Major Russian companies are not sinking yet, but they are fighting for survival

Russian oligarchs’ corporations faced financial difficulties due to the war, impacting Russia’s entire economy.

Even before Russia’s full-scale aggression against Ukraine, the Ministry of Transport and the state-owned company Rostech had an idea of how to sustain and keep airlines going. At that time, they aimed to support Russian civil aviation, which had suffered heavy financial losses during the pandemic. Today, the government is considering introducing a mandatory fee for passengers on each ticket to support airlines. The cost would be low, about 300 Rubles, equivalent to 3.31 USD, but it will increase the price of expensive tickets anyway. Since the beginning of this year, the average cost of airline tickets has increased by 30 percent. However, the Russian authorities are trying to save airline companies. Five major airlines, Aeroflot, S7, Pobeda, Rossiya, and Ural Airlines, carry most Russian passengers, although over 100 companies are registered there.

The closure of airports in Europe and America and other sanctions, such as financial restrictions and limited access to aircraft services and spare parts, has severely impacted the Russian aviation market. The Kremlin has resorted to cannibalizing spare parts by using components from other aircraft to replace those from Airbuses and Boeings. As a result, many small regional airlines have been forced to stop flying due to their inability to maintain their aircraft fleet. Even though Russian airlines still have about a thousand An-2s, which are small biplanes popularly known as “Kukuruznik” and are produced in Poland and China under license, they are at risk of being grounded due to sanctions. More than two hundred currently have valid certificates and carry several dozen passengers. These flying planes are essential on the regional routes of this vast country.

The oligarchs lose the profit

The aviation industry’s struggles pale compared to major Russian corporations’ significant challenges. One such example is the NLMK concern, owned by oligarch Vladimir Lisin, which is currently selling some of its plants in the Urals. Additionally, Lisin has decided to relocate his companies from Europe to the United Arab Emirates. Despite owning multiple properties and investments in Europe, including Belgium, and supplying the arms industry, Lisin has managed to avoid significant personnel sanctions in the EU for a lengthy period of time. Over time, he also started to worry about the consequences of sanctions. It has become a standard procedure as Russian oligarchs relocate their businesses away from British or EU territory. They usually choose Kazakhstan, the UAE, or Turkey as their new base. However, Lisin’s difficulties are not solely due to sanctions against him. They have also impacted the entire Russian metallurgical industry, causing other Steel Tycoons like Roman Abramovich, Alexei Mordashov, and Aleksandr Abramov to experience losses in their profits.

Prior to the Russian invasion of Ukraine, the NLMK company, overseen by Lisin, was responsible for generating approximately 14 million tons of steel each year and primarily earned profits through exports. Before the conflict, Europe was increasingly purchasing Russian steel. However, following the war and the sanctions that resulted in the closure of European markets, NLMK’s steel sales declined by over 20%. As a consequence, the Lisin conglomerate’s market value decreased by one-third. In addition to sanctions, Russian metallurgy is also affected by EU regulations regarding climate policy. As a result of the conflict, Roman Abramovich’s net worth, estimated at around 16 billion USD before the Ukrainian invasion, was cut in half. The Mordashov family’s fortune also shrank from 29 billion USD to 20 billion USD, while Lisin’s wealth decreased from over 28 billion USD to 20.1 billion USD.

The Kremlin officials are concerned about financial issues and the possibility of a budget shortfall. As a result, they implemented a one-time tax on large corporations’ extraordinary profits. Putin explained that this tax would help support the country’s war efforts by allowing companies to contribute their earnings to the state. In June, new regulations took effect and imposed a special tax of up to 10 percent on companies with a net profit of 1 billion rubles, approximately 12 billion USD per year, starting in 2021. The budget is to earn about 4 billion USD from this tax. Analysts predict that the new tax will mainly impact medium to large private companies in the service, transport, and production sectors and large corporations such as fertilizer and agricultural companies still making profits. It is not the first time the Kremlin has utilized targeted taxation to raise funds for war efforts. Gazprom had to pay a similar tax on their exceptional profits last year.

Despite all odds, the sanctions work

During the initial stages of the war, Gazprom saw a surge in profits as gas prices soared. However, the Russians attempted to use this as leverage to blackmail Europe by halting gas supplies. Unfortunately, this tactic backfired, and Gazprom lost 45% of its European market share. While the Kremlin boasts of transitioning to non-European recipients, progress has been slow and will likely take many years to implement fully. Despite a profitable first quarter in 2022, Gazprom faced setbacks such as taxes, market losses, and declining gas prices in the following quarters. These factors ultimately resulted in a loss for the company last year, and they could not pay dividends to their shareholders. Gas production decreased by 20%, marking the first time in history that such a situation occurred.

A major player in the Russian economy, Rosneft, recently boasted about their profits. According to the largest oil producer, their first quarter results showed a 45% increase, totaling around 4 billion USD compared to the previous quarter. However, there are concerns that Rosneft may be manipulating its financial reporting due to secrecy surrounding data on oil production mandated by Putin. Data from the previous year indicates that Rosneft experienced a loss of nearly 8% compared to 2021. Additionally, the direction of Russian oil sales is a significant issue, with the company shifting some of its sales to Asian and Turkish markets. Yet, this strategy has a problem, as Russia sells more and more to India.

As of June, the amount of oil exported to India by the Russians had already reached 2.2 million barrels per day, overtaking 46% of the Indian oil market. However, the Russians face several problems in this endeavor. Firstly, they are selling their oil at a low price, and amidst the sanctions imposed on them, India is leveraging this opportunity to negotiate significant discounts. Secondly, the Russians receive payment in Indian Rupees, which is not very useful due to the sanctions. Lastly, the Russians have been experiencing frequent instances of their “ghost fleet” of tankers being stopped or blocked. These tankers are registered under shadow companies and were meant to be a way for the Russians to bypass Western sanctions. However, Western services have successfully blocked these tankers, with global insurance companies and maritime transport companies becoming increasingly effective.

The financial struggles of large oligarchic companies and state-owned businesses will hurt the Russian economy. Some companies seek out new markets outside of Europe to avoid a severe crisis, while others focus on maximizing their presence within Russia. Despite facing sanctions and restrictions, specific sectors, such as agriculture, chemical production, and nuclear energy, particularly Rosatom, are performing well. However, Bloomberg foresees that by 2026, the Russian economy will shrink by 190 billion USD, although it is difficult to estimate the extent of losses accurately. Large corporations play a critical role in the Russian economy, as they are also major employers. For instance, Gazprom alone employs almost half a million Russians. The statistics on employment only provide a partial view of the situation since numerous smaller businesses and sub-suppliers work for state and private oligarchic concerns. The prosperity of the Russian urban middle class relies on the success of large enterprises, as they are clients and leading service providers for the financial, managerial, and media sectors that serve these corporations. Furthermore, significant declines in the income and capitalization of major companies lead to cost-cutting and reduced job opportunities. The Russian economy’s leading players are facing a challenging situation. On the one hand, they are struggling due to sanctions imposed over the war with Ukraine. Meanwhile, the Kremlin is demanding more profits from these large enterprises to fund the ongoing conflict.

Michał Kacewicz/belsat.eu

Translated by PEV.