ECONOMY
Are Russia’s Economic Resources Truly Inexhaustible?
November 15, 2024
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Tatiana Rybakova
Journalist and writer
Journalist Tatiana Rybakova argues that private business in Russia is increasingly under pressure, which threatens to undermine the market mechanisms essential to the stability of the entire Russian economy.
Queue at a Soviet grocery store. Moscow. Source: Dzen
“We have run out of butter,” a Russian friend recently began a conversation with me. I remember how, back in 1989, my relatives from the provinces began a conversation with the same words. The USSR had three years to live – or rather exist – after that.
Of course, there is a difference. In Soviet times, the entire city where my relatives lived, an important one for the province, ran out of butter. Today, it was only the discount store where my friend, taking advantage of discounts and promotions, buys groceries. There is butter at an expensive supermarket, almost RUB 500 for 180 grams – this is the market. But she cannot afford that. For context: in 2022, the average price of butter was RUB 390. For a kilogram.
Will the market fix everything?
The fact that today’s Russia has a market economy is often used to explain why sanctions have not destroyed it and why even a long war cannot destroy it. Indeed, when a product becomes scarce, people and companies immediately appear that try to either sell it at a higher price or, by hook or by crook, make or import more of it.
“I have come to respect Russian business,” another friend told me the other day. “No matter how greedy, dishonest and insatiable it is, when the shelves really started to empty in the summer of 2022 due to sanctions and the exit of Western companies, it got off its butt and started filling the store shelves again.”
This summer, she brought back from her vacation in Georgia several packs of hygiene products of a brand that is no longer available in Russia, but she swears that the overall situation with consumer goods is fine. “It’s just that everything is expensive and continues to get more expensive,” she sighs.
In the USSR, certain people could also buy goods in short supply – butter, meat and then-fashionable muskrat hats, even jeans, televisions and cars. Just not at state prices.
In 1989, in the store next to my house, there were queues stretching kilometers for eggs, even though at the time the store shelves were bare. People stood in these queues for 5-6 hours, buying eggs in packs of 30; that was all they would give to one person. Many came with their whole families to buy as many as they could.
I walked 200 meters further, to Rogozhsky market, and bought a dozen eggs – but at a 400% premium. I also bought meat there – three times the price in a state shop, where, incidentally, there was none. A speculator I knew sold us jeans – of course, they cost as much as an engineer’s monthly salary. We bought a Sony TV in the Beryozka luxury goods store, where they accepted “checks” – currency substitutes for Soviet citizens who worked abroad. These checks were bought right there, near the store, for twice their nominal value.
That was how we bought a car too. We were simply a well-off family by Soviet standards, and my parents were engineers who worked for a specialized Soviet construction company abroad and regularly traveled outside of the country for work. Most Soviets could not afford such prices with their salaries.
Of course, there is a difference. In Soviet times, the entire city where my relatives lived, an important one for the province, ran out of butter. Today, it was only the discount store where my friend, taking advantage of discounts and promotions, buys groceries. There is butter at an expensive supermarket, almost RUB 500 for 180 grams – this is the market. But she cannot afford that. For context: in 2022, the average price of butter was RUB 390. For a kilogram.
Will the market fix everything?
The fact that today’s Russia has a market economy is often used to explain why sanctions have not destroyed it and why even a long war cannot destroy it. Indeed, when a product becomes scarce, people and companies immediately appear that try to either sell it at a higher price or, by hook or by crook, make or import more of it.
“I have come to respect Russian business,” another friend told me the other day. “No matter how greedy, dishonest and insatiable it is, when the shelves really started to empty in the summer of 2022 due to sanctions and the exit of Western companies, it got off its butt and started filling the store shelves again.”
This summer, she brought back from her vacation in Georgia several packs of hygiene products of a brand that is no longer available in Russia, but she swears that the overall situation with consumer goods is fine. “It’s just that everything is expensive and continues to get more expensive,” she sighs.
In the USSR, certain people could also buy goods in short supply – butter, meat and then-fashionable muskrat hats, even jeans, televisions and cars. Just not at state prices.
In 1989, in the store next to my house, there were queues stretching kilometers for eggs, even though at the time the store shelves were bare. People stood in these queues for 5-6 hours, buying eggs in packs of 30; that was all they would give to one person. Many came with their whole families to buy as many as they could.
I walked 200 meters further, to Rogozhsky market, and bought a dozen eggs – but at a 400% premium. I also bought meat there – three times the price in a state shop, where, incidentally, there was none. A speculator I knew sold us jeans – of course, they cost as much as an engineer’s monthly salary. We bought a Sony TV in the Beryozka luxury goods store, where they accepted “checks” – currency substitutes for Soviet citizens who worked abroad. These checks were bought right there, near the store, for twice their nominal value.
That was how we bought a car too. We were simply a well-off family by Soviet standards, and my parents were engineers who worked for a specialized Soviet construction company abroad and regularly traveled outside of the country for work. Most Soviets could not afford such prices with their salaries.
“So, when we talk about the market fixing everything through prices and not allowing the economy to collapse, we must remember that a collapse begins not when there are physically no goods, but when most of the population cannot buy them.”
All the while, the budget deficit may be negligible, the national debt low, the trade balance in surplus; yet the life of many people turns into a race for survival.
Prices continue to rise
So, when the private research firm ROMIR calculates, based on receipts from stores, that the most popular consumer goods in Russia have gone up in price by 87% since the war started, it is worth remembering that real wages during this time, according to the estimates of ROMIR, have grown much less. It was only last year that saw record growth, at a little over 20%. And that was driven by huge payments to soldiers and defense industry workers.
At the same time, teachers, for example, have not seen significant pay raises. Nor are they likely to see any moving forward: they are paid out of regional budgets, and regional governors are now competing to recruit contract soldiers for the war with higher and higher signing bonuses, which in some regions already exceed RUB 2 million (approximately $20,000). In Irkutsk Region, meanwhile, school and kindergarten teachers are losing their bonuses, which account for up to 30% of their pay, because there is no more money in the budget, and contract soldiers need to be paid ever-increasing sums.
Contract soldiers, however, are also having their compensation reduced – just for wounds, for now. Moreover, this was done as a “special operation” – without warning and in a single day.
Likewise, though pensions are being indexed, it is below the official inflation rate, and in real terms they are even lower than in 2013.
But it’s not just food that is getting more expensive: utility prices have risen at a record pace this year. By more than 10% on average, but it was the first heating bills in October that horrified many Russians – the increases are steep. Pensioners are already saying that they will have to choose between paying their utility bills or buying food and medicine. Medications, by the way, are going up in price no slower than butter.
So far, the population’s discontent has been channeled quite successfully by the Kremlin. Firstly, through the above mentioned demonstratively high payments to soldiers. If you want to live well, sign a contract to fight in Ukraine, the government tells Russians. Secondly, the authorities take great pains to show they are fighting high prices, blaming them on the retail and wholesale sectors and even on citizens themselves, who have allegedly begun to eat too well, as the minister of agriculture claimed.
In late October, Deputy PM Dmitri Patrushev (son of Nikolai Patrushev, the Kremlin’s “grey cardinal”), who oversees agriculture and the food market, ordered measures to stop price growth within two weeks. His underlings will surely find a way to do that – for a time – by twisting the arms of retail chains. But then prices will start to rise again, as happened with eggs: the authorities had a hard time slowing down egg inflation in the spring (in reality, it just got warmer, and the hens started laying better), while another 10% increase is expected at the end of the autumn.
But it may be the case that even if the arms of retail chains are twisted, it will not help the economy.
Between a rock and a hard place
Prices continue to rise
So, when the private research firm ROMIR calculates, based on receipts from stores, that the most popular consumer goods in Russia have gone up in price by 87% since the war started, it is worth remembering that real wages during this time, according to the estimates of ROMIR, have grown much less. It was only last year that saw record growth, at a little over 20%. And that was driven by huge payments to soldiers and defense industry workers.
At the same time, teachers, for example, have not seen significant pay raises. Nor are they likely to see any moving forward: they are paid out of regional budgets, and regional governors are now competing to recruit contract soldiers for the war with higher and higher signing bonuses, which in some regions already exceed RUB 2 million (approximately $20,000). In Irkutsk Region, meanwhile, school and kindergarten teachers are losing their bonuses, which account for up to 30% of their pay, because there is no more money in the budget, and contract soldiers need to be paid ever-increasing sums.
Contract soldiers, however, are also having their compensation reduced – just for wounds, for now. Moreover, this was done as a “special operation” – without warning and in a single day.
Likewise, though pensions are being indexed, it is below the official inflation rate, and in real terms they are even lower than in 2013.
But it’s not just food that is getting more expensive: utility prices have risen at a record pace this year. By more than 10% on average, but it was the first heating bills in October that horrified many Russians – the increases are steep. Pensioners are already saying that they will have to choose between paying their utility bills or buying food and medicine. Medications, by the way, are going up in price no slower than butter.
So far, the population’s discontent has been channeled quite successfully by the Kremlin. Firstly, through the above mentioned demonstratively high payments to soldiers. If you want to live well, sign a contract to fight in Ukraine, the government tells Russians. Secondly, the authorities take great pains to show they are fighting high prices, blaming them on the retail and wholesale sectors and even on citizens themselves, who have allegedly begun to eat too well, as the minister of agriculture claimed.
In late October, Deputy PM Dmitri Patrushev (son of Nikolai Patrushev, the Kremlin’s “grey cardinal”), who oversees agriculture and the food market, ordered measures to stop price growth within two weeks. His underlings will surely find a way to do that – for a time – by twisting the arms of retail chains. But then prices will start to rise again, as happened with eggs: the authorities had a hard time slowing down egg inflation in the spring (in reality, it just got warmer, and the hens started laying better), while another 10% increase is expected at the end of the autumn.
But it may be the case that even if the arms of retail chains are twisted, it will not help the economy.
Between a rock and a hard place
“The rising prices for food and industrial goods are a direct consequence of the war.”
Had Russia maintained its trade ties with the rest of the world, any problem with a particular product would have been quickly resolved in the most efficient way: by importing an analog. The most that would have been required of the government would be to raise or lower tariffs and customs duties in a timely manner, regulating the speed and volume of commodity flows.
Now, it manually controls the flows themselves. The government is looking for butter in “friendly” countries, just like it previously looked for eggs. Yet it still has to figure out how to pay for it, as Russia is cut off from convertible currencies, and it lacks enough yuan for all its imports.
Russia is getting butter from the UAE, which, never known for its dairy farming, is obviously serving as a middleman to get butter from “unfriendly” countries. Some say that the butter is made in Ukraine. Naturally, the prices for it are higher, pushed up by the cut taken by intermediaries.
Now, it manually controls the flows themselves. The government is looking for butter in “friendly” countries, just like it previously looked for eggs. Yet it still has to figure out how to pay for it, as Russia is cut off from convertible currencies, and it lacks enough yuan for all its imports.
Russia is getting butter from the UAE, which, never known for its dairy farming, is obviously serving as a middleman to get butter from “unfriendly” countries. Some say that the butter is made in Ukraine. Naturally, the prices for it are higher, pushed up by the cut taken by intermediaries.
The 2024 Russian Economic Forum in Chelyabinsk. Source: VK
In this environment, it is not only households that are facing unstoppable price increases – businesses are too. Recently, representatives of major industrial firms spoke up: at the Russian Economic Forum in Chelyabinsk, they complained that credit has dried up – as has labor.
The Russian media was afraid to quote the speech of the general director of the Chelyabinsk Forge-and-Press Plant, Andrei Gartung, in full. He said: “the key areas of the machine building industry may collapse due to the rising key rate. No competitive business can operate with 27% interest rate loans, when your Chinese competitors get loans cheaper than 5%. Regular manufacturing cannot withstand the competition from the military-industrial complex and natural monopolists. Defense industry enterprises will hire workers and raise loans, regardless of interest rates. It is impossible to compete with defense factories for labor on pay, and the outflow of workers [to the military-industrial complex] will stop only in two cases: either the formulas for the prices of state defense orders change, or defense procurement volumes actually decrease.”
In other words: end the war or business will die. This is no exaggeration: even the data from the Kremlin-loyal Center for Macroeconomic Analysis and Short-Term Forecasting says that corporate lending conditions are now worse than they were during the 2008 crisis, when many companies went bankrupt. Meanwhile, Russian oligarchs, on condition of anonymity, are complaining to Bloomberg that upbeat economic forecasts hide a grim reality, with a crisis expected in the coming years.
‘Inefficient’ business
The Central Bank has raised its key rate to 21% – and quite clearly signaled its intention to hike it further – not because things are so good. When Elvira Nabiullina and her colleagues repeat that inflation in Russia is nonmonetary in nature, they are absolutely right, as illustrated by the examples cited above.
Yet they are not telling us something. For example, the money supply (M2) in Russia has increased 43.3% over the past two years. This is due to the issuance of government bonds by the Finance Ministry, which thus fills state coffers with unsecured money so the government can throw it in the incinerator of its Ukraine war. This is a monetary factor, prompting the Central Bank to hike rates. The population is thus incentivized not to spend money, which would accelerate inflation further, but to park it at banks.
But banks cannot give a 20% interest rate on deposits without earning at least 27% on loans. The Central Bank has practically banned mortgages through its rates policy (see Russia.Post about the situation in the Russian mortgage market here) and increasingly tightened consumer lending regulation.
The Russian media was afraid to quote the speech of the general director of the Chelyabinsk Forge-and-Press Plant, Andrei Gartung, in full. He said: “the key areas of the machine building industry may collapse due to the rising key rate. No competitive business can operate with 27% interest rate loans, when your Chinese competitors get loans cheaper than 5%. Regular manufacturing cannot withstand the competition from the military-industrial complex and natural monopolists. Defense industry enterprises will hire workers and raise loans, regardless of interest rates. It is impossible to compete with defense factories for labor on pay, and the outflow of workers [to the military-industrial complex] will stop only in two cases: either the formulas for the prices of state defense orders change, or defense procurement volumes actually decrease.”
In other words: end the war or business will die. This is no exaggeration: even the data from the Kremlin-loyal Center for Macroeconomic Analysis and Short-Term Forecasting says that corporate lending conditions are now worse than they were during the 2008 crisis, when many companies went bankrupt. Meanwhile, Russian oligarchs, on condition of anonymity, are complaining to Bloomberg that upbeat economic forecasts hide a grim reality, with a crisis expected in the coming years.
‘Inefficient’ business
The Central Bank has raised its key rate to 21% – and quite clearly signaled its intention to hike it further – not because things are so good. When Elvira Nabiullina and her colleagues repeat that inflation in Russia is nonmonetary in nature, they are absolutely right, as illustrated by the examples cited above.
Yet they are not telling us something. For example, the money supply (M2) in Russia has increased 43.3% over the past two years. This is due to the issuance of government bonds by the Finance Ministry, which thus fills state coffers with unsecured money so the government can throw it in the incinerator of its Ukraine war. This is a monetary factor, prompting the Central Bank to hike rates. The population is thus incentivized not to spend money, which would accelerate inflation further, but to park it at banks.
But banks cannot give a 20% interest rate on deposits without earning at least 27% on loans. The Central Bank has practically banned mortgages through its rates policy (see Russia.Post about the situation in the Russian mortgage market here) and increasingly tightened consumer lending regulation.
“The nonmilitary private sector cannot afford these rates, but without loans it cannot keep going.”
It is not for nothing that in recent days a pressure campaign has begun from both business and Kremlin-affiliated think tanks to make the Central Bank cut rates.
Experts warn that shopping centers may begin to go bankrupt en masse: retail has less and less money due to government demands to slow down price growth and less and less ability to pay off loans.
One in three big firms complains of rising payment arrears, a harbinger of bankruptcy – so imagine the situation for small and medium-sized businesses. The Central Bank counters that bankruptcy is good because it removes inefficient companies from the market.
As economist Oleg Itskhoki notes, two economies coexist in today’s Russia. One is state-owned, quasi-state or dependent on state orders. This economy knows no problems with orders or loans, which are provided at subsidized interest rates or forgiven altogether. It is, basically, the military economy. The other one is the nonmilitary economy, which gets the short straw: from government demands to stop raising prices to 30% interest rate loans.
There is little doubt which of these two economies the government thinks is “inefficient.”
Experts warn that shopping centers may begin to go bankrupt en masse: retail has less and less money due to government demands to slow down price growth and less and less ability to pay off loans.
One in three big firms complains of rising payment arrears, a harbinger of bankruptcy – so imagine the situation for small and medium-sized businesses. The Central Bank counters that bankruptcy is good because it removes inefficient companies from the market.
As economist Oleg Itskhoki notes, two economies coexist in today’s Russia. One is state-owned, quasi-state or dependent on state orders. This economy knows no problems with orders or loans, which are provided at subsidized interest rates or forgiven altogether. It is, basically, the military economy. The other one is the nonmilitary economy, which gets the short straw: from government demands to stop raising prices to 30% interest rate loans.
There is little doubt which of these two economies the government thinks is “inefficient.”
God Nisanov, a Russian-Azerbaijani billionaire property developer. In October 2024, Nisanov (and the company Kievskaya Ploshchad that he co-owns) withdrew from the capital of the developer Samolet. Experts say that after the government ended subsidized mortgages, the real estate market has become less attractive for private investors. Source: Wiki Commons
Many expect mass bankruptcies as early as next year. The first alarm bells have already gone off: the co-owner of one of Russia’s largest property developers, Samolet, is selling his 31.6% stake. Earlier, the well-known developer God Nisanov cashed out. The reason is that Samolet, having aggressively expanded construction using borrowed funds, has now found itself in a difficult situation after the government’s cancellation of subsidized mortgages (less than six months have passed since then) and Central Bank rate hikes.
Or here’s the Wall Street Journal talking about a potential merger of Russia’s three largest oil companies: Rosneft, Gazprom Neft and Lukoil. Rosneft, has so far firmly denied the existence of such plans, but the reason for the merger is obvious: Rosneft is feeling the pinch financially, and it hopes that the government will bail it out. There is no doubt that if the decision to merge is made, the privately owned Lukoil will hardly be able to resist. The company faced tangible pressure last year, and several of its top managers have died strange deaths (see Russia.Post about it here).
If “ineffective” nonmilitary business begins to die out, the structure of the Russian economy will start to look like its Soviet predecessor, with state enterprises fulfilling state orders using state money and the state being the main consumer of manufactured goods.
Is private business ready to die without complaint? Are Russians willing to look on without complaint as products become out of reach?
Many economists say that with the current budget deficit and low public debt, Putin can fight Ukraine indefinitely – and it is hard to argue with them. But will he be able to “fight” his own people and their businesses for that long? And if the Russian economy turns out to be less robust than observers think, which path will the Kremlin take: further beefing up its repressive apparatus or curbing its military appetite?
Or here’s the Wall Street Journal talking about a potential merger of Russia’s three largest oil companies: Rosneft, Gazprom Neft and Lukoil. Rosneft, has so far firmly denied the existence of such plans, but the reason for the merger is obvious: Rosneft is feeling the pinch financially, and it hopes that the government will bail it out. There is no doubt that if the decision to merge is made, the privately owned Lukoil will hardly be able to resist. The company faced tangible pressure last year, and several of its top managers have died strange deaths (see Russia.Post about it here).
If “ineffective” nonmilitary business begins to die out, the structure of the Russian economy will start to look like its Soviet predecessor, with state enterprises fulfilling state orders using state money and the state being the main consumer of manufactured goods.
Is private business ready to die without complaint? Are Russians willing to look on without complaint as products become out of reach?
Many economists say that with the current budget deficit and low public debt, Putin can fight Ukraine indefinitely – and it is hard to argue with them. But will he be able to “fight” his own people and their businesses for that long? And if the Russian economy turns out to be less robust than observers think, which path will the Kremlin take: further beefing up its repressive apparatus or curbing its military appetite?
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