Page 12 - bne IntelliNews monthly magazine September 2024

12 I Companies & Markets bne September 2024
and so harder to sanction, these methods have not fully resolved the payment challenges faced by the two countries.
Western sanctions are creating more and more difficulties in Russian trade with its main partners. After the US threatened sanctions against Chinese banks, Russia began to experience a yuan deficit, which is a problem, as Russia has dumped the dollar entirely and adopted the yuan as the foreign exchange of choice in a yuanisation of its economy.
Chinese banks are now refusing to provide Russian banks with yuan liquidity and the Central Bank of Russia (CBR)
has had to take over this role. Half of the central bank’s non-frozen currency reserves of around $300bn are made up of yuan, with most of the rest as monetary gold. The deficit led to a multiple increase in interbank loan rates. The
situation with yuan liquidity has worsened in the last few months and has become "quite difficult", The Bell reports.
Next in line is Turkey, which also recently received a stern reprimand from the US for trading with Russia. Ankara was told that it must either curb its trade in American-origin chips and other parts vital to Russia’s war machine, “or face consequences,” the State Department said. Turkey ranks as the world’s second- biggest source of “high-priority” goods to Russia, behind China.
The Russian government is already recommending that businesses switch to barter schemes in the spirit of the 90s in relations with foreign partners to avoid problems.
In parallel, Russia is working hard to develop cryptocurrency and digital currency payments systems as a work-around.
Russia’s economy growth will cool as the military Keynesian boost starts to wear off
Ben Aris in Berlin
The Russian economy has enjoyed surprising and rapid growth in the last two years due to massive government cash injections that have given the economy a military Keynesian boost. But the variables fuelling that boost are now almost exhausted and the economic growth is likely to cool from here on in, Vladislav Inozemtsev, a well-respected commentator who fled Russia after the war started, said in a paper for Riddle.
This growth has been primarily based on underutilised capacity and a reversal of Putinomics: for most of the last decade and a half the Kremlin has run an austerity budget, hoarding money, paying down debt and scrimping on fixed investment; since the war started it has turned on the spending spigots and poured cash into the economy.
With investments concentrated in defence, infrastructure and small and medium-sized enterprises (SMEs), to sustain growth, the government should have kept interest rates relatively low and prioritised continued growth over fighting inflation.
But with so much cash sloshing around the system, coupled with an acute labour shortage that reduced unemployment to a post-Soviet low of 2.6% in July, has stoked inflation, which touched on 9% in July.
The Central Bank of Russia (CBR) has almost lost control
of inflation and CBR governor Elvia Nabiullina has been aggressively hiking rates since the first quarter of 2023, putting through another large 200bp hike in July to 18% – close to a ten-year high. More hikes are on the cards before the end of year, unless inflation stalls.
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“The Central Bank's decision to curb inflation at all costs could lead to an economic slowdown by 2025, potentially increasing public dissatisfaction with the economic consequences of the ongoing war and sanctions,” says Inozemtsev. “The outcome will depend on the Central Bank's flexibility in monetary policy and its ability to navigate the challenges posed by war, sanctions and fluctuating demand.”
Nabiullina commented on this decision, stating that "for the first time in the last ten years, Russia is experiencing a cyclical overheating of the economy, and a long period of high interest rates is needed to cool demand."
This announcement contrasts sharply with the majority of Western experts and politicians who argue that sanctions are working and the Russian economy is faltering, says Inozemtsev, who disagrees. He argues that most of the military Keynesian boosts the economy has received in the last two years have been exhausted and the exception growth Russia has enjoyed will start to slow from here.
“The Russian economy, which had grown unnaturally fast
in recent years on the back of a multi-channel – but mainly government-initiated – cash injection, has used up its positive effect by mid-2024,” Inozemtsev says.
Unpinning Russia’s growth is the rapid rise in aggregate demand from both the government and the population in the last two years. Between 2021 and 2024, budget expenditures increased by over RUB12 trillion ($82bn), equivalent to 7% of GDP.