Buckle up - August is Here

Christopher Weafer. CEO of Macro-Advisory, a Eurasia based strategic consultancy.

August has always been an unpredictable month in Russia with a high proportion of accidents, political surprises, and economic crises recorded this month in history. Of course, since February 2022, August has lost its position as the month most to be feared - there has not been a quiet or uneventful month since. Still, as we head into another August, there are a couple of key issues to watch this year, in addition to the almost inevitable surprises associated with the last month of summer.

The progress of the Ukraine offensive. It is clear, from the Nato summit and the recent Aspen Security Forum, that several big Western donor countries are frustrated with the slow progress of the Ukraine offensive. Kyiv has responded with a major escalation and, according to many reports, is making gains. President Zelenskiy has said that the war will be brought to Russian cities and to expect more of the drone attacks seen in recent weeks.

The fighting will intensify through August for certain. The ground is hard, and Ukraine wants to show positive results to donor nations. The recent Wagner mutiny may also indicate some disarray in the Russian military and that also may add to the opportunity. The question is “what would Moscow’s response be in the event the Ukraine offensive threatens Crimea”? And what would be the response if some drone attacks succeed in hitting sensitive targets or killing civilians in Moscow? That would undermine public support for the Kremlin’s actions although the initial response would be one of greater national defiance and solidarity. The more public response might only come in the colder and darker days of autumn and early winter.

The fallout from the Wagner mutiny is still being assessed and while there have not been any major personnel changes, in the military, security forces or the Kremlin, some are expected and may occur this month. It has historically been a month for political surprises. In August 1991 there was an attempted coup against Mikhail Gorbachev by those – taking advantage of the traditional holiday month - looking to prevent the break-up of the Soviet Union. In August 1999 was when Boris Yeltsin promoted a relatively unknown Vladimir Putin to the post of prime minister.

Efforts to being about a cease-fire (clearly not before the results of the current offensive are known) appear to be picking up. Saudi Arabia is the latest nation to get involved and to host preliminary talks (August 5-6 in Jeddah) and, maybe crucially, is involving others from the BRICS nations and G20 (ex G7) states ahead of the respective summits in late August and late September. Historically August has been a month when significant military and geopolitical events took place. 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 2008, the Russia-Georgia war provided the backdrop.

There is also a lot of interest in the fate of the now suspended grain deal and the implications for Russia-Turkey relations. President Erdogan appears to be taking the suspension personally. It was one of his few geopolitical wins so maybe not surprising. It is reported that Putin plans to visit Turkey in August but, it is assumed, that will not happen unless there is progress in restoring the grain deal. Of course, Erdogan also wants the establishment of the Zangezur Corridor (connecting the Nakhchivan enclave with mainland Azerbaijan) which would allow direct access from Turkiye to the Caspian, and on to Central Asia, via a friendly state. So, there are trade-offs to be negotiated with the Sword of Damocles being Turkey’s control of Russia oil tanker transit via the Bosporus.

There will also be keen interest in the trend in Russia’s oil export receipts. The budget has lost close to $60bn in 1H23 because of discounting but, in recent weeks, there are credible reports from Asian traders that the discounts are falling quickly, and that Urals is now trading well above the G7/EU price cap (set a $60 per barrel). The budget report for July, published in early August, will show if the Finance Minister’s optimism that the budget deficit for the year will end between 2% and 2.5% of GDP (comfortably affordable) or if it is wide of the mark. If the latter, then the danger of expanded taxation or a cut in spending will grow and that would have medium term implications for the current socio-political stability now seen in Russia.

In Russia’s favour is the fact that Asian oil demand is starting to pick up while OPEC has again cut supply. There also appears to be a big reluctance on the part of the G7/EU nations to try and strictly enforce the $60 per barrel price cap for fear that would lead to a spike in the oil price in the autumn.

Historically, there is also a fear about the economy in August. The default (on domestic debt) and the start of a steep ruble devaluation in August 1998 ranks as one of the most memorable events of the last thirty-years and one which proved a turning point for Russia, both economically and politically. There is no risk of any such repeat this year (debt to GDP is now down to 14.9%) while the rube exchange rate is entirely managed by the Central Bank. Last year, it held the rate close to RUB60 to the dollar to bring inflation lower while. This year, the Central Bank has orchestrated a steep devaluation to help the finance ministry boost export tax income in local currency terms.

The main interest this August, apart from the value of oil export receipts, will be the response of Kazakhstan and other states in Central Asia and the Caucasus to US and EU pressure to curtail the transit of cargoes to Russia. If enforced too enthusiastically then, amongst other things, the CPC oil pipe (carrying Kazakh oil to the Black Sea) may again have technical difficulties. Many states in the region are facing an increasingly tricky balancing act this year.

Sanctions feature prominently in previous Augusts. 2014 saw a major ramp up of western sanctions against Russia and the start of the ban on imported food from the US and Europe. The effect of that, plus the start of a steep drop in the oil price, was a big rise in food inflation through winter (25% y/y at peak), a recession across the economy and, on a more positive note, a more serious approach to investment into the agriculture sector and food production which led to Russian being a major exporter of some food types. In the year ended June 30, Russia exported a record volume of 60mn tonnes of grain worth $41bn.

Nature has regularly been very unkind to Russia in August. In 2002 widespread fires raged in 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, although boosted from August 2014 when western sanctions escalated.

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.

August 2023 will not be uneventful. That is already clear. The only question is whether it will take its place in history as a month when there was a major geopolitical or domestic political event or something else which will be viewed as important or a critical turning point. Maybe it will be a month when something more positive, or very negative, happens? Unfortunately, history favours the latter.

Christopher Weafer is CEO of Macro-Advisory, a Eurasia based strategic consultancy.