Forecast from a former minister: the ruble will weaken, incomes will grow, the quality of goods will fall
Almost 20 months ago, the Russian economy was bloodily torn out of its familiar global environment and I found myself in a dark forest. Wandering in the darkness of these sanctions “circles of hell”, having irretrievably lost the markets of Europe and the USA, hundreds of billions of dollars of its own gold and foreign exchange reserves and much more, it eventually melted into something qualitatively different. We talked about the essence of these metamorphoses with the former Minister of Economic Development (from June 2013 to November 2016), and now the chief researcher of the Economic Policy Foundation, Doctor of Economic Sciences Alexey Ulyukaev.
Alexey Ulyukaev.
— I believe that this is a systemic transformation. Of course, if we take certain time periods in 2022, we can talk about a recession—a decline that continues for more than two quarters in a row. Or about a rise in 2023, based on statistics. But manipulation of these concepts is not very informative. In terms of content, we are dealing precisely with systemic transformation. This is the transition of a system from one state of stable equilibrium to another state of stable equilibrium. The economy is becoming double-circuit, which is always a sign of a transformational transition. For example, after the October Revolution of 2017, the market economy was replaced by an administrative one, but in the early 1920s the NEP coexisted in parallel with the state economy. And these were two economic contours.
Then, in the late 1980s — early 1990s, the double-circuit model emerged during the reverse transition — from an administrative economy to a market economy. And today in Russia an economy has taken shape with obvious features of a mobilization one, and it interacts in a certain way with the one that remained in the previous, civil format.
— Civil society is characterized by the relationship between different sectors and the exchange of results of their activities. Traditionally, according to Marxist terminology, the economy is divided into two sectors: the production of capital goods and the production of consumer goods. There is an exchange of goods between them. For example, a tractor came from the first sector to the second, and with its help they produced potatoes, which were bought for the salary received in the first sector. But in the case of a mobilization economy, there is no such interchange. There, in the sector that can very loosely be called the production of means of production, specific means are created: tanks, guns, airplanes. Military goods are coming from the civilian sector, and wages are being sold. Military equipment goes beyond the classical economic economy and social sphere and is used outside them. And this gap in the exchange of goods between the two sectors, civil and mobilization, is a characteristic feature of a double-circuit economy. The consequence of this is an imbalance of supply and demand in the market for consumer goods and services: there is no mass of goods corresponding to the income of those employed in the mobilization sector. This creates additional inflationary pressure.
— The second element of double-circuiting is what happens in foreign trade and the balance of payments. In a normal market economy, the situation is determined by the difference between exports and imports of goods (the foreign trade balance, which can be positive or negative). This difference, which has traditionally been highly positive in the Russian Federation, is covered by a corresponding increase in the foreign exchange reserves of business, the population and the state represented by the Central Bank. The balance sheet is served by the latter, and this part is constantly growing. This means that an exporter who sold his products to India and received payment in Indian rupees cannot return this revenue to the country in the normal way in order to exchange it for rubles. And he needs to cover his internal costs, pay taxes, pay workers, and purchase the necessary raw materials. Or sell it on the foreign exchange market to an importer who has a demand for some imported goods. Thus, balance of payments statistics must be maintained in two different circuits: trade in freely convertible currencies must be taken into account separately, and trade in other currencies separately. Moreover, each of the currencies is a separate segment, and not part of a single set. That is, trade for rupees and trade for UAE dirhams do not correspond with each other in the same way as trade for rupees and trade for dollars. There is a break in Marx’s classic formula “commodity — money — commodity”.
— Indian partners say: “You can use the rupees in your bank account in India to invest in our economy.” However, history will repeat itself at each subsequent redistribution: let’s say you invested money in production, received goods, sold them, received revenue in rupees. And there is nothing else you can do with it except invest again. It turns out to be such a multi-layered investment nesting doll, and at the end there is no motivation. Of course, there are technical ways out of any situation, business learns to find them; the same Indian rupees can be converted in a certain way into rubles, even into dollars and euros. It will just cost some money. We are talking about additional transaction costs that worsen business conditions.
Thus, in the foreign trade sphere, a structural imbalance is formed in the currency received from exports and the currency necessary to pay for imports. This provokes additional devaluation pressure.
— Yes, another global change concerns the workforce. Over the past year and a half, a large number of personnel have relocated and left the jurisdiction of the Russian Federation; purely statistically, they have been replaced by migrants from Central Asian countries. But correction is needed here, since these personnel differ greatly from each other in their parameters: education, professional qualifications, demand, and so on. For each category, it is necessary to keep separate records, highlighting these two contours: one meets the requirements of the 21st century economy, the second does not quite. Here there is an imbalance between the need for modern jobs and the ability to fill them with appropriate specialists.
For the correctness and comparability of statistics, calculations on GDP, trade and payments balance, and labor resources should be carried out taking into account their double-circuit nature.
— The too short time distance does not allow us to evaluate the relationship. It is clear that there are losses. In particular, they relate to technological aspects: the exchange of technologies in the form of patents, licenses, know-how, the exchange of intellectual and production experience, the exchange of goods and services of modern high technologies are disrupted. The standards associated with their maintenance and operation have been violated. Relevant markets for exports and imports have been lost. They are partially replaced by other markets, primarily through parallel import mechanisms. But, as a rule, any analogue is of lower quality, worse in consumer and operational properties than the original product or service. As for acquisitions… Probably, any import substitution is partly an acquisition. New jobs are created, conditions for domestic producers are improved, which allows for higher financial results. However, this result is always achieved at the expense of reduced competitiveness. You win not because of low costs and better value for money, but because the market is cleared of competitors. In the short term, your winnings are more noticeable, and in the long term, your losses are more noticeable.
“Sanctions are nothing new in world history. They have been accepted before and will continue to be accepted. This is a classic confrontation between sword and shield: the first is looking for a weak point, the second is trying to close all potential vulnerabilities. In the case of Russia, we see the search for these pain points, the directions of attacks, and the building of defense. I would divide the effects of sanctions pressure into short-term and long-term. Short-term ones are associated primarily with changes in the balance of payments. That is, with the freezing of Russian financial assets, with restrictions on the movement of capital, on exports and imports, on payments and settlements.
In 2022, these sanctions practically did not work: despite the measures implemented by the West, the balance of trade and payments remained very high, the supply of currency dominated over demand. The exchange rate of the ruble against freely convertible currencies showed amazing dynamics, strengthening by the middle of last year to the level of 51 per dollar and 55 per euro. But already in the winter of 2023, after price ceilings for Russian oil, petroleum products and gas came into force, the ratio of imports and exports changed sharply not in favor of the latter. This was also facilitated by parallel import mechanisms, which allowed participants in foreign trade activities to generally adapt to import restrictions. As a result, the balance of payments decreased greatly, and in the circuit of convertible currencies it practically went to zero. All this together led to the fact that by the end of this summer the dollar and euro exchange rates reached three-digit values, exceeding the psychologically significant mark of 100 and accelerating inflation.
— Today, inflation in annual terms is 5.84%, and there is no doubt that by the end of the year it will exceed the level of 7%, or even 8%. The situation forces the Bank of Russia to increase the key rate. Over the past few months, this has been done three times: in July to 8.5% per annum, in August immediately to 12%, in September to 13%. It is easy to assume that this is not the last value. Accordingly, there are negative consequences for lending, both for consumer lending (which now largely supports effective demand) and for industrial lending. Problems arise in both the economic and social spheres. On the other hand, the inhibition and freezing of technological connections will result in a technological lag in the long term, which will increase year by year. Yes, it is possible to adapt to these changes. We know this from the example of countries such as Iran, which have been under the burden of sanctions for much longer than Russia. But, again, this is always associated with a certain fee, with costs — a decrease in the quality of the technological level of production. These consequences are only now beginning to emerge.
— The main factor is the sanctions regime, which leads to a decrease in the cost of Russian exports, primarily oil and gas. Gas supplies have decreased significantly, and to Europe (until recently our main market) by an order of magnitude. To a lesser extent, this applies to oil and petroleum products, and to an even lesser extent to fertilizers, which are not subject to sanctions. The next point: the situation with payments and settlements, or more precisely with foreign currency earnings, which have to be cleared of low-liquid components. Plus persistent capital outflow. Taken together, this creates serious pressure on the exchange rate. Meanwhile, exchange rate formation in Russia remains market-based: the Central Bank does not resort to massive foreign exchange interventions and does not adhere to the target for the level of the ruble exchange rate relative to other currencies. The actual devaluation that took place in the summer (it cannot be reversed) will improve conditions for Russian exporters and worsen conditions for importers. The dynamics of the balance of payments will be kept from going into negative values, but only for some time. In principle, as long as there is a shortage of freely convertible currency on the market, the ruble will continue to weaken.
— I think that the Bank of Russia will not resort to classical methods of currency regulation. They would be counterproductive because they tend to produce short-term results that are then replaced by the exact opposite effect. Let's say you have introduced the mandatory sale of foreign currency earnings in one format or another. As a result, more foreign currency will flow into the domestic market, but participants in export-import transactions will lose the motivation to earn it. Rather, we will talk about negotiating with exporters on the sale of foreign currency earnings, refraining from legally formalized demands.
— It all depends on the time horizon. If we talk about a short period, supporters of the first position are right: we have adapted to new circumstances. If it’s long-term, then the second one. The economy faces additional challenges related, in particular, to the imbalances mentioned above. Today, the Russian economy has two main drivers: firstly, mobilization, when the demand comes from the defense industry, and secondly, consumer demand. Investment demand from private business and net exports, which are faced with many obstacles related to sanctions, will not be able to play this role. Consumer demand is supported by fairly high growth rates of nominal wages, income and special payments associated with SVO, as well as consumer lending, mainly its preferential forms for mortgages and car loans. But this is not a very stable structure, as evidenced by the Central Bank’s concerns about preferential lending, which is gradually developing into restrictions.
“We are talking about making a choice under the pressure of force majeure circumstances.” If they had not existed, such a reversal would not have happened. At the same time, systemic transformation occurs too quickly for all participants to have time to adapt to it. The process is accompanied by losses and costs. These are large discounts when paying for our exports to new partners; this is what is called currency mismatch: a discrepancy between the foreign exchange earnings of exporters and the foreign exchange resource required for import operations. India, China, Turkey, and other Russian partners require discounts and deferred payments. So the situation is far from good.
— Roughly speaking, the design of budget expenditures consists of four elements: expenditures of a military mobilization nature, social payments (pension payments, benefits), other social expenditures (primarily on education and healthcare) and expenditures to support the economy. It is clear that determining the parameters of the first component is not within the competence of the Ministry of Finance. This is a requirement introduced by the country's political leadership.
Everything else is determined according to the residual principle and has varying degrees of security. Here priority is given to social payments: pensions and benefits. There is a legal requirement for indexing these parameters, which is unquestioningly fulfilled. And although the share of military spending in the budget for the first time exceeded the share of social spending, the latter is growing and will continue to grow. But the other two components are not protected to the same extent. And we see that spending on both education and healthcare is already being reduced. As for expenditures under the “National Economy” item, their reduction is due not only to budgetary necessity, but also to the fact that the government fears overheating of markets, an increase in non-payments for loan servicing, and destabilization of the financial system.
< p>— We are facing a rather long period of high inflation: 7–10% per year. Nevertheless, the system of indexation of wages and social benefits will work. This means that both nominal (excluding inflation) and real disposable incomes of the population will continue to grow: the former quite noticeably, the latter at a very slow pace. At the same time, the consumer market as such will change significantly. There will be further simplification and deterioration in the price-quality ratio of goods and services presented on it, even with a statistically recorded increase in income.