By Peter Bergman (MoneyAmped.com)
With the notable growth in defense expenditures, the alignment of China, and the utilization of obscure agreements to address the voids created by sanctions, the Kremlin believes it can endure the repercussions of a weakened rouble. However, a pertinent question arises: will the Russian populace readily accept reductions in welfare provisions, should they be implemented?
As the Kremlin implemented immediate measures to address the significant decline of the rouble last week, it became evident that the unsustainable trajectory of excessive expenditures on military capabilities and social welfare initiatives necessitated intervention.
Depending on several analysts, there is a prevailing sentiment that the Russian economy is not currently at risk of experiencing an imminent collapse. According to reports, the current situation suggests that the Kremlin needs to consider the financial implications of allocating substantial roubles toward its ongoing conflict with Ukraine.
Simultaneously, it must also navigate the significant challenges posed by unprecedented sanctions while endeavoring to sustain public expenditure at levels consistent with the prewar period.
Depending on Alexey Eremenko, an associate director at the consultancy firm Control Risks, the fundamental improvement of the Russian rouble is contingent upon Russia’s ongoing excessive expenditures, encompassing both military spending and costly imports.
A real structural issue underlies the entirety of the situation at hand… A vital inquiry pertains to the current status of the Kremlin’s imperative to significantly reduce military expenditures or endure substantial repercussions on the populace’s well-being.
In response to the recent depreciation of the rouble, which surpassed the significant threshold of 100 against the dollar, the central bank of Russia implemented a measure to elevate interest rates to 12%. This decision marks the initial instance in which the cost of borrowing has been augmented since the early stages of the conflict.
According to a report by the business daily Vedomosti, there have been discussions regarding the formulation of informal measures for capital controls after a meeting held last Wednesday involving Vladimir Putin and his senior officials.
These measures, if implemented, could require companies to convert a more significant portion of their export earnings into the national currency, the rouble. The steps above may also be extended to encompass dividends and loans.
The upcoming re-election of President Putin next year is anticipated, and it is customary for the Kremlin to allocate substantial financial resources towards public initiatives before the election to foster vibrant participation among the electorate in support of the presidential candidate seeking a fifth term.
By informed sources, the prevailing sentiment suggests that the governing body is prepared to persist with its current trajectory despite the economic challenges. This resolve is bolstered by the perception that most of the populace has accepted the prolonged conflict and the resulting global seclusion.
According to a statement by a former senior Russian official, it is unlikely that an economic catastrophe or a decision to cease the ongoing war will occur. Under democratic circumstances, in instances of economic decline, individuals exercise their voting rights to elect an alternative governing body.
The current political system in place does not adhere to democratic principles. The subject in question is expected to exhibit a high resilience and is anticipated to endure the circumstances without significant difficulty. Individuals must exercise fiscal restraint and adopt a more frugal approach to their financial affairs.
Russian Economy Is Closed From Other Countries
During a meeting with President Putin, Sergey Chemezov, the esteemed leader of the state-owned defense conglomerate Rostec, it highlighted the commendable dedication exhibited by the workforce in various weapons manufacturing facilities nationwide.
Depending on the statement provided, a notable increase of 17.2% in wages was observed at Rostec. This positive development can be attributed to the diligent efforts of the company’s factories, operating during weekends, holidays, and night shifts. It is worth noting that these additional work periods are duly compensated at an elevated rate.
Putin expressed minimal inquiry regarding the financial implications, as he conveyed to Chemezov in recent weeks the imperative for Russia to intensify its manufacturing capabilities about cutting-edge weaponry, encompassing T-90 tanks, aircraft, and Lancet drones.
The evolving dynamics of Russia’s wartime economy have given increased influence to individuals near Putin, such as Chemezov, who strategically leverage the Kremlin’s unwavering military requirements. According to a government document reported by Reuters, it was revealed last week that Russia had revised its defense spending target to $100 billion, which now constitutes approximately one-third of the nation’s total public expenditure.
Depending on Alexander Gabuev, director of the Carnegie Russia Eurasia Centre, there is a notable level of satisfaction among various domestic stakeholders regarding this particular scenario. Many individuals stand to achieve significant wealth as a result of this situation.
The significant increase in state spending has catalyzed the growth of the Russian economy throughout the preceding 18-month period. According to the International Monetary Fund’s projections, Russia is expected to experience a GDP growth rate of 1.5% this year, surpassing that of the United Kingdom and Germany.
According to Eremenko, the growth of our GDP is primarily attributed to the production of tanks. The impact on public welfare is suboptimal.
During a subsequent meeting, President Putin acknowledged the impact of inflation on small and medium-sized enterprises within the private sector while also acknowledging the substantial influence exerted by military expenditures on the overall economy. According to a headhunter in Moscow, salary expectations and stagnant company offers have been a notable disparity.
According to Alexandra Prokopenko, a former adviser to the Russian central bank, the defense industry is exerting a significant influence on various sectors, thereby generating a surge in import demand, supporting the country’s gross domestic product, and contributing to the financial well-being of ordinary Russian citizens. Various industries are compelled to implement salary increases to maintain a stable workforce. The foundation for a potential surge in inflation has been established.
Punctures in the Sanctions
According to researchers, an analysis of internal data from the Russian customs agency reveals a notable recovery in imports, approaching levels observed prior to the war. However, it is essential to note that significantly elevated prices accompany these imports.
The substances in question have played a pivotal role in supporting industries deemed vulnerable, such as aviation, and aligning with the priorities of the Kremlin. However, it is worth noting that the acquisition of foreign currency required for these imports has exerted downward pressure on the rouble’s value.
The presence of numerous Western components in the ongoing cruise missile attacks targeting Ukraine has been identified by Ukrainian officials.
By Erlend Bjørtvedt, the founder of Corisk, a risk consultancy based in Norway, it has been observed through meticulous analysis of Russian customs data that a substantial influx of various commodities is being directed towards the nation of Russia. The influx of components is primarily sourced from China and different Asian countries, with a notable contribution from the European Union.
The intricate nature of global trade regulations presents challenges in effectively implementing sanctions on certain commodities, such as aircraft parts originating from the United States and the European Union. Despite being prohibited from exporting to Russia, these goods persistently enter the country.
According to Bjørtvedt, there exists a possibility wherein the components may endure an extended period within designated customs areas after they arrive in a given nation. Consequently, discerning between newly acquired items and those procured before the commencement of hostilities becomes a challenging endeavor.
To facilitate the exportation of crude oil and acquire essential foreign currency, Russia has resorted to utilizing a fleet commonly referred to as the “dark fleet,” which operates in a manner that circumvents the price limitations imposed by Western entities.
During the summer, it was observed that Urals crude surpassed the $60 per barrel threshold, which is the price limit set by G7 nations. Coincidentally, Greek vessels previously identifiable in Russian ports along the Black Sea and the Sea of Azov were promptly substituted with older tankers with intricate ownership structures and obscure insurance providers.
Additional Regulation of the Economy
Several international corporations have become trapped within the Russian market due to the Kremlin’s expanding influence on domestic and foreign economic activities. The local subsidiaries of Danone, the French food conglomerate, and Carlsberg, the drinks giant, were placed under “temporary administration” by executive orders signed by President Putin, resulting in Russia assuming control over them.
In a recent statement, Cees ‘t Hart, the chief executive of Carlsberg, acknowledged the company’s current challenge of maintaining effective communication with its employees in Russia and the limited level of interaction with local authorities.
The recently appointed manager of Danone Russia is believed to have familial ties to Ramzan Kadyrov, the esteemed leader of Chechnya. This appointment reflects a recognition of his alleged involvement in supporting the Ukraine conflict.
Unilever, a company that has faced criticism for its continued presence in the Russian market, has stated that the process of exiting this market is complex. This is because the Russian government would take over and manage its subsidiaries.
The current economic outlook for Russia has experienced a notable decline compared to the pre-invasion period. The strategic shift of the Kremlin towards China and other emerging markets and the pursuit of alternative methods to bypass sanctions need to be revised to compensate for the absence of direct entry into Western markets or access to advanced technologies.
The rapid devaluation of the rouble may necessitate the Kremlin to undertake arduous deliberations regarding public expenditure as it grapples with managing the rouble exchange rate and the concurrent escalation of inflation.
Following notable volatility, the Russian economy is gradually stabilizing, potentially establishing a revised status quo. Despite prevailing circumstances, the Kremlin maintains its conviction in sustaining the ongoing war endeavor.
Depending on the statement provided by the former senior official, the entity in question can endure under such circumstances for 100 years. It is commonly asserted that the current situation is merely a transient setback. However, it is widely held that individuals may believe that a catastrophic event or societal collapse is unlikely to occur as they perceive limited alternative options.
