“Man-made” factors after February 24, 2022
The result of the massive fiscal support for the economy was a spike in demand from the defense industry and army. Now, a potential war of attrition is creating ever-increasing demand, though that brings a sharp rise in fiscal risks – in the medium term, it could transform the budget into a pyramid scheme.
Significant injections of budget funds into the economy balloon the imbalances and risks, including of a budget crisis, inflation and under certain conditions a socio-political crisis. A more or less balanced fiscal policy, meanwhile, would preclude further growth in demand.
Perhaps the Ministry of Finance does not want to completely abandon a balanced policy – this is evidenced by the sharp slowdown in the growth
of the budget deficit in August. Yet recent decisions to slap additional taxes on exports (a “depreciation tax”) might not allow the Ministry of Finance to act how it would like. Attempts to pad budget revenues in this way undermine the market nature of the Russian economy – the most important factor for its robustness
The jump in defense spending – given that many defense-related firms are located in economically depressed areas – has led to a diversification of industry across regions. This factor is almost completely exhausted, as it is no longer possible to significantly ratchet up budget spending.
On the whole, the actions of the financial and economic bloc of the government and the Central Bank have made it possible to reduce or postpone risks – for example, fiscal ones. As long as their current leaderships remain, this factor will remain in effect; however, as resources decrease and especially as fewer and fewer options remain at the disposal of the Central Bank and the government, the impact of their actions will steadily decline.
To circumvent sanctions, with regard to both the sale of commodities and the purchase of necessary imports, methods from the “black” and “gray” economy, honed in the 1990s, are being actively used – seemingly with the support or under the direction of the state. The impact of this factor may be seriously reduced in the future (in the short to medium term) as the West improves measures to counter sanctions circumvention. However, at this point they remain insufficiently effective, and increasing their effectiveness may mean significant costs for Western governments and international organizations. Behavioral factors Long-term optimistic expectations
of households and business are based on the objective factors mentioned above, such as the adaptability of Russian business and effective actions by the government’s financial and economic bloc and the Central Bank. In addition, optimistic sentiment is ginned up by propaganda. Inevitably, however, optimism is gradually decreasing, though overall it looks set to persist until some kind of “black swan” drastically changes the mood.
The fundamental factors should remain in effect either for a long time or forever. However, those factors contributing to the robustness of the economy that had been created by Russian regulators and firms and lasted for a long time have now been exhausted to a large extent or entirely. The efforts to create a sanctions-proof economy after February 2022 are gradually losing their effectiveness, and this trend is likely to continue in the coming months and years.
In the short term, there are practically no risks of a “collapse” of the Russian economy. But it is no less obvious that in the medium term and especially in the long term, the economy will continue to lose its robustness as crisis phenomena gradually rear their heads.
The most important element of the robustness – macroeconomic stability, the establishment of which took many years of titanic efforts by economic and financial regulators – has been significantly undermined. Therefore, even though in the short term, the risks of a crisis scenario taking hold in the Russian economy are relatively small, they are now becoming chronic, and should a “black swan” appear, they might materialize quite quickly, transforming the crisis into a catastrophe.