Page 13 - bne IntelliNews monthly magazine September 2024

bne September 2024 Companies & Markets I 13
Real income growth reappeared for the first time in years, with a 5.4% increase last year and a 7.8% rise in real
wages this year. Additionally, capital outflow significantly decreased, partly due to Russians acquiring credit cards from banks in "friendly countries" but spending domestically. And oligarchs have repatriated large amounts of money to keep them out of the hands of would-be sanctioners. The Central Bank contributed to this trend by increasing the money supply by 19-22% per year in 2022-2023, partly by purchasing frozen assets from the National Welfare Fund.
This surge in demand resulted in price increases across various sectors, particularly those replacing lost foreign services, such as hotels, domestic tourism and air transport. This increase in demand appears substantial and not merely short-term.
However, the Central Bank's decision came at a time when several factors contributing to the economy's overheating had already been exhausted. Each of the main demand drivers peaked by mid-2024.
Military spending
The primary sources of aggregate demand growth from 2022-2024 included a substantial rise in military spending, amounting to nearly RUB11 trillion over three years. This spending stimulated demand for military production and related industries, alongside substantial payments to contract workers and mobilised military personnel, estimated at around RUB3 trillion since the war's inception.
But spending is already being cut. The draft three-year budget does not forecast an increase in "defence" spending for 2025 and 2026, and standard allowances for contractors are set
to remain unchanged. Despite reports of increased lump- sum bonuses for contract conclusions in certain regions,
the overall increase in payments to contractors has slowed, reducing their impact on economic growth.
Housing
Government programmes to stimulate housing demand with subsidised mortgages and issued approximately RUB4 trillion in soft loans from 2022 to 2024, with buyers investing up to RUB1.5 trillion of their funds.
But the government's ended the housing mortgage subsidy programme on July 1, triggering a buying frenzy while the cheap mortgages were still available; a record number of loans issued in the first half of 2024.
Now construction sector is already feeling the impact of the decision, with no new housing delivery records expected in 2024, and a decline in residential real estate prices anticipated after significant rises due to the subsidy programme.
Artificially cooling the housing market and construction business will act as a powerful non-monetary policy tool to cool the economy, but it is a very blunt instrument.
The Russian economy has enjoyed surprising and rapid growth in the last two years, but the factors creating a military Keynesian boost are starting to wear off and that growth is likely to fade from here on in. / bne IntelliNews
Wages
Wage growth has been very strong with nominal wages rising much more quickly than inflation, delivering the biggest increase in real disposable incomes of 9.6% year on year in
a decade in July.
Entrepreneurs have been forced to compete with military production for qualified workers, and wages rose responding to labour shortages due to emigration, the remote employment ban and reduced foreign worker inflow.
Nominal wage growth, which peaked at 12.9% y/y in early 2024, is now expected to slow. The official forecast for nominal wage growth in 2024 is now 6.5%, significantly lower than last year's figure. This deceleration is anticipated to continue into 2025, reducing wage pressure on the consumer market. Additionally, an increase in personal income tax for high-income groups in 2025 is likely to slow the growth of disposable income further.
Import substitution: The substitution for imports, particularly in the service sector, also contributed to economic activity, evidenced by booms in domestic tourism, catering, entertainment and transportation.
But import substitution has only been partially successful and is maxing out. After Putin introduced tit-for-tat sanction on EU exports of agricultural products in 2014, Russia famously created a domestic cheese industry more or less from scratch in about two years, as European cheese used to be better and cheaper. But technology sanctions have limited the scope of import substitu- tion and after two years what could be replaced has been.
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