Russia is battling a severe Covid wave, while experiencing stagflation. The price of bread (a major staple in the Russian diet) is set to rise. According to the President of the Russian Union of Bakers Alexei Lyalin, all types of raw materials for bread production have risen several times. The price of margarine increased by 38%, packaging material – by 26%, and sugar – by 9%. There have been price hikes in nearly every sector.
The problem of inflation came up in Vladimir Putin’s annual Direct Line call-in program, when a Russian woman asked Putin Why domestically produced carrots cost 110 rubles [per kilo] and were more expensive than imported bananas? This elicited comment on social media on where did they sell carrots for 110 rubles as the going price elsewhere was 150 rubles.
Russia’s Central Bank sought to dampen inflation by raising interest rates. It did so three times already and another rise is expected in July, 2021. Inflation has not responded to these interest hikes but the higher interest rates have taken their toll on business activity. Small businesses are closing. Economist Vladislav Zhukovsky president of the pro-business Stolypin Club decries the economic conditions that are creating two Russias: the super-rich and the paupers. Russia established a sovereign wealth fund with plenty of cash on hand for a “rainy day” but the government has adhered to a policy of stashing oil profits in the fund and not opening the purse strings even though Russia is confronting a “rainy decade.” In an interview with Anna Semenets of Rosbalt Media, Zhukovsky describes the gloomy state of the Russian economy and his prescription for alleviating the pain and restoring growth. Zhukovsk’y interview follows below:
— How will the new restrictions affect the Russian economy’s state? What will be the consequences of the third coronavirus wave?
— The service sector has practically come to a halt, due to new restrictions introduced on the pass system and QR codes. Restaurants, bars and coffee shops are paralyzed. Food catering services are empty, there are long queues, clients are crowding on the verandahs. Revenues have fallen by two or ten-fold. Five or six take-out orders a day mean bankruptcy. Revenue cannot provide for a month of employees’ salaries payments. The anti-virus measures introduced in the regions deal a severe blow to businesses (especially small businesses, individual entrepreneurs in catering and services). In the future restrictions could spread to trade, taxis and hotels. The Krasnodar Krai and Crimea [resorts] have already announced that tourists will be accepted via QR codes.
Basically, there was no economic growth even before the new restrictions were introduced. For at least 12 last years, the Russian economy was in stagnation Since 2008 the Russian economy’s total growth was 8.5%, in other words the average annual growth rate for 12 years was less than 0.6%. Last year the economy contracted by more than 3%. Today only the exporters of raw materials (i.e. oil, gas, metals, fertilizers, coal, timber) are the cornerstones of the budget. The prices of raw materials (metals, timber, coal, oil) are at a record high in the last 8 years (or even an historical record high), against the backdrop of inflated bubbles plaguing the financial markets around the world. In such circumstances the weak ruble allows exporting companies to generate super profits. Thus, today the 100 largest export-oriented companies influence the incomes growth of the entire economy. The prosperity, of which the government talks about, can be observed only in this sector.
— So, it seems that the raw-material sector will help the Russian economy survive another crisis?
— Well, yes, but you and I won’t survive.
The vast majority of Russians, who work in the catering, service, and trade sectors have no connection to the raw-materials sector. Employees of extractive and contractor companies will survive. Only in the first five months of this year the profits of extractive enterprises have exceeded 5 trillion rubles, they grew by 3.5 times in a year, which is historic record. Meanwhile, the population’s real disposable income has been falling since 2014. Officially, just by 2020, the population’s income fell by 13.5% and it will continue to do so in 2021. True, there is no crisis for businesses that enjoy rent-based export revenues and state orders. The weak ruble (which is artificially undervalued considering the current oil price), as well as high prices for raw materials bring enormous profits. While those segments of the economy that are oriented to the domestic market and domestic demand experience very serious problems. More than 2 million businesses were shut down in 2020. Now history repeats itself. The new restrictions raise a lot of questions. Even according to estimates of state-affiliated polling services, 65-60% of respondents are against mandatory vaccination. It’s obvious that the vaccination plans have already failed. Russia won’t reach the goal of 60% vaccinated by September. The maximum that the authorities can count on is about 25% of vaccinated. And the harsher the pressure [to get vaccinated], the more COVID-dissidents there will be, and the greater will be the social negativity and rejection.
— A number of regions introduced mandatory vaccination for workers in trade, transport, and services. What will happen to these sectors if people simply won’t manage or won’t want to get vaccinated.?
— Let me note that the Labor Code doesn’t provide for the right to fire or suspend an employee for refusing to get vaccinated. The coronavirus vaccine is not on the national vaccination calendar. The State Duma, the Federation Council stated three weeks ago that the vaccination won’t be mandatory. The COVID-19 vaccine is on the national calendar of prophylactic vaccinations based on epidemic data. According to government regulation № 825 of 1999 the national calendar of prophylactic vaccinations doesn’t affect the service sector or trade. It covers just public servants, and not all of them, but only medical workers, who come into direct contact with patients, employees of educational facilities and veterinarians.
Starting with July 15 one can likely expect in a number of sectors to see collective appeals by employees on the refusal to vaccinate. Such employees can face suspension without pay, because the vaccination can only be voluntary. However, the courts will be swamped with lawsuits, and the situation won’t work in the employers’ favor. In other words, the government is essentially shifting the responsibility on the employers. Even without the vaccination issue things are not good for the Russian economy. There was no growth and [growth] is not foreseeable. Meanwhile, the government continues to tighten the screws. There iw talk within the government about yet another tax increase in 2022. I mean a rise in personal income tax, severance tax, tax on additional income, as well as the introduction of a new payment for unemployment insurance (1-3%). With these initiatives the government expects to receive 400 billion rubles out of our pockets next year.
Small business is already pinched, the population’s living standards are dropping and prices are growing. The official inflation is 6%, food inflation is 8%, while the unofficial inflation is 15-20%. An increased tax burden, government pressure on business, and shift of the responsibilities to entrepreneurs doesn’t promise any growth. So far I do not see any advantages for the economy. Production expenses are rising, purchase prices are rising, and the Central Bank will continue to raise the interest rate. The regulator [the Central Bank] has already raised the interest rate three times, from 4.25% to 5.5%. Another 0.5-1% raise is expected to happen in July. It means that credit will become more expensive and so will be the working capital. At the same time demand is not expanding. If business, which just started to recover from last year, will be shut down [due to coronavirus], then we cannot expect to see economic growth of even 2%. Moreover, we can get to zero growth or even negative growth.
— In addition to commodity companies, there are also real estate developers. The analysts argue that shares of construction companies traded on the stock market even appreciated in value last year. So there are only two sectors that are doing well, i.e. commodities and construction?
— You’ve forgot to mention the state banks, which made 1.7 trillion rubles last year, this year their profits will be even higher. They don’t give a damn about the situation in production and the economy. They make money on deposits at 3-4%, that is they get basically free assets, which then can be loaned under 8-10% per annum. So they are doing quite well. The same goes for the natural monopolies, the suppliers of electricity, gas, and railroad companies. Their tariffs grow every year regardless of the economic situation. Only the wages of Russians remain stagnant, but the situation is stable for these enterprises.
The less affiliation you have with the government, from budget, oil and gas assets, the bigger the risks. According to official data wages in the private sector dropped by 3.6% in the first quarter of this year and by 3% last year. In real terms, they decreased even more: by 15-20%. The middle class is dying; and the poor are becoming paupers. The rich strata is also shrinking, however they are becoming super-rich. Society’s polarization is transpiring.
According to Bloomberg [agency], since the beginning of this year the property and holdings of the richest Russians have increased by more than 36 billion USD. It happened not because their businesses produced more goods, but due to the weak ruble, which provides for super profits, they are getting even richer through dividends. According to the latest data of the Boston Consulting Group, the 500 richest Russians own more than 650 billion USD, which accounts for about 40% of Russia’s economy. In this regard we are at the top of the list, in China [500 richest Chinese] account for 15%, in the US – 19% and in India – 19%. Considering the enrichment of the ruling class, of people close to the authorities, we have surpassed all the world’s countries. Meanwhile the problems of small business are multiplying. Many entrepreneurs realize that they have a pile of debts, obligations and unfulfilled contracts. Some will just shut down and reopen later. Many, however, won’t be able to do this and will lose their business forever. Relatively speaking, last year for each business that opened there were three or four enterprises that shut down. This year this proportion will be different: for each opened business there will be two closed ones. The more the screws will be tightened, the less the support measures available for the economy (which were insufficient as it is) the greater the damage sustained by business and the economy. Up to one million enterprises could close this year.
— In your opinion, what government should do to avoid this scenario?
— Russia needs to pass a sound anti-crisis strategy to get the Russian economy out of recession. The budget rule, under which all budget revenues from oil exceeding 43.5 USD are put into the reserve fund, must be abolished. An assistance program for the Russian economy, amounting to at least 6-7% of GDP (about 5 trillion rubles worth) should be adopted. Small businesses, individual entrepreneurs and the self-employed should be exempt from taxes to the end of the year. The subsistence level should be elevated to real values (which can provide living). Thus it should be raised two-fold. Foreign trade policy should be also changed. Until the domestic market’s demand is met, new export duties have to be introduced in order to make the sale of grain, metals and timber abroad inexpedient. Why should Russians buy metal and timber at export prices? Our wages and pensions are not comparable to those in other countries. Why do we buy our own timber at the same prices as Germany? The price of a common wooden board has grown 2-2.5 times in the domestic market. Meanwhile, Russia is considered to be the largest exporter of timber. We need ra eduction of VAT, interest rates, and preferential loans for the real economy sectors. Ultimately, we must focus on industry; a new industrialization and emancipation of small business and entrepreneurship should be put at the forefront. And, of course, there should be no increase in taxes, and excise taxes, no new insurance payments should be introduced.
— In your opinion, the money that, according to the budget rule, is saved in the reserve fund for a rainy day, should be channeled to the economy?
— Yes, [it should be spent] on the population’s support, on employment and industry support, and not to help raw materials exporters and monopolies. There will be no rainy day in Russia. In fact, we should discuss a rainy decade, in which we are already living. Since 2008 the China’s economy grew two-fold, the Indian economy has grown by 80%, Southeast Asia – by 50-60%, the global economy – by 35-37%, while Russia has grown only by mere 8%. We have already wasted 12 years in vain. The budget rule was a form of castration for the Russian economy.
No matter the oil price, the assets for science, education, medicine, industry, agriculture allocated according to leftover principle. The revenues are squirreled away in a pot. The state has money – 605 billion USD in official foreign currency reserves. These assets must be invested in development, otherwise we will have to spend it on a “funeral procession” [for the economy].