2023-08-31 10:44:34
The swing in the value of the Russian ruble has exposed a crack in President Vladimir Putin’s walled-in economy, a vulnerability that the Kremlin’s economic team quickly patched up, allowing the currency to regain its footing, at least for now.
Yet the patch—an emergency interest rate hike—cannot hide the dilemma at the heart of the Russian economy: how to finance the military without undermining the national currency or overheating the economy with politically corrosive inflation. embarrassing.
Life in Moscow presents a facade of normalcy despite extensive sanctions linked to the war in Ukraine and the exit of hundreds of big-name Western companies.
Outdoor tables at restaurants and bars along the popular Bolshaya Nikitskaya street were packed on a recent evening with well-dressed residents enjoying the balmy August weather. Loud music from DJs blared from the patio of a nearby restaurant. At first glance, the malls haven’t changed, but where the Zara and H&M once stood, shoppers now find the new clothing brands Maag and Vilet.
And the Krunchy Dream donut shop might easily be mistaken for Krispy Kreme’s, which once stood in its place at the Evropeisky mall; even their brand typography is similar. In the absence of Apple Pay, banks provide stickers with a chip that allows mobile payment.
Unemployment and growth in Russia
Key economic indicators are also in normal ranges. Unemployment is low, economic growth is better than many expected, and inflation is moderate by Russian standards — 4% in July — though tough for those on limited incomes.
People in Moscow — where criticism of the military can carry prison terms, so some provided only their first names — expressed a mixture of unease and resignation.
Vladimir Cheremesyev, a 68-year-old retiree, recalled that the problems following the breakup of the Soviet Union in 1991 were not reflected until several years later.
“I think even though I am retired and don’t have a lot of income, I still don’t get much of it,” Cheremesyev said, “but there is anxiety: sometimes my blood pressure goes up.”
Others pointed out that prices are constantly changing.
what some say
Yuliana, a 38-year-old businesswoman, was more concerned: “Our situation has deteriorated a lot, it’s not good… It won’t end today or tomorrow, nor the day following tomorrow. I think more than one generation will pay for this story.” Businesses that need supplies turn to alternatives.
Andrei Lavrov, owner of the Smile Atelier dental clinic, said he had to source sutures and silicone from Asia because he uses “quite a lot” of imported materials.
“But by the way, no disaster happened,” he announced. “If something is no longer supplied, it is easily replaced through parallel channels.”
Some Russian-made sutures are made of “very high-quality materials,” he said, as local industry takes over. “There is some substitution taking place.”
In any case, imports to Russia are recovering, with products arriving through nearby countries such as Kazakhstan and Armenia, thereby avoiding sanctions. Government spending on the military and on social programs distributes cash among individuals and businesses, which use part of it to purchase imported goods.
Labor shortages, stemming from people leaving the country, bolster wages, while government-subsidized mortgages help maintain real estate activity.
Some hits to the economy are evident, particularly to the auto industry, following Western automakers dumped their Russian businesses. But imports of Chinese vehicles are growing.
Travel abroad is extremely expensive and limited by bans on certain countries providing Russians with visas, and some airlines on serving them, though the wealthy get by as usual, and those with modest incomes still mightn’t. pay.
As for pressure on the ruble, Russia, one of the world’s largest oil suppliers, earns less from the sale of its crude because of Western sanctions. That is reducing the country’s trade surplus with the rest of the planet because Russian citizens and companies are buying more goods from abroad.
Earning more from exports than what is spent on imports tends to support the ruble. While the shrinking trade surplus has led the currency to steadily lose ground, Moscow has benefited because a weaker exchange rate actually helps the government pay its bills.
This is because the dollars earned from oil can be exchanged for a larger amount of rubles to spend on government agencies and workers’ salaries and pensions.
But the Russian currency fell too far for the Kremlin’s liking, below 100 rubles to the dollar on August 14, a psychologically important level. That prompted the central bank to carry out a significant emergency increase of 3.5 percentage points in the interest rate, with the aim of cooling local demand for imports. The currency rose to 92 rubles to the dollar in the days following the rate increase, but has since steadily fallen; on Wednesday it was trading at 96 to the dollar.
While weaker than last year’s levels of around 60 rubles to the dollar, this lower exchange rate is still not a crisis, if a free fall can be avoided.
sanctions on Russia
The Kremlin has worked to shield the economy from sanctions following it annexed Ukraine’s Crimean peninsula in 2014. It also transferred food production to local companies by banning imports from the European Union, and pressured manufacturers to source locally.
Thanks to oil revenues, the government has negligible debt and robust reserves, although regarding half of those reserves have been frozen due to sanctions.
In the longer term, however, the Russian economy faces “slow wear” under the pressure of sanctions and Putin’s war spending, said Robin Brooks, chief economist at the Institute of International Finance, a global financial industry association. .
“The dilemma is, on the one hand, you have to spend a lot of money: fighting a war is extremely expensive,” Brooks explained. “How do you try to bridge the gap between the need for cash and rising interest rates to keep things from spiraling out of control? In my opinion, there is no adequate solution.”
Russian oil faces Western bans and a price cap that Group of Seven democracies imposed on sales to other nations. The G7 might “make this choice much more difficult for Putin” by lowering the maximum price from $60 to $50, which would reduce Russia’s oil profits, Brooks added.
That would “put even more pressure on the ruble, put more pressure on Russia’s central bank to raise interest rates, and make that choice much more difficult,” he concluded.
In the short term, the fall of the ruble “is not a sign that Russia is regarding to suffer a major financial crisis,” says Chris Weafer, managing director and analyst on the Russian economy at consultancy Macro Advisory Partners.
Without foreign investment in the currency, the Kremlin can influence the exchange rate simply by telling state-controlled exporters when to sell foreign currency for rubles, Weafer explained. On top of that, Russian oil prices have increased recently, reducing the discounts it was able to offer its customers in India and China.
Raising interest rates to boost the ruble “strangles the private economy — or the part of the economy that is not related to the war and defense industries — so that there are enough resources left over for the war to continue,” Janis said. Kluge, an expert on the Russian economy at the German Institute for International and Security Affairs in Berlin.
“It is clear that the government is giving priority to the war over the welfare of homes,” he said.
In the longer term, Putin’s decisions will erode economic growth and put more prolonged pressure on the ruble, Kluge added. Without the foreign investment needed to make complex goods, Russia itself will produce less than it needs and import more.
“And this will mean that, in the future, Russian citizens will not be able to afford the same level, the same lifestyle as in previous years,” Kluge said.
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