Bad news for Putin and Zakharchenkos with Plotnitskys

The position of Russia's economy remains stably-tight despite vigorous statements from the Kremlin. This does not allow increasing the scale of financial assistance to the controlled "DNR" and "LNR" in the foreseeable future. As a result, under the conditions of "freezing" of the armed conflict in the Donbass, it may well be resolved according to the German scenario.

Adaptation to bottom

Prime Minister of the Russian Federation Dmitry Medvedev, as usual, brimmed with tons of optimism on camera at a session of the government budget commission on September 11.

According to him, Russia's economy develops without serious imbalances. It entered the growth path and reduces dependence on world prices for oil and gas.

Except that the double populism of this statement is being broken by one simple question: how does the dependence on oil and gas prices decrease? Is there a leap in some branches of industry in Russia that brought it to a new level?

For example, did Russian motor manufacturers squeeze out Japanese and European competitors from the first places in sales volumes around the world? Perhaps, the Russians won the first place in sales of household appliances and electronics?

No, no, and once again no. Nothing like this happened.

Russia still hopelessly loses out to the West in the sphere of manufacturing technology. Its economy remains predominantly of a raw material type.

In order to see this, it is enough to look at the structure of cargo transshipment in seaports of the Russian Federation – since most of the cargo is exported through ports, and not by rail.

So, in January-August, 517.3 million tons, 277.3 million tons of which are bulk liquids, including base oil – 169.9 million tons, petroleum products (gasoline and diesel fuel) – 95.1 million tons and liquid gas – 9.4 million tons, passed through seaports of the Russian Federation.

The transshipment of bulk cargo amounted to 240 million tons, including coal – 102.7 million tons, grain – 25.3 million tons, mineral fertilizers – 11.2 million tons, iron and manganese ore – 5.39 million tons.

In total, 79% of cargo turn-over was for extractive commodity items, and 52% - directly for oil and oil products.

This means that mildly speaking, D.Medvedev just tried wishful thinking. This is confirmed by other figures.

In principle, the state of the economy of any country, its real strength and position in the world hierarchy is quite easy to assess at the rate of the national currency to the U.S. dollar, which is taken as a benchmark.

In 2015, the average rate in Russia fell to $/61.07 rubles compared to $/38.61 rubles in the pre-crisis 2014.

At the same time, in 2015, Russia's sovereign ratings were lowered by leading global agencies to a speculative grade. In particular, Standard&Poor's - to BB+, Moody's - to Ba1.

The ratings for Russia have not changed in the current year. Standard&Poor's just improved the rating outlook of the Russian Federation in March from "stable" to "positive". However, the rating itself remained at the level of BB+. And the reality for Russia's economy turned out to be even worse than the Western experts had assumed.

In 2015, the same Standard&Poor's forecasted a slowdown in economic growth to 1.5% for the period to 2020 - given the decline in world prices for oil and the outflow of investment from the Russian Federation, caused by sanctions. Whereas according to the results of 2016, the fall in GDP was 0.2% - even according to the Russian Federal State Statistics Service's official data. According to independent analysts, the real depth of the fall is even greater, since the Russian Federal State Statistics Service embellishes the picture in the interests of the Kremlin propaganda.

In particular, Sulakshyn Center estimates the fall in Russia's GDP in 2016 in the interval of 0.89% -6.9%. In 2017, it is projected to fall by 2%, in 2018 – by 2.5%. And only in 2019, it is possible to reach a positive trajectory and an increase of 0.1%.

Now back to the ruble. Its average rate in the current year for January-September amounted to $/58.54 rubles. Yes, there is a slight strengthening against the "bottom", which Russian currency hit in 2015.

However, the ruble is far from the desired stability. In January and August, it for a short time, but fell to $/60.8 rubles – what almost corresponds to a minimum of 2 years ago.

So, it is too soon to speak about reaching the growth trajectory.

As for the next package of anti-Russian sanctions that came into force on October 1, they should not be given too much significance.

They are introduced by the U.S. government and apply to Russian state-owned banks and oil and gas companies. In particular, there are restrictions on their financing by Western banks. Now they can provide loans to their Russian clients, who are under sanctions, for a period of not more than 2 months.

This makes it impossible to finance global projects, such as the construction of the Power of Siberia gas pipeline or the Kerch Bridge.

In this regard, it is worth recalling that once, the USA managed to achieve the dismantling of socialism in Poland by stopping its lending on the part of West.

Furthermore, similar measures against the USSR have become one of the nails in the coffin of socialist system in the USSR itself.

However, much water has flown under the bridges since then and now the recipes of Ronald Reagan's administration are no longer working.

The fact is that the world was bipolar during the Cold War. Now the Russians can easily borrow money from China or from the Arab countries, on which the U.S. influence is minimal.

In other words, there were no alternative sources of outside financing of the economy at that time, now they are.

It was not by accident that commenting on the new sanctions, ex-Finance Minister Alexei Kudrin expressed the opinion that they bear image risks for Russia, nothing more.

"Of course, it is unpleasant to stand next to North Korea and Iran in this list. It is difficult to compare Russia with these countries because of its openness", — he said.

Of course, it is unpleasant. But it is all the same for Russia's economy, as the saying goes.

Doubled uncertainty

Standard&Poor's believes that from 2017 to 2020, the economy of the Russian Federation will grow by 1.7% per year.

Even so, a return to the pre-crisis level will not happen soon. In Russia itself, not everyone believes in such an "optimistic" scenario. For example, the head of Rosneft state-owned company and former vice-prime minister Igor Sechin predicts in 2018 $40-43/bar. for the average world price for oil under current prices of $46/bar.

That is, there is simply nowhere to get the improvement from, because of, as noted previously, Russia's dependence on the cost of oil and gas in global markets.

The situation is somewhat better only in metallurgy – the second most important branch of Russia's economy after the oil and gas complex.

In 2017, there was a serious increase in prices, on average by 38-48%, depending on the type of finished metal products. Coking coal and iron ore have risen in price even more. This allowed to significantly improve the financial performance of all major Russian iron and steel companies.

But here it should be taken into account that the growth was based not on fundamental long-playing factors, but on short-term and situational factors.

For example, the growth in world prices for coking coal was caused by tropical cyclones in Australia, and for steel – by the promises of the Chinese government to reduce the excess steelmaking capacity in the country.

However, these promises, in fact, did not lead to a reduction in production and exports from the PRC. The rise in price of copper is associated with a multi-month strike at the world's largest mine Escondida in Chile, etc.

And the situation on the most important commodity markets for Russia is still uncertain.

For example, world prices for iron ore, in addition to China's economic policy, will largely depend on whether the largest mining corporations, Brazilian Vale and Australian-British BHP Billiton, can launch their joint project Samarco, stopped more than a year ago because of the environmental disaster. If yes, the prices will definitely be dropped, as it is the largest producer of iron ore. But the point is that it is still unclear whether the work on Samarco will resume.

Eurasian failure

And all this against the backdrop of failures with the Eurasian Economic Union – pet project of the President of the Russian Federation Vladimir Putin, which had so many hopes 3-4 years ago.

Then Western experts worried about the danger of the revival of the USSR, Russian pro-governmental media presented the initiator of the project as a new collector of Russian lands.

Meanwhile, last April, President of Belarus Alexander Lukashenko at the summit of the heads of the EurAsEC countries in Bishkek expressed dissatisfaction with the fines and other trade restrictions, in particular with respect to Ukraine, which the "elder brother" introduced unilaterally.

According to the Belarusian leader, this negatively affects the other members of the Eurasian Economic Community. He also spoke in favor of a moratorium on the adoption of new legal acts discriminating against the partners in the union.

The position of the Belarusian leader was supported by the President of Kazakhstan Nursultan Nazarbayev.

A.Lukashenko also stressed that the Eurasian Economic Union failed to eliminate the reasons for the decrease in trade turnover between its members in 2016, and therefore the decrease continues.

Such a decrease in mutual trade turnover is an indisputable proof that the Eurasian Economic Community does not work as successfully as the Kremlin promised.

As for the state concern Gazprom as the main donor of the Russian budget, the main hopes are placed on the start of export to China.

But this will not happen until 2019, after the construction of the Power of Siberia transcontinental gas pipeline. And for this, first, they still need to survive 2018 somehow.

In addition, low oil and gas prices in the medium term will hardly allow to increase revenues from their exports in volumes that will have a tangible impact on the state of the Russian economy.

This means that the Kremlin will not have the opportunities to provide large-scale financial support for the "DNR-LNR".

Starvation ration for CDDLO

And without it, one cannot seriously talk about restoring the destroyed economy in the areas of the Donetsk and Luhansk oblasts controlled by the separatists.

Back in August 2016, the head of the "DNR" A. Zakharchenko said that coal mining in the "republic" returned to pre-war indicators.

But "the Ministry of Coal and Energy of the DNR" hesitates to publish these victorious figures for some reason.

And proceeding from the plans approved by it (provided that they are strictly followed), the annual coal mining in the "DNR" should vary between 6-8 million tons per year.

For example, in August, the plan was approved for 435.6 thousand tons, for July - 461 thousand tons, for June - 528 thousand tons, etc.

These figures practically correspond to those established by the "ministry" in 2016 and in 2015.

That is, there is no growth, there is stagnation. Meanwhile, in the pre-war period, only the Makeevugol State Enterprise produced up to 2 million tons, now it produces about 1 million tons. It is not surprising, because only 4 out of 8 mines are working. Other associations found themselves in the same conditions. There are objective reasons for that.

In the pre-war period, most of the mines of the Ukrainian Donbass had state grants - now they obviously do not.

Accordingly, there is no financial resource for development, investment in new equipment, resuscitation of stopped mines, pumping out water.

There are no funds even for paying salary. But there are problems with the coal that is still being extracted.

A few days ago in the Western media there was information referring to Russian officials who admitted that the coal from the CDDLO was exported under the guise of the Russian coal.

At the same time, earlier the Russian media specified that it was a coal with negative quality characteristics. Thus, the sulfur content in the export shipment in the Rostov port was 1.4%. While the indicator should not exceed 1%, otherwise there is a significant discount. It was pointed out that separatists were about to send 30 thousand tons of such products to Spain.

Obviously, shipments of this quality cannot be large-scale. Power engineering in Turkey, Spain, Italy can buy it in small volumes, in a mixture with better coal to plug "holes" in their own warehouses.

They are not interested in stable and large revenues of such products. In other words, you can sell 30 thousand tons of coal to Spaniards, but not 1 million tons.

Therefore, there is no more truth in Zakharchenko's statement than in Dmitry Medvedev's statement about the growth of Russian economy.

The situation in metallurgy is no less sad, the second most important "whale", which previously held the economy of Donbass.

On September 29, the same Zakharchenko reported about the launch of the Yuzovsky Steel Plant - the former Donetskstal. At the same time, he forgot to say that the current owners of the plant promised to do this back in November 2016.

That is, it took them a year to launch the production process in an enterprise that had not suffered from shelling. But there is a question - in what volumes and for how long will this process continue?

On the one hand, in terms of quality there are no such problems with the sale of Donetsk metal. And, as already noted, the market situation as a whole is now favorable for metallurgists.

Nevertheless, according to media reports, last summer, only 121,000 tons of pig iron were exported for $34.9 million and 86.8 thousand tons of bars for $35.7 million were exported from Yenakieve Steel Plant through Vneshtorgservice.

First of all, it should be noted that before the war, Yenakieve Steel Plant smelted over 600 thousand tons of pig iron for 3 months, i.е. now the load of its capacities has decreased for exactly 5 (!) times.

Obviously, the Yuzovsky Steel Plant will get similar results, even if the plant does not stop in a couple of weeks.

One of the main problems is the provision of iron ore. According to the State Enterprise "Ukrpromvneshexpertyza", Yenakieve Steel Plant received 74 thousand tons of iron ore in July and Donetskstal got 62 thousand tons. Respectively, 346 thousand tons and 220 thousand tons for April-July.

That is, there are some stocks of ore on the plants. But such volumes of supplies do not allow increasing the smelting of metal above the summer figures. Which, once again, are 5 times lower than the pre-war ones. In addition, the source of receipt of the CDDLO iron ore remains unclear. According to experts, it is shipped from some state reserves of the Russian Federation.

Since all major Russian ore producers are public companies and cannot directly deal with supplies to Donetsk and Yenakieve. Otherwise, in case of evidence of cooperation with unrecognized "DNR" and "LNR", they fall under severe international sanctions.

Supplies from reserves cannot be large-scale because of the limitations and the need to observe secrecy.

It is also curious to analyze the marketing policy of the so-called "external managers" of the Yenakieve plant.

Since the data on exports from the "DNR" are published with reference to customs declarations, we will consider them reliable.

In this case, it turns out that the average price of pig iron under export contracts of Vneshtorgservice (that is, Yenakieve plant) was $288 per ton.

According to the Russian system "Metalltorg", in summer, the average price of pig iron from the CIS for export through the Black Sea ports was $ 347/ton.

That is, illegal products are sold with a significant discount in comparison to the products of legal producers.

From this follows one simple conclusion: the authorities of the "DNR" are not able to adjust the work of the rest of the economy of Donbass in the self-repayment regime.

And, therefore, for Vladimir Putin the problem region remains the notorious suitcase without a handle: it's a pity to throw it out, and it's hard to carry.

It turns out that the CDDLO will not get out of the economic gap by itself, and the "big brother" has no resources to help.

In turn, against this background, the situation with the standard of living in Ukraine looks much more preferable. And this in any case will work for the reintegration of the Donbass. It will create, albeit not immediately, the prerequisites for this in the public consciousness beyond the current line of demarcation.

Vitaliy Krymov, OstroV