Page 29 - bne IntelliNews monthly magazine December 2024

bne December 2024 Cover story I 29
spending usually happens in December. Currently, the official forecast for the deficit is 1.7% of GDP of around RUB3 trillion, increased from 0.8% earlier
in the year. For 2026, the Ministry of Finance is expecting the budget deficit to be flat.
“One should add that the Russian government’s debt is insignificant by modern standards,” say the authors. Debt is expected to reach 18.1% of GDP by the end of 2024, which leaves a huge space for domestic borrowing. The Ministry of Finance is planning to issue RUB4 trillion of domestic debt in 2024 (nearly double pre-war levels), tapping the estimated RUB19 trillion of liquidity in the domestic banking sector. That is enough money to continue Putin’s war in Ukraine for years.
The growth of real disposable incomes during the war was an even bigger boon, as it came after the longest period of their fall in Russian history – from 2014 to 2021 – ironically caused by the chronic labour shortage as men were bled away from the labour pool to fight on the frontlines. In three years since the start of the aggression against Ukraine, this figure will grow by at least 17.5% (4.0% in 2022, 6.9% in 2023 and, according to the government forecast, about 7% in 2024).
Domestic consumption has become a bigger growth driver than the booming raw material exports. It has created a new War Middle Class and is fuelling activity in the civilian segment of industry. At least until mid-2024, the rate of income growth accelerated (the maximum figure of 8.1% was recorded in the first half of this year) with ever higher pay going to soldiers, who earn three times the average salary.
The growth of incomes is part of the reversal of Putinomics that war has brought with it. Pre-war the Kremlin effectively ran an austerity budget, starting in about 2012 when Putin launched a drive to modernise the military. The CBR hoarded cash, building up a huge $600bn reserve, debt was paid down and investment into non-strategic sector was muted.
Since the war started, the Kremlin has opened the spending spigot and money has poured into wages and investment, as much as is needed to get the job done. From mid-2023 to mid-2024,
the Kremlin paid RUB3 trillion in military salaries, equivalent to the entire budget deficit.
While many commentators have pointed to the huge military salary
bill as a weakness, the Kremlin doesn't appear to think so. The current 2025- 2027 budget proposal keeps military spending at 6% of GDP and this is not seen to be excessively high, but the current budgetary structure looks sustainable over a three-year horizon, maintaining the massive military spending. What is spent on salaries can be offset to a large extent by what is earned on taxing consumption and growth. Already the non-oil part of the budget revenues is easily outstripping those from oil.
A dramatic U-turn in strategy, the reversal of Putinomics has unleashed years of pent-up growth. Another side- effect of the spending is to undo some of Russia’s legendary income inequality, as the poorest regions have been
the biggest winners of the Kremlin’s largesse, as that is where most of the military factories are located as a legacy of the Cold War. Putin stressed the importance of balanced investment into both civilian and military parts
of the economy in his guns and butter speech in May and more generally, the Kremlin continues to push its National Projects 2.1 agenda aimed at improving the lives of the average family.
“With the outbreak of the war, a trend in the transformation of social policy became especially noticeable: the efforts of the authorities and budget funds are directed at those Russians who either belong to less well-off social strata,” say the authors, “or do not show a tendency to emigrate.”
“It should be noted that in Russia a significant part of both individuals
and businesses does not experience profound economic discomfort either from Putin’s aggression against Ukraine
or from the Western nations’ reaction to it,” the authors add. “The main effect of sanctions has so far been felt by the upper middle class, which has historically taken the most critical stance vis-à-vis Vladimir Putin and his policies.”
And the upper middle class are actually making money from the strain the economy is under. Sky-high interest rates are threatening SMEs, but they have also become a cash cow for the middle class, which are depositing their cash in banks for the interest income that can be earned. Over the first nine months of 2024 retail deposit soared by 53.8% year on year and companies are also placing so much of their cash in deposit accounts the CBR is currently planning to impose special restrictions on corporate deposits in order to keep this cash in circulation.
Sale of the century
“The first and most important circumstance is the free market character of the Russian economy, which has been underestimated by analysts,” the authors argue.
Most of Russia’s detractors have tried to paint Putin as reverting to Soviet control. The famous Yale University report that predicted Russia’s economy was headed into oblivion, mentioned the word “Soviet” 19-times, although few modern economic commentators make any reference to the Soviet Union today. The report was debunked by bne IntelliNews at the time, and by Russia’s performance since.
As Putin established control over Russia’s largest corporations, the idea of the “étatisation” of the Russian economy, and consequently about its growing similarity to the old Soviet system, spread amongst the Western expert community. It was argued
that the state controls 100% of the railway and pipeline infrastructure, and that by 2018 the share of state- owned companies in overall corporate revenue had reached 63% in the oil and gas industry, 79% in the machine- building sector and 92% in banking. The observers therefore arrived at
www.bne.eu