Society
Kremlin Moving Away From People-Pleasing and to Belt-Tightening
May 28, 2024
Sergei Shelin
Journalist, independent analyst
Journalist Sergei Shelin believes that the ability of the Kremlin, with the war in Ukraine dragging on, to maintain a sense of “normality” in society is inevitably waning and predicts a decline in the standard of living among nonmilitary groups of the population, as well as an increase in the financial burden on civilian sectors of the economy.
The original text in Russian was published in The Moscow Times and is being republished here with their permission.
In Putin’s previous presidential term, unpopular measures came three months after his reelection – in particular, the pension reform was unveiled on June 16, 2018. This means that there is not much longer to wait now.
Upcoming measures, such as tax hikes, have been announced only in the most general terms, while certain things, of course, are being kept under wraps. Some details that have already been leaked look quite possible, though the authorities are denying them just in case: “a decision on increasing the interest rate on family mortgages for families with children over six years old has not been made by the Russian government. Discussions are currently underway with experts and agencies.”
But these are only fragments of a larger picture that is not yet visible. So, let’s approach the issue another way. Does the regime now have an objective need to make citizens seriously tighten their belts? After all, the economy is growing rapidly (by 5.4% year-on-year in the first quarter of 2024), and there seems to be no reason for additional sacrifices and hardships. But let’s take a closer look.
The challenges
The civilian technocrats in charge of Putin’s finances and economy are facing at least six challenges at once:
1. Avoiding a serious decline in export revenues;
2. not allowing imports to decrease significantly;
3. financing all defense needs without hiccups and also, to a minimally sufficient extent, civilian needs;
4. reducing government spending without running too big of a deficit;
5. not letting inflation spiral;
6. keeping consumer spending at current levels (preventing its further growth).
These challenges partially overlap. Still, listing them makes clear how much the technocrats are now like jugglers who have to keep a whole bunch of balls in the air at once. Meanwhile, the main thorn in their side is the fact that the rapid (by official estimates) growth of the Russian economy is not felt at all in most civilian sectors.
More money in consumer pockets but nowhere to spend it
Only a few sectors of the economy have flourished. Domestic tourism has gone up as foreign tourism has gone down. Import substitution has made progress in some areas. But in most nonmilitary industries the situation is stagnant or worsening. This is intuitive.
Half a million workers have migrated from civilian sectors to the military-industrial sector. Double that number have gone to war as mobilized and contract soldiers. Many hundreds of thousands have emigrated.
In Putin’s previous presidential term, unpopular measures came three months after his reelection – in particular, the pension reform was unveiled on June 16, 2018. This means that there is not much longer to wait now.
Upcoming measures, such as tax hikes, have been announced only in the most general terms, while certain things, of course, are being kept under wraps. Some details that have already been leaked look quite possible, though the authorities are denying them just in case: “a decision on increasing the interest rate on family mortgages for families with children over six years old has not been made by the Russian government. Discussions are currently underway with experts and agencies.”
But these are only fragments of a larger picture that is not yet visible. So, let’s approach the issue another way. Does the regime now have an objective need to make citizens seriously tighten their belts? After all, the economy is growing rapidly (by 5.4% year-on-year in the first quarter of 2024), and there seems to be no reason for additional sacrifices and hardships. But let’s take a closer look.
The challenges
The civilian technocrats in charge of Putin’s finances and economy are facing at least six challenges at once:
1. Avoiding a serious decline in export revenues;
2. not allowing imports to decrease significantly;
3. financing all defense needs without hiccups and also, to a minimally sufficient extent, civilian needs;
4. reducing government spending without running too big of a deficit;
5. not letting inflation spiral;
6. keeping consumer spending at current levels (preventing its further growth).
These challenges partially overlap. Still, listing them makes clear how much the technocrats are now like jugglers who have to keep a whole bunch of balls in the air at once. Meanwhile, the main thorn in their side is the fact that the rapid (by official estimates) growth of the Russian economy is not felt at all in most civilian sectors.
More money in consumer pockets but nowhere to spend it
Only a few sectors of the economy have flourished. Domestic tourism has gone up as foreign tourism has gone down. Import substitution has made progress in some areas. But in most nonmilitary industries the situation is stagnant or worsening. This is intuitive.
Half a million workers have migrated from civilian sectors to the military-industrial sector. Double that number have gone to war as mobilized and contract soldiers. Many hundreds of thousands have emigrated.
“The ‘peacetime’ economy has lost at least two million workers overall.”
To this we must add tepid civilian-sector investment and slower earnings growth than in the military-industrial sector. The war is consuming money and people. Under such conditions, there can be no real growth in the supply of civilian goods and services. It is nonexistent. Even though imports of civilian goods have basically recovered to pre-war levels, the Russian consumer market is only stagnating.
Meanwhile, the potential demand for goods and services is rising, as real (inflation-adjusted) earnings are now growing even faster than last year – in the first months of 2024 they were up as much as 10% year-on-year. In addition, unemployment has almost disappeared. Having declined back in 2022-23, in the spring of 2024 it continued to tick lower from month to month.
Hence the last challenge in the above list: actual spending must not be allowed to increase despite the rapid growth in household earnings. That is being done with varying degrees of success. In April, consumer spending (seasonally adjusted) even decreased slightly, though before that it had gone up for three months.
The main way to cap consumer spending is to soak up the “excess” money through bank deposits. And so far this has more or less been effective. In April alone, and only at Sberbank, money on individual accounts increased by half a trillion rubles. Yet people give money to banks – i.e., to the state – only as long as they are calm, reasonable and listening to authority. Once they panic, this idyll will end. But tackling the remaining five challenges depends on maintaining this calm.
Meanwhile, the potential demand for goods and services is rising, as real (inflation-adjusted) earnings are now growing even faster than last year – in the first months of 2024 they were up as much as 10% year-on-year. In addition, unemployment has almost disappeared. Having declined back in 2022-23, in the spring of 2024 it continued to tick lower from month to month.
Hence the last challenge in the above list: actual spending must not be allowed to increase despite the rapid growth in household earnings. That is being done with varying degrees of success. In April, consumer spending (seasonally adjusted) even decreased slightly, though before that it had gone up for three months.
The main way to cap consumer spending is to soak up the “excess” money through bank deposits. And so far this has more or less been effective. In April alone, and only at Sberbank, money on individual accounts increased by half a trillion rubles. Yet people give money to banks – i.e., to the state – only as long as they are calm, reasonable and listening to authority. Once they panic, this idyll will end. But tackling the remaining five challenges depends on maintaining this calm.
A Chinese car dealership in Moscow. Source: VK
Under the wing of China
With the first and second challenges, though the situation is still tolerable, things are worse than they were even just recently.
In April, exports of oil and oil products decreased 5.8% in physical terms and 6.5% in revenue terms. Trade with China (oil in exchange for consumer goods), which grew rapidly in 2022 and 2023, has plateaued. So-called secondary sanctions have complicated and slowed down payments for goods bought and sold. Just in March, imports from China to Russia decreased 16% year-on-year. This is an obvious blow to Russian consumers (read about what economist Vladislav Inozemtsev calls the “major pause” in Russia-China relations here).
These problems can, in principle, be solved, but Russia will now have to supply and pay more for the same goods and services than before. There is no one else to replace China.
For example, Russian consumers obviously cannot do without Chinese cars given the collapse in Russian production. The supply of passenger cars from China has increased during the Ukraine war sevenfold (and even more for trucks), worth about $1 billion a month (80% of the entire local market for imported cars). This has made China the largest exporter of cars on the planet. At the same time, the Chinese have showed no interest in localizing their automobile production in Russia.
“Beijing supplies to Russia, first of all, what is profitable for it, not what Moscow needs,” writes analyst Alexandra Prokopenko. “Chinese supplies of dual-use products rose in 2023 by only $1 billion in value terms, amid an overall 47% increase in exports from China to Russia to $111 billion. Obviously, most Chinese companies will prefer not to risk their right to access key Western markets for the sake of the Russian market. And for Russia, replacing Chinese suppliers is becoming an almost impossible task.”
With the first and second challenges, though the situation is still tolerable, things are worse than they were even just recently.
In April, exports of oil and oil products decreased 5.8% in physical terms and 6.5% in revenue terms. Trade with China (oil in exchange for consumer goods), which grew rapidly in 2022 and 2023, has plateaued. So-called secondary sanctions have complicated and slowed down payments for goods bought and sold. Just in March, imports from China to Russia decreased 16% year-on-year. This is an obvious blow to Russian consumers (read about what economist Vladislav Inozemtsev calls the “major pause” in Russia-China relations here).
These problems can, in principle, be solved, but Russia will now have to supply and pay more for the same goods and services than before. There is no one else to replace China.
For example, Russian consumers obviously cannot do without Chinese cars given the collapse in Russian production. The supply of passenger cars from China has increased during the Ukraine war sevenfold (and even more for trucks), worth about $1 billion a month (80% of the entire local market for imported cars). This has made China the largest exporter of cars on the planet. At the same time, the Chinese have showed no interest in localizing their automobile production in Russia.
“Beijing supplies to Russia, first of all, what is profitable for it, not what Moscow needs,” writes analyst Alexandra Prokopenko. “Chinese supplies of dual-use products rose in 2023 by only $1 billion in value terms, amid an overall 47% increase in exports from China to Russia to $111 billion. Obviously, most Chinese companies will prefer not to risk their right to access key Western markets for the sake of the Russian market. And for Russia, replacing Chinese suppliers is becoming an almost impossible task.”
“Therefore, any kinks or trouble in trade with the Chinese big brother directly reduces the robustness of the Russian economy and the Russian consumer market.”
And we see that this resilience is now dwindling, judging by the difficulty with which the third, fourth and fifth challenges on the list are being managed.
Deficits and persistent inflation
Federal budget expenditures in the first four months of 2024 rose to RUB 13.2 trillion. That is RUB 2 trillion more than in the same period in 2023 and higher than implied by the full-year budget, which from the very beginning was regarded as very tight. The war has again taken more than expected.
The four-month budget deficit amounted to RUB 1.5 trillion, meaning, if that pace is maintained, a RUB 4.5 trillion deficit for the full year. This is close to the level seen as critical for state finances.
However, with the resurgence of previously suppressed inflation, those finances may now think differently. Already in April, amid a rather moderate uptick in headline consumer inflation, so-called core inflation (excluding fruits and vegetables, fuel and regulated tariffs) jumped to an 8.1% SAAR (i.e., annualized and seasonally adjusted). And based on data for the first weeks of May, headline inflation could soar to a 10% SAAR in May.
The only action the Central Bank can take in response is hiking its key rate, which is already prohibitively high, by another 2-3 percentage points. Yet it is not obvious that this will forestall a consumer panic, which, as already mentioned, is so undesirable for the regime. After several months of decline, inflation expectations among Russians rose noticeably in the first weeks of May (to 11.7% for the year ahead) and are likely to continue rising.
Deficits and persistent inflation
Federal budget expenditures in the first four months of 2024 rose to RUB 13.2 trillion. That is RUB 2 trillion more than in the same period in 2023 and higher than implied by the full-year budget, which from the very beginning was regarded as very tight. The war has again taken more than expected.
The four-month budget deficit amounted to RUB 1.5 trillion, meaning, if that pace is maintained, a RUB 4.5 trillion deficit for the full year. This is close to the level seen as critical for state finances.
However, with the resurgence of previously suppressed inflation, those finances may now think differently. Already in April, amid a rather moderate uptick in headline consumer inflation, so-called core inflation (excluding fruits and vegetables, fuel and regulated tariffs) jumped to an 8.1% SAAR (i.e., annualized and seasonally adjusted). And based on data for the first weeks of May, headline inflation could soar to a 10% SAAR in May.
The only action the Central Bank can take in response is hiking its key rate, which is already prohibitively high, by another 2-3 percentage points. Yet it is not obvious that this will forestall a consumer panic, which, as already mentioned, is so undesirable for the regime. After several months of decline, inflation expectations among Russians rose noticeably in the first weeks of May (to 11.7% for the year ahead) and are likely to continue rising.
Andrey Belousov, Minister of Defence of the Russian Federation. Belousov was a cofounder of the Center for Macroeconomic Analysis and Short-term Forecasting (CMASF). Source: Wiki Commons
As we see, responding to each of the six challenges separately is being done with increasing difficulty, though the situation is not yet critical. Taken together, however, they clearly incline the authorities to the idea that it is time to simplify the game and move to belt-tightening.
‘Full adaptation to the new conditions’
I will not guess how credible this or that rumor is or how much money will be confiscated from which group of citizens or businesses. But the logic of where things are moving was quite coherently outlined two months ago in a report that, not by chance, came out of the Center for Macroeconomic Analysis and Short-term Forecasting (CMASF) close to Andrey Belousov.
‘Full adaptation to the new conditions’
I will not guess how credible this or that rumor is or how much money will be confiscated from which group of citizens or businesses. But the logic of where things are moving was quite coherently outlined two months ago in a report that, not by chance, came out of the Center for Macroeconomic Analysis and Short-term Forecasting (CMASF) close to Andrey Belousov.
“The author of the CMASF report refutes the outlook for ‘normalizing’ budget policy, which technocrats of the ‘systemic liberal’ variety have penciled in to every government plan:”
“the very likelihood of such a ‘normalization’ around 2025-26 is of particular interest for thought. Is it possible to return to the previous budget structure or will fiscal policy have to fully adapt to the new conditions? ... It stands to assume that it is impossible to return to the previous fiscal policy model.”
The appointment of Andrey Belousov as minister of defense and allocator of the growing war budget embodies this “full adaptation to the new conditions.” And the signal was received, at least by the markets. Following the personnel reshuffle, the yield on five-year government bonds soared to 14.2%. The last time the Kremlin borrowed at such a high price was early 2015, when the country was facing oil, currency and military crises.
“The government debt market does not believe that Andrey Belousov will help avoid the Cold War military spending trap. Comments that the appointment of an economist as minister of defense will help stabilize the share of the military-industrial complex in the GDP structure and prevent destabilization of the private sector should have calmed inflation expectations and given the market confidence in a major conservative turn for future fiscal policy. The market perceived this signal differently. It probably took the appointment as a signal that the [Ukraine] conflict would be longer and would require a more significant restructuring of the economy than hoped,” reflected Kholodny Raschet (“Cold Calculation”) Telegram channel.
It seems that average Russians are no longer safe from the regime’s desire to make the war endless and put the financial and economic system on a war footing. Juggling the various parameters has proven too hard and exhausted bureaucrats. The time has come to simplify governance by reducing the standard of living across nonmilitary groups of the population and increasing the burden on civilian sectors, in particular through tax hikes.
We will not have to wait long for the details.
The appointment of Andrey Belousov as minister of defense and allocator of the growing war budget embodies this “full adaptation to the new conditions.” And the signal was received, at least by the markets. Following the personnel reshuffle, the yield on five-year government bonds soared to 14.2%. The last time the Kremlin borrowed at such a high price was early 2015, when the country was facing oil, currency and military crises.
“The government debt market does not believe that Andrey Belousov will help avoid the Cold War military spending trap. Comments that the appointment of an economist as minister of defense will help stabilize the share of the military-industrial complex in the GDP structure and prevent destabilization of the private sector should have calmed inflation expectations and given the market confidence in a major conservative turn for future fiscal policy. The market perceived this signal differently. It probably took the appointment as a signal that the [Ukraine] conflict would be longer and would require a more significant restructuring of the economy than hoped,” reflected Kholodny Raschet (“Cold Calculation”) Telegram channel.
It seems that average Russians are no longer safe from the regime’s desire to make the war endless and put the financial and economic system on a war footing. Juggling the various parameters has proven too hard and exhausted bureaucrats. The time has come to simplify governance by reducing the standard of living across nonmilitary groups of the population and increasing the burden on civilian sectors, in particular through tax hikes.
We will not have to wait long for the details.
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