August in Russia: what could possibly go wrong?
Chris Weafer is a founding partner of Macro-Advisory, which helps investors cut though the noise and focus on underlying trends, real political risks, and opportunities in Russia/CIS, the Eurasia Union, and Mongolia.
In a year when Russia, along with the rest of the world, has been dealing with the worst global pandemic for decades, it seems extraneous to warn about the possibility of nasty surprises to come in August. Most in Russia will hope for a quiet vacation month to recover from what has been a hectic seven months already in 2020, but history is not on their side. August is the month when more memorable events occur than in any other month of the year; whether accidents, natural catastrophes or political events. It is very rare for August to pass without a legacy-creating event.
Last August saw devastating fires against a backdrop of record-setting temperatures in Siberia and Arctic regions while, at the same time, the lowest average temperature for that month in 100 years was recorded in Moscow. These events added momentum to the environment debate and placed it firmly on the political agenda. There were also weekly well-attended protests in Moscow which, at least in part, led to President Vladimir Putin committing to social and income improvements in the coming years. Two servicemen in Crimea were handed a bill for RUB46mn ($641,000) for “inadvertently” launching two missiles. No mention of where they landed!
What of this year? We have already had the traditional seasonal warnings from retired military officers and East European nationalists that Russia is preparing to invade Eastern Ukraine or one of its other western neighbours. The phrase “this year it is different” is an equally traditional part of the argument. There is also the usual Cold War Redux narrative, although more confined to the US and UK this year.
What of the more serious threats and concerns coming into August 2020? There are a few already visible that one should be wary of, with the most dangerous being the continuing virus pandemic and the effect on the economy. Russia has reported a high infection number but a low death rate, a fact that has engendered a new genre of Russia conspiracy theories. The economy has passed the worst point of decline and the government is in a rare position of having ample financial resources to fund remedial actions. A case of “so far, all (relatively) good” but watch this space.
The threat of US sanctions is never far away and the recent rush to reactivate the “sanctions from hell” on the back of the Afghanistan allegations, shows the eagerness of many in Congress to pull that trigger. Additional sanctions against NordStream 2 and Turkstream 2 seem inevitable (they will add cost and delays to the projects but not stop either) while the more serious broader threat level will remain elevated at least up to the November election and, probably, much longer.
The continuing protests in the Far East, sparked by the arrest and firing of the Khabarovsk region governor, are grabbing more international media headlines than justified, at this stage. That said, the Kremlin will for sure not dismiss these events as protests in the regions are always a greater concern than those in the capital.
The weather is less unpredictable than it used be i.e. in the sense that historical patterns and expectations have been disrupted for several years. It is now a case of “what will be different this year and what damage will that cause?” Flooding, fires and smog are almost expected in modern Russia in August.
This year the big issue may not be in Russia but in what Moscow regards as its near-abroad. The presidential election in Belarus will take place on August 9 and the lead-up has already been marred by a greater incidence of protests than seen previously. That is an event to pay close attention to. On the southern border, the main concern is the steady increase in the fatal clashes between Armenian and Azerbaijani forces on either side of the Nagorno-Karabakh border. That is unfinished business for Baku and only a question of when it escalates into another full-scale conflict.
So, what is on the list of memorable August events that justifies such concern? The Molotov-Ribbentrop Pact was signed in August 1939, and construction of the Berlin Wall started in August 1961. Soviet troops entered Prague in August 1968, and in August 1991 there was an attempted coup against Mikhail Gorbachev by those looking to prevent the break-up of the Soviet Union. August 1999 was when Boris Yeltsin promoted a then relatively unknown Vladimir Putin to the post of prime minister. The Russia-Georgia war provided the backdrop to August 2008.
As this July draws to a close the economy is recovering from the April-May collapse and the country’s finances are in good shape. But a quiet economy has not always been the case in August, with arguably the two biggest macro events in the history of the state initiated in August 1998 and in August 2014. The former was the default on domestic debt and the collapse of both the ruble and a big portion of the banking system. In 2014 the sectoral sanctions were met with a retaliation that banned the import of food from most Western nations. August 2014 also saw the start of the collapse of the oil price, which directly pushed the economy into recession and, in combination with sanctions, led to 25% food inflation and some shortages the following winter. On a more positive note, Russia ended almost 19 years of stop-start negotiations and was finally admitted into the World Trade Organisation in August 2012.
Nature has also been very unkind to Russia in August. In August 2002 widespread fires raged the peatlands around Moscow and blanketed the city in a toxic haze. August 2013 brought very destructive flooding to much of Russia’s Far East, which led to both expensive economic disruption and loss of life. The worst weather-related disruption came in August 2010 when large swathes of the country were hit with high temperatures and forest fires. That combination contributed to drought conditions across much of the farming belt and led to a big drop in the year’s harvest. In fact, it was this combination that persuaded Putin the country’s reliance on imported food (55% of consumption that year) and medicines was not only bad economics but a national security issue. The origin of what we now refer to as the ‘localisation’ policy was in August 2010.
August can be an accident-prone month, such as in August 2000 when there were several serious accidents including the sinking of the Kursk submarine and a fatal fire in Moscow’s landmark Ostankino TV tower. In August 2006, 170 people died in an aeroplane crash on a flight from the Black Sea resort of Anapa to St Petersburg. In August 2005, the first case of avian flu was reported and while thankfully that did not develop as had been feared, it did lead to a sense of heightened concern for the month. In August 2009 one of the country’s largest hydropower stations suffered a catastrophic explosion in which 75 people died.
Even in relatively quiet Augusts, of which there have been very few over the past 25 years, there is always something noteworthy or just odd. In August 2001, the then North Korean leader, Kim Jong-il, visited Moscow. But because of his fear of flying he rode his private train across Russia and caused havoc to passenger services. Such was the frustration of the inconvenienced people that when the train arrived at a Moscow station there were multiple bullet holes clearly visible on its side.
In August 2007, a group of nationalist politicians paid for a mini sub to take them to the floor of the Arctic Ocean where they planted a Russian flag in support of the country’s claim to sovereignty over the Lomonosov Ridge.
Coming back to this year, apart from the COVID-19 crisis and oil price collapse, 2020 is already a noteworthy year because of, for example, the record high average temperature in Moscow in January, the constitutional referendum and the disastrous toxic spill in Norilsk. Perhaps the country is now due a break from such disruptive events and can enjoy a peaceful August for a change? The resumption of flights to Turkey and to London, the former being Russians’ favourite holiday destination and the latter dubbed Londongrad, from August 1 is a good omen. Unfortunately, history remains firmly on the side of the Doomsayers.