Page 30 - bne IntelliNews monthly magazine December 2024

30 I Cover story bne December 2024
the conclusion that Russia’s economy could collapse just as easily as the Soviet one once did.
But this ignores the fact that half of Russia’s economy is privately owned and that even the leading state-
owned enterprises operate in highly competitive environments. As part of Putin’s hybrid ZAO Kremlin model, the state purposely sets up two big state- owned companies to directly compete against each other and also encourages privately owned business to also keep their feet to the coals. It has been a successful model that ensures both state control over key sectors but also efficiency and competitiveness in the leading state-owned enterprises.
“Many large state-controlled corporations (one may just look on the banks) operate in a highly competitive environment, acting as if they were owned by private capital,” the authors conclude.
The Kremlin’s changes to the regulations after sanctions were imposed – most importantly the legalisation of “parallel imports” that undid a decade of intellectual property rights rules – that opened up a plethora of new opportunities to sell famous brands royalty-free.
Likewise, the departure of scores of foreign brands, many of which simply sold their Russian businesses to their Russian managers, was probably the largest transfer of property in Russia’s modern history. What was in effect the appropriation of decades of FDI has also opened huge opportunities for entrepreneurs as they took over businesses worth billions of dollars at knock-down prices.
In just the car sector – by far the worst hit of all the sectors by sanctions – all the Western brands have left but Russian carmakers and the leading distributors have taken over their businesses. Renault-Nissan sold the largest car concern in Russia Avtovaz for just one ruble, while the sector
as a whole has completely recovered after production came to a complete
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standstill in 2022. The team that took over the McDonald franchise claim its replacement Vkusno i Tochka (Tasty. Period) is now more profitable than its predecessor. There are similar stories in nearly every sector of the economy.
The Yale report claimed the departing international companies had revenue that was equivalent to 40% of GDP, but this revenue didn't leave the country; it was simply taken over by Russian businessmen.
“No less important is the fact that property became the main reason for non-resistance to the authorities, since fears of losing it perfectly disciplined the Russian entrepreneurs. In other words, the private and market nature of the Russian economy made it much more resilient than the Western policymakers had expected,” the authors wrote.
The commodities backstop
Russia’s economy has always been strong thanks to the bedrock of the commodities subsidy. Even during the chaotic 90s, Russia has suffered from multiple crises, but the economy has always bounced back relatively quickly and each crisis did progressively less damage than the last one.
“Despite a probable slowdown in economic growth in the second half
of 2024, Russia looks safe from the collapse of the existing economic model in the near future: the budget remains balanced, and real disposable incomes are expected to grow further. Of course, the increased military spending provokes growing inflation, but for now it is kept within single-digit numbers,” the authors argue.
This resilience is thanks to the subsidy the country earns from the export of things like oil and metal. The best way to understand this is from the so-called non-oil deficit. For all of Putin’s reign until the war in Ukraine the headline budget has been in surplus, but if you magically remove the oil and gas reve- nues then the non-oil budget has been around -4% of GDP in the non-crisis years. In other words, the Kremlin has used the oil and gas income to subsidise the rest of the economy. In times of crisis the non-oil deficit can blow out to
-13% at its most extreme in the past, as the Kremlin taps its cushion of cash to ease the pain.
As the table shows, the government continues to rely on its raw materials subsidy to cushion the cost of the war by running a non-oil budget deficit of
Non-oil and gas budget deficits 2022-1H24 (RUB trillion)
2022
2023
1H 2024
total revenue
oil & gas revenue
non-oil & gas revenue
total expenditure
nominal GDP
deficit nominal*
deficit% GDP*
non-oil & gas deficit nominal
non-oil & gas deficit% GDP
Source: Ministry of Finance
27.9 25.5 14.5
11.6 8.8 5.7
16.3 16.7 8.8
31.2 29.7 15.5
151.5 160.5 80
-3.3 -3.2 -0.2
-2.3 -1.9
+0.25
-14.9 -13 -6.7
-9.8 -8.1 -8.4
* the numbers don't add up merely by subtracting just two kinds of revenue from expenditures, as the government has additional sources of income.