What are the implications of Trump and Vance bullying Zelenskyy in the Oval Office for the Kremlin and for Europe? How does the mobster mentality that Trump brings to international relations changes the Kremlin’s calculus regarding the war? Will the Russian federal government have to fund an increasing amount of sectoral crisis management programs? In this somewhat long-winded dispatch I am trying to answer these questions and comment on some other developments in Russia’s regions from the past weeks that did not make it into Bear Market Brief.

Hail the mob – the aftermath of the Zelenskyy-Trump meeting

More than three days have passed since the disaster triggered by the US president and vice president in the Oval Office, and, in spite of early hopes of a quick reconciliation, this does not appear to be the direction, in which developments are headed. US national security advisor Mike Waltz said that the White House now expects Zelenskyy to apologize before any further negotiations on the “minerals deal”, which Zelenskyy was supposed to sign last week. Trump has reportedly ordered a “pause and review” of US military aid to Ukraine.

For the below reading of the situation, I must add that I am not a specialist on either Ukrainian or US domestic politics, however, I believe I have a good grasp of how both foreign policy and illiberalism work.

In my view, those arguing that Zelenskyy should not let himself be provoked are misreading the intention of the White House. I believe by the time the meeting took place there wasn’t any actual deal on the table: not because, as several experts pointed out, Ukraine does not have (or at least does not have easy access to) the deposits that Trump claims to want, but because the deal, as it was laid out, made no sense to either side. For Ukraine and Zelenskyy personally, who faces domestic political challengers, agreeing to any deal in the context of the ongoing US-Russia negotiations, which does not contain security guarantees, would be disastrous. Some suggest this was exactly why Zelenskyy insisted on going ahead with the White House meeting, which may have been his actual mistake.

Trump and Vance, on the other hand, had made it fairly obvious prior to the meeting that they regard Zelenskyy as an obstacle to the actual deal that they want to strike: the one with the Kremlin (and let’s not forget also that Trump has a personal grudge against Zelenskyy, which in this administration matters). Thus, the Ukrainian president had to be humiliated and forced into a position where he had only bad choices. Of these, by the way, I believe Zelenskyy chose the somewhat less terrible alternative: supinely acquiescing to lecturing from someone like JD Vance or attempting to change the topic would simply have invited more bullying and calls to show respect.

Just like the listing of adulatory messages that the Trump White House put on proud display following this disaster, perhaps in an attempt to remind everyone else of the eager deference they expect, it was all theatrics and bully politics, and we need to be ready for more of this. It looked like a performance arranged by a former reality show star who played a businessman on TV to some success, and is now trying to play a strongman. My immediate reaction – that any Secretary of State with a shred of decency would have to resign after the spectacle in the Oval Office – still stands, but to be honest, I am finding it increasingly difficult to convince myself that it matters whether the fresh-faced hologram this White House is sending to certain meetings is called Marco Rubio or StateGPT as long as the White House’s vision of international politics is something akin to mobsters establishing protection rackets over their own territories without even a pretense of lawfulness or principles.  

As regards Russia – and here I am on more familiar territory – one of the questions that has often surfaced over the past three years in various contexts is whether Putin is a rational actor or not. To many this may seem rhetorical, given the vile destruction that the Russian leader has unleashed on Ukraine (and, in a different way, but also on his own country), however, it is an important question. It is important not only to understand how Putin arrived to the decision of launching the invasion – was it an intelligence failure, was it isolation triggered by COVID, was it the domestic political situation, his deeply held beliefs about history, or perhaps all of these? – which is the context in which this question is most often asked, but also to decide whether Ukraine and its backers can conduct negotiations in Putin beyond talking to the man to check his state of mind.

With the caveat that nobody really knows what is inside Putin’s head – and I am certainly very far removed from him – I believe Putin is a rational actor. But this is exactly why I also believe that currently he has very little incentive to want to end the war. I have not seen convincing arguments either to suggest that Putin has given up on his original war aims or that he could not be coerced and talked into giving up on them. But I think this debate is beside the point: the objectives of the moment are determined by the Kremlin’s assessment of the domestic and international limitations, and with Trump and Vance in the White House, Putin may very well assess that he is going to be able to improve his position in the foreseeable future from whatever the initial offer was on the table.

The initial reactions in Russia to the chaos that Trump unleashed in the field of foreign policy over the past month, were, of course, partly jubilant – but this kind of commentary, usually coming from paid propagandists, is what the media will be very eager to pick up. From the Kremlin itself (including Kremlin-adjacent analysts), the reaction has been rather more cautious. Putin postponed his yearly address to an indefinite future date, suggesting that he understood that a lot was depending on how talks with the US would go, but was not sure yet how to use the opportunity – or indeed what the achievable alternatives were. Russia chose serious negotiators for the Riyadh talks – the contrast between the two delegations was, frankly, striking – but at the same time, Putin’s office also made it clear that Putin was in no rush to meet Trump or to talk about the end of the war. Instead, in the past weeks, the Russian government has worked hard to convince Trump that they had better deals to offer, from rare earth minerals (partially taken from Russian-occupied parts of Ukraine) to common development of Arctic deposits and the Northern Sea Route. From the Kremlin’s point of view, these would also help to de facto legitimize Russia’s claims over Ukrainian territories, and push the US towards removing sanctions from Russia’s Arctic development projects – sanctions which actually did hurt the Russian economy and led to the mothballing of major projects.

The Kremlin seems to understand that from its own perspective, the best thing that it can presently do is to take things slowly, for several reasons. First, the purpose is to see how much damage Trump is able to cause on his own to European politics, in American domestic politics and to the US’s international alliances. All of this would improve Putin’s position, but as of early March it is unclear how much pushback Trump and his agents of chaos are going to face. Second, Putin’s main objective is not to end the war but to have US sanctions removed, without which, according to the Kremlin’s likely calculus, EU sanctions will soon also fold. Yes, there is war fatigue in Russia: public opinion, while tricky to gauge, has likely shifted, and wartime policies are causing frictions both in the elite and on the level of policies relying on scarce resources. The Kremlin’s ability to maintain domestic stability has depended on maintaining the mirage of an eventual Russian victory as timelines gradually shifted from a short war against Ukraine to a long conflict with the West, from temporary fiscal prioritization to fundamental budgetary and asset redistributions, and changed domestic political dynamics. From the Kremlin’s point of view, the return of Trump is not a chance to end the war, but to improve Russia’s position by so much that the continuation of the war will not cause critical domestic economic and political risks. A third reason for the caution, I believe, is that while Putin understands the necessity to react to the American overtures, he also wants to keep control of escalatory dynamics. Rushing into a deal with Trump – even talking about eventual outcomes as if they are imminent – deprives him of this possibility.

Obviously, the Kremlin cannot play this game for eternity. There will be concessions, negotiations – more theatre – but I cannot yet see a stable peace on the horizon, because currently, the Kremlin is not interested in this and the White House is indifferent to it; only Ukraine and the EU want a stable peace and they are currently either sidelined or unable to show force on their own. To change this, EU leaders will need to understand that the undermining of the European Union is not a negotiating tactic or a rhetorical hyperbole of this US administration, but one of its foreign policy objectives. And then they will need to get their act together very quickly.

Sectoral crises

I may write a longer piece about the political implications this in the future, but for now I would simply like to note that we have seen, over the past weeks, an increasing number of sectoral crisis management programs being considered or at least discussed. But this does not mean that they are actually going to be implemented.

It appears that, even though the coal industry’s troubles, triggered by a loss of Western export markets, clogged transit corridors and low global prices, have been laid bare over the past year, the federal government is in no rush to help out coal producers with subsidies. In late February the Ministry of Energy – led by Sergey Tsivilyov, who himself has business interests in the coal industry – took the position that before any subsidies are paid from the federal budget to struggling coal companies, transportation companies such as Russian Railways and ports should provide discounts to export coal via Southern and Western Russian ports from the Kemerovo and Novosibirsk Regions and Khakassia.

Of all the industries hit by the ongoing restructuring of the Russian economy, the problems of the coal industry are probably the most acute for the time being: in Kemerovo, Russia’s main coal producing region fiscal revenues dropped by 14.5% last year, at least eight mining companies have closed and others, including major firms, are accumulating losses; mines need to be put in conservation at a high cost; as of February, exporting coal from Kemerovo in any direction was unprofitable.

But representatives of other industries have also been requesting state support: both metallurgical and timber producers have turned to the government after the double whammy of the of Western export markets and the phasing out of subsidized mortgages. Both industries are also important for specific regions, several of them in Russia’s northwest, where bankruptcies may increase the risk of significant social upheaval. Potential support measures for the timber industry include tax breaks, mandatory federal and regional purchases of timber, and freeing up transportation capacities. Metallurgical companies, which were affected by a surtax earlier, requested tax cuts.

In general, the Kremlin also suggested Mishustin’s government to return to the type of structural support measures that Russia adopted during the COVID-19 pandemic, but it is unclear whether the government is ready put money behind these measures as long as war-related expenditures remain prioritized and inflation expectations remain high. A recent report of the Central Bank on loans confirmed that subsidized lending was responsible for up to 20 percent of the growth in money supply since 2022, even without accounting for preferential mortgages. Limiting these loans was the Central Bank’s main request of the government at the end of last year in exchange for not raising the key rate further.

Extending productivity-enhancing projects to whole industries to achieve a 20-percent productivity growth by 2030 sounds great, but this is easier said than done. Without better access to imported technology and as long as Russia’s current labor crunch, exacerbated by the war, is driving up salaries, as the Kremlin’s ongoing nationalization program further erodes property rights, there is only so much better organization and domestic technologies can do.

This matters because it underlines that under the veneer of stability, the ongoing significant structural reorganization of the Russian economy is triggering challenges and requests that the state, under the constraints created by the war, the Kremlin’s domestic priorities and international sanctions is currently ill equipped to handle, and which may thus increase competition both for the limited funds available in the budget and for the assets of companies that are weakened or felled by these sectoral crises.

Also-happeneds

• More development projects disrupted by wage arrears: Following the builders of the Bashkortostan and Sverdlovsk Region stretch of the Moscow-Kazan motorway, the workers building a bridge across the Uda river in Ulan-Ude, the capital of Buryatia, also staged a protest in February due to wage arrears. Similarly to the incident in Bashkortostan, where the contractor complained about steeply increasing costs (due in part to war-related inflation and more expensive imports), the price tag on the Buryatian project seems to have been steadily inflating and the workers’ strike will likely cause further delays to the project that was originally supposed to be completed in 2024. These wage arrears do not only cause disruptions and delays – quite a common thing in Russia – but also force local and regional authorities to deal with the risks triggered by the strikes, which they are often not well placed to address, e.g. if the contractors are based in another region.  
• New arrests in Rostov and Ulyanovsk: The situation of Vasily Golubev, the former governor of Rostov seems to be worsening. In February he was reportedly summoned to the Investigative Committee for questioning, with the FSB and the Prosecution also interested in hearing from him (albeit this was later denied). Meanwhile, now a total of four ministers in the regional government and other officials, including one of Golubev’s aides, were also arrested under suspicion of corruption. Following his dismissal in November last year, Golubev arranged for himself a seat in the Federation Council at lightning speed. This kind of promotion into a sinecure position has traditionally been seen as a relatively safe retirement. Another corruption case worth noting concerned Igor Edel, the former deputy governor of the Ulyanovsk Region and a close colleague of the region’s communist governor, Alexei Russkikh. Edel was sentenced to 12 years in prison in February for having received 117 million rubles in kickbacks from contractors when he managed development projects on behalf of the region. While Edel was arrested in 2023, it is worth noting that Russkikh is regarded as an ally of Security Council secretary Sergei Shoigu, many of whose former appointees and allies have been arrested after last year’s government reshuffle, which prompted speculations about the potential removal of Russkikh even before his current gubernatorial term ends in 2026.
• Putin meeting regional heads: A propos governors – in February Putin has started meeting and thus de facto approving the candidacies of governors who face elections in September. This concerns the incumbent heads of 11 regions, not counting six newly appointed regional heads (who are currently interim governors but will have to officially win a vote), the head of the Nenets Autonomous District who is not directly elected, and the head of the occupied Sevastopol. The governors who have received presidential approval include Kamchatka governor Vladimir Solodov, Bryansk governor Alexander Bogomaz, Kaluga governor Vladislav Shapsha and notably Irkutsk governor Igor Kobzev who has recently come under fire in the region due to the introduction of differentiated electricity tariffs that locals fear will lead to a massive spike in utility bills as many in the region use electric heating. Оther governors to watch include Alexander Drozdenko, the head of the Leningrad Region and Sergey Sitnikov, the head of the Kostroma Region, both of whom have been in office for 13 years. Drozdenko has had to deal with a series of corruption cases in the region over the past years, while Sitnikov’s seat, according to rumors, is coveted by Vladislav Davankov, the deputy speaker of the State Duma from the New People party.
• Cryptomining goes dark: As regards cryptomining – one of the main reasons why the government introduced the much-contested differential tariffs in the Irkutsk Region – it is unclear whether the regulatory changes have helped. Along with the tariffs the government also banned mining in several regions with overloaded electricity grids and in parts of certain regions (including Irkutsk) over the fall and winter. But with the price of Bitcoin going through the roof after Donald Trump’s inauguration, according to RBK many local cryptominers simply went underground and boutique mining cooperatives that work in garages or in apartments are difficult to track. At the same time, the Energy Ministry claims that across Siberia as a whole the ban has successfully reduced the load on the power grid. It could also be that some cryptominers have temporarily relocated their work to other regions. Far East plenipotentiary and deputy prime minister Yury Trutnev would actually like to attract cryptominers to the Far East, provided that the macroregion is able to build up energy reserves.
• Campaigning from the trenches: Russia’s electoral legislation is going through its newest frenzy of substantial revamps, as usual before Duma elections (due next year). The most absurd proposal so far came from the regional legislature of Tatarstan. The region would support Vladimir Putin’s call to get more veterans elected to assemblies of various levels by allowing military servicemen to put forward their candidacies through a “trusted person” – most likely their commander – while still fighting. It is unclear what will then happen to those who happen to win a seat: it is unlikely that the Ministry of Defense would simply make exceptions and rotate them back to Russia, while it is quite unlikely that they could fulfil their duties from the frontline. Perhaps they would be able to exercise their mandates through another “trusted person”? As far as I can tell, this might just be a brilliant idea to square the circle of complying with Putin’s vision of a “new elite” and report neat figures of war participants elected to positions of power, while keeping things pretty much intact on the ground.
• Regional debt forgiving rules: The government finalized the rules of forgiving regional debt held by the federal government. The initiative itself to forgive two-thirds of this kind of debt came last year from the Kremlin and followed several years of the Finance Ministry actively replacing regions’ debt from financial markets with low-interest budgetary loans. According to the rules, regions will need to spend at least half of the funds they thus free up to modernize housing and communal infrastructure (a major problem in many regions), with the rest spent on various other development projects ranging from public transit to industrial development. In the Arctic and the Far East regions are encouraged to spend the funds on city master plans, as populating these territories is a stated priority of the Kremlin due to their increasing economic importance in Russia’s pivot to Asia; and poorer regions (where, interestingly, the “needs of the special military operation” are mentioned as a priority). While the Kremlin has presented the debt write-off as a major step in fostering a more active investment policy in the regions, it is questionable how much this will actually count. For one, regions will not benefit equally or even according to their needs, given that heavily indebted regions are going to see a comparatively bigger breathing room. Moscow, the Moscow Region and Tatarstan are going to be among the biggest winners, in nominal terms, albeit some smaller regions with significant debt burdens (e.g. Udmurtia or Tomsk) will also benefit.
• The power struggle in Khakassia continued with Sergey Sokol, the United Russia head of the regional legislature announcing on February 21 that a majority of the region’s municipal heads supported overturning governor Valentin Konovalov’s veto against a law, which would see Konovalov lose his power to suspend fiscal transfers to municipalities (I reviewed the debate and its stakes in an earlier post). This would have only mattered if it had moved the needle for Sokol in the regional legislature – but it did not. Five days later the chamber voted not to put the issue on the agenda, even though United Russia has just enough deputies to override gubernatorial vetos. The fact that Sokol has been seeking the performative support of municipal heads suggests that Sokol and his backers are trying – so far unsuccessfully – to dismantle the local coalition around Konovalov that prevented the Kremlin from removing him in a 2023 gubernatorial election.