Cutting their losses
Ukraine withdraws from Avdiivka
Hello from the Bear Market Brief.
This week in the news:
Ukraine’s Commander-in-Chief announced the military’s withdrawal from Avdiivka after months of fighting Russian troops for control of the city.
A U.S.-Russian dual citizen was arrested in Russia on charges of treason. The 33-year-old donated $52 to a Ukrainian human rights organization.
Protests and memorials following the death of opposition leader Alexei Navalny prompted backlash from authorities.
The Central Bank of Russia (CBR) issued its February report on regional economies earlier this month, noting slowing inflation.
The CBR revoked Qiwi Bank’s license, shutting down a popular electronic payment system in Russia.
— Sara Ashbaugh, Editor-in-Chief
Ukraine withdraws from Avdiivka
On February 17, Ukraine’s Commander-in-Chief Oleksandr Syrskyi announced Ukraine’s withdrawal from Avdiivka after months of resisting Russia’s offensive. “Based on the operational situation around Avdiivka, in order to avoid encirclement and preserve the lives and health of servicemen, I decided to withdraw our units from the city and move to defense on more favorable lines,” Syrskiy’s statement reads. The Avdiivka offensive was extremely costly to Russia. According to Ukrainian General Oleksandr Tarnavskyi, since January, Russia lost over 20,000 troops, close to 200 tanks, and more than 450 armored vehicles fighting for Avdiivka. The National Resistance Center of Ukraine reports that due to the high number of casualties in Avdiivka, Russia is using abandoned schools instead of morgues.
During the withdrawal, several severely wounded Ukrainian service members could not be evacuated due to continuous Russian attacks. According to Ukraine’s 110th Brigade, which was defending Avdiivka, Russians promised to evacuate the wounded Ukrainian soldiers and provide necessary medical assistance to them. However, later, relatives of the wounded service members found videos online in which they saw their loved ones killed. According to the 110th Brigade, among those executed were Andrii Dubnytskyi, Ivan Zhyntnyk, Heorhii Pavlov, Oleksandr Zinchuk, and Mykola Savosik. There was one more soldier, but the information on his whereabouts is currently unavailable. On Tuesday, Ukraine’s Ombudsman Dmytro Lubinets appealed to the United Nations and the International Committee of the Red Cross (ICRC) to investigate the killings of Ukrainian prisoners of war in Avdiivka. “This is not the first time that Russia grossly violates the norms of international humanitarian law and the Geneva Conventions by executing prisoners of war,” Lubinets wrote on Telegram.
— Lisa Noskova
The Ukrainian military withdrew from the city of Avdiivka in the Donetsk oblast last Saturday. The city, which was once an industrial hub with a pre-war population of more than 30,000, has been the site of fierce fighting with Russian invaders since October. Now, it is virtually destroyed; this view from above shows the extent of the devastation. After Russia announced it had taken full control of the city, Putin congratulated Russian troops on “such an important victory.” (photo: t.me/itsdonetsk)
American arrested in Russia
A 33-year-old U.S.-Russian dual citizen, identified as Ksenia Karelina, has been detained in Russia on suspicion of treason. According to the Los Angeles Times, Karelina was visiting her parents, sister, and grandmother in Yekaterinburg when she was detained. The Russian Federal Security Service reported that she was arrested for “providing financial assistance to a foreign state in activities directed against the security of our country.” According to the law group Perviy Otdel, Karelina donated $51.80 to Razom for Ukraine, a New York-based Ukrainian human rights nonprofit. Mykola Murskyj, director of advocacy for Razom for Ukraine, said the group was alarmed by Karelina’s arrest. Karelina has been living and working in Los Angeles for nearly a decade and obtained American citizenship in 2021. A video of Karelina’s arrest was shared by Russian state-run media in which she is handcuffed and escorted away by police. U.S. National Security Council spokesperson John Kirby said that the State Department was trying to “secure some consular access” to Karelina. He also reiterated a warning about U.S. citizens traveling to Russia. Karelina is currently being held in pre-trial detention. If convicted of high treason, she faces 12-20 years in prison.
Several other U.S. citizens are currently imprisoned in Russia, including former marine Paul Whelan and journalist Evan Gershkovich. Whelan was convicted of espionage in 2020 and is currently serving a 16-year prison sentence. Gershkovich was arrested last March on espionage charges and remains in pre-trial detention. During President Putin’s interview with media personality Tucker Carlson, Putin said that a deal could be reached to release Gershkovich “if our partners take reciprocal steps.” However, this week, a Moscow court upheld Gershkovich’s detention until at least March 30, rejecting his latest appeal.
— Sara Ashbaugh
Silenced voices
Silent protests and commemorations have been taking place across Russia after the death of opposition leader and political prisoner Alexei Navalny in captivity on February 16, likely as a consequence of deliberate torture. Many of these commemorations have taken place at existing memorials to other victims of political repression, showing that citizens are linking Navalny’s death to his persecution on political grounds. The independent outlet Vyorstka created an interactive map of these demonstrations, which have taken place in more than 140 towns and cities.
In response to the protests, police have upped their presence, arrested people showing up at demonstrations, and dismantled makeshift memorials to Navalny. During the first three days following Navalny’s death, at least 400 people were arrested according to rights group OVD-Info, which monitors police activity against protesters.
In general, regional officials seem to be afraid that previously-announced protests could become ad-hoc demonstrations in support of Navalny or other political prisoners. The independent outlet Govorit NeMoskva collected a list of decisions from the Ulyanovsk, Novosibirsk, and Rostov regions, as well as the Altai Territory, in which local authorities banned previously authorized demonstrations. In the Khabarovsk Territory, a court labeled the (non-existent) “I/We Sergey Furgal” movement, which involves protest activity in support of the region’s jailed former governor, as “extremist” and the authorities arrested a former local deputy who supported the protests.
While Navalny’s reach in Russia’s countryside was limited, his organization’s regional headquarters established solid footholds in many regional capitals and mid-sized cities. Prior to being dismantled, Navalny’s group sought alliances with local civil society initiatives. Several of Navalny’s regional coordinators have been arrested and jailed over the past two years, including Liliya Chanysheva of Ufa, Ksenia Fadeeva of Tomsk, and Vadim Ostanin of Barnaul.
— Andras Toth-Czifra
Yulia Navalnaya, widow of Alexei Navalny, has vowed to continue her late husband’s work. She posted a powerful video statement to Navalny’s YouTube channel on Monday in which she encouraged Russians to continue fighting for a democratic future. She also posted the video to a newly-created account on X, which was briefly suspended the next day. Meanwhile, Russian authorities have refused to release Navalny’s body for at least another two weeks, and Navalny’s mother initiated a legal case related to his death. (photo: @yulia_navalnaya / X)
Macroeconomic trends
The Central Bank of Russia (CBR) issued its February report on regional economies earlier this month. The report notes that while inflation (including food inflation) is slowing, consumer spending is also slower as consumers are postponing bigger purchases after last year’s rate hikes. This was also noted in the Center for Macroeconomic Analysis and Short-term Prognosis’s (TsMAKP) report. The TsMAKP report highlighted that, at the end of last year, investments grew considerably only in the construction industry. It also said that the utilization of production capacities in manufacturing is high (around 75%), which leaves room only for a moderate increase.
Altogether, the regions of Central Russia and the Volga Federal District, where many of the country’s defense industrial factories are located, continued experiencing higher-than-average industrial growth. Industries that took a hit from international sanctions in 2022-2023—notably timber production and automaking—are still in a recovery phase. However, the report also notes that companies in the Urals Federal District reported slower repairs, postponed investments, and labor market tension. The combination of sanctions and the prioritization of defense plants diverts both labor and resources away from other industries. The report also notes how Russia’s still-ongoing preferential mortgage program supports higher-than-average output of the construction industry in the Far East and in the North Caucasus.
The steep fall of export-oriented industrial production over the past year is evident from a government report that was published earlier this week. According to this document, the volume of non-energy exports dropped by 23% from $190.4 billion to $146.3 billion over the past year. As Russian exporters lost their Western markets and had to find new buyers in other countries, not all exports could be easily reoriented. Due to oil prices dropping for Russian exporters in early 2023, however, the share of non-energy exports increased to 35%. New economic realities are also impacting agricultural exports. The government is going to reduce the agricultural sector’s planned export volume from $47 billion to $36 billion in the sector’s development strategy by 2030.
— Andras Toth-Czifra
Flightless Qiwi
The CBR revoked the license of Qiwi Bank, which ran an electronic payment system that is popular in Russia, due to “high-risk operations” (including on the black market). As a bank, Qiwi was only Russia’s 89th largest, but it was a popular way to transfer small amounts of money (e.g. utilities payments) and to buy and sell cryptocurrencies, both among ordinary citizens and cybercriminals. Following the announcement, Qiwi’s online payments and terminals stopped operating.
The CBR has been consistently cleaning up Russia’s banking sector in recent years to prevent high-risk institutions from causing systemic imbalances, including taking regulatory action several times against Qiwi itself. However, commentators have also noted that the revocation of Qiwi’s license comes a month after the bank’s owner, a Cyprus-based company, announced the restructuring of its assets and the sale of its Russian operations. The CBR’s decision means that the company’s Russian assets will be put under temporary administration of Russia’s Deposit Insurance Agency.
— Andras Toth-Czifra
On the Podcast
Almost two years after Russia’s full-scale invasion, Bear Market Brief investigates how we got here in the first place. What does theory say about Vladimir Putin’s decision making? Seva Gunitsky joins to discuss.
Quickfire: Regions
Several anecdotal signs suggest that while recruiting volunteer soldiers remains a main responsibility of regional governments, they are increasingly struggling. In the Sverdlovsk Region, authorities have reportedly hiked one-time payments to contract soldiers from 20,000 to 100,000 rubles ($212 to $1,060). The Rostov Region also increased payments, from 200,000 to 500,000 rubles ($2,120 to $5,300), following the lead of other regions. In Krasnoyarsk, Vyacheslav Dyukov, the head of the Committee on Construction in the City Assembly, complained that only alcoholics, homeless people, scoundrels, and prisoners are signing up as contract soldiers. Despite later apologizing for the statement, he was expelled from United Russia. Increased payments weigh down regional budgets but provide manpower to the war, which allows the federal government to postpone a new round of mobilization. Military recruitment also remains an important performance indicator for regional leaders.
The government is continuing to nationalize factories with links to the defense industrial complex. This week, the Prosecution announced its intention to review the 1992 privatization of the Ivanovo Heavy Machine Tool Plant, currently owned by structures linked to the Bazhanov family (albeit some production lines have already been taken over and modernized by the state-owned conglomerate Rostec). Also this week, Putin signed a decree to transfer the Ulyanovsk Machine Tool Plant to the temporary management of the Federal Property Management Agency. The original owner of the company was the Japanese-German investor DMG Mori, but the plant ceased production in March 2022. In both cases, the state is trying to revive inactive production capacity.
The State Duma started to discuss bills that would provide tax breaks for companies residing in planned international “territories of rapid socio-economic development” (de facto special economic zones) in the Far East. The zones must be located in a region or regions bordering China, and the government expects 30 billion rubles ($318 million) in investment projects for high-tech production by 2033, particularly given Russia’s trade pivot to Asian markets. Special economic zones have been used by the Russian government to attract investments into underdeveloped regions both before and after the 2022 invasion of Ukraine, including in the Far East, but with limited success. The purpose of the new law is to provide additional tax incentives.
— Andras Toth-Czifra
Quickfire: Ukraine
On Saturday, the U.S. Department of Justice issued a press release pledging to transfer approximately $500,000 in confiscated Russian funds to Estonia. Estonia will use the money to help Ukraine repair its electrical distribution and transmission system, which has been targeted by Russia. The U.S. confiscated the funds after uncovering an illegal procurement network that was trying to supply Russia with American-made high-precision tools to be used in the defense and nuclear proliferation industries.
According to a recent survey conducted by the Kyiv International Institute of Sociology, the vast majority of Ukrainians (69%) believe that Volodymyr Zelenskyy should remain president until the end of martial law. Only 15% of respondents said that elections should be held in May 2024. Out of those, 4% believed that martial law should be paused for three months to hold elections, while another 11% said that elections should be held despite martial law. Additionally, 10% of respondents would like to see Zelenskyy resign in May and be replaced by Chairman of the Parliament Ruslan Stefanchuk until a new head of state can be elected. The study was conducted through phone interviews with 1,202 people over the age of 18.
— Lisa Noskova