Page 28 - bne IntelliNews monthly magazine December 2024

28 I Cover story bne December 2024
of the year international experts gave
a figure of just 1.3%. These are not small mistakes. They belie a deep misunderstanding of what is happening in Russia, the authors argue, and lead to very poor policy recommendations.
“We believe this disconnect is largely subjective, reflecting essential features of three main groups of analysts.
“The first group consists of long-time Russia specialists who view current events through a Soviet-era lens, interpreting Putin’s dictatorship as an attempt to restore the Soviet system.
“The second group includes analysts who work for Western governments or NGOs, and feel compelled to propose sanctions and restrictions, projecting confidence in their effectiveness.
“The third group is made up of experts with Russian backgrounds, including those former politicians who despise Putin and are convinced of his regime’s imminent collapse.
“The deep biases of these groups hinder objective assessments of the Russian economy’s current state and prospects,” the authors opine.
Sanctions don't work because the “international community” is in reality
only the handful of countries that make up the Global North, and even in Europe, within the EU itself, the willingness to impose sanctions is weakly followed
or enforced. Turkey’s propensity
to continue to act as a way-station
for trade with Russia, Austria and Hungary’s continued imports of Russian gas and Germany’s luxury carmakers that continue to export top of the range cars to Moscow via Minsk are only a
few of the manifold examples of how sanctions are being undermined. The West’s failure to get China and India on board and refusal to join the regime by the real “international community” of the Global South, which makes up 90% of the world’s population, blows a major hole in the sanctions regime.
Another miscalculation is to put all the growth at the feet of the military-
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industrial sector. The civilian sector has also flourished. Several things have gone into this growth but among the most important was Russian businesses reacted to sanctions
by investing heavily into retooling factories to replace hard-to-obtain Western technology, and booming consumption fuelled by the rapid rise in real disposable incomes.
In 2023, the largest increase in gross value added was recorded in the hotels and catering enterprises (by 10%), in the information and communications sector (10%), in financial and insurance
deficit for 2022 and collapsing tax revenues in January 2023, the oil sanctions were hailed as huge success. However, the numbers were misleading.
“Bureaucratic factors became more important: the excessive strengthening of the ruble exchange rate under the influence of paramount currency restrictions and the Ministry of Finance’s sluggishness in changing the methodology of determining the price of oil for tax purposes [which used to be based on the price of the sanctioned Urals blend, but was changed to a Brent benchmark],” the authors explain.
“Bureaucratic factors became more important: the excessive strengthening of the ruble exchange rate under the influence of paramount currency restrictions and the Ministry of Finance’s sluggishness in changing the methodology of determining the price of oil for tax purposes [which used to be based on the price of the sanctioned Urals blend, but was changed to a Brent benchmark]”
activities (8.6%), in wholesale and retail trade (7.3%) and in construction (7.0%), which reflects an increase on the share of final consumption expenditures
in GDP to 68.7% from 64.9% in 2022, including the share of household expenditure to 49.8% from 47.4%.
“It seems that the development of the Russian economy in the last two years, as well as the real effect of sanctions, should have led to a re-evaluation
of the quality of the expertise used by policymakers – but this has not happened yet,” the authors say.
Russia’s robust growth
The introduction of the twin oil price cap sanctions at the end of 2022 and start of 2023 were also misunderstood. When the budget figures were released in March 2023 and showed a massive
“When these factors ceased to have
an effect, budget revenues stabilised and soon began to increase rapidly, outpacing economic growth – the Ministry of Finance began to collect an
“inflation tax” of additional revenues from VAT, profit tax and personal income tax, caused by a significant excess of the inflation rate over what was anticipated in the draft budget,” which bne IntelliNews reported on at the time and also discussed in an oil podcast, but was not well understood by most commentators.
In 2023 the Ministry of Finance had
to dip into the National Welfare Fund (NWF) for RUB3.46 trillion to cover a 17% of the budget shortfall. In 2024, the budget spending to date is fully funded by revenues – although it may not stay that way, as typically 20% of all