War in exchange for impoverishment
Neither the legends about the saviors of Russia – the "systemic liberals" from the Central Bank, nor the hopes for a gas collapse in Europe, nor the throw into the arms of Eastern partners save the Russian economy. The budget became scarce. Over the past 12 months – more than 7 trillion rubles, and for January – May 2023 – 4.6 trillion rubles. (with 2.9 trillion rubles planned for the whole year). However, the economy is a system of communicating vessels, so that the lack of funds can be closed at first, for example, through the National Welfare Fund, housing overhaul funds, or even the Movie Fund – all these are stocks made in past years, and they will be consumed.
In addition, the state put the oil industry under the knife. A cut in the oil damper, which stabilized gasoline prices in the Russian market in the past, is being prepared, but has been temporarily postponed. Artificial settlement prices for oil exports were also introduced and duties were increased. And all this under the motto – "Survive somehow!".
Large businesses are being robbed of their money through excess profit tax. This is done according to the clumsy principle – “Big? Give it back! Over a billion? Give it back! They also pump money out of the stock market through the sale of federal loan bonds. To do this, the state has to increase the offered yield of these securities. It is already close to 11% per annum and will continue to grow.
Large businesses are being robbed of their money through excess profit tax
Next in line is the population, which has tens of trillions of rubles. In a protracted war, this may be enough for 10 years. And if the conflict turns into the “Korean version” (no peace, no war, temporary-perpetual truce), then it will be longer. But the standard of living will fall, investments in the civilian economy will decline, many businesses will become unprofitable and close. The economy will deteriorate, but there will still be money for the army, military equipment and law enforcement agencies. And all this will be paid for by the population of Russia in the most direct way – through taxes, inflation and the devaluation of the ruble. Which is actually already happening. The official thinks simply: nothing is a pity, we will look for money for the main thing – "for the military", and then we will figure it out. If we win, then we will repair the survivors. And if we lose, then other people will “resolve” the trouble.
At the same time, Putin had no plans for a protracted war. There are rumors that, they say, Nabiullina and Kudrin warned the President of the Russian Federation about the dangerous economic consequences of not even the “Northern Military District”, but only the annexation of the so-called Lugansk and Donetsk republics to Russia. However, Putin allegedly replied that the economy would manage somehow. Judging by further improvisations, it was this position that became the basis for the actions of the Russian state, and now officials are getting out as best they can.
Destruction of the economy
According to the results of the first quarter, things are developing normally only in agriculture. But even this cloudless picture could be damaged by the cessation of supplies from abroad. At the same time, even non-sanctioned products can stop supplying due to the inability to pay through banks cut off from world systems.
In other sectors, everything is very bad: the manufacturing and mining industries have shrunk and are struggling to recover, oil revenues have declined (since the beginning of 2023, budget oil and gas revenues have fallen by almost 50%). Gazprom is at a loss, there are big problems with diamonds on the horizon, and even in the fertilizer market the clouds are gathering. The Russian state is trying to find new markets for the metal. At the same time, ferrous metals cannot be supplied to India, because the ferrous metallurgy there is larger and stronger than in Russia. The Indian company ArcelorMittal is No. 1 in the world in steel smelting, and the largest Russian producer NLMK is only in 17th place. In order to supply metal to Africa and Asia, transport routes are needed, but the ships that are available are not ours and they are not particularly willing to carry Russian cargo. As a result, all Russian exports to Africa in 2022 barely exceeded $1 billion. In the domestic mining industry, only the extraction and production of building materials have grown significantly. And this is understandable – gravel, cement and other materials are needed to create defensive structures.
In general, the Russian economy is becoming less and less transparent and suitable for analysis. The Ministry of Finance plays with money, hides something, announces something, talks about advance payments and problems with the new tax collection procedure. Understanding the real picture is more and more difficult. And this is a very dangerous story. In this sense, we return to the Soviet Union, where much of the statistics were classified as "secret" or "for official use" and much had to be calculated in roundabout ways.
At the same time, there is an opinion that since we survived in the Soviet Union, we will survive now. But analogies don't work well here. Yet the Soviet economy worked in completely different conditions. Firstly, the Soviet Union was all the union republics together, that is, approximately 285 million people (twice as many as now in Russia) and a more or less balanced labor market (thanks to the labor-surplus republics of Central Asia). Secondly, it was also a socialist camp, the CMEA – all of Eastern Europe, which then worked in coordination with the economy of the USSR and which Russia no longer has. Therefore, there can be no automatic parallels with the Soviet Union.
In addition, over the past 30 years since the collapse of the USSR, huge amounts of production capacity and competence in the production of a large range of products have been lost. The one that the Soviet Union knew how to do. Products of low quality, expensive, often unprofitable, but somehow suitable. After all, the Soviet Union, in the madness of the planned economy “in the ring of enemies”, tried to produce everything itself – from space rockets to sewing needles. Now this is no longer possible.
Let us recall, by the way, that Ukraine was a very powerful industrial region of the USSR, and without it, the Russian aviation industry is simply impossible to imagine. The economy of the USSR was a world of production distributed throughout the country – for example, ILs were assembled in Tashkent, and now Russia is trying to negotiate with Uzbekistan on the assembly of the new Tu-214, the USSR ballistic missiles were produced and serviced by Yuzhmash and other Ukrainian enterprises (who now serves these ballistic missiles in Russia and in what condition they are, by the way, a curious question).
The handiwork of the drowning themselves
Russia lived under a market economy for almost 30 years. They were not as successful as we would like, but they were not completely lost either – over the years, entire industries and market institutions have emerged, people have learned to work in a market way. Now Russia is being saved not by the state, but by private business. If not for him, the shops would have been empty and the country would have been a disaster. However, these energetic managers know how to work in a market economy, but not in a planned (mobilization) economy, towards which Russia is slowly but slipping.
There is a misconception that in 2022 the economy of the Russian Federation, they say, was saved by “systemic liberals” from the Central Bank and the Ministry of Finance. But in fact, the West simply spared Russia, afraid of hurting itself too much. All skeptical assessments that were made at the beginning of 2022 proceeded from the fact that the sanctions system would start working immediately. But major sanctions, such as an oil embargo in Europe, did not come into effect until December. And the embargo on the supply of petroleum products only came into force in February 2023. Therefore, it's not just that systemic liberals like Nabiullina and Siluanov are so skillful, but there was simply a period from February to December when Russia was selling oil at insane prices and making huge money. By the way, Russian economists proposed to immediately stop buying oil and gas from Russia, believing that it would be cheaper for Europe. However, European politicians got scared, and therefore Russia lived for nine months, swimming in money.
However, this “moneyfall holiday” has come to an end. Now Russia is giving oil to India and China under the motto "just to sell." As a result, tens of billions of rupees have accumulated in the accounts of Russian exporters, with which it is not clear what to do. The Central Bank of India forbids converting them even into rubles within Russia. As a result, the Indians offered Russian companies to buy government bonds of India with these rupees, that is, to become – out of hopelessness – investors in the economy of this country. But the oilmen still have to sell oil at a loss, because otherwise they will have to close the wells.
Russia gives away oil under the motto "just to sell"
Nothing good comes out of friendship with China either. So, Shanghai signed a decision on a different route of the Great Silk Road than it had been discussed with Russia for a long time. After all, it was assumed that the railway would pass through Moscow to London. The calculation was that high-speed Chinese trains (300 km / h) would deliver goods from Shanghai to London in 19 days using this route. By becoming a participant in this project, Russia would earn a lot of money on transportation through its territory. However, in the end, China signed a contract for a completely different route, which goes through the countries of Central Asia, Iran, Turkey, Bulgaria and then further to Europe. Russia was taken out of the brackets. And the new gas pipeline for the Chinese economy will not be Russia's Power of Siberia 2, but a pipeline from gas-rich Turkmenistan.
Finland announced the termination of the pipeline contract with Gazprom. They put a ship near their shores to liquefy LNG gas and they no longer need Russia. This is how the whole of Europe lives now. This gas market is lost for Russia.
Nor should one hope that the war can stimulate the Russian economy. Supporters of this idea refer to the American and Japanese experience. Indeed, the United States rose during World War II and developed a gigantic military industry, followed by the growth of the rest of the industry. But in 1945 the war ends. What are the Americans doing? They launch the Marshall Plan and tie the entire European market to the American industry, getting a market for years to come. Otherwise, the American economy would have collapsed with the advent of peace.
Yes, and the Japanese economy has become powerful not only on orders for the American army fighting in Korea, but also on investments in the development of the production of peaceful products based on licenses purchased from the same Americans, and its own developments based on ideas for military products.
But in Russia, the road from the military industry to civilian markets has never been successful, and it is unlikely that we will see anything different in the future.
Moreover, when we talk about the rise of the military industry as the engine of the economy, the question arises of who pays for the banquet. Russia is now ordering more weapons and concrete pyramids for defensive structures. This is paid for by the state budget. At the same time, it is becoming more and more difficult to raise money for this budget.
Private companies worked for Hitler throughout the Second World War. Similarly, in Russia, private business is forced to serve "SVO". The mobilization zone of the economy is distributed according to a simple logic: if you need weapons, then you need stable supplies of metal. The state hangs the obligation to supply metal to metallurgical plants and introduces a price limit. But then the next step would require mandatory supplies and price limits for everything that the metallurgical plants themselves need to buy.
As a result, when the government introduces a model of a mobilization economy, a state price system begins to take shape, which is fraught with conflicts. So, the head of "Rostec" Sergey Chemezov proposed to increase the wages of employees of defense enterprises by 10%. He noted that "to a large extent, our success at the front depends on their work, sometimes in three shifts." But if you fulfill a state order for the Ministry of Defense, then the state approves the price. For this, there is a special employee who is engaged in the purchase of military equipment. And he trades not by price, but by analyzing costs. The fact that in private business is a commercial secret, in the state defense order it is open information. The customer from the Ministry of Defense looks at the costs and forbids raising salaries by 10%.
When the authorities introduce a mobilization economy, a state price system appears, which leads to conflicts
This is what is called the birth of the mobilization economy – you start expanding the zone of state defense orders, and the zone of state orders in general and state prices automatically grows. First, these are the prices for military equipment, then these are the prices for metal for this equipment. Then you must set the same prices for iron ore and coal, while keeping the wages of the iron and steel workers low enough. This does not mean that the entire economy of the country immediately becomes mobilized. But this is happening in industries adjacent to the military industry, and is slowly spreading further.
And this destroys the fabric of private, market-based business that helped Russia so much in 2022. This means that it is increasingly undermining the foundations of its stability and ability to provide the citizens of the country with more or less acceptable living conditions – without a total shortage of goods and food cards.
In general, if you try to find an image of what is happening to the Russian economy now, when it unexpectedly finds itself in a situation not of a short-term and successful military-police operation, but of a long and painful military conflict, then lines from Vysotsky's old song about sprint speed skater:
Well, I'll die at a long distance – I won't groan,
I’ll run, perhaps, only the first lap – and I’ll die!
But the coach is sternly like this to me: they say, it’s necessary, Fedya,
The main thing is that the will, he says, be for victory.
Will by will, if there is too much strength – and I got carried away:
I rushed ten thousand, like five hundred – and baked!
You let me down – I warned you! – breather:
Ran only two laps and fell.
What a pity!
Substitute the word "oil industry" instead of "breather" – and the picture in the Russian economy will become painfully recognizable …