“Russia is a gas station masquerading as a country,” the late US Senator John McCain said in 2014. “It is kleptocracy, it is corruption.” “It is a nation that relies on gas and oil to fuel its economy and that is why economic sanctions are important,” said the American politician in the year the Kremlin illegally annexed Crimea and lit the spark in Donbas. At that time, symbolic sanctions were imposed against Russia. A decade later, almost two years after the war, the restrictions against Russia for the total invasion of Ukraine are much tougher, but they have not, as stated, doomed the country, although they have reduced its war potential. The big threats for 2024 are inflation and the devaluation of the ruble.
These words by McCain continue to worry the Russian government. Russian Foreign Ministry spokeswoman Maria Zajárova recalled it again this week, declaring it a “Russophobic” statement and accusing the United States of being “a more complex gas station: one with an integrated money printer” (in reference to its monetary policy).
According to economist Vladislav Inozémtsev, founder of the Moscow Center for Post-Industrial Studies, McCain's simplification gets to the heart of the sanctions' big flaw. “The main mistake of Western experts and politicians was to spread fairy tales that the entire Russian economy was state-owned,” says this independent expert on the other end of the phone, continuing: “The sanctions were imposed on the assumption that it was “State economy” was flexible and would therefore collapse quickly. But it was a mistake because the Russian economy is largely a market economy.”
Russian military spending amounts to about 6% of gross domestic product (GDP), about the same percentage as during former U.S. President Ronald Reagan's first term in office from 1981 to 1985. “And no one would say that the North American economy was a war economy “, he says. Emphasis Inozémtsev, who emphasizes that the Russian public sector is based on large companies with huge budget revenues, but very small in terms of employment.
Unlike the collapse of the USSR and its planned economy, “Russian private companies have been looking for a way to survive the sanctions and have opened new distribution channels and supply chains,” Inozémtsev adds. For example, through illegal imports from non-Western countries.
The Russian authorities expect GDP growth of around 3.2% this year. “3% is an insufficient growth rate, it should be higher, everyone understands that, many differences need to be leveled out,” Russian President's spokesman Dmitry Peskov recently admitted.
The Russian rating agency AKRA – the Western ones no longer operate in the country – agrees with the Kremlin's forecast for 2023, but predicts that Russian growth next year will stagnate in the range of 0.5% to 1.3%, compared with the forecast 1.4% the Russian government. One of the reasons for this is the inability to find workers (unemployment is 2.4%) due to military mobilization and the exodus of Russians and immigrants due to the war. Another reason is inflation and high central bank interest rates. “Household savings will most likely increase,” the company warns.
“For now, I don’t expect many upheavals in the coming year. The minimum wage will be increased by 18.5%, construction advances from the government. Subsidies. Putin wants to expand the discounted mortgage program. That is, everything indicates that there is a lot of money in the economy, and that will stimulate public spending and support economic growth,” warns Inozentsev, albeit cautiously: “If there are no surprises, because we don't know what Putin will do after that.” the elections. Maybe he will announce a new mobilization, maybe the war in Ukraine will intensify.”
Janis Kluge, an economic expert at the German Institute for International Politics and Security, concludes in a detailed analysis by the Riddle think tank that 2024 will be the litmus test for the Russian system after two years, 2022 and 2023, were saved thanks to reserves. The funds previously accumulated and the additional revenue generated at the start of the invasion thanks to the shock in international gas and oil prices caused by the offensive.
“2022 was a historically positive year for Russia; the economy is not always fair,” says Kluge. In addition, the sharp devaluation of the Russian currency since the second half of the year (from 66 rubles per dollar to 90 now), due to the small inflow of dollars and euros, has spared the coffers of the Kremlin, which pays its citizens in rubles. and thereby (and by reorienting its market towards India and other countries) solved the Western-imposed price cap on Russian oil. “For these reasons, the Treasury estimates the real deficit in 2022 and 2023 at 0.7% and 2.7% of gross domestic product, respectively. In 2023 the situation will have worsened significantly,” says Kluge.
Expenses and revenues are up 10% this year compared to forecast. The expenditure, around 33 billion rubles, will be finally announced in December this year, the month in which a large part of it will be made, but revenues have also increased to 28.7 billion rubles. A comparison in euros makes no sense, since an average Russian salary of 52,000 rubles in the summer (532 euros) has greater purchasing power in the Russian market than outside it, according to the country's main bank, Sberbank.
The problem for the Kremlin is that while this devaluation benefits its military budget, it also increases pressure on its population. “35% of products or the resources for their production are imported,” Inozentsev points out. “The limit until the ruble falls and inflation does not rise has been exhausted. The authorities will do everything to keep the exchange rate at current levels. Unless they want strong inflation, which they fear,” says the economist, who assumes an exchange rate of 115 rubles per dollar this year if the situation remains stable.
However, the Kremlin does not have everything under control: despite OPEC+ cuts in recent months and spurred by the Gaza war, Brent barrels have fallen from almost $100 to $75. “Russia has become much more vulnerable to the fluctuations of oil,” says Kluge. “If prices fall, the ruble will be drastically devalued and it will become increasingly difficult to defend the currency,” he says, stressing that this would entail massive spending cuts: “And at a time of rising military spending, any fiscal consolidation will be a problem . “even more painful for the population.”
The Russian government expects to end the year with official inflation at 8%. According to the statistics agency Rosstat, prices for consumer goods rose by 6.7% between January and October. However, a study by the expert platform Romir puts the real price increase of the shopping basket at 20.4% during this period and at 47.9% since the start of the war in February 2022.
The Kremlin has imposed its monetary policy on the Russian central bank. Although the agency claimed that the ruble's devaluation was due to demand for dollars and euros, it followed instructions and raised interest rates last week to 16%, the latest percentage point. They have also taken risks, such as lending rubles to the government with funds frozen by the West as a counterparty. Overall, the money supply has increased by around 23% since the start of the war.
According to experts, some sanctions have worked (the aviation industry has produced only a few Superjet 100 aircraft this year and in December its airlines had a serious aviation accident practically every day), while others, such as those on hydrocarbons, have their targets achieved only half-heartedly. “What McCain said about gas stations was terrible,” Inozémtsev says.
“In fact, a big mistake has been made here, because a gas station is something very necessary, everyone passes by it every day. “If I believed that it was possible to deal a hard blow to exports with sanctions, I would be quite naive,” says the Russian economist, concluding: “Every new package of sanctions provokes more and more controversy and less and less effect, “why it is so.” would end these talks and focus on financial and military support for Ukraine.”
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