The data on the Russian economy is a disaster

The data on the Russian economy is a disaster

On Thursday 30 June in Russia, police arrested Vladimir Mau, one of the economists who for decades has been unsuccessfully trying to reform the country from within, on charges of corruption. It is just the latest example of a series of upheavals among Russia's economic elites that have been occurring since the start of the large-scale attack on Ukraine.

Four months after the Western coalition imposed unprecedented sanctions on Russia, the economy of the country engaged in the invasion seems to hold up better than expected. The central bank, led by the legendary Elvira Nabiullina, has managed to stabilize the Russian financial system and the authorities are trying to project their optimism into the future. However, this is an ephemeral optimism. Sanctions are starting to bite: problems in supply chains are intensifying the balance between economic privileges and political power has been upset.

Russia is facing turbulent times is what emerges from the latest report of the 'Rosstat Official Statistical Institute. One of the sectors most connected to the global economy, the automotive sector, is close to paralysis. Two out of 20 factories remained open, with a 97% drop in the number of cars produced (just 3,700 cars produced in May, compared to more than 108,000 in February). Sales of the legendary Lada fell by 84%, trucks that came off assembly lines fell by 40%, refrigerators, washing machines and locomotives by 60%. It is finally official data, not rumors escaped by some dissident bloggers, and therefore probably hide a reality in even more gloomy colors.

With inflation rising by 14%, real wages and pensions eroded by 7% in one year, the average Russian can afford to spend less and less. Thus Russia imports less and less from abroad: imports fell by 9% from China, by 60% from Taiwan, South Korea and Japan, by 30% from Turkey. According to the Rosstat report, May GDP will go down by 4.3%. The forecasts for the end of the year are much worse: from -7.8% by the Russian central bank to -15% by the Institute of International Finance.

The myth of the "strong ruble" Despite this, thanks to the 'soaring prices of raw materials and Europe's inability to detach itself from Russian fossil fuels in a few months, a unique situation has arisen: in Russia, goods are scarce but, due to the surplus in the trade balance, the market financial "drowns" in foreign currency (dollars and euros). And the ruble, which does not find a market abroad, has strengthened to the point of being named as "the strongest currency in the world" of 2022: in one year it gained over 40% against the US dollar.

But is all that glitters gold? According to data provided by the Minister of Finance (Anton Siluanov), strengthening the currency rate by 1 ruble costs the Russian budget, according to various estimates, from 130 to 200 billion rubles. For this reason the minister does not exclude "corrective" interventions. The dilemma of the Russian currency is all here: large trade surplus, of course, but in two or three years there is a risk of an unsustainable deficit with the contraction of non-energy exports and the possible fluctuation of the price of oil. The strength of today's ruble is the worst economic preparation for tomorrow's weakness.

Less clear is the situation regarding Russia's "technical default", as reported by Moody's and other foreign agencies. According to the economist Khazbi Budunov of the Politeconomics blog, in the mass consciousness in Russia the word "default" has become synonymous with a particularly deep economic crisis like that of 1998, or like the Great Depression for Americans. But now there are no signs of financial panic, says Budunov: "In the Russian case we can talk about the 'Schrödinger default': technically the Ministry of Finance made the payment, but the European Financial Clearing Center blocked it, and Western investors have not received anything ... There are no particular consequences for the Russian economy: the only ones who lost from the default were foreign investors, who did not receive their money. "

Meanwhile, Thursday 30 June was a black day for the Moscow Stock Exchange. Gazprom has announced that it will not distribute dividends for 2021, and the gas giant has lost 30% of its value. Gazprom's future is uncertain. It cannot survive in its present form without the profitable EU market. Profitable business is at stake for Putin's friendly subcontractors and subsidized energy for the population. One of the most worrying data that emerged from the Rosstat report is the demographic one: for the first time in many years the migration toll is negative, and combined with the massacre caused by Covid in the two previous years, Russia finds itself having lost almost a million inhabitants. in the last 12 months: a record since the end of the USSR.

The great replacement In the long run, writes the German economist Janis Kluge, of the German Institute for International and Security Affairs, the Russian economy will become more primitive and it will "decouple" itself from international trade. To avoid social tensions, the government will therefore have to make a radical choice: intervene to support Russian companies, opt for greater protectionism and greater state intervention in the economy. Only in this way will Russia will be able to "replace" the lack of imports from Western countries.

A larger share of government spending, adds Kluge, will end up in subsidies to sectors unproductive and in political patronage in an increasingly old country, where the ambitious bourgeoisie and educated young people will try to emigrate. Finally, the Russian economy will become less transparent: the government will have less interest in bringing out the real data, corruption will increase and the commercial economy will grow. Statistics on trade, production and spending will become more opaque, and it will be more difficult to measure the effects of sanctions. Above all, the latter will create incentives to replace imports with lower quality products, changing the habits and tastes of the middle class.

What will be the consequences of the consensus for the regime? The problem arose, during the recent economic summit in St. Petersburg, Margarita Simonyan, director of RT (formerly Russia Today), one of the most famous and brilliant Putinian propagandists, showed the Russian president a box of fruit juice from the vintage look, asking: “There is a lack of printing ink and machines to make it more modern. Will we be able to make it? ". Putin cut it short by saying that Russian identity is not made up of these details and that the suffering of the present will be rewarded by a rediscovered historical role in the world.

Much will depend on parallel imports through accommodating third countries, and other economists have doubts: like Andrey Klishas, ​​senator and chairman of the Constitutional Legislation Committee, close to the government, who says: "The import substitution program it is a complete failure ”. A professor of economic geography at Moscow State University, Natalya Zubarevich, is much more drastic: once the stocks run out, already in the coming months, the sanctions will paralyze the real economy.

So goodbye the liberal and austeritarian approach that has characterized Putinian Russia in recent years? As usual this too will depend on the outcome of the war on the ground. A collapse of the anti-Putin front or of Volodymyr Zelensky's government in Kyiv, with a completely skewed negotiating game in favor of Moscow, could result in the Kremlin withdrawing a substantial part of the sanctions and a return to the previous status quo. As long as the technological dependence on imports does not play some tricks on Putin according to a report by the Cepa in Washington, even the Russian Iskander missiles used electronic components made in America until 2017. And the difficulties in self-producing hi-tech parts in significant quantities could trouble the Russian military. All yet to be seen, to be demonstrated. For now, both sides in the struggle are showing signs of considerable suffering.

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