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Guns vs. eggs: Economist Igor Lipsits on Russia’s dismal economic results in 2023

In spite of international sanctions not working well, the Russian economy is still having a very hard time due to increased military spending and lack of investment, says Doctor of Economics Igor Lipsits. The quick cash injections that low-income people suddenly received from military government contracts or payments to mobilized soldiers was immediately spent, leading to a surge in inflation and the growth of a credit bubble. The state plans to revive the economy with huge public investments, but the authorities can only take that money from the private sector and the population: the Finance Ministry has already set its sights on Russians' deposits in commercial banks and plans to make citizens buy government bonds, both voluntarily and by force.


Throughout the year, the population was told that everything was calm and normal. By the end of the year, however, people began to suspect that things were far from normal and would remain so for a long time. InfoM, a company that surveys the population on behalf of Russia’s Central Bank, recorded a jump in inflation expectations at the end of fall last year: Russians expect prices to rise by at least 14% in 2024. People were alarmed by the realization that individual price hikes were not excesses, but a sign that Russia was on its way back to high inflation. This was a wake-up call for the Central Bank, which has raised its key interest rate to 16%. The Central Bank is trying to keep this rate above expected inflation to limit credit availability for purchases and, conversely, encourage deposits. The thinking is that this will prevent the market from seeing too much growth in “hot” money, which fuels inflation.

Some financial analysts have even suggested that 16% is not the limit, as the Central Bank may raise the key interest rate to 17% and keep it there. This is the only way to make consumer credit too expensive for the Russian people, who have been spending like crazy in recent months.

“In all segments, the growth of loan issuance in the first 9 months of 2023 exceeds the issuance in the same period of 2022 by more than 55%. The volume of mortgage loans issued amounted to RUB 962.1 billion. This is the highest recorded since records began. The figures for September 2023 are 12% higher than in August 2023 and 84.8% higher than in September 2022,” the study says.

This behavior had a reason, as the government pumped money into the economy due to military production and payments to military families. From the beginning of 2023 until September 1, the country's money supply increased by 7.72 trillion roubles (+9.4%). By September 1, the annual growth rate of cash in the economy reached 28.9%. This was its highest level since March 1, 2021, when the figure was 29.6%.

This growth in the money supply is what is driving the economy. There are experts who believe that an increase in the money supply is an automatic guarantee of economic growth, but this only works for a short period of time. After that, other factors start to hamper growth, including the inflation that this money pumping has itself created.

Now, however, money supply growth is also starting to slow. In May it (measured by the M2 aggregate, which includes the most liquid money in the country) grew by 22% year-on-year. By fall, the growth rate had gone down to 14%. In other words, the first fiscal impulse (the time when the Russian economy was put on a military track) is already fading. But it managed to trigger the acceleration of price growth and inflation expectations that the Central Bank is now trying to extinguish.

If the income of a rich person, who has been able to make ends meet for a long time, increases, they will likely deposit the increase [in a bank], buy securities or gold, and that money will not put pressure on the consumer market. And if a low-income person, a worker or a family member of a mobilized soldier, gets money, they will start to spend it before it becomes worthless — Russians have already understood inflation’s effects.

When a low-income person gets money, they start to spend it before it becomes worthless

Last year's surge in consumer demand came precisely because people started buying household appliances, cars, and taking out mortgages. This is so-called “hot” money, meaning it’s immediately available on the market — it pushes up inflation as the growth in demand outstrips the supply of goods.

What about sanctions?

The sanctions imposed on Russia have not been as effective as planned, but they are working. The Russian banking system is struggling with complicated money transfers. Some foreign companies are willing to sell non-military goods, but how will they pay for them? And they’re beginning to leave the Russian market — not because it’s forbidden outright, but because there are massive issues with withdrawing the proceeds from Russia, originally received in roubles. They eventually realize that it’s easier not to sell to Russia at all. That's how the sanctions work.

Many companies don't sell to Russia as there are massive issues with withdrawing their revenues

Russia has learned to get around the oil price ceiling — albeit in a dangerous way. It has bought close to a hundred old Greek tankers and is using them to transport crude oil. Part of the revenue from their sale is used to cover Russia's own costs of delivering the commodity. It also has to insure the deliveries on its own, as it can no longer do so in Europe. So it's impossible to say that the oil sanctions are working 100%, but they have managed to reduce Russia's income to some extent. And most importantly, Russia now has only two oil buyers: India and China. They buy more than 90% of Russia’s oil exports, which means that it’s them, not Russian oil companies, that are dictating the terms of sale.

Sanctions are a war, and wars aren’t made up of single battles — they are rather long campaigns. The West has made some mistakes, has seen them, and now the US and Europe are trying to increase the effectiveness of sanctions. For example, the hundred tankers mentioned have already been identified and the hunt for them has begun. That is probably why there are now six tankers off the coast of India that are not allowed to enter ports.

So it seems that the sanctions are going to be fine-tuned and they are going to hurt Russia more.

The egg market as a mirror image of the Russian economy

The panic in the media and among consumers over the rise in the price of chicken eggs did not come out of thin air. Inflation in Russia is partly monetary, meaning a lot of money is being injected [into the economy] from the state budget and the money supply is growing. But there is also cost inflation. There are two types of chicken: broiler chickens (raised for meat production) and laying hens. Laying hens are bred from hatching eggs, a considerable proportion of which come from abroad. Until recently, the Netherlands was Russia’s main supplier, but it has now been replaced by Turkey. The hatching eggs are brought in from other countries, the hens are bred, and they then lay the eggs that are sold in the shop. The hen itself does not reproduce. It is genetically engineered in such a way so that the importer cannot breed it at home, bringing in generations of eggs from foreign suppliers each time.

Meanwhile, the rouble is depreciating, which means that to buy hatching eggs in foreign currency, the price of eggs from laying hens must rise. The government has promised to solve this problem: Russia will be able to achieve full self-sufficiency in hatching eggs by 2024, according to Deputy Prime Minister Viktoria Abramchenko. But here’s a report from December 19, 2023: “The LLC ‘Lohmann Breeders Rus’ from the Chelyabinsk Region has received the right to import day-old chicks and hatching eggs from the United States, the EU, Brazil, Australia and Canada.”

Imported antibiotics also have to be added to the chicken feed to combat epidemics on poultry farms. Then there are special premixes and additives to improve digestibility and productivity. Add to that rising petrol and diesel prices. On top of that, people are going to war, and those left behind have to be paid more so they don't leave the poultry farm to work at the bullet factory.

Even pro-government experts agreed that the price of eggs had risen not as a result of any malicious market manipulation, but because the industry, which was already marginally profitable, couldn’t break even and had to raise prices when costs went up. And that's part of the answer to the question of whether sanctions work.

And the answer to the question of which came first — the chicken or the egg — is this: first there was the egg from the Netherlands, and now, to the chagrin of Russian poultry farmers, eggs will come from Turkey and Azerbaijan.

Dangerous mortgage growth

While the Central Bank is trying to curb inflation, the government is also playing against it, hoping to give the economy a second fiscal stimulus in 2024. This is part of the already approved budget, where the amount of revenues (and expenditures) is 22% higher than in 2023. In other words, one branch of government is trying to put out the blaze of inflation. The other is adding fuel to the fire in the form of budget allocations.


But this situation is obvious to the government officials themselves, which is why they are already trying to turn on some of the taps that have pumped additional state funds into the Russian economy. One of these taps is the programme of preferential mortgage support for the population (granting loans for the purchase of housing with government support at a below-market rate). This program was launched back in 2019, and was significantly expanded during the COVID-19 pandemic to ensure that builders were not left without work. When the pandemic ended, the support continued, creating a price bubble in the housing market that the Bank of Russia never gets tired of talking about.

Since 2020, the cost of housing in new buildings in Russia has risen by 80%, while the cost of housing on the secondary market has gone up by 51%. What is the inflation rate in Russia? 80% for new housing, and 50% for pre-owned properties. This has helped the construction sector, but it has also led to inflated prices. This is dangerous, because when developers go bankrupt, the banks that lent them money follow. And the Central Bank simply doesn’t have the means to correct the situation when it comes to mass bankruptcies: the reserves of Russia’s Deposit Insurance Agency are sufficient to put out local fires, but in case of mass bankruptcies the Bank of Russia will have to inject funds into the Agency. But then the Central Bank will resemble the Ministry of Finance and will start to increase the money supply and inflation, which it is fighting against!

That is why they are trying to deflate this bubble gently, so that it doesn’t burst with a terrible crash, leading to an economic and banking crisis. This is a new situation for the Russian property market, which until now has lived in the constant belief that Russians have bought, are buying and will continue to buy property. At any price!

The restriction of preferential mortgages is an attempt to prevent an explosion in the part of the money world connected with construction. Everyone remembers the horror stories of the Japanese housing crisis in the 1990s or the collapse of the U.S. housing market in 2008. We will soon see how the reduction of preferential mortgages will affect the construction industry and Russian banks, which have financed the launch of a huge number of construction projects.

Business pessimism

Business has a different history of relations with banks, the motto of which is: “You can't get enough loans in advance to last a lifetime.” Expensive loans are a threat to business stability. Another survey of Russian business sentiment showed that businessmen are much less optimistic about the future than they were a few months ago, when company owners and top managers spoke of a grandiose future, their plans for investment, the expansion of production, and growth in the number of employees.

Economists looked on in horror: «Don't you understand what's happening in the economy?» They replied: “It's you who don't understand. We’re people on the ground, people in the real economy, and we have a better understanding of what’s happening in Russia. There’s growth! And you, the ivory tower economists, don't understand anything.”

By the end of fall, it turned out that the “ivory tower economists” had a better understanding of the situation and the outlook. By the end of the year, the optimism of the Russian business community had noticeably faded. They spoke with increasing sadness about their bleak prospects and the problems they faced in living and developing. One of the biggest worries is the rising cost of borrowing, mentioned by 32% of the CEOs surveyed. In other words, a third of Russian business leaders say that money is so expensive that you can't get close to it. The rising cost of money is becoming a constraint on economic growth. At the same time, it’s important to understand that the Central Bank, in trying to stop inflation, is inevitably hampering economic growth and import substitution.

One third of Russian CEOs say money is so expensive that they can't get close to it

Economists have been saying this for a long time: you cannot simultaneously support the economy with fiscal injections and believe that there’ll be low inflation. It doesn't work that way. And we warned that Russia would have to choose between fighting inflation or supporting economic growth. The Central Bank has chosen to fight inflation, which means that we’ll see a slowdown in economic growth and a sharp reduction in investment. This means that the slogans about import substitution and rapid economic growth are nothing less than utopian.

We understand that people are still in ecstasy and are trying to take out loans, but the economy has already realized that loans are becoming unaffordable and will have to slow down. In other words, people are borrowing and trying to create more demand, while businesses, which are supposed to create more goods in return, have dropped their illusions about growth and have their heads in their hands. What kind of economic growth can there be with such expensive credit and investment? Better to just survive…

Clearly, the state looks down on all this and thinks there’s nothing to worry about. So what if loans are expensive, we’ll give you investment. But where will it come from? Foreign investors have left Russia and are unlikely to return. The Russian stock market has virtually collapsed — it’s now mostly small investors and individuals who still believe they can strike it rich. The top five Russian stock issuers account for almost 50% of the market's liquidity and capitalisation, while the top ten account for 65%.

Where can Russia get money?

As already mentioned, investors from the U.S. and Europe have left, and Chinese investors are simply not investing in Russia — there isn’t any available data on Chinese businesses bringing investments into the country. There are small, limited projects, namely the conversion of existing enterprises for large-scale vehicle assembly. There are reports from Kaluga that Volkswagen’s equipment is being dismantled with bolt cutters replaced with plants for assembling Chinese cars. That’s as far as China’s investment goes. So, unless Russian citizens return money from foreign jurisdictions as part of the “return of the prodigal sons” — redomiciliation — there will be no foreign investment.

And this is where an interesting — but frightening — massive state investment project comes into play. First of all, there was the idea that the state should invest in the Russian economy. Andrei Belousov, by no means a libertarian, but rather a Keynesian statesman, joined the government with that very concept in mind. Back in 2018, he had the idea that it was necessary to rip off large companies, take away their 350-500 billion roubles in “super profits” and invest them in large state programmes like national projects in order to “start the engine” of the Russian economy.

In the beginning, he wanted to clamp down on metallurgical firms and the chemical industry, which didn’t work out. But Belousov ran with his project for five years and eventually got what he wanted — a tax on “excess profits” was introduced in 2022 for all businesses with annual profits of more than a billion roubles (no one analyzed the reasons for these profits: whether they had a particularly favorable market environment or not, the concept was simple — “if you’re big, pay up”). This brought the Ministry of Finance 315 billion roubles in 2023, but it promised not to use this measure again.

All of a sudden, Finance Minister Anton Siluanov stepped out of the shadows in front of the president and told him that he wanted to extract a staggering 40 trillion roubles for state investment. An incredible figure! Where will this money come from? The answer is that the government wants to promote its supplementary pension scheme. The idea is to revive the system of voluntary pension insurance, so that citizens themselves contribute money to increase their pensions, and the state will encourage and contribute on top of their savings.

The government has decided that people have no memory of how their pension contributions were frozen, and that they can easily be tricked into falling for the same thing again. They're going to propose — again — that people should pay into pension funds, and the state will give them tax breaks in return. And all will be well!

“Finance Ministry plans on attracting 40 trillion roubles of citizen funds to invest in the economy”
“Finance Ministry plans on attracting 40 trillion roubles of citizen funds to invest in the economy”
TASS Russian News Agency (Screenshot)

When this was discussed at the beginning of the year, Siluanov said that they hoped to attract 2 million people and raise about 300 billion roubles. Meanwhile, Russia has 83 million able-bodied people. Suddenly, in December, Siluanov tells the president not 300 billion roubles, but 40 trillion roubles (without specifying how long these funds are expected to be raised). Dumbfounded experts begin to look at the hundredfold increase in the target, and a lot of intriguing things come to light.

It turns out that Siluanov means that Russians have over 40 trillion roubles deposited in commercial banks — it's these funds that the Finance Minister sees as his future haul. In other words, Siluanov has announced that the government will try to convince citizens to take these 40 trillion worth of deposits out of Russian banks and direct them to non-state pension funds, which will only be allowed to use them to buy Russian government bonds.

In my opinion, this restores the system of forced-voluntary bond redemptions. There’s no coercion or force so far — it’s voluntary, but when we’re talking about 40 trillion roubles, it’s reasonable to have doubts.

Russians have 40 billion roubles deposited in commercial banks — Finance Minister Siluanov sees these funds as his future haul

The notorious 40 trillion roubles are held by Russia’s richest citizens, which make up about 20% of the population, while the remaining 80% does not have any savings. Surveys show that the majority of the population, having lost their jobs, will be able to live on their “stash” for one to three months. To what extent are rich Russians interested in additional pension insurance? These people provide for their old age in a different way. That's why they're rich — because they're mistrustful.

Siluanov says the government will provide more state insurance for one's income than the banks: instead of 1.4 million roubles, they’ll give people 2.8 million. And some kind of personal income tax deduction — which isn't much for a serious owner of large savings. There are suspicions that if rich Russians refuse to pay, the state will force them to do so, according to a plan that appears to be in plain view — but I won’t hint at it.

This is a sign that the state is slowly moving towards withdrawing all deposits from the banks, both voluntary and forced, and pumping them into government bonds. It's becoming clear how the Kremlin is going to finance a long military campaign.

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