“Why the situation with the Russian economy is worse than the Russian authorities say”, — write: epravda.com.ua
Russian President Vladimir Putin often brags about the strength of his country’s economy and claims that Western sanctions have only made it stronger (although he immediately calls for them to be lifted). In reality, “stagflation” is looming over Russia – inflation combined with minimal economic growth rates. Putin’s war in Ukraine has led to both a continuous rise in prices and a labor shortage, as many workers have been mobilized or killed, while many have fled the country. On the eve of the regular meeting of the board of directors of the Central Bank of the Russian Federation at the end of December, most observers expected that the monetary authority would raise the discount rate from 21% to 23%. But the Central Bank left the rate unchanged despite an increase in the official annual inflation figure from 8.4% to 9.5% in just two months. It is not difficult to guess what happened. A day before the meeting, Putin announced that he had spoken with the head of the Central Bank Elvira Nabiullina. It’s safe to assume he told her to keep the rate at the current level. Any illusions about the independence of the central bank have evaporated. Advertisement: Read also: All is not well. What kind of economy is Russia entering 2025? For the first time, Putin seems to have listened to Russian oligarchs, not to professional economists in charge of monetary policy. Over the past few months, a number of Putin’s top managers and businessmen, including Serhiy Chemezov of Rostec (defense industry), Igor Sechin of Rosneft (oil), Oleksandr Shokhin of the Russian Union of Industrialists and Entrepreneurs (RSPP), have complained bitterly that high interest rates will bankrupt many companies. These warnings are not unfounded. Since the Russian government canceled mortgage subsidies in July, new-build sales have fallen by about 50%, pushing two of Russia’s biggest developers, Samolet and Pyk, to the brink of bankruptcy.Advertisement: Meanwhile, official inflation figures in Russia are getting less likely. According to independent research company ROMIR, the average price of Russia’s basket of fast-moving consumer goods (FMCG), which includes food and household chemicals, rose by 22.1% year-on-year in September. Since then, the company has not released any new inflation data. It’s easy to guess why. Yes, the FMCG price index does not reflect overall consumer inflation because it does not take into account the prices of durable goods and services, which have not risen as sharply as food prices. But there is no doubt that the official figure of Russian inflation is underestimated. We may not know if it’s 12% or 22%, but we can be pretty sure it’s higher than 9.5%. Even at Putin’s carefully staged annual press conference in December, inflation was the dominant theme of concern. Inflation in Russia is not caused by open spending of the budget. On the contrary, the Kremlin has been running a budget with a surplus for many years (although a small deficit of around 2% of GDP was recorded in 2022 and 2023, and this is most likely to happen again in 2024). But Russia expert and former banker Craig Kennedy recently uncovered evidence that, starting in mid-2022, the Kremlin is forcing Russian banks to issue loans to war-related businesses on preferential terms. This scheme of off-budget financing contributed to an increase in corporate borrowing by $415 billion, increasing inflation and the vulnerability of the Russian financial system. In a normal country, a budget deficit of 2% of GDP is not a cause for concern. But Russia is not a normal country. It has been under Western financial sanctions since July 2014, and these sanctions have effectively blocked its access to international funding. The total amount of private and public external debt of Russia decreased from $729 billion at the end of 2013 to $293 billion at the end of September 2024. At the same time, no one, including Chinese state banks, dares to lend her money. Left without funding, Russia has significantly raised taxes this year. Abandoning the flat 13% income tax rate introduced in 2000, the authorities approved a progressive income tax system, with rates starting at 15% and rising to 22% for high earners. The corporate income tax rate has increased from 20% to 25%. However, these measures will increase state revenues by only 1.4% of GDP, and the remaining part of the deficit will have to be financed at the expense of domestic bonds, the interest rates on which have already risen sharply: since 2019, the cost of debt service as a share of total expenses has doubled >> As a result, Russia remains dependent on its only source of financing – the National Welfare Fund, whose liquid reserves have decreased from $117 billion in 2021 to $31 billion at the end of November 2025. This will only be enough to finance three quarters of the budget deficit in 2025. Western financial sanctions also affected the ruble, which fell from 34 per dollar in 2013 to 103 today. This also increases inflation because the Central Bank no longer has reserves to protect the exchange rate (spending dollars to buy rubles).. Russia has practically stopped publishing foreign trade statistics, but according to estimates by the Institute of Developing Countries (IEE) at the Bank of Finland I head the scientific council of this institute), from 2022 to 2023, the total amount of exports fell by 28% (to $425 billion). In 2024, it will most likely remain at the previous level, because Western energy sanctions were not tough enough. However, the outgoing Biden administration strengthened them on January 10. At the same time, the strengthening of technological sanctions of the West had a killing effect on Russian industry. Of the 108 airliners that Russia planned to build starting in 2022, only seven were completed. Difficult conditions in the civilian sector probably extend to the arms sector, which was largely monopolized by Chemezov’s corrupt Rostec. Compressed by these factors, the Russian economy is approaching the moment of truth. Inflation will continue to rise in 2025, and people will become increasingly dissatisfied with high food prices. Big bankruptcies loom on the horizon, and the Russian state cannot afford large packages of financial aid. Business leaders are furiously protesting high interest rates, and the shortage of labor – and soldiers – is approaching crisis levels. But the most acute deficit is budgetary money, since Russia’s last liquid reserves will most likely run out in the fall of 2025. At this point, budget spending will need to be reduced. Meanwhile, the military economy will probably require the introduction of price controls and coupons for goods – as in the Soviet past. As the risks of financial collapse have increased, the Russian economy is in jeopardy, and this will create serious difficulties for Putin’s war. Copyright: project-syndicate.org