By the summer, Russians’ deposits at state banks had grown to half the size of monthly budget revenues. Despite the rapid growth of salaries and government payments, people cannot convert the money in their hands into goods. A desperate and perhaps final attempt by the authorities to stop inflation now lies ahead.

Normal life in abnormal times

The situation on the Russian home front now looks typical for a country at war. But it is unusual for the regime.

The 22% year-over-year growth in nominal wages in the first months of 2024 marked the highest since the invasion of Ukraine. Such a jump is intuitive for an economy into which money is being pumped to pay for defense orders. Not to mention payments to soldiers that would have been unbelievable before.

In 2022, ordinary people were precisely afraid of the war hitting home and greatly reduced spending. This was just was needed to save the Russian domestic market, as foreign links were abruptly rerouted from the West to the East and import flows from China were set up.

In 2023, demand for a return to normal life emerged, while this year purchases of goods and services have returned to prewar levels.

The question is what happens next. The war goes on, the militarization of the economy is progressing and Russians have more and more money, and everyone would like to know whether the growing prosperity will last.

For that to happen, the mass of goods and services available to Russians has to grow. This problem can be solved either by importing more from abroad or producing more locally amid economic growth.

No workers, no investment

The authorities say that in the first five months of 2024, Russian industry increased output by as much as 5.2% year-over-year. Maybe. But they also say the engine of the growth was manufacturing (up 8.8%), with the fastest growing subsegments being metal products (up 37.4%) and computers (up 39.4%). This is clearly defense production, meaning the current industrial growth is driven by the war.

Russian statistics do not report as a separate line how many consumer goods are produced in Russia. However, there is some growth there, too – as part of import substitution. But it’s small. Because there is nowhere to source big growth.

Imports not up to the task

Let’s take a closer look. Most of the export-import statistics are now classified, meaning the authorities have something to hide. It is still possible to get the overall picture, however. After all, the Chinese, Indians and Turks do not conceal their foreign trade data.

It seems that, in physical terms, Russian exports of oil and petroleum products have declined in recent months. Freight transport statistics confirm this indirectly but clearly: in the first half of 2024, total freight turnover on Russian railways fell 5.7% (to the level of 2010). “They transport raw materials, reorienting shipments from West to East,” the economics-focused Telegram channel MMI explained. Putin, having vowed to his OPEC+ partners to cut oil exports, even appears to be keeping his promise, albeit belatedly.

Another factor putting pressure on Russia’s foreign trade is the latest wave of sanctions, which has made it difficult to settle payments for transactions.
Against this backdrop, Russia’s trade with China has been declining since the end of last year. First, imports from China fell, and then Russian exports also went down. This May, the total trade turnover with China was 10% lower than in December.

People giving money to the government on their own

Having added up the slightly higher nonmilitary output and lower imports – and taking into account that neither has any special prospects for growth – we can conclude that Russia has entered the classic trajectory of a country at war. Where rapid growth of the money supply is combined with a stagnant market for consumer goods and services.

For aggressive regimes, especially dictatorial ones, there is nothing hopeless about this, though. Many mechanisms have been invented to force citizens to consume less. Two of them do not even require much administrative effort.

The first is a war bond. Moreover, realized in the simplest possible way – with money given voluntarily.

You do not even have to call it that so as not to scare people. Because if citizens believe that the regime is strong, that the rulers will continue to rule, and if they are lured with high rates, then they will take their money to state banks on their own. The public cuts back on consumer spending, and the authorities use their money. It’s quite a comfortable setup.

And it is already in full swing. In the first five months of 2024, accounts and deposits of individuals went up by RUB 4 trillion. Even in 2023, which was exceptional in this sense, the inflow of money into banks was noticeably weaker.

Let’s compare this figure with federal budget revenues for the same five months: they amounted to RUB 14.3 trillion. The collection of money by the state machine and that by banks brought to the disposal of the authorities sums of comparable magnitude. And that is not all.

Just in May (the last month for which we have data), federal budget revenues reached RUB 2.6 trillion, while RUB 1.3 trillion was added to individuals’ accounts. In other words, the public’s “contribution” was half as much as all the taxes and duties so laboriously wrested from across the economy.

Such alacrity surprised even the Central Bank: “these dynamics are atypical for May, as usually in this month household funds grow slightly or even decrease due to an increase in pre-vacation expenses and long holidays.”

Following this, the government probably decided to closely monitor people’s behavior in the hope that their monthly contributions would increase another 50%, at least to RUB 2 trillion, in which case the problem of excess money in consumers’ hands would resolve itself.

But there is apparently no serious expectation for more munificence on the part of Russians. Therefore, the authorities are forced to turn to the second typical wartime mechanism – the inflation tax.

Prices still not behaving

The highly competent financiers who run Putin’s financial agencies cannot stand inflation. The president himself does not like it either.

Immediately after the attack on Ukraine, inflation in Russia naturally soared. But the head of the Central Bank, Elvira Nabiullina, tackled the problem in just a month and a half. The key rate, having been hiked to 20% in the first days of the war, was quickly lowered by the Central Bank, and by the autumn of 2022 it was already lower than before the war (at 7.5%).

The seasonally adjusted annual rate (SAAR) of inflation fell to just 3% as early as the third month of the war, and then for the rest of 2022 inflation was moderate and looked quite manageable. However, from June 2023, contrary to all expectations, it began to climb again and fluctuated around a 10-15% SAAR for several months.

The Central Bank used the same playbook: the key rate was raised to 12%, and then to 16%, but inflation did not behave this time, coming down only at the very end of 2023. And not for long. Although the key rate has not been cut, inflation is now rising rapidly, again exceeding a 10% SAAR in May-June.

It is considered almost certain that in three weeks, at its next scheduled meeting, the Central Bank will again raise the key rate, to 18% or even higher.

What the effect will be remains to be seen, as super-high rates weigh on the civilian sector but cannot cool down defense industries, since they are financed by the budget no matter what.

Thus, the inflation tax is actually in full effect already. The authorities will have to decide what rate of inflation really poses a threat to them and requires taking more radical measures, and whether standard anti-inflation actions still make sense for them. But they are now moving away from nonstandard ones.

From July 1, preferential mortgages, the main beneficiaries of which were developers, not buyers, were partially abolished. This was an obvious inflationary program, which, however, was advertised as something diametrically opposite – namely, as a way to save buyers from the high cost of housing. Because of the program, however, in the first quarter of 2024 the price per square meter was 31.7% higher than a year before in the primary market and 19.0% higher in the secondary market.

This rise in prices is not counted in the consumer price index. It does not “see” it. But even the partial tapering of preferential mortgages will lead to a drop in demand for housing by 15-20%. Higher prices, previously masked by government subsidies, will now have their say, and the inflation tax will force people to reduce their consumption in this area.

The same thing is happening in other areas. The Russian economy is that of a warring country. By definition, such an economy is incapable of providing an increase in living standards. The authorities are handing out money that cannot be converted into goods. Thus, higher incomes are an illusion and will be confiscated. The debate at the top is only about how to do that.