Deep thoughts about the Russian economy

A sampling of economy-related commentaries from Russian media

Despite 10,000+ sanctions, the number of oligarch-kitties in Russia has grown by 500%. Very impressive.

Earlier this month your humble Moravia correspondent typed up a blog post urging his cherished and very attractive readers to avoid the temptation of making sweeping generalizations about Russia’s economy.

But to help you make up your own mind about what the heck is happening in Russia, economically, I have compiled some views on this subject from across Russian media. I hope you find this information mildly informative, and I wish you a very pleasant day. — Riley

“The Russian economy is very stable, but at the same time it is completely inefficient”

Let’s start with a perspective from Sergei Aleksashenko, a prominent Russian economist, and an outspoken critic of the Kremlin. In the 90s he served as deputy finance minister, and later worked for the Bank of Russia. He opposed Crimea’s reunification with Russia, and is currently involved in various anti-war activities. I’m not actually sure what his political beliefs are, but I think it’s fair to describe him as a “free market” liberal.

In a recent interview with (very liberal) The Republic, Mr. Aleksashenko said Russia had “survived” the barrage of Western sanctions, but its economy was basically treading water:

No matter what we say about the balance of payments, about the ruble exchange rate, about the decline in plywood production, or about something else, this does not affect the entire population, it does not affect the vast majority of the population.

Therefore, I am ready to agree that the Russian economy has survived. In principle, the Russian economy is very stable, but at the same time it is completely inefficient—its growth rates are very low. For example, from 2013 to 2022, the average GDP growth rate was 1% per year. This is very little, but, on the other hand, it did not collapse by 20%, right? […]

I want to repeat once again, and please write it in large letters, caps lock: NO SANCTIONS CAN DESTROY THE ECONOMY. When I talk about the professionalism of the employees of the Central Bank or the Ministry of Finance, I always say that the main stabilizer of the Russian economy is its free market nature. This is what Putin inherited from the 90s, which he so disliked.

He also dismissed the notion that the ruble was “collapsing”, noting that Russia’s currency has been steadily losing value against the dollar for many months, and that there was nothing particularly alarming or distressing about the current USD/RUB rate. In his opinion, the benefits of a devalued ruble (more revenue for the budget) outweighed the disadvantages (higher inflation—which he claimed had not yet materialized).

So that’s the liberal perspective on Russia’s economy, for your consideration.

“In Russia, unfortunately, there are no alternative calculations of inflation without ‘little tricks’”

Economist Tatyana Kulikova believes the devaluation of the ruble will accelerate inflation, which she claims is being misreported (or concealed using “little tricks”) by Rosstat. In a July 19 op-ed for Russia’s Free Press, Kulikova wrote:

In June, inflation in Russia accelerated. So, if we consider in annual terms (that is, in relation to the corresponding period of the last year), then it accelerated to 3.2%; in May it was 2.5%. What are the problems, then? Even after accelerating somewhat, inflation remains well below the Central Bank’s target of 4%.

However, in reality, everything is not so rosy, since statistical indicators (any, not just inflation) in annual terms lose all meaning if something extraordinary happened a year ago, which caused sharp jumps in their values. This fully applies to inflation in Russia. […]

It is more informative to look at current inflation, that is, to compare the price index in the “month to the previous month” format, with the seasonality removed. In June, monthly inflation, according to the Central Bank, rose to 0.52%, while in May it was 0.39%, in April - 0.31%, and in March - 0.29%. There is not just growth, but accelerating inflation.

If we recalculate these monthly inflation figures for a year (such recalculated statistics are denoted as SAAR, an abbreviation of the English term “seasonally adjusted annual rate”), then June inflation turns out to be 6.4% SAAR, despite the fact that in May it was 4.8 %. That's already a lot!

It is easy to guess that by the end of July, inflation in monthly terms will grow even more: the effects of devaluation will begin to appear. Moreover, the devaluation of the ruble affects prices not only directly (through an increase in prices for imported goods), but also indirectly—through an increase in inflationary expectations, which spur an increase in prices even for goods and services that have nothing to do with imports.

It is also worth considering that, due to the methodology used, official inflation is usually underestimated compared to what people feel when they come to the store (and not only in Russia, but also in Western countries). […]

In Russia, unfortunately, there are no alternative calculations of inflation without “little tricks.”

Kulikova’s articles can be found on the official website of KPRF (Russia’s Communist Party), so I’m assuming she dabbles in socialism.

“The unprofessionalism of state managers and their henchmen is becoming more and more noticeable”

Kulikova’s colleague at Free Press, Ivan Rybin, has gone beast-mode in recent weeks. Rybin is the ultimate curmudgeon-economist. Just scroll through his published articles at Free Press so that you can fully appreciate this fellow’s relentless disapproval of the current state of economic affairs in Russia (July 17: “Market failure: Where does pink salmon go? We have heaps of salmon, but salmon prices in Russia are the highest in the world”; July 10: “Is the meaning of Russia’s existence to please Erdogan?”; July 5: “‘Cunning’ Indian transit: Russia’s natural resources are already being impudently sold”; etc.).

I would like to highlight an article he wrote at the beginning of July, which supports Kulikova’s thesis that Russia’s economic data might be a tad misleading:

The unprofessionalism of state managers and their henchmen is becoming more and more noticeable, “officialdom” has begun to issue economic statistics that can only cause laughter … [I get the impression that these statistics are] sculpted by completely mentally handicapped individuals. But it’s true—the conclusions are made firmly, although there is no logic behind them.

Another Rosstat opus, “The Socio-Economic Situation in Russia,” is full of optimism: everything is good in our country, we are developing very quickly. Graphs of GDP and everything else are optimistically going up, and the state statistical office does not particularly bother about particulars. In general, everything is fine and dandy, and trifles—well, they are trifles.

“When statistics are drawn by illiterate dolts who have never had anything to do with it, its elements tend not to fight with each other. Of course, this has nothing to do with the current Russian Federation,” says Mikhail Delyagin, deputy chairman of the State Duma Committee on Economic Policy.

Rybin provided several examples of what he claims to be glaring red flags of data manipulation. He also observed that experts from the Institute of Economics of the Russian Academy of Sciences have predicted industrial production will decrease by 0.9% in 2023, while the Russian government is confident that it will grow by 0.2%. I mean … not a massive discrepancy. But point taken.

Similar to how the Russian government calculates the number of citizens are living in poverty, it wouldn’t surprise me if there was some kind of data manipulation going on. But how extensive it is—this is an open question. Obviously it is safe to assume that every government engages in this kind of dishonest numbers-crunching. Because we are all ruled by space lizards.

“The ‘economic mobilization’ we deserve”

Of course we must also consult with Nakanune.ru, which recently published a rather incendiary critique of the economic and monetary policies being pursued by the Ministry of Finance and the Bank of Russia.

source: Nakanune.ru

The outlet opined:

Finance Minister Anton Siluanov said his ministry, and the government, are preparing to “mobilize resources” for the next three years. That is, for the next year everything is under control, everything is fine, but then a “small deficit” is predicted.

Old-timers recall the “small deficit” that “does not bother anyone” from the 90s, when 5-10% resulted in a deadly crisis and cuts in social spending. If the deficit from one year smoothly passes to another, we will not see the end of this—the problem will become chronic. And then there’s also the ruble depreciation, because no one could have imagined that if the country does not receive petrodollars, then sooner or later dollars and euros will run out. Some have run out, while others continue to flow out of the country amid ongoing capital flight. All of this is happening, instead of the concentration of resources for industrial and technological breakthroughs, which is so necessary for the country if the “pipe economy” dies … What awaits us in the time of so-called “resource mobilization”? […]

The deficit for January-May 2023 amounted to 3.4 trillion rubles, with a plan for the whole year of 2.9 trillion. Oil and gas revenues of the budget for the first six months of 2023 amounted to 3.4 trillion rubles, against 6.4 trillion rubles for the same period in 2022. How will [Siluanov’s] “economic mobilization” be carried out? Taxes and cutting social programs—at the expense of medicine and education? We’ve traveled on this optimization path for 30 years already. […]

The whole piece is worth reading, actually.

“The high exchange rate … is simply killing our national production”

The conservative rabble-rousers at Katyusha.org are equally unhappy with Siluanov and Nabiullina:

Already now, Russian business entities, forced to buy foreign currency to purchase goods abroad for gray and other imports, are already paying more than 100 rubles per dollar in banks. Thus, the high rate does not contribute to the solution of the tasks set by the president on import substitution and strengthening the work of enterprises of the military-industrial complex.

The fact is that through the efforts of the “privatizers” who now wear the mask of system liberals, we completely destroyed more than 33,000 large and medium-sized factories in the 90s. And now machine tool building and mechanical engineering are absent in Russia. We have to buy the production equipment and tools we need for the functioning of the defense industry and microelectronics from abroad. [We’re importing] machine tools, chemicals, processors, and much, much more.

You don’t have to be an economist to understand this: The high exchange rate of the unfriendly American currency, which de facto remains the main unit of account, is simply killing our national production. There is not enough currency for purchases, because the profit inside the country is only in rubles. This is also why there are problems with the dynamics of foreign trade. […]

[I]n the hands of Nabiullina and Siluanov, there is only one “vaccine” for the economy for all occasions. Vladimir Putin needs to urgently decide what to do, but in the conditions of the information blockade organized by the system liberals in the government, it is very difficult to make the right decision.

So basically, Katyusha’s argument is that if Russia were more self-sufficient, then the USD/RUB rate wouldn’t really matter that much. But since import substitution has had mixed results, and Russia needs to import stuff to produce its own stuff, the high exchange rate is actually rather problematic. A fair argument, in my opinion.

(There are some interesting updates regarding import substitution/parallel imports, which I will share with you in the nearest future.)

“Blaming Nabiullina is stupid: she is a prominent member of the IMF sect and is loyal to her real bosses”

We’ll finish with the pro-military hardliners. Here’s what Military Review wrote on July 18:

Budget addicts in power made another powerful injection: by devaluing the ruble by ten percent, they received several additional trillion in the budget. At the same time, the chairman of the Bank of Russia, E. Nabiullina, said that the rumors that this was done to replenish the budget are a “conspiracy theory.” […]

Curiously, this happened immediately after President Putin set the goal of keeping inflation at 3%. It is clear that now it will be many times higher, due to the large volume of imports to the Russian Federation. Nabiullina and Co. clearly heard the president’s order, but they did exactly the opposite—apparently, they simply have no one to be afraid of.

Let's be objective, blaming Nabiullina is stupid: she is a prominent member of the IMF sect and is loyal to her real bosses. […]

At the same time, the financial authorities did not use the National Wealth Fund, which contains more than 12 trillion rubles … They try not to touch the sacred NWF, because the fundamental meaning of its existence is to withdraw funds from the national economy.

With our level of monetization of the economy (about 50%), it would be possible to issue tens of trillions of rubles without the threat of inflation. Instead, they once again preferred to improve the budget by rummaging through the wallets of Russians. Of course, one could simply stop the outflow of capital abroad (over 250 billion dollars in 2022), but this is the “holy of holies” of the liberals. Replenishing the budget through devaluation is like fast carbohydrates: they help solve the problem at once, but cause medium and long-term harm to the economy.

Then there is a simple formula, known even to monetarists:

Inflation → increase in the discount rate → rise in the cost of credit → decrease in investment.

Additionally, the significant volatility of the ruble leads to the impossibility of systemic ruble investments. It must be tied to a predictable reserve currency. Perhaps the future BRICS currency will play such a role, but the ruble could also be made a reserve currency if there is political will.

The last paragraph about a future BRICS currency is interesting—we will have to wait and see what happens with that at the upcoming summit in South Africa. Who knows?

But I want to underscore what Military Review said about the National Wealth Fund (NWF), which currently boasts more than 12 trillion rubles. The sole purpose of this stash of cash is to serve as a “rainy day” fund for Russia in her time of need. It is a bit odd that the Russian government has been so reluctant to dip into this treasure chest. (Actually, in January, the Ministry of Finance sold 3.6 tons of gold and 2.3 billion yuan taken from the NWF, generating 38.5 billion rubles, which were then used to reduce the budget deficit.)

That’s all for today.

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