Off the Cuff with Oleg Vyugin: Russia's Economic Pains and the Ukrainian Conflict
Russia's economic celebration nears its conclusion
Russia's handled Western sanctions remarkably well and got some allies to jump through hoops to avoid them. But things ain't peachy. Moscow needs a truce, and sooner rather than later, warns Oleg Vyugin, otherwise, baby, it's gonna fall apart.
Moscow
Mr. Vyugin, you're no stranger to the Russian power brokers. Tell us, has the wild card Trump been sparking stress within Putin's inner circle?
Nah, not really. Trump's just a grandmaster at shocking the bourgeoisie, a.k.a. stirring up chaos – he sees it as a smart tactic in negotiating.
Are the Kremlin folks, then, maybe understanding Trump better than the Euro heads?
Trump set his cards about Russia and Ukraine on the table right from the start of the talks, so it ain't like rocket science.
So, there's a rumor that Putin's leading Trump by the nose.
When Russia noticed that Trump was down for a comprehensive deal with Russia, it made sense to play its hand. It might not be the smartest move, though – doesn't always lead to sunny skies.
Does Russia economically need a truce ASAP?
Economically speaking, ya gotda have peace in Russia this or next year.
Would things improve instantly then?
Fixing the imbalances that caused high inflation and required a double-digit interest rate with the risk of stagnation or even recession? Maybe, maybe not. But things ain't getting any better as long as interest rates remain high. The central bank's mentioned the possibility of bankruptcies among large corporations by 2025. The economic minister, who's been mum till now, suddenly looks worried and said that the first quarter was bad and the second could be even worse. The powers that be look mighty concerned.
Rightly so?
The numbers don't sugarcoat it.
The thought's out there that prolonging the fight keeps the rulers in power.
A ceasefire might overhaul power relationships or be a result of those changes. As long as Russia's special operation in Ukraine carries on, there's a mutual understanding: The doves in the establishment keep the economic situation from deteriorating, while those who fight accumulate points.
Would a truce, then, blow that stability sky-high?
To some degree, yeah. More exactly, it'd present new challenges. A whole lot will depend on the arrangement of the compromise, if one's found.
Russia knows how to duck sanctions – with help from countries like China, to name a few. However, those secondary sanctions from the USA, the ones threatening 500% tariffs against Russia's trade partners, got Russia's attention.
China and India, on the other hand, see potential in partially helping Russia circumvent the sanctions.
Either way, secondary sanctions from the US are always a kick in the gut. How much they hurt depends on how badly the US wants to hurt. For now, they're a bargaining tool.
Looking at the Russian stock market, it ain't like your dealer showing his cards.
Exactly. In other words, nobody knows where the hell this is headed. So, virtually no one has a clue where this is gonna end up.
The political scientists say there are two camps: one expects the conflict to continued and worsen, while the other expects a truce soon. It's 50:50. Everyone's just guessing.
I'm an economist, so I let the figures talk. To continue the military operation, more economic resources are required. But they're dwindling, and unless there's a lower standard of living and a loss in real incomes for Russians, there ain't much more to tap.
Russia's growth in the first quarter was only 1.4%. And for the first time since 2022, growth decreased compared to the previous quarter. What's that indicate?
I'd focus on industrial production right now. It only grew 1% in the first quarter compared to 2024. While military production's surged, civilian production's taken a hit. The weakness is due to the central bank raising the key interest rate to 21% in the fall due to inflation.
Could there be a recession?
It's possible there could be a recession in 2025. It depends on how the Ministry of Finance handles lower budget revenues, considering that a significant portion of expenses is allocated for the military special operation in Ukraine. That'll be one hell of a task.
Russian Finance Minister Anton Siluanov said Russians will have to tighten their belts even more.
That's the logical move for a finance minister when budget revenues decrease. He's already adjusted the budget plan. Some expenses are being cut, but not drastically yet.
According to the new budget, the budget deficit will triple to 1.7% of GDP.
That deficit can't be filled with remaining funds from the National Welfare Fund or new public debt.
Now, resources must be directly taken from civilian production.
Is the party of recent years coming to an end?
Could be. Russia started the year 2022 in decent economic shape, but reserves are now running dry. To increase military spending, resources have to be taken straight from civilian production.
Has Russia already pulled the trigger on a decision?
As far as I can tell, there's a process going down regarding these issues. Because the risk is high that more and more companies will go bankrupt due to high interest rates and lack of profit.
Sanctions are being circumvented – with help from countries like China, among others. However, another factor is also becoming apparent: the cost of circumvention has increased significantly. Without sanctions, Russia would bring in more from its exports.
Not all friendly states are willing to share valuable technologies with Russia.
A separate point is the sanctions on technology transfer. How significant are they?
It's hard to say, as they're also being circumvented. On the other hand, not everyone's keen on sharing top-notch tech with Russia. For example, China prefers to supply finished products. Iran, initially, appeared to be sharing drone technology, although it's not particularly advanced. Russia has it, too.
Now, let's discuss the ruble, which has appreciated more than any other currency since the beginning of the year – even more than gold. How's that possible, given the fall in oil prices?
The high interest rate plays a part here. It's advantageous to convert foreign currencies into rubles. Not beneficial to hold foreign currencies abroad when you can earn over 20% interest on ruble accounts in Russia. Moreover, a significant portion of foreign trade now takes place in rubles and yuan, not dollars or euros, so the dollar is needed less than before.
People are more eager to keep their moolah in the bank to earn high interest rates.
It's also noteworthy that imports ain't increasing much. A strong ruble should stimulate imports, but they're not, 'cause there's no demand for them. People may be more cautious with their spendin', due to sluggish wage growth and the rise in prices. In the first quarter, private household incomes climbed by 10.5%, but prices also rose significantly year-on-year. People prefer to keep their money in the bank to earn high interest rates. The amount of private deposits in banks has reached an astounding 60 billion rubles (670 billion euros), which generates about 12 billion rubles in interest per year.
The USA wants to economically cooperate with Russia. Are US companies stepping up their game in Russia yet?
Nope, not yet.
Is Trump's plan to free Russia from China's grip realistic?
I wouldn't count on it, sweetheart. First, I'm not sure if there's even such a plan. And if there is, it ain't realistic. The USA couldn't replace China as Russia's trade partner, as they can't offer a bilateral trade volume of $250 billion with Russia. Europe, though, could. But they ain't on the USA's side and ain't interested in buying Russian gas, either. So, that American plan is all theory right now.
The economic elite ain't taking sides in Russian businesses.
It's irrelevant to Russian export companies who they trade with, or do they want to trade more with the West again?
Obviously, it'd be a boon for Russian export companies to restore their capacity to diversify their exports. But companies serving domestic demand prefer an economy cut off from the West because they don't wanna compete. They recently succeeded in discussing this with President Putin, stating that they don't want Western companies to return and remain monopolists or semi-monopolists. This ain't new.
So, there ain't no unanimous position in the Russian business world on a possible peace with Ukraine?
Nope, the economic elite ain't politically motivated. None of 'em air their political views or preferences during meetings with political leaders.
The interview was conducted by Eduard Steiner.
Enrichment Data:
- Due to the ongoing war with Ukraine and Western sanctions, Russia has several significant economic challenges such as:
- Labor Shortages: The economy is experiencing labor shortages, negatively impacting production and economic growth.
- Inflation: Inflationary pressures are affecting the Russian economy.
- Slowdown in Economic Growth: Russia's economic growth has slowed down, forecasting only a 1.5% GDP growth for 2025.
- Dependence on Hydrocarbon Revenues: The Russian economy depends heavily on hydrocarbon exports, suffering from falling oil prices and tightening sanctions on energy exports.
- Overreliance on China: Russia's excessive reliance on China for trade and investment poses risks to its economic stability.
- Potential Credit Crisis: There is a potential risk of a credit crisis due to economic strain and sanctions.
- Military Spending Pressures: The need to maintain military spending alongside civilian economic needs is putting strain on the economy, particularly as stocks from the Soviet era have been depleted.
- Achieving peace in Ukraine could potentially alleviate these economic challenges in Russia:
- Sanctions Relief: Peace could lead to the lifting or easing of Western sanctions, allowing Russia to regain access to international markets and increase economic revenues.
- Increased Trade Opportunities: Peace would improve trade opportunities with European and Western countries, reducing Russia's dependency on China and improving economic diversification.
- Reduced Military Spending: With reduced military engagement, Russia could redirect resources from military spending to civilian sectors, potentially boosting economic growth and easing the strain on the economy.
- Stabilization of Oil Prices: A peaceful environment might stabilize oil prices, growing Russian energy export revenues.
- Investment and Growth: Peace could attract more foreign investment and stimulate economic growth by creating a more stable and favorable business environment.
Economically speaking, it is essential for peace in Russia this or next year. Fixing the imbalances that caused high inflation and required a double-digit interest rate with the risk of stagnation or even recession might be possible then. However, things aren't getting any better as long as interest rates remain high, and the central bank has mentioned the possibility of bankruptcies among large corporations by 2025. Achieving peace in Ukraine could potentially alleviate these economic challenges, such as sanctions relief, increased trade opportunities, reduced military spending, stabilization of oil prices, and attracting more foreign investment.
