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OPINION

Everything goes according to Gosplan. How the orgy of state regulation is deepening the economic crisis

The government tries to cope with the total crisis in the economy through prohibitions, strict regulation and subsidies. Even the February results show that the money printing press has started working with an intensity unseen in years, and prices are naturally rising. The factories are shutting down; the deficit is spreading in every direction. According to economist Valery Kizilov, incompetent government regulation may finally bring down the already shaky economy.

Many compatriots still believe that the changes in the economy caused by the military actions, sanctions, and decisions of the Russian authorities will mostly be for the better, or not for long, or will cause even more turmoil in the West than in our country. As if in confirmation of these hopes, the official ruble exchange rate quickly recovered between March 11 and March 31 - from 120 rubles per dollar to 84, and initially grey market prices corresponded to the change. In addition, on March 24 trading on the Moscow Stock Exchange resumed, and stock prices were on average 6% higher than before the closure on February 25. However, the decline in production, soaring prices, degradation of transport and the number of the government's frantic destructive measures are growing, and it is this growth that will determine the future - both in the short- and medium-term.


A run to nowhere

Initially, the recession, and in some instances production shutdown, was triggered by a shortage of imported components. This mechanism is well illustrated by the example of AvtoVAZ, which announced on March 3 it was «taking a break» because of the lack of components. Since then, normal work has not resumed at the company, which controls the Togliatti and Izhevsk plants. It was only announced on March 10 that the Granta and Niva assembly lines would return to work for three days from March 16-18, while the B0 line, where foreign cars are assembled, and the Izhevsk plant will remain idle. During the next work week, from March 21 to 25, in contrast, the Granta and Niva lines stood idle, while the B0 line and Lada Izhevsk were working, but not for a full week, only on Monday and Tuesday. The idle staff was paid only two-thirds of their wages.

The difficulties did not end there. The starting date of the three-week annual leave for all AvtoVAZ employees has been postponed from July 25 to April 4 - the company is hoping to replenish its inventory of parts during the leave. Then the French group Renault, Avtovaz's majority shareholder with a 67.6% stake, halted production at its Moscow plant and said it was «taking the necessary measures to comply with the international sanctions» and «assessing the available options» regarding its VAZ assets.

For Avtovaz this means severing its technological ties with its parent company, dropping out of Renault's unified procurement system, and abandoning its plans to launch new models. Now it is planned that the Volga plant will produce the original, i.e. old, models, but it will take several months to resume the production of the original components and to obtain certification. From June they want to make the VAZ plants work four days a week, which means that production and wages will go down 25%. And what will happen between the end of April and the beginning of June is not yet clear: according to Kommersant, the Ministry of Industry and Trade expects that at the end of the leave on April 24 Avtovaz will resume the assembly of some of the cars «in the most simplified version».

Production output and wages will drop by 25%.

KAMAZ has similar difficulties. It could lose 40% of its production volume and put 15,000 employees on idle time, Tatarstan President Minnikhanov told Putin at one of the meetings. «KAMAZ is under EU sanctions, German partner Daimler Truck refused to participate in joint production and stopped supplying components on February 28. As a result, Russia's largest truck manufacturer is curtailing production of next generation models (K5 and K4) and switching to the cheaper K3, which have «almost no imported parts,» according to plant director Sergei Kogogin. And the engines of the new Kamazes will only meet the Euro-2 environmental standard from April on, instead of the Euro-5 which has been mandatory in Russia since 2016. Here we have lost not two, but three generations of technology: the Euro-2 standard, which was in effect in the European Union from 1997 to 2001, and in Russia from 2005 to 2012, implies twice as much carbon monoxide (CO) emissions and 16 times as much particulate matter. Fuel and equipment with such characteristics have been banned in Russia for almost 10 years, and Kamaz trucks with engines of this class used to be produced at the rate of 1,000-1,500 units per year exclusively for export to Africa and Latin America. Now, the government plans, they will be legalized for the domestic market too.

The situation in the automobile industry is summarized in a letter from the metallurgical lobbyists to First Deputy Prime Minister Andrei Belousov: according to Kommersant's report, «eight out of 14 Russian auto plants have suspended their work, and the drop in production in the automobile industry could reach 50%».


«You are nobody without paper»


Other industries are also bound to cut production and reduce quality. For example, a serious crisis has arisen in the office paper market. The U.S. company Sylvamo halted operations at its SvetoCopy paper mill in Svetogorsk on March 7. The Mondi Group, headquartered in Britain and Austria, announced on March 10 that its Snegurochka paper mill in Syktyvkar was suffering a shortage of chemicals, spare parts and other critical materials. And on March 14, the Arkhangelsk Paper Mill announced that, due to a lack of imported bleaching agents, it would switch to the production of «unbleached paper of single-sided smoothness.» Not surprisingly, media monitoring showed at least a threefold increase in office paper prices in a month or even two weeks.

Monitoring showed at least a threefold increase in office paper prices

Yet, reassuring statements from highly placed officials are available in abundance and free of charge. Andrei Frolov of the Union of Timber Producers and Exporters called the news of a threefold increase in the price of paper «a fake» on March 18. On March 21, the Ministry of Industry and Trade assured that they «expect stabilization with paper supply within a week.» And when the week passed, the ministry released another statement on March 28: «The situation with the supply of paper should stabilize by mid-April.» Novosibirsk's response to the paper supply crisis was quick: the mayor is planning to switch to digital workflow, the city council asks deputies to save paper, local print shops raise their rates and prepare for a 20% shutdown, while the prosecutor's office and Federal Antimonopoly Service are scapegoating wholesale traders.


End of construction


The construction sector has its own problems. In Kazan, the demand for apartments in new buildings has fallen 47% in a month, and the developers, due to the 20-40% increase in the cost of construction materials, «aren't risking embarking on new projects.» This is quite natural, because when the Bank of Russia's base rate is 20%, the market cost of housing loans has reached 22-25% per annum, and the interest rate for reduced-rate mortgages (which used to account for 50-70% of such loans) jumped from 7% to 12%. An apartment buyer's monthly payment has grown at least 1.5 times. As a result, conventional mortgage loans at market rates have practically disappeared, but the volume of subsidized loans increased by 54% in three weeks.

Mortgage subsidies are a rapidly growing item of federal spending. In 2019, it absorbed 20 billion rubles (Accounts Chamber), in 2020 - 64 billion (same), in 2021 - 120 billion rubles. In 2022, the government is going to allocate more than 200 billion rubles for this purpose, but the calculations show that even if reduced-rate mortgage loans were no longer provided since February 1 this year, 275 billion would still be needed to subsidize the already provided loans. But they, as we have just seen, they are still being provided, and their number has increased by 54%.

There is no way to reduce this expenditure item in the next 20-30 years, as budget subsidies are critical for the already issued reduced-rate loans. Without them, either the debtors would have to sharply increase the monthly payments (which is usually impossible for a family with a mortgage), or the bank would have to suffer losses (and hence the depositors, whose money was used to finance the loan). Such a situation would be hopeless even in peacetime. Stopping the flow of reduced-rate mortgages would mean leaving the construction sector without orders, then all the suppliers will suffer, followed by their suppliers, and so on, according to the domino principle. And continuing means doubling government spending on subsidies, which is what the Finance Ministry called a «Ponzi scheme» in 2020, or a «bubble,» as the Accounts Chamber warned in 2021.

Stopping the flow of reduced-rate mortgages would mean leaving the construction sector without orders

A decrease in production and sales is observed or expected in various sectors. Metallurgists are concerned that the demand for their products in the domestic market will drop 30% in a year, exports will become unprofitable and railway tariffs will sharply increase. Telecommunications operators expect communications failures because of the lack of equipment and are asking the government for concessions through the Russian Union of Industrialists and Entrepreneurs. The Russian Grain Union points out that «the spring sowing season is subject to big risks»: the price of seeds has doubled, and «the entire market of resources for the sowing campaign has switched over to full advance payment, which has never happened before». Fertilizer producers, in turn, have been deprived of the ability to export products since early March, and if it drags on, according to market participants, they «will lose most of their revenue.» And oil exports from Russia are 26% lower for the week from March 17 to 23 than for the week before, according to Bloomberg. Finally, in transportation, market players describe the situation as «chaos» and «a madhouse» - «logistics are broken.»


Record high inflation


Price hikes go hand in hand with a decline in production. From January 1 to February 24 the consumer price index rose by 1.99%, then it kept growing by nearly 2% every week after that: 2.22% from February 24 to March 4, by 2.09% from March 5 to 11, 1.93% from March 12 to 18 and 1.16% from March 19 to 25. Cabbage (16%), onions (18%), carrots (11.5%) and beets (9%) prices rose most significantly during the last reporting week. Sugar prices rose only 6.5%, although earlier they had been growing 12-13% a week for two weeks in a row.

If we look not only at the last week, but at the whole period since the beginning of the year, the total increase in consumer price index amounted to 8.91%. Cabbage, tomatoes and bananas rose in price by more than 50% during that time, whereas prices on sugar, onions, carrots and television sets rose by more than 30%. Of all the items tracked by Rosstat, vacation trips to Turkey grew the most - by 90%.

The increase in prices of utilities, accommodation in cheap hotels and resorts, gasoline and diesel fuel, poultry, eggs, pork, and cigarettes was the smallest, less than 3%. Uneven price increases create gaps in the profitability of industries and businesses, as is always the case with inflation. Or, as in this case, stagflation.

The rise in prices is driven both by a shrinking supply of goods and by growing demand for them. We have already discussed the shrinkage of supply in many examples - it has been caused by the war, foreign sanctions, domestic bans and restrictions, the rupture of economic ties, problems in supply chains, the curtailment of investment. And the growth in demand can be divided into «real» and «nominal». Real growth of the «aggregate demand» alongside a decline in the «aggregate supply» is a rather subtle thing: we are talking about eating up savings, buying on credit and other similar decisions. But a nominal growth in demand is simple: it is driven by an increase in the money supply.

The printing of money by the authorities, in the vast majority of cases, is the main reason for higher prices. However, in today's Russia, we do not yet know what role this factor plays - the Central Bank publishes money supply data once a month with a pretty big lag, and the latest publication is dated March 1. The growth of the monetary aggregate M2 (the amount of cash in circulation and account balances) was 2.1% in February 2022; in 2011-2021, the February growth of this indicator was always in the range of 0.6% - 1.6%. The cash component of the money supply grew even faster, by 6.8% in February. At the same time, it should be said that February is not a month in which the rate of operation of Gosznak's printing presses is the highest. The last year, when the mass of cash ruble (M0) was growing that fast in February, was 1995. What's next? How quickly the volume of rubles in circulation will grow is, one might say, the main intrigue of Russia's economic policy.


Government's fingers in every pie


Another important intrigue is to what extent administrative price controls will be applied. Rampant money emission and price regulation is a sure path to a widespread shortage of goods and a black market, as in the late Soviet years. And a generous emission alongside free prices means a sharp rise in prices, like in the nineties. State control of prices, without a sizable emission, also means deficit and a black market, but not everywhere, only in certain niches. It is naive to hope there will be neither of these things.

For politicians, especially when they are absorbed in fighting foreign and domestic enemies, it is unnatural to consider their own actions as a source of economic problems, such as price hikes. This is doubly true of Putin's regime figures. From their point of view, the prices of goods are going up not because the war has undermined the supply chains, and not because the volume of rubles in circulation is growing too fast, but because some enemies are jacking up prices, conspiring to monopolize markets, hiding products, speculating, manipulating, using the feverish demand to their advantage, trying to get rich on panic buying. And hence the decisions to coerce, threaten, and suppress those speculators.

Goods are becoming more expensive because some enemies are jacking up prices

Metallurgists are forced to sell their products on the domestic market at the prices recommended by the Ministry of Industry and Trade. A natural addition to this step consists of similar measures being taken against metal traders and coal suppliers. Because of the increase in the export tariffs on scrap metal, operations of this type have almost halted since the beginning of the new year. Tariffs and the profitability of railroad transportation, gas and electricity supplies had been controlled by the government before. Domestic oil prices and, since last year, grain prices have been kept at the level the government wants them at with the help of huge export tariffs. Retail bread prices have been frozen until the end of the year. Retail chains have «accepted the regulator's recommendations» and must now limit markups on vegetables, dairy products, sugar and baked goods to five percent. They are also required to ensure that these products are actually available on store shelves - apparently, officials from the Ministry of Industry and Trade are afraid the retail chains will not trade under such conditions voluntarily. That is, in fact, we are talking about a situation where a store owner is forced to do what he otherwise wouldn't.

The series of forced measures include nationalization plans and all sorts of bans. It is impossible to cover them in a short review, but one regulatory masterpiece seems to deserve special attention. From March 9 until the end of 2022, the government decree № 311 prohibits the export of several hundred types of goods from Russia – the full list has 25 pages. Various industrial equipment, wooden barrels, bicycles, vacuum cleaners, refrigerators, electric shavers, microphones and tape recorders, light bulbs, calculators, smartphones, washing machines, dirigibles and hang gliders, kid strollers and their parts, mirrors, spectacles and much more are no longer allowed to be exported even to friendly China, with the exception made only for the CIS countries, DNR, LNR, Abkhazia and South Ossetia. The government's logic, apparently, is that if these valuable items are taken out of the country, there'll be nothing to replace them with. Everybody seems to have forgotten that in the past Russia stimulated exports of manufactured goods, and large subsidies and benefits were allocated to encourage such exports as part of the programs that have yet to be canceled. But amid the turmoil of emergency measures and manual control over everything in the world, yesterday's decisions are instantly forgotten, and new ones, equally delusional, keep multiplying at a horrible rate, almost unnoticed by anyone and meeting no resistance.

And when everything collapses, there's only one thing you can be sure of - the new Gosplan leaders will not forget about themselves.

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