With Russia's budget deficit at 3.3 trillion rubles, 21% key...

With Russia's budget deficit at 3.3 trillion rubles, 21% key interest rate and 2-3 million job vacancies, Russia has to choose between hyperinflation or an economic freeze, says Vladimir Milov, former Deputy Minister of Energy in an interview with Frontelligence Insight
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2/ Vladimir Milov (@v_milov), an economist and longtime ally of Alexei Navalny, explains that Russian markets are gloomy ahead of the Central Bank’s board meeting on Dec 20. The Bank is expected to raise interest rates once again, from the current 21%, possibly to 23% or even 25%

3/ For Central Bank to continue interest rate hikes means to kill the real sector of the economy, where most companies simply don't have sufficient profitability to borrow at current interest rates (Central Bank's 21% rate translates into 25-30% commercial loan rates)

4/ Relaxing tight monetary policies and lowering interest rates would push Russia into hyperinflation territory. However, the "elephant in the room" is the war, which is the root cause of all these problems. The war drives extreme military spending, which fuels inflation

5/ Ruble depreciation will contribute to inflation even further, as Russia continues to be heavily reliant on imports... while being under all sorts of embargoes, and China and other Global South countries are not opening their markets to most Russian goods

6/ When current revenues are insufficient to cover budget expenses, the state must find alternative sources to finance the deficit. In the current situation, Russia is cut off from international financial markets and cannot turn to Western governments or the IMF for assistance

7/ This is what Russia has typically done in a deep systematic crisis: in the last years of the Russian Empire during World War I, or of the USSR during the 1980s, the government heavily borrowed money from the West, which prolonged the existence of the empire - but not for long

8/ Now, this option is not available, and neither China nor other countries of the Global South are interested in providing loans to Russia. China doesn't even agree to give a permit to the Russian government to issue yuan-nominated Russian state bonds.

9/ Russia can still borrow domestically, which it tries to do...but with high interest rates and rising state bond yields (10-year OFZ bond auctions over 17%), it makes no sense: the government spends more on servicing expensive debt than it raises through OFZ bond placements

10/ The only option left is depleting the state's reserves (National Wealth Fund), whose liquidity portion is down to just 5.5 trillion rubles ($56 billion) as of November 1, 2024. The budget deficit for 2024 is planned to reach 3.3 trillion rubles, or 60% of the liquidity

11/ There are currently around 2-3 million job vacancies in the labor market and this number is growing. Most industries - manufacturing, agriculture, logistics, retail, utilities, and IT report shortages of workers, measured in hundreds of thousands or 10%-50% of the workforce

12/ To give you an idea about how bad the labor market situation, reference to the discussions at the annual "Russian Industrialist" forum held in St. Petersburg. One of the main ideas on how to ease labor shortage problem is hiring teenagers under 18 and pensioners to work

13/ This is a key reason why Putin, contrary to many forecasts, hasn't called for a second wave of mandatory mobilization since Autumn 2022. This is not to say that he can't do it, but this would be a disastrous hit for the labor market

14/ There are no sources of good news for the Russian economy on the horizon, only bad news. War-driven inflation is not reacting to the Central Bank's interest hikes. By 2022, it was expected that Russia would be on its feet, with import substitution. None of this is happening

15/ Putin may continue the present course for some time, but 2025 will be some kind of moment of truth for him. The clock is ticking. We're not there yet - but at some point soon, Putin will have to seriously reconsider continuation of the war

Thank you for reading. This is a brief excerpt from the full interview, which includes additional insights and data. To read the complete conversation, please follow this link:

frontelligence.substack.com/p/war-deficits…