The Russian Economy’s Rainy Day Has Come, But Maybe It’s Not So Bad
March 14, 2024
  • Vladislav Inozemtsev

Economist Vladislav Inozemtsev points out that the Kremlin’s economic policy is no longer guided by the priority of maintaining a balanced budget, which Putin had striven for since he came to power. Now, running a deficit is seen not only as acceptable, but beneficial for the country.
The original text in Russian was published in The Moscow Times and is being republished here with their permission.

From the moment Vladimir Putin stepped foot in the Kremlin, the government’s most important goal was to reduce public debt – which fell from $158.7 billion on January 1, 2000 to less than $45.0 billion at the beginning of 2008 – and then, as the debt faded as an issue, to build up reserves: gold and foreign-exchange reserves skyrocketed from $12.5 billion to $478.8 billion in the same period, while the Stabilization Fund, created in 2004, ballooned to $156.8 billion.

Each time a major crisis took a bite out of reserves, the Kremlin managed to replenish them and then some.

A budget deficit was viewed as something terrible; the idea of “living within your means” was preached: in 2000-13, Russia’s federal budget ran an average surplus of 0.39% of GDP, versus, for example, an average deficit of 3.6% of GDP for the US in the same period.

The logic of the government was that a rainy day was ahead, so accumulating reserves was more important than having a soft monetary policy and developing the real sector, which many Kremlin advisers advocated.

Economic growth steamrolls fiscal discipline

Apparently, the rainy day has come: the rate at which the liquid part of the National Wealth Fund (NWF) is being spent indicates that it will be depleted next year, while the ceiling for government borrowing in the market penciled in to the 2024-26 budget is RUB 3.5 trillion a year.

The budget deficit does not yet look catastrophic at just under 2% of 2023 nominal GDP, but hardly anyone is serious about returning to a balanced budget in the foreseeable future. Experts have been reluctant to treat this shift as fundamental, but I would.

Implemented after almost 10 years of zero growth (Russia’s GDP grew by only 8.56% in 2013-22), it speaks of a decision to prioritize economic growth over financial discipline.
In the short term, this means that the government has decided to spend more money – and, apparently, not only on tanks and shells.
UralVagonZavod, one of the largest scientific and industrial complexes in Russia and the largest tank manufacturer in the world. Nizhny Tagil, Sverdlovsk Oblast. Source: Wiki Commons
Increased spending means more funds channeled into various sectors of the economy, creating a multiplier effect and boosting employment, household income and tax revenues. In addition, there are more and more signals that, besides the war, infrastructure is being financed, and not only in the occupied territories in Ukraine: I would not be surprised at all if the prolonged construction projects of recent years suddenly come to life.

By removing fiscal restrictions, the government is now also able to finance the Russian army – which had devolved into a gang of mercenaries – even more lavishly and thus continue to attract volunteers, avoiding another mobilization. This is undoubtedly better for the government than the panic and disorganization that took place during the mobilization in autumn 2022.

The first results of the new policy are already evident: 3.6% GDP growth in 2023 and a 5.4% increase in real household income. Meanwhile, the IMF recently upgraded its Russian GDP growth estimate for 2024 from 1.1% to 2.6%. The government’s prioritization of economic growth over balanced budgets means that the population’s financial situation should not worsen in the near future.

Alas, dreams of inflation going back to 4% are apparently not destined to come true.

Will the new policy outlast Putin?

The long-term consequences of the paradigm shift seem more serious, though that is debatable. During wartime, it is harder for capital, including corrupt capital, to leave the country – which is why the printing of money could produce decent results: if there was a time to try and repeat in Russia Western-style fiscal stimulus of the economy, it is now.

If budget deficits remain within 2-3% of GDP over the next decade, public debt will still be far from dangerous levels, while borrowing will be done in the local market and in rubles, which implies a low probability of default.

In any case, even if a default takes place due to the strains of militarization – recall Vladimir Putin’s statements that the government intends to at least maintain the current level of defense orders for a long time – by the mid-2030s there will be completely different people in charge of the Russian economy.

In fact, the new doctrine of Russian economic growth possibly came about because of the emerging understanding that Putin is unlikely to have to reap what he sows.

All this means that, in the minds of the leaders in the Kremlin, the rainy day has arrived. And they themselves could be surprised at how much less wet it turns out than they imagined.

If that is so, then the latest stroke of luck that has befallen the Russian authorities may well turn out commensurate with the unexpected jump in oil prices in the 2000s, which gave Russia its current great-power mojo.
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