Summary of the collapse of the Russian Federation: Inflation is rising and GDP could fall by 10 percent

The abstract was prepared by the KSE Institute team in collaboration with Jacob Nell, ICU, Dragon Capital; using materials from the Communications Department of the NBU.

Macroeconomics

Consensus forecasts on the fall of Russia's GDP converge at -10 percent, assuming that the effect of sanctions is smaller than expected. The average estimate of 35 forecasters (compiled by FocusEconomics) is 10.2 percent.
The European Commission has also released its forecast, which expects Russia's GDP to fall by 10.4 percent in 2022. At the beginning of the war, when economists thought it was possible to impose harsh sanctions quickly, estimates ranged from 15.30 or even 50 percent.
The Central Bank of the Russian Federation recognizes that managing the economic situation is a difficult task for them - the head of the Central Bank called the crisis of 2022 "one of the most significant challenges facing the Russian economy since the 1990s."
With a 10 percent reduction in GDP, the Russian Central Bank's baseline scenario assumes that exports of goods and services could fall by 17-21 percent and imports by 32.5-36.5 percent in 2022.
Against the background of strengthening the ruble, the Russian authorities continue to ease currency restrictions. As noted above, imports are declining faster than exports, providing foreign exchange to balance the exchange rate and allowing foreign exchange restrictions to be lifted.
Compared to February 23, 2022, the Russian ruble has risen by ~ 21 percent against the US dollar and ~ 28 percent against the euro, which currently gives it the title of the strongest currency in the world.

On May 20, the US dollar fell to 57.4 RUB / USD on the Moscow Stock Exchange, which is a record low level since April 2018. The euro fell to 59.8 RUB / EUR.
On May 16, the Central Bank of the Russian Federation allowed individuals to transfer up to $ 50,000 a month abroad (a $ 10,000 limit was previously introduced). In addition, the Russian government has allowed exporters not to sell foreign exchange earnings if they have import contracts.

In April, the central bank authorized banks to sell foreign currency to citizens (April 18), and facilitated currency control for all exporters - the time required to sell foreign currency was increased from three to 60 working days (April 21).
However, it is still very difficult to buy dollars or euros from Russia, which has led to the black market. Bloomberg notes that on May 17, exchange rates on the black market in Moscow ranged from 73 to 76 rubles (data on exchange channels in currency exchange applications), while the official XE was 63.35.
Inflation continues to rise, but at a slower pace. Year-on-year, inflation rose to 17.83 percent in April from 16.69 percent in March.
Annual inflation accelerated in the food sector (from 17.99 percent in March to 20.48 percent year on year in April) and services (from 9.94 percent to 10.87 percent), while in the non-food segment the annual growth rate slowed slightly from 20.34 percent to 20.19 percent annually.
Reserves continue to decline. Russia's international reserves fell by an additional 7.4 billion dollars from May 1 to 13. In more than two months of war, the aggressor country's reserves fell from a historic high of $ 643.2 billion to $ 585.7 billion ($ 57.4 billion or ~ nine percent).
In addition, last week the US House of Representatives passed a law banning the Treasury from giving dollars to Russia and Belarus in exchange for their special drawing rights.
The crypt says, "Goodbye." Binance forbade the Russians to make transfers and withdraw funds from foreign banks, regardless of the country in which they live. The Coinbase cryptocurrency exchange has also restricted Russians' access to their accounts (by more than 10,000 euros) due to EU sanctions, while the United States imposed sanctions on April 20 against Russian cryptocurrency mining company Bitriver.

Industry

Russia has begun confiscating the assets of foreign companies leaving Russia. Last week, Siemens terminated maintenance contracts with Russian railways, including Sapsan high-speed electric trains.
However, on May 16, the Arbitration Court in St. Petersburg decided to seize the Siemens equipment needed to repair the Sapsan and Lastochka high-speed trains and hand it over to the Russian Railways. Formally, the court annulled the termination of the service contract and ordered that the equipment be transferred from Siemens.
Despite the fact that this is the first such precedent, Russia has already refused to return the leased planes. For example, Avolon (Ireland) lost 304 million dollars due to Russia's refusal to return the plane. American Air Lease has written off 27 remaining planes in Russia worth about $ 800 million.
The United Arab Emirates wrote off a $ 538 million loss due to the refusal of Russian airlines to return the planes. In addition, Russia has appropriated 113 planes of the Irish company AerCap Holdings, worth about two billion dollars, in response to the sanctions.
Sanctioned Sovcomflot is selling its fleet to repay loans: 23 of 134 ships have been sold. Such agreements should be monitored, as they could allow Russia to send a fleet to other Russian-friendly owners to circumvent sanctions on Russian ships.
In the last two weeks, the media has been widely reporting on Sovcomflot's plans to sell up to a third of its fleet to repay loans to Western banks. The state-owned company probably needed foreign currency to repay the loan.
There were two waves of sanctions directly against Sovcomflot: in late February (the EU imposed restrictions on securities and money market instruments; banned new loans), Canada (introduced a broad ban on transactions) and March (EU (ban on all transactions with companies)), United Kingdom (frozen funds).
Switzerland (imposed restrictions on securities and money market instruments, banned transactions with the company). Norway (introduced an export ban), Liechtenstein (imposed restrictions on securities and money market instruments, banned loans or credits, banned business transactions).
On April 7, 2022, Shell suspended two LNG tankers leased from Sovcomflot due to the risk of sanctions.
In addition, the United Kingdom closed access to its ports for Russian ships in early March and the EU in early April. As a result, on April 26, the company was unable to pay Eurobonds due to sanctions.
Last week, Sovcomflot sold nine ships due to sanctions: it is known that five tankers have Koban Shipping based in Dubai and four Singapore's Eastern Pacific Shipping, reports WSJ.
Evangelos Marinakis subsidiaries Capital Maritime & Trading purchased four Aframax LNG tankers. While on May 17, the Russian newspaper announced that the company had already sold 23 ships. In addition, some preliminary agreements on fleet expansion have not been implemented.

Daewoo Shipbuilding and Marine Engineering (DSME, South Korea) canceled an order for one of three LNG vessels for Sovcomflot worth $ 270 million because they did not receive a second advance from the company due to sanctions.
According to Korean media, the agreements between DSME and Sovcomflot are still in force, but they will face a similar problem of early repayment. The total value of the contract for the three ships, signed in 2020, is $ 800 million.
Russian authorities are trying to prevent a shortage of lead in the domestic market. On May 14, the Russian government introduced export licensing from May 15 to November 15 (subject to the export of lead waste and waste, as well as unprocessed lead outside the customs territory of the Eurasian Economic Union).
Exceptions are semi-finished products for the production of non-ferrous metals that contain precious metals. Keep in mind that lead is needed to make batteries and is widely used by car manufacturers.
Russia fears problems with mobile communications. After Nokia, Ericsson and Huawei left Russia, Russian mobile operators are considering buying used network equipment.
If the equipment is not found, the quality of mobile communications in Russia will deteriorate by the end of the summer, and network failures may begin.
The secret of Russian soldiers who steal washing machines from Ukrainians has been revealed. After the introduction of Western sanctions, Russia was forced to use parts from dishwashers and refrigerators in military equipment.

Oil and gas

Russia is considering a unilateral increase in tariffs on the transport of hydrocarbons exported to the EU in response to the freezing of its reserves. So Russia wants to return its "illegally" frozen funds in the next three to four months.
Failure to pay the increased price will be considered a refusal to purchase, which will lead to complete cessation of delivery. In return, the EU is considering limiting the price of natural gas to avoid unreasonably high costs if Russia significantly restricts or suspends exports.
  At a closed meeting, the European Commission approved the scheme for paying for Russian gas, which was proposed by Russian President Vladimir Putin, according to Bloomberg. Companies will be allowed to open accounts with Gazprombank in euros or dollars, where the funds will be automatically transferred to ruble accounts.

Earlier, it was announced that 20 companies from the EU have already opened accounts with Gazprombank for paying for gas from Russia, and another 14 have requested a list of documents for opening such accounts.
According to Bloomberg, West African oil companies are increasing sales in the EU. Of the OPEC member countries, "small players" show the largest increase in deliveries to EU ports. West African oil stocks in the EU averaged 1.23 million barrels per day in March and April, up 40 percent from the same period last year and the highest level since February 2020.
In return, Israel is increasing natural gas production and is working to reach an agreement on EU supplies in the coming months, according to Reuters. Bulgaria will be able to receive gas from Azerbaijan in full from July 1st.
Saudi Arabia and the United Arab Emirates, the two largest OPEC producers, have refrained from making additional deliveries to Europe, despite capacity. Algeria is not against the increase in sales, but it lacks investments and capacities.
Poland, Bulgaria and now Finland are excluded from the supply of Russian gas because they refuse to pay in rubles, but can replace it. In 2020, Poland's dependence on Russian gas was 46 percent (imports for domestic consumption), Bulgaria's 73 percent, and Finland's 68 percent.
The disruption of Russian gas supplies did not lead to any disruptions in energy supplies to the three countries. Although Finland imports most of its gas from Russia, Russian gas accounts for only about six percent of its total energy consumption.
In this way, Finland can replace gas with other energy sources and switch to gas supplies from neighboring countries.
Bulgaria and Poland are the only two European countries whose contracts with Gazprom expire later this year, and both said they would not negotiate a renewal of the agreement because they have alternative supply options. Poland is increasing its LNG capacity at the newly installed terminal and has announced the imposition of contractual penalties on Gazprom. Russia has imposed sanctions on 31 companies from Great Britain and the EU, which previously controlled Gazprom.
One of the results is that the Yamal-Europe gas pipeline through Poland will miss the opportunity to transport Russian gas. On May 3 and 11, Putin signed decrees imposing sanctions on a number of foreign companies, including Gazprom Germania and its 29 subsidiaries in various countries, as well as EuroPol GAZ, which owns the Polish part of the Yamal-Europe pipeline.
In response, Polish authorities said the country was ready to give up the use of the Polish section of the Jamal-Europe gas pipeline owned by EuroPol GAZ.

Lukoil bought 100 percent of Shell Oil. The price of the contract is not known, but Shell lost about $ 8.1 billion when he left Russia. Shell has completely stopped selling fuel in Russia, shops and cafes continue to operate.
Over the past month, the company has gradually withdrawn from the Russian market: it has withdrawn staff from its joint ventures with Russian Gazprom (including Sakhalin II), then management and technical staff, and closed all gas stations.
Over the past month, the company has gradually withdrawn from the Russian market: it has withdrawn staff from its joint ventures with Russian Gazprom (including Sakhalin II), then management and technical staff, and closed all gas stations.
In May, Shell sold Lukoil 100 percent of Shell Oil in Russia, which includes 411 gas stations and a lubricant factory in the Tver region. In the period January-March 2022, Shell spent 4.24 billion dollars due to the refusal to participate in Russian energy projects and the wholesale purchase of fuel from Russia. Due to leaving Russia, the company was forced to write off $ 3.9 billion. Chinese state-owned companies have expressed a desire to buy a stake in Shell (27.5 percent) in the Russian oil and gas project Sakhalin II, but the fate of this agreement is unknown.
In return, Japan is afraid to abandon Russian energy projects (especially Mitsubishi and Mitsui own 22.5 percent of the Sakhalin-2 oil and gas project), because it will be replaced by other major players from China - Bloomberg, Nikkei Asia.
As a result of rising energy prices, Russian imports to Germany increased by 77.7 percent compared to the previous year to 4.4 billion euros. Despite the import of oil and natural gas from Russia, it decreased by 27.8 percent, in monetary terms, it increased by 56.5 percent.
Russia has unsuccessfully blackmailed Finland with electricity over plans for NATO membership.
Russia's Inter RAO announced that it would cut off electricity supplies to Finland on May 14 because it did not receive payments in rubles. About 30 percent of Russia's electricity exports come from Finland (8.2 billion kWh, ~ $ 0.4 billion), which covers about 10 percent of Finland's electricity consumption. The Finnish network operator (Fingrid) said these quantities could be replaced by imports from Sweden, as well as domestic production.

In 2021, Russia produced 1.131 billion kWh of electricity, of which 1.106 kWh was consumed on the domestic market. In 2021, Russia exported 21.77 billion kWh of electricity worth $ 1.33 billion.

Avoidance of sanctions

Russian oligarchs on Western sanctions lists can use Hawala's informal payment system linked to terrorist financing. This allows them to transfer money abroad, maintaining complete anonymity and remaining almost out of the control of the regulator.

Russian motherboard manufacturer sells products with Chinese KaiXian microprocessor from Zhaoxin. This may indicate that the Chinese company Zhaoxin is selling a chip to Russia, which is a dual-use commodity and is banned by sanctions from the United States, the European Union and allies.

The Russian military could use chips to create advanced weapons.