The Russian government is trying to revive the Soviet ideology, while emphasizing their commitment to avoid repeating past economic mistakes. President Putin asserts that the country is progressing in accordance with market principles. However, Soviet economic principles are resurfacing in Russia alongside political ones, including manipulation of statistics, impractical development plans, superficial income growth through investment sacrifices, elements of state planning, and relatively transparent methods of extracting funds from the population. The Kremlin's economic sector is increasingly employing Soviet tactics to conceal the escalating issues, which is a ticking time bomb.
Symbiosis between ideology and free market no longer works
Soviet economists were prone to self-deception
De-kulakization of business
Achievements fit propaganda
Citizens are told to chip in and trust the government again
Statistics becomes a state secret
Anti-fake: officials' excuses contradict reality
Moscow Stock Exchange becomes a hub for speculative trading
No plan B
Symbiosis between ideology and free market no longer works
Long-standing nostalgia for the USSR has been steadily accumulating within Russian society. Initially centered around cultural aspects such as Soviet films, revered figures, and the adoration of delectable ice cream, the Kremlin gradually introduced other elements of the Soviet way of life. This began with the declaration of the Soviet Union's collapse as the paramount geopolitical catastrophe of the 20th century.
The curtailment of fair elections, crackdown on opposition forces and independent journalism, intensification of anti-Western propaganda, and mounting confrontation with NATO seamlessly aligned with sluggish economic growth and prolonged hopes for a breakthrough. Ultimately, the so-called “breakthrough” materialized in the form of the incursion into Ukraine, triggering a rapid surge in Sovietization. Criticism of governmental policies became prohibited, denunciations became commonplace, and the concept of rule of law was now met with ironic disdain.
Criticism of governmental policies became prohibited, denunciations became commonplace
The state of the late Soviet Union is becoming increasingly comparable to the current situation, with economic policy serving as the final differentiating factor. Elements such as the market economy, private enterprises, a convertible ruble, legally recognized billionaires, and the absence of rigid central planning are incompatible with the historical five-year planning model. However, as the war unfolded, the market economy started to erode. Despite assurances and development plans, the state found itself descending into the same pitfalls as the Soviet Union.
Soviet economists were prone to self-deception
The collapse of the USSR has been extensively analyzed through numerous books, scholarly papers, and articles, all of which present a range of factors contributing to its downfall. These studies allocate significant attention to economic challenges, including the mid-1980s oil price decline that adversely impacted petrodollar inflow and exacerbated ongoing deficits.
However, both market-based and planned economies can weather such crises if they effectively manage panic sentiments and avoid planning errors. The decisive factors that render these difficulties fatal are often of a different nature – ideological, as was the case with the USSR. The cornerstone of the late Soviet regime rested on the belief in an inevitable and ever-growing economic superiority over the West. The ruble was expected to surpass the dollar (which was deemed destined for imminent collapse), the standard of living was envisioned as perpetually rising, prices for goods remained stable or increased in accordance with government directives, unemployment was nonexistent, production of goods was steadily expanding, and their quality continued to improve.
In theory, a planned economy could function without the need for an ideology, but in the case of the Soviet Union, it necessitated the need to justify the merits of socialism. However, these merits were not particularly abundant. Simultaneously, the absence of planned accomplishments from higher authorities posed a risk of disciplinary actions for local leaders. To navigate this predicament, a solution emerged in the form of data falsification, which eventually reached an extensive scale.
In the February 1987 issue of Novy Mir magazine, an article titled “Tricky Numbers” was published, authored by Vasily Selyunin and Grigory Khanin. These economists employed alternative methods to scrutinize the official macroeconomic statistics and arrived at startling findings. Specifically, their calculations revealed that the national income of the USSR from 1928 to 1987 did not increase by the proclaimed 90-fold figure put forth by the Central Statistical Authority of the USSR Council of Ministers. Instead, they determined that the increase amounted to a mere 6.9 times, which was approximately 13 times less than the officially stated figure.
The USSR income over a span of 60 years was revealed to be 13 times lower than what the Soviet leadership had claimed
The utilization of Gosplans, which relied on statistics significantly divergent from reality, compelled the implementation of temporary measures that ultimately exacerbated the situation. Faced with worsening scarcity, ration cards emerged as a surrogate for money, granting access to goods. Eventually, the Soviet government acknowledged its loss of control over the money supply, leading to the monetary reform of 1991. While this reform aimed to stabilize currency circulation, it instead triggered a surge of public anger. As highlighted by Alexei Yurchak in “Everything Was Forever, Until It Was No More,” the United States acknowledged the falsity of Soviet statistics but assumed that accurate figures were circulating within the ministries and departments. However, it transpired that the Soviet government relied on the same officially published estimates when making crucial decisions.
De-kulakization of business
Quality statistics play a pivotal role in the functioning of a market economy. Companies rely on accurate data to formulate business plans, while banks utilize it to make informed decisions on granting affordable loans. Furthermore, stability in the conditions provided by the state is of equal importance, as it alleviates concerns related to long-term investments. In a market economy, pricing is determined through free market forces and regulated by competition. The primary objective of businesses is to generate profits, rather than merely executing government directives. Consequently, the government does not view companies solely as a means to fulfill its own financial obligations.
Russia was granted market economy status by the United States in 2002. This designation afforded domestic companies the opportunity to challenge U.S. anti-dumping duties if they believed they were acting in their own interests rather than the Russian government's. However, after two decades, the U.S. Department of Commerce revoked Russia's market economy status in 2022. The official rationale behind this decision was the extensive state interference in the national economy. While one perspective may view this as another in a series of sanctions, it is noteworthy that the decision was delayed until November although it did not require any preliminary approvals. As of the summer of 2023, there are increasingly compelling reasons to support this conclusion. The state's approach has expanded significantly compared to the pre-war era. One prominent indication of this shift is the treatment of businesses as a readily accessible source of funds, which can be tapped into whenever needed.
In Russia, the government treats businesses as a piggy bank which can be tapped into whenever needed
In the spring of 2021, the Russian government took steps to swiftly address budgetary challenges by targeting major corporations without much formal procedure. First Deputy Prime Minister Andrei Belousov claimed that Russian metallurgical companies were earning excessive profits without adequately sharing them with the state, essentially accusing them of “shortchanging” the government. The entrepreneurs' argument that increased profits would help them navigate future difficult times fell on deaf ears. Unfortunately, those difficult times arrived sooner than anticipated. By August 2022, the Ministry of Industry and Trade acknowledged that industry recovery to the level of two years prior would require an estimated eight years due to sanctions. Subsequently, in November, the state had to intervene and provide assistance to the steel companies by allowing them to reduce their payments to the budget.
Another significant casualty was Gazprom. During the budget law deliberations in the fall, the Russian authorities may have presumed that Europe would capitulate to Russia's demands and pay the set gas prices. However, in reality, the company now finds itself obligated to pay an additional 50 billion rubles per month to the budget from January 2023 to December 2025, all while witnessing a drastic decline in gas exports to an unprecedented low level.
The government's attention extended to the broader business sector as well. In February, as the budget deficit rapidly expanded, Finance Minister Anton Siluanov proposed that large companies should consider making a one-time voluntary payment to the budget, ranging from 250 to 300 billion rubles. When asked about the consequences for those unwilling to contribute, Dmitry Peskov emphasized the crucial aspect of voluntariness in the suggested levy.
However, within a few weeks, the proposed amount increased to 300 billion rubles, and the notion of voluntariness vanished. Alexander Shokhin, the head of the Russian Union of Industrialists and Entrepreneurs, urged for the prompt establishment of regulations governing the payment scheme:
“We initially started with 200 billion rubles ($2.4 billion), and as time goes by, the Ministry of Finance's appetite grows – 250 billion ($3 billion), 300 billion ($3.6 billion). We believe that each month of deliberation will result in an additional contribution of 50 to 100 billion rubles ($0.6-1.2 billion).”
Consequently, the levy was formalized based on a percentage of the excess profits generated by companies between 2021 and 2022 compared to the figures from 2018 and 2019. This payment requirement will apply to companies with profits surpassing one billion rubles during the specified period, except for those involved in energy production, oil refining, and liquefied natural gas.
While the exact amount to be collected was not disclosed, calculations by the Center for Economic Expertise of the Institute of State and Municipal Management suggest it could reach as high as 470 billion rubles ($5.6 billion). Furthermore, sources indicate that the Ministry of Finance intends to transform the purportedly “one-time” levy into a permanent arrangement through the enactment of the law “On Tax on Excess Profits from Previous Years”.
The Ministry of Finance will transform the “one-time” levy into a permanent arrangement
Towards the end of April, as costs continued to rise, the Ministry of Finance turned its attention to the oil industry. Without much prior preparation, Siluanov announced a significant change in the mechanism that regulated domestic fuel prices by utilizing market practices. The damping payments, which provide compensation to oil refineries from the state now that the export prices of gasoline and diesel are high, will be halved starting from July. And price stability at gas stations would be ensured by the Federal Antimonopoly Service instead of competition. The Ministry of Finance estimated that this innovation would save approximately 30 billion rubles ($357 million) for the budget each month. Amidst such hasty actions, officials' assurances that the tax system would remain unchanged appear to be empty words. While the official tax rates might not be altered, the market perceives that authorities can still take as much money as they deem necessary, and the manner in which profits will be flowing into the budget doesn't matter much.
The authorities referred to this measure as a “one-time” windfall tax, which traditionally implies levying excessive profits accumulated over a specific period from a particular company or industry. However, unlike windfall taxes occasionally employed in market economies (although often contentious), the proposed collection of funds is not based on industry but on the existence of greater profits, essentially targeting the ability to adapt during a crisis. Furthermore, a windfall tax is typically intended to rectify income disparities within industries or prevent the excessive withdrawal of profits by private individuals. In Russia's case, neither of these problems is effectively addressed. It is impossible to correct imbalances by collecting funds indiscriminately from all businesses, and under the current circumstances, businesses already face challenges in retaining funds within the country, thereby exacerbating the constraints on investment opportunities. This tax bears a striking resemblance to “protection money,” with even the initial references to “voluntary” payments coinciding. The only notable difference is that this terminology from the gangster era of the 1990s is hardly applicable to a functioning market economy.
Achievements fit propaganda
Nevertheless, it is evident that the government does not attempt to hide the intentions behind the levy. Siluanov extensively outlined its purposes in his speech at the Union of Entrepreneurs Congress in mid-March. According to him, the collected funds will be allocated for various sectors such as infrastructure, road construction, education, healthcare, and the salaries of public servants. Essentially, the intended use encompasses a wide range of areas without any specific focus. Furthermore, the minister hinted that no expenses should be spared. Undoubtedly, money is necessary as the Kremlin's efforts to instill in Russians a willingness to sacrifice for a righteous cause and historical correctness, while simultaneously tightening their belts, have not yielded significant success. There is still a lack of queues at military recruitment centers, and acts of patriotism mainly occur under orders from superiors. Hence, the government resorts to the proven Soviet method of reassuring citizens that life is continuously improving and that the West is gradually declining and becoming poorer.
The government resorts to the proven Soviet method of reassuring citizens that life is continuously improving and that the West is gradually declining and becoming poorer
The authorities' claims of success, however, raise doubts. In early May, Rosstat declared that the poverty rate in Russia had reached a historic low. According to the latest figures, 14.3 million Russians, accounting for 9.8% of the population, were living below the poverty line in 2022. However, the ministry acknowledges that this outcome was achieved through targeted social support, specifically through social payments that reduced income inequality from 15.2 times in 2021 to 13.8 times. There are concerns about the methodology used for these calculations, but if the data is accurate, it primarily indicates a departure from market principles. Reducing poverty in the face of a significant GDP decline (officially reported at 2.1%) is implausible without significant government intervention in the economy. Another source of pride in the Kremlin is the remarkably low level of unemployment. In his address to the Federal Assembly in February, Putin expressed satisfaction, stating, “Today, amidst great difficulties from all sides, our labor market has become more favorable than before. Remember, before the pandemic, we had an unemployment rate of 4.7%? Now it stands at 3.7%, a historic low.”
The legitimacy of such an achievement is further questioned, particularly due to emigration and the mobilization of workers, which the government itself cautiously acknowledges. The Minister of Economic Development, Maxim Reshetnikov, admitted at a forum supporting small and medium-sized businesses that entrepreneurs will have to navigate a challenging and complex labor market. Their competition for skilled workers with large corporations will intensify, inevitably impacting the growth of enterprises. The Central Bank takes a more assertive stance in its assessments. Elvira Nabiullina, the head of the Central Bank, explicitly states that when unemployment is excessively low, it leads to higher wages without a corresponding increase in labor productivity, resulting in increased costs and slower economic growth. In simpler terms, businesses consume profits and miss out on opportunities for development. Nabiullina herself noted that this process would eventually lead to higher inflation.
While Putin boasts of record-low unemployment, business complains about the lack of skilled personnel
“Increased labor shortages are causing companies' labor costs to rise. This trend is particularly evident in manufacturing, transportation, logistics, and construction sectors. If wages continue to outpace labor productivity, it could result in further price increases due to higher business expenses,” Nabiullina said in late 2022. Since then, the situation has further deteriorated.
Meanwhile, businesses themselves are voicing concerns about the shortage of employees. Engineers are particularly scarce, and manufacturing and agricultural industries are the most affected by the labor shortage. While experts from the Central Bank highlight the negative impact of artificially supporting employment in industries with declining demand, Putin emphasizes the preservation of jobs as one of the main objectives for the Russian automotive industry. It is evident which path the government leans towards and which is closer to its approach - the market or the USSR.
The issue of rising tariffs in Western countries also remains a focal point of Russian propaganda. Pro-Kremlin media outlets highlight the difficulties faced by ordinary Europeans due to soaring gas and electricity prices, while drawing comparisons to the situation in Russia where payment increases are claimed to be under control. However, they conveniently omit the fact that this success is not indicative of economic growth but rather the transfer of additional costs onto businesses, contrary to their interests.
The case of Gazprom serves as a striking example. In 2021, the company achieved significant sales on the domestic market, with revenues exceeding a trillion rubles from selling 274 billion cubic meters of gas. Simultaneously, Gazprom sold 227.9 billion cubic meters of gas to non-CIS countries, including 174.3 billion cubic meters to Europe, generating net proceeds of over 4 trillion rubles. However, in 2023, gas supplies to Europe are projected to decrease threefold compared to that period, and prices have been declining in the first half of the year. With the additional burden of paying an extra 50 billion rubles to the budget each month, Gazprom now faces the challenge of compensating for the substantial income shortfall, which constitutes a significant portion of its revenue.
The domestic market becomes the sole source of funds for Gazprom, as other revenue streams decline. Pavel Zavalny, head of the Duma Committee on Energy, reassures that the increase in tariffs will not burden the population, as all costs will be borne by industrial enterprises. However, increasing domestic demand requires investments in gasification and upgrading thermal power plants, which necessitates funding. All previous attempt to locate them failed both in the USSR and in Russia. The source of these funds remains uncertain, as Gazprom's revenues from hydrocarbon sales to Europe diminish. Therefore, the burden falls on the industrial plants.
Similar treatment is observed in the electricity sector. Tariffs for commercial consumers in the Far East have risen by 1.5 times since the beginning of the year, leading to outrage among small and medium-sized businesses, who seek justice from the prosecutor's office. Experts highlight the disastrous impact of such prices on major investment projects. Despite this, RusHydro emphasizes that operations in the region remain unprofitable even with the new tariffs. Additionally, as of May 1, the government raised tariffs for electricity transmission through the unified national electric grid until December 31, 2023, justifying the indexation by the need to finance large-scale infrastructure projects. Although in both instances the population may not directly notice the price increase as the burden is placed solely on businesses, they are likely to pass on the costs to Russian citizens.
Citizens are told to chip in and trust the government again
The chosen approach has led to Rosstat reporting a marginal increase in real disposable income, excluding inflation and mandatory payments, by 0.1% in the first quarter of 2023 compared to the same period last year. The fourth quarter of 2022 also saw a growth of 1.5%. Real pensions, adjusted for inflation, experienced a 5.4% increase in the first quarter. In January and February, real wages rose by 1.7% (data for the entire quarter is yet to be released), and the Ministry of Economic Development predicts that by the end of the year, the growth will reach 5.4%, the highest rate since 2018. However, according to Rosstat data, retail turnover in the first quarter of 2023 saw a significant decline of 7.3% year over year, with food sales dropping by 3.4%. This suggests that despite the rise in incomes, Russians are consuming less or experiencing a decline in the quality of their food. Nevertheless, no one has demanded reporting an increase in food expenditures. The government and Rosstat seem to be fulfilling Putin's core objective of increasing citizens' incomes. Similar to the Soviet era, it is crucial to officially maintain or improve the quality of citizens' lives, as reflected in their income levels, even if temporary declines occur only briefly and accidentally.
Despite rising incomes, Russians began to consume less or experience a decline in the quality of their food
However, the government relies on the conscientiousness of citizens to voluntarily return a portion of their income. In the current circumstances, membership fees have been replaced by mandatory military assistance fees, constantly reported by state employees and workers in state-owned enterprises. Under the “voluntary-obligatory” scheme, they are required to contribute hundreds and thousands of rubles per month. These payments result in negative wage growth, but they do not have any impact on Rosstat's calculations.
Another traditional Soviet method of extracting money from the population without formally reducing wages was through government loans. Throughout the history of the USSR, a total of 60 different loan issues were introduced, but only a few managed to generate returns. Payments were often deferred, converted, and not indexed, despite currency devaluations and other economic challenges. Back in 1959, Nikita Khrushchev said in one his speeches: “Millions of people in the Soviet Union willingly agreed to defer payments on their old government loans for extended periods of 20-25 years. This remarkable fact showcases the emergence of unique character traits and moral qualities within our population, qualities that were deemed unimaginable under an exploitative [capitalist] system.”
Amid deep skepticism among Russians who were wary of lending to the government, it was not until 2017 that the government decided to reintroduce government bonds to the citizens. These government bonds, known as OFZs (federal loan bonds), were presented as a market product, offering the possibility of selling them to agent banks after one year along with accrued coupon income. Yet, since the beginning of 2023, the authorities have introduced three more questionable projects.
The first project involved zero-coupon federal loan bonds, a concept being developed by the Ministry of Finance and the Central Bank. These bonds are issued below their face value and redeemed at par, with the income being determined by market interest rate dynamics. The target audience for these bonds is people with low incomes, including those with pension savings who could potentially invest in them. Essentially, these loans can be profitable in the case of sustained economic growth, but if economic problems arise, buyers could risk losing their savings. The second idea proposed “patriotic” government bonds, reminiscent of the ones issued in the USSR after the Great Patriotic War, with repayment being deferred by the Soviet authorities for 20 years.
The third innovation, which is the most though-out, involves long-term savings and can be seen as a pension system reform, despite the government's attempt to distance itself from such comparisons. This initiative revolves around entering into a contract with a non-state pension fund (NPF) for a minimum of 15 years, with payments starting either after this period or when a man reaches the age of 60, and a woman reaches 55 years. Withdrawals without any loss of income will only be allowed in specific life situations, such as expensive medical treatment. Otherwise, even with a target inflation rate of four percent over ten years, depositors will only receive two-thirds of the requested amount.
Statistics becomes a state secret
Long-term government loans are a common market instrument used to secure funds for infrastructure development and long-term programs. However, they require accurate and comprehensive statistics more than any other financial products. A significant error at the outset could undermine the entire investment. However, the issue of data transparency has become increasingly problematic.
In March 2022, the Central Bank prohibited Russian banks from disclosing basic forms of Russian Accounting Standards (RAS) statements. Subsequently, Russian issuers were granted the right to withhold certain corporate information from public disclosure. Credit organizations were also given the right to withhold data that could impact their financial and economic activities. The Ministry of Finance has issued a warning, emphasizing the need to address this issue promptly. Without access to reliable data, analysts struggle to assess the financial health of companies, and few investors are willing to make blind investments in the stock market.
Bank of Russia Governor Elvira Nabiullina and Finance Minister Anton Siluanov
As of now, only a third of the companies in the Mosbirch Index (13 out of 37) have published their 2022 reports, primarily those operating in the extractive and raw materials sectors, which form the backbone of the Russian economy. Large companies argue that disclosing such information poses risks to national defense capabilities, as it could reveal the military's consumption of resources like metal and fuel. Consequently, there is a growing reluctance to impose stricter disclosure requirements.
In April 2022, the Federal Customs Service ceased providing detailed statistics on imports and exports, citing the need to “prevent incorrect estimations and speculation.” While the agency has resumed publishing monthly export and import statistics, it no longer includes a breakdown by commodity group or country. Experts argue that this limited data, devoid of crucial details, serves more as a tool for rhetorical reassurance rather than providing a comprehensive analysis of the economic situation. Furthermore, in August it became apparent that the anti-sanction amendments to the law on state purchases have resulted in a significant distortion of statistical data in this area. By the end of the first half of 2022, the Ministry of Finance reported a more than twofold decrease in purchases by state-owned companies, plummeting from 11.5 trillion rubles ($136.5 billion) to 5.5 trillion rubles ($65.3 billion).
In a concerning move, the State Duma in February granted the government the authority to halt the dissemination of any statistical information if deemed necessary. Given the State Duma's track record as a place where laws are often passed without thorough scrutiny, it is evident that this permission will likely be utilized. Adding to the concerns, Rosstat, the Russian statistical agency, recently blocked data on oil production, raising suspicions that Russia may not be fulfilling its obligations to reduce oil production by 500,000 barrels per day. Experts question the rationale behind such actions, as it is unlikely to deceive Russia's partners in the OPEC+ alliance, who employ alternative methods to assess production levels. However, they emphasize that these measures will further obscure the understanding of the economy, making it even more difficult to assess the situation. Consequently, this heightened opacity increases investment risks and costs.
At present, the authorities can classify any information if need be
The recent withdrawal of income declarations for civil servants from public view is perplexing, and attempts to justify it as mere laziness and reluctance to go through the trouble seem questionable. This decision lacks economic rationale and, from a social perspective, is likely to have a negative impact. It appears to reflect a broader trend of exercising authority simply “because we can.” This echoes the Soviet era, where discussing officials' property was not customary.
Anti-fake: officials' excuses contradict reality
Officials face mounting challenges in justifying the disparity between statistical data and their own statements. In late December, the head of the Ministry of Finance, Siluanov, asserted that oil sanctions had no impact on the devaluation of the ruble, attributing the decline instead to a sharp rise in imports. However, as the undeniable decrease in oil revenues emerged and President Putin demanded corrective action, Siluanov's office adopted an intriguing approach to address the growing budget deficit.
The Ministry of Finance explained the 1.6-fold surge in January expenditures compared to the same period in 2022 as a result of a “leftward” shift in payments, previously assigned to December, namely prepayments for government contracts. Siluanov himself supported this explanation. Nevertheless, operational budget data showed an increase in February expenditures, rising from 97 to 98 billion rubles per day ($1.154 billion to $1.165 billion) Siluanov evaded commenting on these dynamics, instead focusing on assurances that the deficit would normalize by year-end. At the end of the first quarter, the Ministry of Finance announced that budget revenues were beginning to catch up with expenses, and the deficit had even slightly decreased from February to reach 2.4 trillion rubles ($28.6 billion) against the annual target of 2.9 trillion rubles ($34.5 billion). However, by May, the deficit had surpassed the annual target, and is currently estimated at 3.4 trillion rubles ($40.5 billion).
Notably, the significantly reduced expenditures in March, amounting to 75 billion rubles ($892 million) per day, appear to have been a mere façade aimed at creating a favorable impression. In April, expenditures skyrocketed to a record 105 billion rubles ($1.25 billion) per day. These developments strongly suggest that Siluanov's explanations in February were fabricated. This is further substantiated by the decline in the volume of government contracts concluded in the first quarter, dropping from 2.91 trillion rubles ($34.6 billion) in 2022 to 2.46 trillion rubles ($29.3 billion) in 2023.
Moscow Stock Exchange becomes a hub for speculative trading
Exchange trading plays a crucial role in a market economy, facilitating the flow of capital and enabling promising enterprises to raise funds quickly. However, in modern Russia, the stock exchange is gradually losing its intended functions.
Restrictions on capital flows, including the prohibition on fund withdrawals by investors from unfriendly nations, have had a severe impact on company capitalization. The market is effectively closed to Western investors, while other investors find limited opportunities, thereby diminishing the potential for profit in top-tier companies. This is evident in the Moscow Stock Exchange index, which plummeted by half to 2500 points following the resumption of trading in March 2022. In the autumn of 2022, the index dropped below 2000 points but has since recovered. As of the beginning of May 2023, it has stabilized at the March 2022 level.
Consequently, the stock exchange is increasingly becoming a hub for speculative trading. The trading volume of lower-tier stock, often referred to as “junk” shares, has experienced exponential growth in recent times, with monetary transactions surging from 18-33 billion rubles ($214-393 million) in October-November to 110-164 billion ($1.3-2 billion) in February. Experts say that professional traders manipulate the situation by artificially inflating demand and subsequently withdrawing funds from inexperienced retail investors.
Moscow Exchange is increasingly being used for speculative trading
During a brief period from February 1 to February 8, Red October confectionary stock experienced a threefold increase in price, only to plummet by half within the next two days. Similarly, stock of the coal producer Belon rose more than twofold in a single day, followed by a drop of over one and a half times the following day. In response to such scenarios, the Central Bank and Moscow Stock Exchange devised measures at the end of April to address these issues, primarily focusing on technical aspects. However, the fact that manual regulation is being implemented indicates that speculative gambling, where investors can potentially profit by making correct buying and selling decisions, is becoming more enticing than traditional investment.
Speculators also possess the ability to manipulate the exchange rate of the ruble. On March 16, between 12:25 and 12:30, the dollar rate at the Moscow Exchange surged by 1.2 rubles, recovering its former position soon thereafter. This situation was connected to the execution of futures contracts and provided an opportunity for traders to earn additional profits. If genuine trading activity were present on the exchange, such actions would likely result in financial losses for these players. Presently, the exchange lacks the capability to enhance predictability in the ruble exchange rate. In April, the Russian currency unexpectedly weakened despite a sharp rise in oil prices, whereas in May, when prices began to decline, the ruble strengthened instead. The reasons behind these fluctuations were attributed to factors such as the scarcity of yuan for banks, currency purchases for payments to Shell for the assets in the Far East, and the closure of correspondent accounts of Russian banks by the Austrian Raiffeisen Bank. In essence, these are elements detached from fundamental factors and thus remain unpredictable for forecasting purposes.
The concept of “import substitution,” which gained prominence after the initial wave of sanctions, faced significant criticism for being largely illusory. While lofty rhetoric was employed, funds were allocated, but the promised technological advancements failed to materialize. In 2022, the need to earnestly consider alternatives to Western developments emerged, revealing an unintended consequence that steered away from market-oriented practices and towards Soviet-style approaches.
In a market economy, enterprises strive to expand their markets in order to lower production and service costs. The focus lies in introducing products on a global scale rather than solely catering to the needs of the state. In contrast, the Soviet system, akin to many non-democratic states, relied on self-sufficiency (autarky) with minimal reliance on the external world. Consequently, the country primarily reproduced a basic range of goods and services for domestic consumption. As these goods could not withstand competition from market-driven products, they could only be exported to developing countries, often necessitating loans for payment. It is important to note that this situation does not carry an ideological bias. However, attempting to develop all technologies simultaneously inevitably leads to a focus on the domestic market. This hinders scalability, resulting in either expensive or low-quality goods. The USSR fell into this trap, and Russia is heading in a similar direction.
Concentrating solely on the domestic market hinders the ability to achieve cost reductions, resulting in goods that are either too expensive or of inferior quality
In late March, President Putin acknowledged that the domestic market is emerging as a pivotal factor in driving economic growth. This signifies a shift where companies, excluding raw materials and energy resources, prioritize domestic sales and focus on developing technology and production to meet domestic demand. In contrast, China, often cited as an example by Russian officials and supporters of the current government, followed a different path to technological advancement. China initially secured a position in premium American and European markets, leveraging technology, and only later turned its attention to the domestic market as a growth catalyst. However, Russia faces severe limitations in pursuing a similar approach, as Africa and Asia are unlikely to provide sufficient investment for technology development.
Consequently, the burden falls on the state to provide financial support while protecting against competition from foreign counterparts producing cheaper and higher-quality goods, even if only China remains as a major competitor. In light of this, the business sector's call for the return of state planning may appear more reasonable. According to a survey conducted by the State University of Management on behalf of the Ministry of Education and Science, 78.5% of managers from medium and large industrial enterprises desire the reinstatement of long-term strategies, including five-year plans. Such a request essentially transfers risks to the state, where it is the state that determines the demand for products and funds their production. Theoretically, this approach aims to reduce costs. However, in practice, when the economy is driven by ideological objectives, the opposite outcome is often achieved.
The current development strategies face challenges as they are built on ambitious goals and yet-to-be-achieved successes. One such example is President Putin's directive to exclusively use Russian-made software at critical information infrastructure facilities starting in 2025, and to transition to domestically produced software and hardware complexes from 2026. However, the fuel and energy sector has expressed concerns about the technical feasibility of implementing these plans, as well as the substantial costs involved in the transition. While Russia aims for digital sovereignty, state-owned companies are grappling with financial constraints that hinder their ability to pay software developers, leading to calls for limiting price increases on software. Consequently, IT companies may be forced to cut costs, potentially compromising the quality of their products.
Fishing companies are also facing difficulties, with shipbuilding schedules disrupted by technological obstacles that cannot be resolved solely through financial injections. In the aviation industry, promises have been made to replace Boeing and Airbus with yet-to-be-introduced airliners. However, even the restoration of Soviet aircraft models such as the Tu-204 and Tu-214 has encountered difficulties, and the stable production of the SSJ-100 has struggled for over a decade due to persistent problems with repairs and parts delivery. Additionally, authorities are pinning their hopes on the Power of Siberia-2 gas pipeline, despite the absence of a signed contract. The prevailing belief is that oil prices will inevitably rise, and if they fail to do so, companies will still be obligated to pay as if they had risen. This logic stems from the law on the maximum Urals to Brent discount.
Similar to the Soviet era, the government is painting an idealized vision of the future that is often unattainable from a technical standpoint, based on which resources are being allocated on a residual principle. After all, Putin demands that the incomes of the population must grow.
No plan B
Acknowledging the professionalism of economic officials overlooks the challenge they face in learning to reconcile their market economy expertise with the ideological remnants of the Soviet era. There is a lack of suitable mentors in this regard. Even the most ardent market proponents must prioritize social benefits by reducing business income and curtailing investments. In the absence of the ability to produce quality goods, the response is to restrict imports, while increasing unemployment and poverty becomes unacceptable. Commercial enterprises are compelled to devise unrealistic plans and reports as their only hope for securing funding from bureaucrats, who maintain their positions through grandiose plans.
It is challenging to reconcile market economy expertise with the ideological remnants of the Soviet era
In an attempt to address the shortage of workers in the production sector, a potential solution of career assignment is being considered, which involves compelling students to work in their field of study for at least three years, determined by a special commission. This proposal has emerged in the Parliament of Tatarstan, amidst complaints from Nikolai Patrushev, Secretary of the Security Council of Russia, regarding the scarcity of engineers. However, funding for such initiatives, which is not forthcoming from wealthy nations and unattainable for poorer countries, will ultimately need to be sourced from citizens.
The liquid portion of the National Welfare Fund currently stands at less than seven trillion rubles ($83.3 billion). If the budget deficit continues to increase at its present pace, it is projected to surpass the value of the National Welfare Fund by the end of the third quarter. This signifies that the Fund alone will not suffice to navigate through these “temporary difficulties” without incurring losses. The question remains as to how these losses will be concealed and explained to the public – whether through printing more money, leading to inflation and criminal charges against businessmen, as practiced by Lukashenko, or by increasing fees imposed on businesses.
Thus, the endeavor to merge Soviet ideological principles with a market economy is facing increasing obstacles. Similar problems are being tackled using familiar methods from the past, with the hope that this time they will yield success through manipulation of reality. It is as if the previous failure of the “Kyiv in Three Days” plan has been completely disregarded.