It's OK?
In July 2022, the economic situation in Russia continues to deteriorate. However, it is far from being as bad as one might expect 4 months ago. Russia continues to export significant volumes of oil and gas. Revenues from them go to the federal budget and make it a surplus. Therefore, the authorities do not need either a printing press or a debt pyramid.
Both ordinary citizens and entrepreneurs in general are aware of this, because the manifestations of panic are minimal. The Putin government and the Central Bank see that the people are not panicking and cancel the emergency measures introduced at the beginning of the war. Market supplies and market prices have survived virtually wherever they have been. Consumption is not rationed, centralized redistribution of resource flows in favor of "priority" needs is not practiced. The nationalization of "incorrectly" operating enterprises is almost never carried out. Most people who have money can travel abroad and withdraw their capital there (by decision of Elvira Nabiullina of June 30 – in the amount of up to a million dollars a month). But this opportunity is not used by everyone and not completely. Those who wish can buy foreign currency practically without problems, and it costs less than before the war.
The rise in prices after a sharp surge actually stopped. According to official statistics, inflation from the beginning of the year to mid-April was 11% , and from the beginning of the year to July 1 – the same 11-12% . There is also no nationwide rise in unemployment. You don’t hear about high-profile bankruptcies and ruins. Coca-Cola is still on the shelves. Neither sugar, nor salt, nor buckwheat, nor rice disappeared from the sale – they simply rose in price by 20-30%, as it should be in a market economy during times of hardship. McDonald's is gone, but Burger King and KFC are.
There is no nationwide rise in unemployment. Coca-Cola is still on the shelves, like sugar and buckwheat
The official explanation for this picture is that the Russian economy has turned out to be stronger and more stable, and society more cohesive and far-sighted than in the West. Little is allegedly dependent on the G7 countries and the like, but what is really important for Russia is China, India, Turkey and Saudi Arabia, with which partnership or at least mutual understanding is maintained with de facto neutrality. Western sanctions harm the West itself more than Russia, and if they are expanded, it will only get worse. Therefore, Russia can remain stable and fight for at least 10 years, like the USSR in Afghanistan or Iraq with Iran in the 1980s.
Just stopping factories
Something does not fit into this picture. Official information on industrial production in January-May 2022 shows a sharp decline in many industries. Worst of all with cars: in May, their output amounted to only 3.3% of what it was a year earlier. In essence, this means that all car factories have stopped. Also, the production of diesel locomotives, freight cars, internal combustion engines, electric motors, buses weighing more than 5 tons, refrigerators, televisions, washing machines, fiber-optic cables and some types of glass has also decreased by more than 50%. The production of trucks, passenger cars, pumps, elevators and bakery equipment fell by more than 30%.
This is a picture from last month. If we consider the entire period of January-May, then compared to the same period in 2021, a decline of more than 50% occurred only in cars, and a decline of more than 30% in heavy buses, electric motors, elevators and refrigerators. Thus, according to the results of May, the crisis in certain segments of the manufacturing industry worsened. The reason, of course, is the rupture of international economic ties, the loss of access to foreign technologies and components.
For a more complete picture, it is worth mentioning the types of products for which the dynamics are the most positive. Forging and pressing machines – doubled growth. Radar, radio navigation equipment and remote control radio equipment – plus 59% in five months and an increase of almost three times in May. True, for this position the volume of output is indicated in rubles, and not in pieces, so it is not known what is the contribution of the increase in prices for which army purchases are made. Next, semiconductor devices and their parts – an increase of more than 40%. Canned meat, cereals, overalls, suitcases, doors, certain types of glass, concrete, tractors, electric locomotives, pleasure and sports boats – for all these positions, production growth in five months is 20% or more. In general, the official dynamics of industrial production for January-May is plus 2.8%. However, this aggregate indicator cannot hide the failure in a number of important sectors.
Just a credit collapse
Not consistent with the optimistic picture and what happened in the mortgage market. In April-May 2021, 150-190 thousand such loans were issued in Russia every month. But in April 2022 – only 49 thousand, and in May 2022 – less than 37 thousand . That is, they became 4 times less. The volume of mortgage loans issued decreased slightly less – by about 3 times, because the average loan size a year ago was 2.9 million rubles, and now it is 3.8 million. The total amount of mortgage loans in May 2021 was 434 billion rubles, and in May-2022 only 140 billion.
In the spring of 2022, four times fewer mortgage loans are issued in Russia than last year
For June, there are no official data from the Central Bank on mortgage volumes, but the results of monitoring by Frank RG are available. They show that in June, compared to May, lending has significantly revived, and not only mortgage lending. But if we compare not with the failed May 2022, but with June 2021, the feeling of collapse is returning. According to Frank RG, in June 2022, mortgage loans were issued for 251.5 billion, while a year ago it was 551.4 billion. The number of housing loans issued was 68 thousand, and in June last year it was almost 179 thousand . In other words, if in April-May the volume of mortgage lending was 3-4 times lower than the usual level, then in June it was 2-2.5 times lower, that's all the consolation. Undoubtedly, in peacetime, such a dynamic would be called the “mortgage market crash,” and along with the “auto crash,” it would be a major economic theme.
If we are not limited to mortgages, but consider all bank loans to the population, then according to Frank RG, in June 2022 they were issued in Russia for 675 billion rubles, and in June last year – for 1288 billion rubles. Also a twofold reduction. And it has been observed for the fourth month in a row, since March.
Source – Frank R.G.
The last months of the building boom
Having acknowledged that mortgage lending has collapsed, we need to consider how this might affect housing construction. Fewer loans means less income and opportunities for developers. This means fewer new construction projects and more problems with the successful completion of those already started. And there are signs of this. From the profile commission of the State Duma they report that "since the end of last year, the number of problematic new buildings has almost doubled." Mishustin's government recognized frozen and uncompleted construction as such a serious problem that it decided on July 11 to create a federal register of long-term construction . The actual commissioning of housing in Russia from month to month since January 2022 has been steadily declining (from 10.3 million square meters in January to 6.9 million in May).
Source – "Unified resource of developers" .
The chart shows that this decline has a significant seasonal component – April and May volumes were always less than March ones. It can also be seen that in each month of 2022, much more housing was commissioned than in the corresponding period last year. But in February 2022 – 84% more than in February 2021, and in May 2022 – already only 38% more than in May 2021 . When the data for June comes out, one of the two trends should disappear. If the decrease in volumes from month to month does not stop, but in June 2022, the commissioning of housing will already be less than a year earlier. In other words, in late 2021 and early 2022, Russia's construction industry experienced a massive boom fueled by government subsidies for subsidized mortgages. Now this subsidization is maintained, but there are fewer signs of a boom. And it would be logical to expect that by the end of June we will also record a decline in housing construction.
According to the results of June, it is logical to expect a decline in housing construction
But the “housing commissioning” indicator is very inertial, and its values for the spring and summer months of 2022 reflect the completion of construction projects that began before February 24. What will we see when it comes to the delivery of projects started after the fateful date? Are there many of these new projects? How many are now ready to make long-term investments in Russia? The Ministry of Economyexpects that in 2022 capital investments will fall by 19.4%, and according to other experts, the decline could range from 10% to 37%. We already know that the issuance of mortgage loans after the outbreak of hostilities has decreased significantly, despite a new wave of government benefits and subsidies. What will be next? In particular, what will happen to the Russian metallurgy with a sharp decline in the production of cars and railcars and with a very likely decline in construction?
A little less than a month ago, NLMK's forecast was published, according to which Russian steel production in 2022 will decrease by 15%, and even by 26% in the second half of the year. At the Magnitogorsk Iron and Steel Works, according to TASS and other sources , two out of eight blast furnaces have already been stopped, and pig iron production has been reduced by 30%. The general director of Severstal on June 17 claimed that 20-25% of the capacities were forced to stand idle at the plant. The government does not seem to believe much that the steel magnates' business is really suffering. After all, now metallurgical companies are lobbying amicably for the abolition of additional taxes, an excise tax on steel and an increased severance tax on ore, introduced since the beginning of this year, in order to "remove excess profits." Why don't they pretend to be victims, exaggerate their losses? But personally, I would rather believe in the suffering of domestic Krupps than join official optimism. And taking away profits from companies just because they are too big was a bad idea from the beginning.
Rot or explode?
So, in a number of important industries, including the automotive industry and lending to individuals, both demand and supply are falling sharply at the same time. Volumes are shrinking, and because of this, demand is shrinking in related industries, such as construction and metallurgy. At the same time, private investment is curtailed, and most likely for a long time, so it is not clear when production could recover. All this is a full-scale economic crisis, and crises of this magnitude always have political consequences at once in several dimensions.
On the one hand, the political response to an economic crisis often exacerbates it and becomes an even greater source of unrest than the original problem. In March and early April, this seemed to be what was happening to Russia, that it was moving towards reality without a convertible ruble, a stock exchange, and perhaps even without entrepreneurship and market prices for vital and strategic goods. However, then there was a partial normalization. Russia never made the transition to a military mobilization economy, and without this transition it was possible to save a life that in many respects resembled the pre-war one. Yes, there is a crisis in the economy again and it is not clear when the recovery will be, but we have been living like this since 2008, for almost 14 years.
Russia never switched to a military mobilization economy, this made it possible to save a life similar to the pre-war one
On the other hand, economic downturns, especially deep and protracted ones, provoke the search for those responsible, the punishment of those responsible, and some actions, symbolic or real, but necessarily noticeable, which should give hope for renewal. And all this, of course, should become the subject of a fierce political struggle.
The current crisis has a number of very peculiar features. At the level of the highest Russian authorities, it cannot be directly called a crisis, and the official point of view is that the economies of the enemy countries are suffering much more. In this sense, the regime has returned to the stagnant rhetorical patterns of the late 1970s and early 1980s, and this will very soon begin to evoke a suffocating sensation everywhere of unbearable solid lies. As then, we will increasingly feel that economic development is impossible without private initiative, private investment, without the adoption of key decisions by long-term minded private owners. But all this is hindered by the current political alignment, so the most likely scenario is slow decay with a decrease in national income by ten percent a year until the first persons of the state are replaced.
Can this process accelerate to such an extent that we can no longer talk about slow decay, but about the rapid collapse of the system? It is possible, but for such an acceleration, an additional “enzyme” is needed, which is absent today. Such a period may be a "flash of madness" among the authorities, a "sudden indignation" of the masses, or a "cunning move" by foreign opponents of the regime. And, as the least likely, but most favorable option for the country, normalization through an apical coup.
What a “flash of madness” might look like is pretty easy to imagine. Escalation, mobilization, opening of a new front, intensification of the fight against internal enemies, reduction of forms of economic activity unnecessary for the state, elimination of the remaining “bourgeois specialists” from important positions, or something else in the spirit of the March experiments. However, now Putin and his entourage seem to believe that time is working for them and do not plan such a thing.
As for the limits of patience among ordinary citizens, on the one hand, they have not yet begun to be truly tested. A people accustomed to false patriotic speeches can remain silent for decades. And on the other hand, the economic expectations of ordinary people are increasingly at odds with reality, and this is really fraught with an explosion.
Former partners in search of master keys
But the "cunning moves" of external forces, in principle, can undermine the very structure, where the economy and society are degrading, but the constant influx of petrodollars allows the Russian authorities to confidently maintain budgetary and financial stability. Such a move could be an agreement between the United States and the countries of the Persian Gulf, according to which the latter will significantly increase oil production. Or liberalization, contrary to the demands of the "greens", of the development of fossil fuels in developed countries. All this could reduce the world price of oil and gas, but the political obstacles for such decisions are still too great. In addition, for reasons that are not very clear, Western politicians have so far suppressed rather than welcomed the flight of capital from Russia.
For reasons that are not very clear, Western politicians have so far suppressed rather than welcomed the flight of capital from Russia.
But the leaders of the G7 generally agreed on a different plan – to create a cartel of buyers of Russian oil, which would impose a significant price reduction on its suppliers. This decision is quite expected. Its effectiveness, however, is by no means guaranteed, and an interesting article by analyst Sergei Vakulenko shows that the idea of a buying cartel with a price ceiling may not work.
“This idea,” writes Vakulenko, “is based on the assumption that Russia would prefer to receive at least some revenue, as long as it exceeds the marginal cost of production and allows for at least some profit, rather than leaving the oil market and not giving up money. generally. This would indeed be a rational approach if the game lasted only one move. But Russia is a strategic player, and it does not really need a currency that has nothing to spend on now. Therefore, Moscow could "expose the bluff of the West" and declare that if the price is below some rather high level, it will not export oil at all. And then she "will just have to wait until defectors from the cartel of buyers knock on her door."
The assumption here is that "Russia has more resilience than some oil-importing countries", which are therefore "first to flinch". But this is more of an intuitive judgment than supported by convincing evidence. Intuition tending to the opposite conclusion is no worse.
It is very difficult to govern Russia without money. Nicholas II was convinced of this during the First World War, and the Provisional Government that replaced him, and Gorbachev, and Yeltsin. Putin, for all 22 years of his reign, was with money, on which all his successes are based. Therefore, the assumption that he can, for strategic reasons, give up money and hold out for the necessary time due to some kind of non-financial “stability” sounds strange. The saying “There is no money, but you hold on” to both oppositionists and loyalists in Russia sounds like a standard of absurdity. Can the system remain strong under these conditions without oil revenue?