemployment and falling incomes.

The head of Russia's central bank, Elvira Nabiullina, has indicated that Russia's widening budget deficit could mean high inflation and, subsequently, prompt higher interest rates that further choke off the prospect of economic growth. But this does not pose an acute threat to Moscow's finances for two reasons. For one, the Russian government can borrow internally, having successfully issued three federal loan bonds on Nov. 23 that raised a total of 1.44 trillion rubles, or about $21 billion (the main buyers of these bonds were large domestic banks that borrowed the record sum of rubles from Russia's central bank through repo transactions, and this has so far not caused a significant increase in inflation). And secondly, Moscow can also continue to sell off assets from its sovereign wealth fund such as Chinese currency — the liquid portion of which, at current rates, would not be exhausted until 2025.

In the medium term, Russia's attempt to create a semi-autarkic economy will translate to declining living standards and greater difficulties in growing the country's defense production. But these impacts are unlikely to alone cause the political change or weapon shortages needed to end the war in Ukraine. Russia's most pressing medium-term economic challenge stems from its failure to replace key imports from the West, many of which are currently targeted by Western sanctions. The value of Russian imports has fallen by roughly 25% since the start of the war, and almost all sectors of Russia's economy relied on imported goods in some capacity prior to the invasion. Russia's import dependence extends to consumer products and industrial components, which have helped raise the standard of living in the country over the past 20 years. But more importantly, Russia remains highly reliant on imports of high-tech components and critical materials for military production.
Russia cannot, for example, build sufficient semiconductors and other electronics for its military production, let alone its overall domestic needs. Furthermore, since 2014, Russia established import substitution budgets intended to at least give it a head start on replacing key products and goods following the post-invasion collapse of imports. But the program has been widely seen as a near-total failure, as Russia neglected to establish domestic production for key machinery and technology, and is also still years away from doing so for key industries — leaving the country almost completely dependent on China for imports. But luckily for Russia, Western sanctions are leaky, enabling Russia's intelligence services to continue their long history of acquiring sanctioned goods and technology covertly. Russia can also secure many consumer goods and some key equipment through gray import schemes via China, Kazakhstan and Turkey. These two factors will mitigate the impact of Russia's failure to establish domestic production for the foreseeable future.

In 2014, the Russian government introduced an import substitution program that provides subsidies to businesses creating analogs for critical technologies and components previously purchased from the West. But in May 2022, influential Russian senator Andrey Klishas acknowledged that the program had 'completely failed' and that now the government's only real plan was to 'transplant our industry, and with it our economy, to a new, now Chinese, needle.'

Russia's history of stealing electronic and other technology from the West dates back to the Soviet era and earlier. The country's recent success in these efforts is evident in public reports detailing Western components illegally present in Russian military hardware. An August 2022 report by the U.K.'s Royal United Services Institute identified 450 unique microelectronic components of Western manufacture, most of which were subject to export controls, in 27 Russian weapons systems recovered in Ukraine.

In the long term, structural economic issues — including Russia's demographic decline, dependency on energy exports, and inability to attract investments — will severely restrain the country's growth potential, which could eventually threaten the war's popularity in Russia and the government's capacity to continue it. Moscow will not indefinitely be able to finance its deficit internally with monetary intervention, nor will it be able to replace its imports with domestically made substitutes in an economically viable manner in the coming decade. Many years down the line, medium-term challenges may leave the government unequipped to prevent a more substantial economic crisis in Russia, as the rents needed to make the investments to end its oil and energy export dependency are falling because Russia's average cost of production per barrel rises due to the lack of Western tech. Russia is also not making those investments anyway amid its contracting economy and use of budgetary resources on the war. Should Russia's export revenues from commodities continue to fall, this could eventually instigate a balance-of-payments crisis in Russia in which foreign investors would not intervene to bail out Russia. In the wake of such a crisis, even investors from friendly countries to Moscow would largely withdraw their capital, though China would likely preemptively intervene and finance Russia to prevent such an outcome. In any case, adding to Russia's gloomy outlook are additional structural factors, including a worsening demographic outlook amid ongoing mobilization that will exacerbate labor shortages. Growing state intervention in the Russian economy (which was already very high before the invasion) will also further limit Russia's productivity and growth potential as once-productive, private areas of the economy increasingly fall under government control. In all, low domestic savings and investment rates driven by stagnant GDP will put an even greater burden on the Russian government to prop up the economy — an increasingly politically risky and difficult task amid the need to simultaneously procure resources and manpower for the war in Ukraine.

Russia's stagnant economy won't make Russia's foreign policy more adventurous and will not have a major political impact in the near term. It will, however, discourage foreign investment and somewhat empower political reformists, though they are still unlikely to secure power should Putin leave office. Russia's struggling economy is unlikely to lead to major changes in the country's foreign policy, which has already become more aggressive since the invasion of Ukraine. Russia's foreign policy is unlikely to become significantly more hawkish, given the country's high losses of men and materials in Ukraine. The only serious potential target for such aggression, Kazakhstan, will also maintain its ties with Moscow and is closing its eyes on gray import schemes through its territory, aiding Russia. Still, struggles to attract significant new foreign investment — even from countries friendly to Russia — will cast doubt on the effectiveness of Moscow's foreign policy course. This will slightly empower reformers in Russia calling for reductions in tensions with the West and de-escalation of the war in Ukraine in order to begin restoring Russia's previous role in the global economy. But for now, there is little reason to believe that such economic arguments would prevail over more hawkish views calling for the continuation and escalation of the war in Ukraine in the still unlikely event that Putin suddenly leaves office.

[Crafty_Dog]

April 25, 2023
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Victory Day
By: George Friedman

We are a few weeks away from the anniversary of Victory Day, which marks the Soviet Union’s defeat of Nazi Germany. The annual parade in Moscow boasts pictures of famous Soviet and Russian leaders and heroes standing atop the Kremlin, watching all the new military weapons roll by. For U.S. intelligence, it’s like Christmas Day, as analysts are gifted a treasure trove of new military hardware to parse and analyze. But for anyone old enough to remember World War II, it’s a recollection of despair. A Russian associate once told me that those who died early and quickly were the war’s only victors. He took pleasure in the fact that Russia, whose chances of survival were dismissed by much of the world, handed to the Germans everything they had dealt out and more.

My father, who was born in Hungary, fought in World War II in his own way. Hungary allied with Germany and sent troops to fight Russia. A forced laborer, my father was at Voronezh north of Stalingrad, where the Hungarians and other allies were deployed. From his point of view, the Russians and the Germans were the same in that they were to be evaded at all costs.

The war began with a treaty between Germany and Russia. Together they agreed to invade Poland, which they did comfortably, with Russia taking the eastern portion. For Germany, the treaty with Russia vastly increased the chances of defeating Poland. Germany was unsure about it; it would be their first major campaign, and Berlin didn’t know how well Poland or its own army, for that matter, would fight. A German attack from the west and a Russian attack from the east simplified the matter. In any case, Germany saw Poland as the first step in a far more ambitious campaign. It wanted Europe, and Europe included Russia. Berlin intended to turn on Russia in Poland and drive toward Moscow to subdue a country of vast resources. The ensuing war lasted until 1945. The truth is we will never know how many died, only that a generation’s representatives stood in front of the Kremlin when the first parade was held.

To be sure, Russians regard the war as a brutal obscenity, but they also regard it as sacred. The dead might not be saints, but, in Russians’ eyes, they are worthy of the name. The viciousness of the Stalin regime is no secret, yet many in Russia still regard the war as a moment of test and triumph, a time that proved its worth on a global stage. Russians regarded their country as a superpower for a generation – not just because it had nuclear weapons but because it had the Red Army, which defeated Hitler and conquered much of Europe. Poles, Czechs, Hungarians, Romanians and half of all Germans bent their knees to Russia. It was not conquest by invasion, according to the Russians, but the consequence of self-defense.

Many Russians saw the collapse of the Soviet Union as an opportunity to become Western. To others, it was an embarrassment. Russia was not in their eyes the land of the heroes of World War II but a land of weakness. It had proved wanting. The land of Gen. Georgy Zhukov, the great commander of World War II, was now in the hands of shifty oligarchs.

The idea that the Russians had done this to themselves through corruption and weakness was as unbearable as such a fate might be to other countries. It was even worse since Russia had defeated Hitler and Napoleon. Russians saved Moscow because of the great distance they put between their capital and Europe. Now that distance was gone. They saw the United States as the dominant force in Ukraine, which now bordered Russia. For many Russians, it was nothing less than a national catastrophe.

There are those who blame their former ally and fellow superpower in the U.S. for the fall of the Soviet Union. To them, the idea that the heroes of World War II lost their country was less palatable than the idea that it had been torn down by America – an enemy they saw as worthy of the crime. The presence of the U.S. in Poland, a country they had once conquered and ruled, is for Russia not just a cruel trick of history but a carefully laid out American plot.

I think about cultural traditions like these as the Ukraine war drags on. I will not lay out the United States' defense, but I invite you to consider the nightmare Russia went through from 1945 and how many of the places of battle and war are still spoken of with pride and bitterness by Russians today. I am an American, and I know where Fulda Gap was, but in facing a nation that is actually an enemy, it is useful to understand the nightmares and compare them to ours.

[G M]

https://www.theguardian.com/world/2020/oct/20/orthodox-cathedral-of-the-armed-force-russian-national-identity-military-disneyland

April 25, 2023
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Victory Day
By: George Friedman

We are a few weeks away from the anniversary of Victory Day, which marks the Soviet Union’s defeat of Nazi Germany. The annual parade in Moscow boasts pictures of famous Soviet and Russian leaders and heroes standing atop the Kremlin, watching all the new military weapons roll by. For U.S. intelligence, it’s like Christmas Day, as analysts are gifted a treasure trove of new military hardware to parse and analyze. But for anyone old enough to remember World War II, it’s a recollection of despair. A Russian associate once told me that those who died early and quickly were the war’s only victors. He took pleasure in the fact that Russia, whose chances of survival were dismissed by much of the world, handed to the Germans everything they had dealt out and more.

My father, who was born in Hungary, fought in World War II in his own way. Hungary allied with Germany and sent troops to fight Russia. A forced laborer, my father was at Voronezh north of Stalingrad, where the Hungarians and other allies were deployed. From his point of view, the Russians and the Germans were the same in that they were to be evaded at all costs.

The war began with a treaty between Germany and Russia. Together they agreed to invade Poland, which they did comfortably, with Russia taking the eastern portion. For Germany, the treaty with Russia vastly increased the chances of defeating Poland. Germany was unsure about it; it would be their first major campaign, and Berlin didn’t know how well Poland or its own army, for that matter, would fight. A German attack from the west and a Russian attack from the east simplified the matter. In any case, Germany saw Poland as the first step in a far more ambitious campaign. It wanted Europe, and Europe included Russia. Berlin intended to turn on Russia in Poland and drive toward Moscow to subdue a country of vast resources. The ensuing war lasted until 1945. The truth is we will never know how many died, only that a generation’s representatives stood in front of the Kremlin when the first parade was held.

To be sure, Russians regard the war as a brutal obscenity, but they also regard it as sacred. The dead might not be saints, but, in Russians’ eyes, they are worthy of the name. The viciousness of the Stalin regime is no secret, yet many in Russia still regard the war as a moment of test and triumph, a time that proved its worth on a global stage. Russians regarded their country as a superpower for a generation – not just because it had nuclear weapons but because it had the Red Army, which defeated Hitler and conquered much of Europe. Poles, Czechs, Hungarians, Romanians and half of all Germans bent their knees to Russia. It was not conquest by invasion, according to the Russians, but the consequence of self-defense.

Many Russians saw the collapse of the Soviet Union as an opportunity to become Western. To others, it was an embarrassment. Russia was not in their eyes the land of the heroes of World War II but a land of weakness. It had proved wanting. The land of Gen. Georgy Zhukov, the great commander of World War II, was now in the hands of shifty oligarchs.

The idea that the Russians had done this to themselves through corruption and weakness was as unbearable as such a fate might be to other countries. It was even worse since Russia had defeated Hitler and Napoleon. Russians saved Moscow because of the great distance they put between their capital and Europe. Now that distance was gone. They saw the United States as the dominant force in Ukraine, which now bordered Russia. For many Russians, it was nothing less than a national catastrophe.

There are those who blame their former ally and fellow superpower in the U.S. for the fall of the Soviet Union. To them, the idea that the heroes of World War II lost their country was less palatable than the idea that it had been torn down by America – an enemy they saw as worthy of the crime. The presence of the U.S. in Poland, a country they had once conquered and ruled, is for Russia not just a cruel trick of history but a carefully laid out American plot.

I think about cultural traditions like these as the Ukraine war drags on. I will not lay out the United States' defense, but I invite you to consider the nightmare Russia went through from 1945 and how many of the places of battle and war are still spoken of with pride and bitterness by Russians today. I am an American, and I know where Fulda Gap was, but in facing a nation that is actually an enemy, it is useful to understand the nightmares and compare them to ours.

[Crafty_Dog]

Telling signs. Russia’s Finance Ministry published a preliminary assessment of the country’s federal budget so far this year. According to its estimates, budget revenue from January to April declined by 22 percent (to 7.8 trillion rubles, or $101 billion) compared to the same period in 2022. Oil and gas revenue plummeted by 52 percent from a year ago to 2.3 trillion rubles thanks to the falling price of Urals oil and to Russia’s declining natural gas exports. Expenditures, meanwhile, climbed by 26 percent to 11.2 trillion rubles. Russia’s federal deficit thus spiked to 3.4 trillion rubles, nearly 850 billion rubles more than the government had anticipated for the whole year. Dmitry Peskov called the situation “absolutely controllable.”

[Crafty_Dog]

August 9, 2023
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Russia’s Economic Rebound Nears Its Limits
The rapid recovery could give way to an equally sudden crash.
By: Ekaterina Zolotova

Despite unprecedented sanctions and massive expenses in the war in Ukraine, the Russian economy has managed to stay afloat for more than a year and a half. Even slight growth is not out of the question. The economy’s resilience can be explained by the revival of consumer demand, greater private investment, import substitution policies and government spending on defense. However, rosy rhetoric notwithstanding, serious internal and external challenges remain for the Russian economy.

Growth Factors

No strangers to economic strife, Russia’s policymakers could rely on a familiar playbook when confronted with Western sanctions following the invasion of Ukraine in February 2022. In the 1990s, large budget deficits financed by short-term government borrowing quickly caught up with Russia, forcing the country to devalue the ruble and submit to an International Monetary Fund rescue in 1998. By contrast, savings from oil export revenues enabled the Kremlin to withstand the 2008 global financial shock comparatively well. Today, Moscow puts a premium on maintaining large reserves and avoiding high levels of external debt. The economy suffered another setback in 2014-15, coinciding with the imposition of Western sanctions related to Russia’s annexation of Crimea, but the primary cause of the slowdown was a sharp fall in oil prices – partially analogous to the situation today. A floating exchange rate enabled the Russian central bank to save foreign exchange reserves and focus on fighting inflation caused by the ruble’s depreciation.

Russia is currently focused on mitigating downward pressure on the ruble, monitoring the federal budget and plugging gaps with the National Wealth Fund, which consists of about 12 trillion rubles ($125 billion) from oil and natural gas revenues. Last year’s windfall from oil and gas exports reduced the government’s need to tap the NWF, but revenues from energy are down significantly this year. But thanks to higher domestic production and imports, the non-oil tax take is much higher. For example, in June it was above even pre-pandemic levels – ironically supporting the Kremlin in its long-standing goal of diversifying its revenue streams. (However, industries that rely on imported goods run the risk of price increases.) Additionally, the Kremlin plans a 10 percent one-time excess profit tax on large businesses. It could use that money to cover the budget deficit, or it could reinvest it in new import-substituting production, which would have positive effects down the road.

Russian Federal Budget
(click to enlarge)

The ruble’s recent decline also indicates that the central bank is allowing the exchange rate to fluctuate. A weaker ruble comes with some advantages. For example, the state receives more revenue in the national currency as exporters convert their increased oil and gas forex earnings on the Moscow Exchange into rubles so they can pay taxes and expenses. (The Russian government prefers an exchange rate of between 80 and 90 rubles to the U.S. dollar.) To relieve some pressure on the ruble, the Russian Finance Ministry decided not to buy foreign currency with its oil and gas windfall in the coming months, as prescribed by budget rules. (According to the rule, the ministry, with the help of the central bank, buys yuan and gold when revenues exceed a specific threshold.)

Dynamics of U.S. Dollar/Russian Ruble Exchange Rate
(click to enlarge)

Other positive factors for the Kremlin include rising oil prices, improving business sentiment and relatively low inflation. Specifically, Russian crude and petroleum products have recently begun selling above the G-7’s price caps. The central bank’s business climate indicator remains close to the highs of the last decade, and estimates of overall current conditions are above the 10-year average. And inflation in the first half of the year was just 2.76 percent. Further, after falling by 1.8 percent in the first three months of the year, the economy grew by 4.8 percent in the second quarter compared with the same period in 2022. (However, much of this can be attributed to base effects.) Lending and business investment remain high; small and midsized private businesses in a few sectors have benefited from liberalization; and weapons production is a major boon for growth.

Reasons for Concern

Still, Russia’s economy faces two important, interconnected challenges. First is the risk of overheating, which could destabilize the economy without improvements in spending or Russia’s economic isolation from the West. Second, Russia’s exports could suffer from a potential slowdown in the global economy.

The central bank has been warning about potential overheating. Though it hailed the economy’s nearly completed return to pre-war levels of activity, the bank noted that this suggests Russia has almost exhausted its capacity for sustainable growth. Unexpectedly strong domestic demand (public and private) fueled Russia’s rapid recovery, but soon the country will need to increase either its own production or its imports to keep pace. The former will be difficult. Many firms are already operating at capacity, and companies have noted a shortage of workers.

At the same time, it is hard to ramp up imports given the higher costs and delays imposed by Western sanctions. By volume, Russian imports were already 16 percent lower in 2022, and although Moscow has made progress on redirecting trade toward “friendly” countries, it is still heavily dependent on foreign trade. The Ministry of Economic Development estimates that “unfriendly” countries now account for 35 percent of Russian merchandise exports, down from 58 percent at the start of 2022. Direct imports from the European Union fell to about 55 billion euros ($60 billion) from 89 billion euros. However, China’s share in Russian imports has grown to 34 percent from 25 percent. Neither has Russia weaned itself off foreign currencies, which are still used to settle about 70 percent of the country’s goods trade.

An even more serious challenge could come from an economic slowdown in Russia’s key trading partners. For example, Turkey has become a major buyer of Russian energy and a supplier of Western goods, but its economy is fragile. Turkish imports of Russian goods were 43 percent lower in June 2023 than a year earlier. Similarly, China, a crucial buyer of Russian energy, imported less oil by volume in June than it has at any point this year except January. Global demand is gradually weakening, and other countries in Africa, Latin America and Asia cannot always supply Russia with the goods it can no longer secure from the West.

The Kremlin’s optimistic assessments of the economy are not entirely misplaced. But the rapid recovery could give way to an equally sudden crash. Despite sanctions, Russia remains deeply embedded in international trade – only now with a smaller, less wealthy pool of partners. Import difficulties and maxed-out domestic production have already started to push inflation higher. A new round of overheating and recession may be just around the corner.

[Crafty_Dog]

August 14, 2023
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Daily Memo: Russian Ruble Falls, Pakistan Suspends Russian Oil Imports
Both developments are bad news for the Russian economy.
By: Geopolitical Futures
Blame game. The value of the Russian currency dropped on Monday to more than 100 rubles to the dollar, its lowest rate since March 2022, just weeks after the Russian invasion of Ukraine. The ruble has fallen by 40 percent over the past 12 months. An economic adviser to the Russian president blamed the central bank’s loose monetary policy for the currency’s weakening. Though he acknowledged the negative effects of a weak currency on the economy, he said the ruble will stabilize in the future.

Quality control. Pakistan suspended imports of Russian oil over complaints from refiners about its low quality. Pakistan Refinery has reportedly refused to process more Russian oil because it didn’t yield enough petrol.

Turkmen concerns. Turkmenistan expressed concern about Moscow’s statement last week that more countries could join its gas union with Kazakhstan and Uzbekistan. Turkmenistan is worried that the project, which is still under development, could be expanded to include one of its own major energy customers, China. In a statement, the Turkmen Foreign Ministry said the creation of gas unions and alliances in the region could affect its interests.

[Crafty_Dog]

Russian revenue. Russian oil and gas companies' revenue in the first three quarters of 2023 declined by 41 percent, according to Russia’s central bank. The drop was attributed to sanctions and lower energy prices. The average price of Russia's Urals oil in 2023 fell to $59.54 per barrel compared to $80.58 in 2022.

[Crafty_Dog]

A photo released by Russia’s Investigative Committee showing one of the houses in Derevyannoye that Igor Sofonov and his alleged accomplice are accused of having burned down following the murder of six residents in the village on August 1.
A photo released by Russia’s Investigative Committee showing one of the houses in Derevyannoye that Igor Sofonov and his alleged accomplice are accused of having burned down following the murder of six residents in the village on August 1. RUSSIAN INVESTIGATIVE COMMITTEE/TASS/ZUMA PRESS
By Matthew LuxmooreFollow
Dec. 5, 2023 12:01 am ET

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In early August, police in Russia’s rural northwest were called to the scene of a mass murder. In the charred remains of two homes set ablaze hours earlier, they found the burned, mutilated bodies of six local residents.

News of the massacre shook Derevyannoye, a village of 1,200 people, where sailing boats bob in Onega Lake and the border with Finland is a three-hour drive away. What was most shocking was the identity of one of the two suspects: a repeat offender freed from a maximum-security prison to fight in Ukraine.

Igor Sofonov had been in and out of jail for 20 years by the time he joined Storm Z, a unit of convicts created to bolster Russia’s war effort. If he and others survived long enough to complete their six-month contracts, they were promised their freedom through a secretive program of presidential pardons.

Sofonov survived, and returned to Russia with the remainder of his sentence for drug trafficking erased. He is among around 30,000 enlisted ex-prisoners, many of whom had been serving long prison terms for violent crimes, who have returned home to liberty.


A photo of Igor Sofonov posted to his account on VKontakte, a Russian social-media platform, shortly before he was dispatched to Ukraine.
Many are traumatized by their experiences of war, in which their underequipped, all-convict units, such as Storm Z, were commonly used in near-suicidal assaults. Others are emboldened by a Kremlin narrative that portrays them as heroes deserving respect.

Communities across Russia have been brutalized by scores of crimes perpetrated by these returning convicts, according to a Wall Street Journal review of court documents, interviews with friends and relatives of suspects and victims, and reports in Russian media. Rights activists said dozens more go unreported.

One man staged a shootout in a cafe, killing one person and seriously wounding another, according to court documents. Another is accused of raping two girls. A third, who had been convicted of murder three times, poured gasoline on his sleeping sister and burned her alive, according to the court’s press office.

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The offenses committed by the convict soldiers risk shattering Russian President Vladimir Putin’s narrative that the war protects Russia from its enemies.

“I don’t feel safe. Thousands of criminals are walking our streets,” said Anna Pekaryova, whose grandmother Yulia Buyskikh was killed in March by a convicted murderer, Ivan Rossomakhin. He had wandered the streets of her village 600 miles east of Moscow—swinging an ax and carrying a pitchfork—after fighting for the Wagner paramilitary force in Ukraine and returning a free man. “I have lost count how many times such crimes have happened.”

Prison population shrinks
Prisoners were routinely dragooned into armies for centuries up through World War II, when a renewed emphasis on the laws of war, and the professionalization of military service, sidelined the practice and made it taboo in the Western world. 

In the modern era, Napoleon deployed penal brigades as he scaled up the scope of warfare across Europe in the 19th century. Hitler had his Strafbataillon, and Stalin’s Red Army drafted criminals and political prisoners from the Gulag labor camps.

Few survived. Putin’s convict army has suffered heavy casualties, too—first under the direction of Wagner, led by Putin’s former lieutenant Yevgeny Prigozhin, then as the Russian army’s own penal units, formed after Prigozhin rebelled against the military leadership shortly before his death in a plane crash in August.

Wagner corralled convicts into disposable penal units that were thrown into the fray by commanders whose disregard for losses shocked even the most hardened Ukrainian soldiers. Ex-Wagner fighters said Prigozhin embraced a policy in place under Stalin of executing on the spot those who retreated.

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A Ukrainian unit commander passes the body of a dead Russian soldier at the front line in Andriivka, Ukraine. PHOTO: ALEX BABENKO/ASSOCIATED PRESS
When the prisoner recruitment started, Putin’s campaign in Ukraine had largely stalled, and his army needed more troops. Offering convicts their freedom was a way to expand the ranks without ordering an unpopular mobilization of more reservists.

In June, Putin confirmed that he pardons ex-convicts, and acknowledged that some reoffend. “This is inevitable,” he said. “But the negative consequences are minimal.”

In 2021, the Russian president pardoned just six people, according to the Kremlin, which hasn’t revealed the number of people given amnesty since the invasion of Ukraine.

Russia hasn’t confirmed the total number of convicts recruited by Wagner and the Defense Ministry, but figures from the prison service show a reduction of more than 35,000 in the country’s total prison population between May 2022 and January 2023, the peak of Wagner recruitment. It hasn’t published such figures since.

The Kremlin was asked in November by reporters whether it would reconsider its policy of pardoning people convicted of the most gruesome crimes, such as a member of a cannibal gang who returned to Russia that month after cutting short a prison term for multiple murders.

The policy remains unchanged, Putin’s spokesman Dmitry Peskov replied. He said that men freed from prisons to fight in Ukraine were “atoning for their crimes on the battlefield with their blood.”

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In September, a court in Rostov near the border with Ukraine sentenced 34-year-old convicted murderer Sergei Rudenko to 11½ years behind bars for strangling a woman to death after an argument over an apartment rental, according to prosecutors. He had been serving an 11-year sentence for murder and theft when the war began and was freed after fighting for Wagner, local media reports said.

Some well-known criminals have been freed. Sergei Khadzhikurbanov, who was sentenced to 20 years in 2014 after being convicted as an accomplice in the murder of investigative journalist Anna Politkovskaya, was pardoned after a six-month tour in Ukraine last winter with the Russian army. Politkovskaya was shot dead in the elevator of her Moscow apartment building in 2006 after writing stories that criticized the Kremlin’s war in Chechnya.


Sergei Khadzhikurbanov, shown at his trial, was sentenced to 20 years in 2014 after being convicted as an accomplice in the murder of investigative journalist Anna Politkovskaya. He was pardoned after a six-month tour in Ukraine last winter with the Russian army. PHOTO: PAVEL GOLOVKIN/ASSOCIATED PRESS
The pardons can also mean expunging the criminal records of repeat offenders. Olga Romanova, head of prisoners’ rights NGO Russia Behind Bars, said Russian courts are removing from databases the criminal records of many men amnestied to fight in Ukraine.

“No one wants these statistics,” Romanova said.

If they commit more crimes, they aren’t tried as reoffenders, meaning they can’t be punished to the full extent of the law. And some are given more lenient treatment by judges because they served in Ukraine, according to court records and interviews with lawyers representing the defendants.

The spate of crimes leaves the Russian state in a bind. Putin has lionized the Russian men who fight in Ukraine. War gives convicted criminals a chance to be depicted as the ultimate patriots, their portraits displayed in local museums devoted to war heroes. Some are invited to give talks at Russian schools, more than 60 of which have been renamed in honor of soldiers.

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Once convict recruits return to Russia, they are free to live their lives as pardoned men. Most struggle to find work and many look for ways to fight again in Ukraine by signing up with Defense Ministry units, according to Yana Gelmel, a Russia Behind Bars activist who regularly speaks with discharged convicts and convicts serving on the front lines.

There is no government program in place to resocialize them or smooth their transition to civilian life, she said, which leaves scores of villages like Derevyannoye worrying over what will come next.

‘They called us dogs’
The prison recruitments began in the summer of 2022, when Prigozhin, a catering entrepreneur who had served nine years in prison during the Soviet era, promised a state pardon to inmates who fought alongside regular Russian forces for his Wagner group in Ukraine.

When the first batches of pardoned convicts returned from Ukraine in January, Prigozhin lauded their exploits and said society should treat them with the utmost respect. “I told you I need your criminal talents to kill the enemy at war,” he said in a speech broadcast by Russian media as he stood on the tarmac beside a military aircraft that flew the men home. “Now those criminal talents aren’t needed.”


A video grab from footage posted this past May by the late chief of Wagner Group, Yevgeny Prigozhin, shows Prigozhin with soldiers in Bakhmut, a city they captured that month. PHOTO: CONCORDGROUP OFFICIAL/AGENCE FRANCE-PRESSE/GETTY IMAGES
By June, shortly before his death, Prigozhin said 32,000 of the convicts Wagner hired had returned to Russia, their records wiped clean, while the Defense Ministry had begun to scale up its own recruitment of prison inmates.

Sofonov, 37, who is accused of the killings in Derevyannoye, signed up to fight in October last year when Defense Ministry representatives visited the St. Petersburg prison where he was nine months into a four-year sentence on a drug trafficking charge, according to court records and Sofonov’s fellow inmates and relatives.

He created a new account on the Russian social-media platform VK, using his surname and his new military call-sign, the Karelian, after his home region. One of the first photos he posted shows him with three other men, all in military uniforms with rifles in their hands.

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“Everyone here is from the camp,” Sofonov wrote, using a Russian slang term for prison.

He left for Ukraine in December. “That’s it. I’m off,” he wrote on his VK page, beside a photo of himself in an olive-green coat with army patches. “Awaiting your return home, alive!” his mother, Lyudmila Sofonova, wrote in the comments section.

Sofonova, a single mother of five who lives several hours’ drive north of Derevyannoye, in a small village that has already lost three residents on the Ukrainian front lines, said she opposed her son’s decision to fight. “I told him, ‘You know this is a one-way ticket?’” she said in a phone interview. “He said ‘yes, but it’s still better than sitting in jail.’”

Anatoly Maslov, a soldier who met Sofonov in December during Russia’s costly offensive to take Soledar, a town in east Ukraine, confirmed that Sofonov joined the Defense Ministry’s penal battalion, Storm Z. Sofonov’s own posts on VK corroborate this. On Feb. 26, he wrote: “Storm detachment.” Later he replaced his profile picture with the emblem of Storm Z: a skull with a lightning bolt on its forehead.


Smoke rises after shelling in Soledar, the site of heavy battles with Russian forces in the Donetsk region, Ukraine. PHOTO: ROMAN CHOP/ASSOCIATED PRESS
Convicts are the lowest rung in Russia’s military hierarchy, routinely subjected to hazing. There is strict discipline—those who drink, take drugs or are caught trying to desert are executed, former fighters say. Captured Storm Z recruits interviewed in Ukraine by the Journal have said they were issued Soviet-era rifles and thrown into futile assault waves against well-defended Ukrainian positions.

One former Wagner fighter interviewed by the Journal said a member of his penal unit was savagely beaten in December, tied to a tree and left to freeze to death after a dispute with an officer. The fighter said he saw others shot for refusing orders.

The convict soldiers were also complicit in war crimes. The former Wagner fighter gave a detailed account of a massacre of civilians that he said his unit conducted in Soledar following the Russian takeover of the city. “They called us dogs,” he said of his commanders. He fled in January and has been hiding in Russian-occupied territory.

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‘Discovered himself’ at war
For many, the offer of cash and a pardon outweighed the fear of death. One Storm Z fighter said he received a salary of 70,000 rubles a month, double the average wage in his part of Russia. “I had a choice: rot in prison another eight years, or try to survive six months in Ukraine,” he said. “I chose the latter.”

The Russian Defense Ministry has never acknowledged creating Storm Z units. It didn’t respond to a request for comment on the scale of convict recruitment, on the origins of its prison recruitment drive or on the treatment of convict recruits.


Captured Russian soldiers at a prisoner-of-war camp in western Ukraine. Many of them are Storm Z fighters and other former prisoners. PHOTO: JOSEPH SYWENKYJ FOR THE WALL STREET JOURNAL

‘I had a choice: rot in prison another eight years, or try to survive six months in Ukraine,’ said one Storm Z fighter, pictured in a POW camp in western Ukraine. ‘I chose the latter.’ PHOTO: JOSEPH SYWENKYJ FOR THE WALL STREET JOURNAL
The last time Maslov saw Sofonov was in March, around the time Sofonov returned from Ukraine to Russia. “Demobilization,” Sofonov wrote on VK that month. Alexey, a friend of Sofonov’s, told the Journal that “he discovered himself” at war, finding at last a sense of purpose.

In a video message to Alexey on July 22, Sofonov said he was staying with his mother, helping with odd jobs. He said he wanted to marry a medic he met while recuperating from light shrapnel wounds in Russian-occupied Luhansk.

Sofonova, his mother, said her son was quiet after his return, refusing to speak about his time at war. He was wounded when a Ukrainian drone dropped a bomb into his dugout. The attack killed several of his fellow soldiers.

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She said he had lost his passport and because of that couldn’t find work back in Russia, and was despondent. And far from being treated like a hero upon his return, he had his jaw broken when he was mugged on a visit to his brother in Petrozavodsk, the regional capital. The assailants took his watch, his wallet and his military documents, Sofonova said.

In late July, Sofonov traveled to stay with his sister in a village a 30-minute drive from Derevyannoye. One evening he got a call from a friend he had served time with in jail, Sofonova said. The friend asked him to come to Derevyannoye, according to Sofonova, and to bring some booze.

Gelmel, the Russia Behind Bars activist, said men such as Sofonov often have delusions of grandeur. After years feeling no one needs them, they suddenly believe they were chosen by the state for the country’s defense and can commit new crimes without repercussions.

“They were in a system set up to control them,” she said of the prison system where many such men spend most of their lives. “And now no one has control over them any more.”

That night with his prison friend, on Aug. 1, Sofonov began drinking heavily. At around 2 a.m., residents said, the two men broke into a house in Derevyannoye, stabbing and killing the owner and his father when they tried to fend off the intruders.

They then entered a second house where a female acquaintance lived, and got into a fight with her husband. According to a person familiar with the case files, Sofonov shouted that everyone living in the house were “ukropy,” a derogatory term for Ukrainians. “We need to clean the place out,” he said, using military jargon. Investigators said the men killed four people in that house, before setting both houses alight to cover up evidence of their crimes.

Sofonov is now in pretrial detention as investigators gather evidence for trial. Since he has had his record wiped clean, according to relatives and the person familiar with the case, he won’t be tried as a repeat offender.

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Romanova from Russia Behind Bars said that as the crimes committed by reoffenders mount, the government is trying to keep convict recruits from returning home. In September, the head of the Russian parliament’s defense committee, Andrey Kartapolov, said recruitment of fighters by the Defense Ministry is “an ongoing process” and service members will only return home once the war is over. Convicts recruited by the Defense Ministry since April said they have been forced to renew contracts that were set to expire after six months.

Sofonov’s mother said men like her son should never have been released from prison. “If they end up in Ukraine,” she said. “They should stay there until the end.”

In Derevyannoye, where locals previously raised funds for the war effort and posted about their hopes that the “heroes” who left for Ukraine would return in one piece, many are now on edge. One resident said people are installing extra security measures and rarely leaving home in the evening. 

“We scrutinize everyone,” the resident said. “We used to sleep soundly. Now we listen out for every rustle after dark, and react to every bark of a dog.”

There is also another, more specific fear seeping through the village—the fear that Sofonov, if he is convicted and returned to prison, could again seek his freedom by fighting in Ukraine.

[Crafty_Dog]

38.
I am a big fan of both geopolitics and alternate history and I would like to ask you a question: in your opinion, without changing the overall situation too much, what could have been done to prevent the entire Wagner situation from happening in the first place and what would have changed on the ground? Maybe a requirement to sign a contract with the MOD from the start of the mobilization or maybe Shoigu's son joining Wagner or maybe something else? Hoping to hear from you soon

I don’t think the Wagner situation—namely, the ‘uprising’ and ‘march of justice’ on Moscow, as it was dubbed—could have been prevented. The reason is, the relationship between Wagner and the Kremlin was extremely toxic, and this had very deep roots that went back many, many years, long before the SMO.

There were stories about Wagner and the MOD’s toxic relationship in both Syria and Africa that would make your head spin. I’ve posted many of them, such as the two sides literally threatening to shoot down each other’s planes/helicopters, which was corroborated by a neutral third party from the Syrian army.

One of the most damaging alleged episodes revolved around the infamous Wagner attack on Deir Ezzor where the U.S. claims to have “killed hundreds of Wagner troops” in an airstrike. Several high profile figures like Israel Shamir have claimed that the MOD deliberately sabotaged Wagner to cut them down to size by secretly working with the U.S. to turn off Russian S-300 systems in order to allow U.S. to strike Wagner.

At the time this happened, no one in their right mind would ever believe such a thing could be possible, least of all me. But now in retrospect, I wouldn’t doubt it for a moment, given everything we’ve seen in Ukraine where the two sides have literally attacked each other multiple times. If you’re interested, you can actually read Shamir’s accounting of it here; it tells not only of the Deir Ezzor story but others as well, but keep in mind none of it is corroborated and the author takes a decidedly biased pro-Wagner and anti-MOD stance which could color his commentary.

The point is that their disagreements and rancor goes back a very long way, almost to the beginning. The SMO proved to be a culmination of the highly vexatious relationship because of the existential nature of the SMO. Everything was on the line for both sides, literally. That means no one was willing to compromise and old wounds were torn open between Prigozhin and the MOD.

Having Wagner sign contracts even at the beginning would likely have never worked for those very reasons. Prigozhin would never have given up his independence, and the project he considered to be his ‘baby.’ The only thing that could have prevented it would be less incompetence on the MOD’s part, which would have kept Prigozhin at bay. But that’s not something easily solvable either because it likewise had deep institutional roots stretching back through the entire post-Soviet era. The course of the SMO was a very painful correction process, a sort of harsh ablution like a snake shedding its skin. The process would always be messy and marked by fits and starts, as years of entrenched and calcified bad habits in the core of the system had to be chipped away like built up plaque. There’s no way to do this that would’ve placated Prigozhin.

So, in essence, my view is that the two were on an inevitable collision course whose intensity was magnified in every way by the unprecedented, existential nature of the SMO, where not only were reputations and careers on the line, but the entire corporeal existence of the various involved parties, PMCs, and the state itself.

[Crafty_Dog]

https://simplicius76.substack.com/p/the-truth-about-russias-economic

[Crafty_Dog]

March 22, 2024
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To Plug Russia’s Fiscal Gap, Something Has to Give
The Kremlin is targeting the lowest hanging fruit.
By: Ekaterina Zolotova

The Russian government is working on a plan to introduce a progressive taxation system in order to plug the growing budget gap. Ahead of presidential elections last weekend, Vladimir Putin said in an interview with state media that he believed both ordinary Russians and Russian businesses viewed the move with a degree of understanding. Having secured a fifth term on Sunday, Putin hopes the measure will help boost budget revenue, finance key social and military endeavors, and avoid further bloating of Russia’s external debt.

Russia’s Economic Reality

The Russian economy will face a number of challenges during Putin’s next term as president. Chief among them will be the Russian regions’ struggle to cope with unrelenting sanctions pressure and guaranteeing that the economy can attract enough foreign exchange to cover the country’s budgetary needs. The Kremlin has limited the number of economic changes it’s willing to make in order to avoid destabilizing the economy any further, but it can’t allow the country’s external and internal debt and budget deficit to swell uncontrolled. Something has to give.

In 2023, Russia’s federal budget saw a deficit of 3.24 trillion rubles ($35.4 billion), or 1.9 percent of gross domestic product, in part due to rising spending. In the first two months of 2024, federal budget expenditures amounted to 6.5 billion rubles, a 17.2 percent increase from the same period in the previous year. But the problem isn’t limited to the federal government; individual Russian regions are also experiencing soaring debt. According to Russia’s Ministry of Finance, 73 of Russia’s federal subjects have seen increases in public debt, which totaled 3.2 trillion rubles for all regions in January, a 15 percent increase over January 2023. Traditionally, loans provided from the federal government account for the majority of regional debt – nearly 77.4 percent so far in 2024 – though they’re often not paid back. In a recent address to the Federal Assembly, Putin announced that the government would write off two-thirds of the regions’ outstanding debt on budget loans. However, the state still plans to increase its provision of infrastructure loans (issued at 3 percent interest per year for up to 15 years) to the regions by no less than 250 billion rubles annually starting next year, meaning that their public debt will only grow. (These loans are crucial to maintaining and improving infrastructure, so forgoing the money isn’t really an option for the regions.)



(click to enlarge)

The Kremlin needs to address the situation, but it’s options are limited. It’s grappling with a slowing economy as foreign companies continue to hesitate to do business with Russia. The Russian economy is starting to overheat, with growth rates expected to decline after sharp increases last year as the economy recovered from the initial fallout of the Ukraine invasion in 2022. Gross domestic product increased by 3.6 percent in 2023, but some economic forecasters predict just 2 percent growth for this year. In addition, the demand for labor decreased substantially this month for the first time since spring 2022. As falling labor demand is often a result of declining industrial output, this could indicate the beginnings of a recession.

The Kremlin can’t allow the income levels of the poor and middle classes to fall. In addition to growing inflation, which now exceeds 7 percent, Russian society is characterized by a high degree of inequality. In 2023, Russia’s Gini coefficient, which measures a country’s level of income inequality, jumped to 0.403 from 0.395 a year earlier. Considering that at least a third of the population lives on state benefits and that many others work in state institutions, supporting social projects and income growth may require much more financing than the Kremlin is willing to allocate. Russia still has a safety net in the form of the National Welfare Fund, which holds about 12 trillion rubles. But its ability to replenish this fund is constrained, in part due to Western sanctions, which are limiting its revenue from oil and gas, and in part due to the lack of infrastructure connecting Russia’s energy sector to potential new markets. Thus, Russia’s only way to offset its growing budget spending is to introduce progressive taxation.

Sharing the Burden?

The government believes this system won’t result in mass unrest or social destabilization, or at least not as much as doing nothing to address the problem would. Roughly 76.4 percent of Russia’s federal budget revenues come from taxes. Most of this is collected through fees and payments for the extraction of natural resources – which account for almost 50 percent of all tax revenue. However, due to an OPEC+ deal to cut output, Russia’s lack of new technologies and export limits, Moscow has been forced to reduce oil production, limiting government revenue derived from energy sector taxation and fees. The government’s second-largest source of tax revenue – duties paid on imports – is also not a reliable source of income considering the West’s increasingly tight sanctions regime and new trade routes being developed that allow countries to conduct trade without accessing Russian territory. Value-added tax accounts for 20 percent of all tax income, but given the rising inflation rate, the Kremlin can raise the VAT only in very targeted ways without provoking public backlash. For example, the VAT on hamburgers increased from 10 percent to 20 percent last October. This forced the former McDonald’s restaurant chain, now called “Vkusno i Tochka,” to raise prices for its burgers, but it did not result in any serious social unrest.

The government’s only reliable option to increase tax revenue is to introduce higher personal income tax rates – under the pretext of sharing the tax burden more equitably. Personal income taxes currently account for 10 percent of budget revenue, but this can increase significantly under a progressive taxation system. Initial indications of a transition to just such a system appeared in 2021, when it was announced, at the initiative of the president, that income over 5 million rubles per year would be taxed at 15 percent, while those earning less than this amount would continue to pay the flat rate of 13 percent.

The government is now talking openly about introducing a full progressive taxation system. While the majority of the population won’t see significant changes to their tax payments, wealthier segments of the population will be expected to pay more, according to the proposals for implementation that the government is considering. One of the plans under consideration would tax those earning less than 360,000 rubles at a rate of 0 percent, up to 5 million rubles at 13 percent, between 5 million and 10 million rubles at 15 percent, 10 million to 50 million rubles at 25 percent, between 50 million and 100 million rubles at 30 percent, and more than 100 million rubles at 35 percent. The scheme would affect less than 10 percent of the entire Russian population, which has an average monthly income of 100,000 rubles.



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It’s difficult to say how much revenue a progressive taxation system generate. Considering that the biggest burden will fall on a small, though wealthy, segment of the population, it seems that the Kremlin isn’t willing to take the risk of angering the middle class or scaring off businesses and potential investors by imposing broader tax hikes. It’s a limited measure that can partially offset losses, but it’s no panacea, and it certainly won’t replace tax revenue from the largest source: the oil industry. It also comes with a number of risks. It’s possible that tax evasion will spike, the gray market will grow, and more people will transition to self-employment to try to avoid paying higher tax rates.

But higher rates for the wealthiest individuals are now seen as inevitable. It’s possible, then, that Putin was correct in asserting that Russian individuals and businesses understand why the changes to the tax system are being imposed, knowing that they can’t do much to stop them anyway. But their support will continue only as long as they see some benefits, either to market conditions or to their own pocketbooks, in exchange.

[Crafty_Dog]

 https://twitter.com/i/web/status/1771236203305509005

https://www.theguardian.com/world/2024/mar/22/moscow-concert-hall-shooting-blast

[Crafty_Dog]

https://jamestown.org/program/moscows-disturbing-reaction-to-crocus-city-hall-attack/?fbclid=IwAR0sCZinIn7YxtYvfC5z-xxkbQbbtSpN_Xtna-dkONyKsI4hXUNZnHe5-uU_aem_AWX2jOkJNprcQgZuGRr43tgfYgm2E99XnH89mIk9JNaNdl2oRPgB9QI52lI7GobvILZp-h4PkI5MxXHZeEmgbfbR

[Crafty_Dog]

https://www.youtube.com/watch?v=M9iRA8bXOSU

[ccp]

 I like his voice and the song though a bit generic:

I am Russian
I breathe in this air
The sun in the sky is looking at me
A free wind
flies above me It is just like me
And I just want to love and breathe
And I don't need
anything else The way I am, and I can't be broken
And all because
I'm Russian, I'm going to the end
I'm Russian, my blood is from my father, I'm
Russian, and I'm lucky
I'm Russian to spite the whole world
I am Russian
This song
flies into the sky And calls me with it
, And my heart
burns in me, Lighting the way home
Where I just want to love and breathe
And I don't need
anything else This is how I am, and I can't be broken
And all because
I'm Russian, I'm going to the end
I'm Russian, my blood is from my father, I'm
Russian, and I'm lucky
I'm Russian to spite the whole world
I am Russian
I'm Russian, I'm going to the end
I'm Russian, my blood is from my father
I'm Russian, and I'm lucky
I'm Russian to spite the whole world
I am Russian

[Crafty_Dog]

https://nsarchive.gwu.edu/briefing-book/russia-programs/2024-05-25/waiting-gorbachev-chernyaev-diary-1984?eType=EmailBlastContent&eId=8bedf5d9-ad82-4278-b62a-36735d1fd622

[Crafty_Dog]

https://www.youtube.com/watch?v=nUPzv6EB28I

Haven't watched this yet, but it comes at the recommendation of a Finnish friend.

[Crafty_Dog]

Not quite what we were told when picking a fight with a "Gas Station with Nukes" . . .

https://simplicius76.substack.com/p/major-russia-officially-becomes-worlds?utm_source=post-email-title&publication_id=1351274&post_id=145412111&utm_campaign=email-post-title&isFreemail=true&token=eyJ1c2VyX2lkIjo1ODg4MTI0MCwicG9zdF9pZCI6MTQ1NDEyMTExLCJpYXQiOjE3MTc5NzkyNTksImV4cCI6MTcyMDU3MTI1OSwiaXNzIjoicHViLTEzNTEyNzQiLCJzdWIiOiJwb3N0LXJlYWN0aW9uIn0.95ao34pA1HHDBq_7NLRrmWzcfFRhExgyifDQjk4n1B8&r=z2120&triedRedirect=true&utm_medium=email


=================
In a related vein:

GPF:
Russian production capacity. Russia’s helicopter industry has enough capacity to meet the needs of the country’s armed forces and fulfill export orders, the head of Russia’s main arms exporter Rosoboronexport said. Alexander Mikheev also noted that the company has orders for over 170 helicopters from more than 20 countries.

[Crafty_Dog]

https://www.msn.com/en-us/news/world/hackers-take-over-russian-state-tv-and-blame-putin-for-ukraine-invasion-in-significant-victory/ar-AA1pf6QB?ocid=msedgntp&pc=HCTS&cvid=d3d5e45a82f64969b9ddc24a5a659c8b&ei=129

[Crafty_Dog]

August 26, 2024
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The Paradox of Russian Energy
How is a country so rich in resources facing energy deficits?
By: Ekaterina Zolotova
In early August, Russian President Vladimir Putin signed a law that, starting Nov. 1, legalizes the mining of cryptocurrency, which the Kremlin sees as a handy tool for circumventing international sanctions and replenishing its budget. Crypto mining is notoriously energy intensive, but all it requires is electricity, something Russia has in abundance. But even for Russia, uncontrolled growth in electricity consumption could lead to a power shortage in certain regions that are already struggling amid sanctions and the war in Ukraine.

It’s an increasingly precarious issue for a country that, in its search for new income sources, has decided to expand its data economy. The data center market in Russia grew by 21 percent in 2023, its rise facilitated by the use of Russian-made equipment and Russian cloud services. For scale, the data center near Balakovo will use as much electricity as the entire city, which boasts a population of 200,000 people and is home to several manufacturing plants. And this is to say nothing of the expected growth in digital services and the eventual introduction of artificial intelligence.

Put simply, the development of a digital economy requires reliable electric power infrastructure capable of ensuring data security and a mature IT sector. Uninterrupted electricity, then, is important not just for the niceties of everyday life but also for a burgeoning technology market. And though Russia is among the world’s biggest energy producers, the risk is that demand may grow faster than Moscow can build new infrastructure. Last year, electricity consumption increased by 1.4 percent, reaching a record volume of 1.1 trillion kilowatts per hour. Power consumption also reached a historic high of 171.1 gigawatts. In addition, Russia sells a ton of electricity. In the first half of 2024, it exported 3.5 billion kWh to Kazakhstan, 600 million kWh to Mongolia, and 500 million kWh to China.

Production & Consumption of Electric Energy in Russia

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Complicating the situation is the nature of the Russian grid. Every region has its own energy issues, and supply can vary widely with the changing of the seasons. The Unified Energy System of Russia does what it can to centralize operational control, but the country is so vast, and its population centers so few and far between, that it’s difficult to evenly distribute capacity. Some regions cannot be connected to each other at all. It also explains why Russia can have so much energy that it exports to nearby markets but can nonetheless have regional deficits.



(click to enlarge)

The energy industry thus may be unable to match the Kremlin's ambitions to increase energy production for new IT enterprises, balance power distribution, overcome deficits in certain regions and literally keep the lights on. Even now some regions are unable to cope with the growth of electricity consumption. For example, in southeastern Siberia, it’s impossible to connect new large-scale consumers, and in the south, power outage schedules have had to be introduced to support heavier loads on networks during summer temperature spikes. Even Moscow may face an electricity deficit, according to the draft of the General Scheme for the Development of Russian Energy (a shortage of 1.6 GW of capacity by 2030 and 4.2 GW by 2042). Insufficient capacity will also limit Russian energy exports. By the end of 2023, the country had reduced electricity exports by 21 percent to 10.7 billion kWh. This owed partly to European sanctions, which brought exports there to a halt, and partly to a lack of capacity in the Far East, which forced Russia to reduce exports to China by a third.

Infrastructure is also a problem. Unscheduled outages and emergency repairs in older facilities often take capacity offline. Recently in the south, for example, generators failed at the Rostov nuclear power plant, and on Aug. 16, damaged equipment halted generation in Vladivostok and other nearby cities. Power grid firm System Operator notes that the current fleet of turbines used to generate electricity, which were put in place from 1960 to 1990, is all but exhausted. In distribution networks of medium and low voltage infrastructure – which constitutes more than 80 percent of total infrastructure – the situation is even worse. Upgrading existing infrastructure – and building new facilities outright – is time-consuming and expensive.

In addition to the difficulty of introducing new power capacities, there is a risk that existing ones will underperform. The Ukraine war, for example, creates security risks all along Russia’s western border, where important facilities in the Russian grid are located. The recent breakthrough of Ukrainian troops in Kursk region has cast doubt on whether the Kursk nuclear power plant will continue to be a part of the electrical system. The Kursk facility is one of the largest of Russia’s 11 nuclear power plants, so Moscow can ill afford to lose it as Russia has plans for it to offset Moscow’s looming energy deficit. (However, the International Atomic Energy Agency has found no reason to worry about nuclear safety at the Kursk plant.)

Meanwhile, the international sanctions campaign against Russia has also affected its energy industry. The sheer volume of Russian energy exports has been dramatically reduced, as have the number of markets available to its sellers. Restrictions introduced in 2022-23 hurt cable and conductor supplies and equipment imports. Russia was thus forced to restructure production as it endeavored to increase capacity. But import substitution brought on by sanctions slowed the implementation of projects meant to overcome energy deficits. (Renewable energy projects were especially affected.)

The paradox of the Russian energy system as a whole is that it can theoretically produce large capacities, overcome its deficits and, in the event of a failure of one station or another, tap into energy reserves to transfer electricity to and from various regions. So – again, in theory – Moscow should have no problem mining cryptocurrencies and building out new data centers. Yet the Kremlin will have to also build new infrastructure, update old stations, stabilize existing power plants, ensure the safety of its facilities and guarantee the provision of the imported material needed to do all of this. In light of these risks, Russia may not be able to absorb as much loss as many seem to think.

[Crafty_Dog]

https://www.msn.com/en-us/news/world/vladimir-putin-on-high-alert-as-russian-leader-warned-his-regime-will-collapse-quickly-and-without-warning/ar-AA1r3qlv?ocid=msedgntp&pc=HCTS&cvid=3be18106acad430d8c25cf13a5759e4a&ei=20

[Body-by-Guinness]

Western tech boycott is cited, but more likely the plane is a dog:

https://pjmedia.com/vodkapundit/2024/10/11/russias-most-advanced-stealth-fighter-is-in-serious-trouble-n4933240

[ya]

Just thought I should comment the India-Russian relations in light of US sanctions.
1. India is buying a lot of Russian oil, what it does not use, it sells back to Europe. This is great because the cheap oil which built the German economy is now moving to India. This will lead to the decline of Europe, for nothing beats cheap energy.
2. The US has also restricted India and rest of world from trading with Russia, i.e. USD cannot be paid to Russia via the SWIFT network. This has forced countries such as India to trade with Russia in local currencies, i.e. India pays for the oil in rupees. This is happening with multiple countries which trade with Russia for commodities. So a lot of rupees have accumulated in Russia and Russia did not know what to do with the accumulating Rupees. In some cases, the residual balance is paid back in Gold. Well now Russia is investing Rs in India, for machinery etc. Latest is the  deal to make ice-breakers in India, this is in advance of the developing Northern/Arctic trade route which will shorten the shipping times for trade with Asia and will also be cheaper. In essence, the economy is shifting from Europe to the east. Dedollarization is happening, at the very least nations are shaking off the iron grip of Uncle Sam that payments must be in $.
3. This ice-breaker deal is also important for it gives India a foothold into the arctic trade route and not just to China.

The US has made many self goals..kicking Russia out of SWIFT was the biggest error.

[ya]

Here's Russia's proposal on the BRICS currency. It does not exist as I indicated a while ago. Now if they were wise enough to adopt BTC..as the global reserve asset.
https://pdfupload.io/docs/e1231f66

[Crafty_Dog]

THAT is a very interesting idea!!!

[Crafty_Dog]

https://www.msn.com/en-us/news/world/putin-sees-red-as-civil-war-nears/ar-AA1tJUAf?ocid=msedgntp&pc=DCTS&cvid=38fe23c650104f8d8650307b676caa32&ei=28