Economy of a siege

On August 28, the head of the self-proclaimed DPR, in an interview with the state-run Rossiya-24 channel, admitted that Russian troops were fighting in eastern Ukraine. What will it cost us?

It would be premature to say that the Russian economy will be put on a war footing. If only because the war itself does not yet require strenuous efforts from the economy. Tractor factories are not switched to the production of tanks. The war did not make a hole in the federal budget - in January-July it was reduced to a surplus of 675.5 billion rubles. (1.7% of GDP, or 8.9% of budget expenditures over this period).

Spending on "national defense" is growing, but not catastrophically. If in 7 months all budget expenditures were financed on average by 54% of the annual plan, then military appropriations - by 64%. Obviously, the Ministry of Finance has made the army the No. 1 budgetary priority. Judging by current spending on defense, in total, this item in 2014 will be spent not 2475 billion rubles, as planned (17.6% of all budget expenditures), but at least 150-250 billion rubles. more. For the Ministry of Finance, this will not be a problem: the army will simply "eat" part of the budget surplus. And the military saves like real accountants (although Serdyukov is no longer a minister): sending “volunteers” to Ukraine, the unclear status of the Russian military in Ukraine and the “hybrid” nature of the war in general allow saving on payments to the wounded and the families of the dead. Yes, and on equipment: first of all, not new weapons were sent to Ukraine (until recently), but those that had been idle for a long time in reserve.

The economy is much more affected not by the war itself, but by 1) confrontation with the countries of the West and 2) insane domestic economic policy, apparently caused by the excitement of the minds of statesmen in connection with territorial conquests.

Obviously, sanctions against Russia will be tightened in the near future. The European Union, as the German newspaper Die Welt reported on August 29, is considering a ban on the import of vodka, caviar and diamonds from Russia. Europe is afraid to offend Putin. Diamonds are a significant item of Russian exports ($2.5 billion), but at such a pace it will take 20 years to compile a list of goods exported from Russia. This step will cause no more damage to Russia than to the States - a possible ban in Russia of McDonald's and Jack Daniel's.

But not only the pace is important, but also the direction of movement. Not a separate ban, but their accumulating sum. Moreover, sometimes bans appear unexpectedly. On the same day, August 29, Poland and Ukraine banned a plane with Defense Minister Sergei Shoigu from flying over their territories, although he has not yet been included in the list of people subjected to sanctions.

„

UK to pressure EU to cut Russia off SWIFT

”

The United States is likely to continue the line associated with financial sanctions. Great measure threatens Russia with Great Britain: Bloomberg, on condition of anonymity, quotes a government official as saying that the country will put pressure on the EU in order to disconnect Russia from the SWIFT system. Removing Russia from the system of international interbank settlements will complicate foreign trade and make it impossible, for example, to use cards of Russian banks abroad. In 2012, such a sanction was applied to Iran.

An indirect consequence of the sanctions is the deteriorating prospects for Russian financial markets. If the content of Russia's Ukrainian policy does not change, the ruble and its stock market will fall, while bond yields will rise. The depreciation of the ruble (to almost 37 rubles/$1 last week) will be driven by capital outflows and a decline in foreign investment in Russian assets, both direct and speculative. This year, according to Bloomberg estimates, out of 24 currencies of developing countries, only the Argentine and Chilean pesos were worse than the ruble against the dollar.

Already last week, OFZ yields maturing in 2027 reached 9.7%. The prospect of a fall in the ruble may encourage the population to withdraw funds from banks and, as a result, lead to a banking crisis or, at least, to the need to spend 2-3 hundred billion rubles from the wealth fund to support the largest banks.

The development of the political situation is pushing the Russian stock market to the "Lehman moment", according to JPMorgan Chase analyst Alex Kantarovich, allowing even a 50% drop in the MICEX index (since the beginning of the year it has fallen by 6.6%). Such falls are well known to the Russian stock market: in 2008 it lost 67% of its value.

The analogy with the bankruptcy of Lehman Brothers in this case is the possibility of a sharp and strong outflow of funds invested in the ruble and ruble assets. Morgan Stanley also considers the Russian stock market overvalued, pointing out that the escalation of geopolitical tensions inevitably puts Russia's investment attractiveness into question. Financial markets no longer expect that the Russian-Ukrainian conflict will be easily and quickly resolved, Kantarovich writes, on the contrary, they are waiting for deterioration. This means that you need to withdraw funds from ruble assets.

In response to the new sanctions, Russia is likely to punish its citizens by banning the import of finished cars from Europe. The vast majority of citizens will approve this measure as well: last week, according to the FOM and the Levada Center, 78-79% of respondents approved of the ban on food imports, and Vladimir Putin's electoral rating (FOM) is at the maximum level.

This year, of the 24 currencies of developing countries, only Argentine and Chilean pesos were worse than the ruble against the dollar.

”

In addition to sanctions against Russia for violating the global world order, Russian officials are taking a lot of decisions that cannot be assessed otherwise than measures against themselves. Thus, the aggressive struggle of the Central Bank against inflation, which once again raised the key interest rate in July, despite the recession in the economy, causes an irresistible itch in the government and the Kremlin - a desire to eliminate the independence of the Central Bank. Inflation by the end of the year may exceed 9%, predicts Yulia Tseplyaeva from the Center for Macroeconomic Research of Sberbank. The Central Bank in this situation would have to raise interest rates, but officials want to force the Central Bank to conduct a softer monetary policy.

Last week it became known that Vladimir Putin approved the proposal made at the end of July by the Ministry of Economic Development, which wants to participate together with the Central Bank in determining the target inflation range, expand this range itself, and also revise it during the year depending on current inflation. The implementation of this idea will actually put an end to the policy of inflation targeting and, following the Supreme Arbitration Court, will kill another functioning institution of the market economy.

Oddly enough, the Customs Union risks becoming another involuntary victim of Russian aggression. As Russian foreign trade becomes more politically motivated, the opportunity for a coherent trade policy is being lost. After all, neither Belarus nor Kazakhstan has the same political motives that Russian policy makers have. By itself, the need to conduct a customs check to establish the country of origin of goods imported into Russia from Belarus or Kazakhstan deprives the Customs Union of half of its attractiveness: the rules of trade in the three countries are no longer uniform.

The tax and administrative burden is growing - at best, they will increase VAT by 2% (up to 20%), at worst, they will introduce a sales tax. The frequency and severity of inspections of retailers is increasing, which is required to prevent excessive growth in consumer prices. Opponents of American companies do not calm down either. As Bloomberg found out, now Rospotrebnadzor checks more than 100 McDonald's establishments in 12 cities of Russia. All this can lead to sad consequences - to the isolation of the country. With each passing day, there are less and less connections, threads that induce the Russian political machine to behave decently.