Russia and Donbass: aggression has its price

Having stopped reporting deliveries to areas of the Donetsk and Luhansk oblasts beyond the control of Ukraine, the Russian state concern Gazprom, main donor of the federal budget, did not cease to bear financial losses.

They will accumulate until the question of returning the occupied territories in Donbass and Crimea to official Kyiv remains settled.

$2.91 bln down the drain

Naftogaz of Ukraine national oil and gas company has stopped deliveries to CADLO since 2015. They took place all this time, but already from the Russian side. Gazprom regularly calculated the volumes of this resource, for some reason, demanding repayment from the Ukrainian company.

The Stockholm Arbitration put an end to this dispute in December 2017 – having ruled that Naftogaz owed nothing to the Russians for these volumes. Gazprom stopped issuing relevant invoices since 2017. But before the beginning of the current year, it all the same displayed these amounts in its recordings as deliveries to Ukraine.

Now, when the contract with Naftogaz of 2009 was terminated in January 2020, the legal grounds for such accounting have disappeared.

In fact, nothing has changed over the past 6 years: Gazprom pumps gas into CADLO for free and covers the corresponding expenses from the proceeds from the sale of its resource for export in Russia itself.

According to the media estimates, given the average price of gas imports by Naftogaz for 2015-2019, such "charity" cost Gazprom $2.91 billion.

Given that this concern is the main filler of the federal budget, it can be said that all citizens of the Russian Federation paid $2.91 billion for aggression in the Donbass out of pocket. And this is only for gas! Apart from social payments, its military, militants of the "republics", etc.

This is the money that literally "went down the drain". But this is far from all payments. Electricity in CADLO also comes from the Russian Federation. Under the same conditions as gas.

It is even simpler here: the cost of electricity for the "republics" is included in the tariff for Russian consumers.

Its main recipient In CADLO is the "LNR" – since collaborators have the Starobesheve TPP and the Zuyevska GRES in the Donetsk oblast.

According to the media estimates, the annual cost of electricity supplies to the "LNR" for 2017 was in the range of 2-4.6 billion rubles, or $34-78 million at the then exchange rate.

In total, this is $204-468 million over 6 years.

It remains to add that the payment of pensions in the "DNR" costs the Russian Federation 2.5 billion rubles in month. This is 30 billion rubles, or $514 million a year. There is less population in the uncontrolled areas of Luhansk oblast, so there are fewer payments.

But considering all other social expenses, including benefits, salaries to state employees and illegal armed formations, the total monthly income of CADLO will be approximately $2 billion a year, or $12 billion for the entire period of the "Russian Spring" in the Donbass. This does not take into account direct military expenditures in the form of deliveries of weapons, ammunition and fuel for the military equipment.

Following the USSR path

On the one hand, the Kremlin's spending cannot be called exorbitant. According to the results of 2019, the same Gazprom, nevertheless, reported a net profit of $18.619 billion. This is even taking into account the costs of gas supply to CADLO, Transnistria, South Ossetia and Abkhazia. All these enclaves not recognized by the world community are provided on a free basis.

This is net of taxes to the federal budget, from which money goes to the Donbass, to the North Caucasus, and more recently, to military ventures in Syria and Libya there again.

It remains to recall the support of ruling government in Venezuela, which is suffering a financial collapse, as well as subsidies to the annexed Crimea and Chechnya – and come to the conclusion that the current president of the Russian Federation repeats the mistakes of the Soviet leadership.

At the time, it spent enormous sums (obtained mainly from the export of oil and gas) to finance loyal governments in different regions of the world and on their direct military support.

Against the backdrop of the technological backwardness of the Soviet economy (and Russia, which inherited its assets, has not made a breakthrough in the field of technology during the years of independence) and the fall in world oil prices, the USSR simply could not stand the long-standing Afghan war.

Now there is a similar situation. Another depreciation of oil hit Russia hard this spring.

Accrual effect

The events developed according to the classic market pattern. At first, the EU and China, the main buyers, completely abandoned Russian oil in March.

Then in April, when the situation with unsold volumes at the Russian oil industry reached the expected degree, purchases at a bargain price sharply increased.

In April, Chinese refineries increased the import of Russian raw materials by 17.4% compared to the same month of 2019, to 7.2 million tons. The only thing is that they only took it at a negative price.

According to Argus agency estimates, Russians lost $6-8 on each barrel of oil. By this figure, the selling price was less than the cost of production (including transportation costs).

Thus, Russian oil industry workers received a direct loss of $420 million on April imports to China, and taking into account supplies to the EU – $1-1.2 billion.

According to the results of 2020, Argus predicts the loss of the Russian economy from oil exports at the level of $18-20 billion. The similar applies to another main item of Russian exports – gas.

According to Gazprom's reporting, its exports in January-March fell by 24.2% compared to the same period in 2019, to 46.6 billion m3 – mainly due to the abnormally warm winter in Europe.

The financial results were even more failed. Gazprom's export earnings in the first quarter fell 51.6%, to $6.81 billion – due to a drop in gas prices.

This means that compared with last year's result for January-March, the Russian state concern did not received $7.319 billion less.

As a result, Gazprom received losses for the I quarter in the amount of 306 billion rubles, or $5.827 billion (according to the Russian Accounting Standards, RAS) instead of profit for the first time in its history.

Gazprom's "charity" price in relation to the "DNR"-"LNR" under such conditions is already completely different than even the one that was a year ago.

It remains to add that world prices for coal and metal – the next by importance Russian export item – also declined this year due to the coronavirus crisis. Which, as you know, stopped the work of industry in developed countries. Which in turn reduced the use of electricity (a significant part of which is still produced from coal) and steel.

And of course, do not forget about the destructive effect of Western sanctions on the Russian economy.

The ban on technology transfer preserves its backwardness; the departure of large Western companies from Russia means the loss of jobs and tax revenues.

The lack of access to cheap Western loans should be added to this – which in turn makes further development impossible.

According to estimates of the Institute for National Economic Forecasts of the Russian Academy of Sciences, the Russian economy lost $160-200 billion in Western loans in 2015.

Earlier, Advisor to the President of the Russian Federation Sergey Glazyev noted that direct damage from sanctions for the Russian economy in 2 years reached $250 billion – i.e. $125 billion a year.

This means that the damage is an impressive $625 billion over 5 years of restrictive measures.

The addition of all these factors (sanctions, falling world prices for commodities, participation in foreign military conflicts and coronavirus crisis) makes the costs of financing separate enclaves in the CIS territory (including CADLO) a burden that is getting heavier every month – bringing the collapse of the Russian economy closer.

Vitaliy Krymov, OstroV