Non-consumption society

The economy is being rebuilt on a war footing. Money and labor flow into the army and the industries that serve it, the state budget swells, and private consumption falls. This can take a very long time. To paraphrase a well-known joke: “No, son, you will spend less now.”

Consumption, lights out!

This is already reflected in the statistics. In 2022, real (taking into account price increases) retail trade turnover decreased by 6.7%. The decline in consumption is also noticeable in the structure of GDP: the share of household expenditures on consumption fell from 49.2% of GDP in 2021 to 46.9%. Russia's GDP is about 150 billion rubles, so these 2.3 percentage points are more than 3 trillion rubles not spent.

It's not that people don't have money. Real (inflation-adjusted) incomes and average salaries decreased by only 1% in 2022.

But income is important not in itself, but in how people can use it. At the end of the year, according to calculations by the TsMAKP analytical center, which advises Russian authorities, consumer activity was at a minimum, and the share of income saved by households was at a maximum. The share of those who prefer to save free money rather than spend it on expensive goods reached 55.9% in February - this is the maximum since March 2021. People are unsure about the future.

In addition, there is often simply nothing to buy . With the departure of global brands, the supply of goods has decreased sharply. The drop in sales is the stronger, the more Western companies have curtailed supplies, Central Bank analysts noted (this is not its official position): outsiders include household appliances and electronics, cars and furniture - this was affected by the departure of IKEA.

The fall in sales of non-food products explains almost the entire decline in trade. It is highest in the Central and Northwestern Federal Districts (–12%: the Moscow and St. Petersburg agglomerations influenced this) and in the Urals (–8.5%). In other counties, the decline is 3–6%, which is less noticeable for those living in small towns and rural areas, where the penetration of global players is not so high.

Parallel imports, which reached $20 billion by the end of the year, are little substitute for the former consumer diversity.

“Structural transformation [of the economy] = transition to new means of transportation,” the Hard Figures analysts sneer about the jump at the end of last year and the beginning of this year in the production of “other vehicles,” which includes military equipment, against the backdrop of automobile production, which still half the pre-war level.

Military industrial complex, rise!

Special equipment has become more important for the state than passenger cars. The Russian economy was just as unprepared for war as the army . But the situation is beginning to change. The main thing that the authorities now need from plants and factories is uninterrupted supply to the front. The military-industrial complex cannot quickly and manifold increase the production of weapons and equipment, but some results are already visible.

Industrial output in January was 2.4% less than in January 2022, but in some places there was noticeable, sometimes phenomenal, growth. These positions include those used in war and occupied territories.

Among the most dynamic sectors last year, along with agriculture, were construction (+5%) and “Public administration and military security, social security” (4.1%) - everything is clear with this. There is no boom in construction, rather the opposite . Traffic to shopping centers is already almost as low as during the pandemic, and every tenth one is for sale. Office centers are empty after foreign companies leave. Housing commissioning in 2022 increased by 11% to a record 102 million square meters, but these are echoes of the past boom (construction is a long process) and the result of a dacha amnesty. The record is largely due to the growth of individual housing construction by 16.5% - it accounted for 55.7% of housing commissioned last year. Housing developers are putting a good face on a bad game: demand has decreased; in the fourth quarter, the number of equity participation agreements (sales of new buildings) was 3.7 times lower than a year earlier. In Moscow, home sales have fallen significantly , and prices have been declining throughout the country for three quarters in a row.

But restoring what was destroyed by war or constructing defensive structures is also construction. The Belgorod region, for example, spent 10 billion rubles on this.

The contribution of the military-industrial complex to industry can be judged by the index calculated by TsMAKP. Unlike Rosstat, its industrial production index does not take into account closed positions. Until 2021, the discrepancy between the rates of industrial growth according to Rosstat and according to TsMAKP rarely exceeded 1%, but in 2021–2022 it often reached 3–4% (naturally, in favor of Rosstat). This means that war production has consistently grown faster than civilian production, where the decline has been greater than average.

How deeper this decline can be judged only by indirect signs. Financing of state defense orders in 2023 will increase by 1.5 times. The supply of ammunition to the army increased by 69–109%. Kalashnikov increased production by 40%, breaking a 20-year record for the production of small arms. The civil aviation industry lacks spare parts, since enterprises are “ stressed by state defense orders ”: component suppliers supply military aviation. The demand of the military-industrial complex, according to stock analysts, supports the production and price of shares of companies producing steel.

The explosive growth of government orders from military-industrial complex enterprises against the backdrop of stagnation or decline in many other areas makes it increasingly attractive for business and workers. Manufacturer of Su-34 fighter-bombers, Novosibirsk plant named after. Chkalov, who is also planning to produce drones, in connection with the expansion of state defense orders, increased the number of employees from 5 to 6.5 thousand, and plans to hire another 3.5 thousand. Defense companies are hiring (here are some more examples ) while depriving other industries of workers. The number of people wishing to work in the military-industrial complex jumped in the fall: more than 830,000 employees of military factories and related sectors are exempt from mobilization, it is possible to get an apartment (such programs are being launched in many regions), the government is subsidizing relocation to another region, banks are rushing to lend under special programs for the construction of housing for military-industrial complex employees . Rostec, Almaz-Antey, Roscosmos, and Ural enterprises operate in 2-3 shifts and have switched to a six-day work week.

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The result of the decisions of 2022: the structure of GDP is changing - the share of “guns” is growing, and “butter” is falling, explains economist Yuri Danilov. Now GDP will be much less consistent with the assessment of the population’s standard of living: it will fall (even taking into account all the falsifications) more slowly, and the standard of living will fall faster. “If the military-industrial complex produced an expensive rocket, it was launched, it exploded somewhere, and GDP increased. Did much of the civilian economy benefit from this process?” — asks a rhetorical question. economist Sergei Khestanov

A similar deformation of the economy destroyed the USSR: it produced a lot of missiles, tanks and machine tools, but people did not feel it. Having overtaken Western countries in tons of metals and shells produced, the USSR lost in the standard of living of the population.

Money from the state

Not only people, but also companies do not spend money. They are able to support production, but not investment programs, said Kirill Tremasov, director of the Central Bank’s monetary policy department, citing surveys conducted by the Central Bank and their own conversations with business leaders. The expansion of government investment replaces the reduction in investment activity of the private sector, the Central Bank notes .

This is clearly not enough. In his forecast, which is generally quite optimistic (up to 1% GDP growth this year), he predicts a decline in investment of 1.5–4.5%. Now business investment has been replaced by government projects, noted Sofya Donets, chief economist at Renaissance Capital for Russia and the CIS, citing as an example the above-mentioned growth in construction, “not typical for previous crises.” And the chief economist of Alfa Bank, Natalia Orlova, predicted that this year would be a year of investment recession.

“There will be no money next year. We will need foreign investors,” Oleg Deripaska said at the Krasnoyarsk Economic Forum on Thursday, calling state capitalism and “Gosgazmyas” a path to nowhere: “I am horrified by the [budget] resources that were obviously wasted over the past year. I used to think it was billions, but now, I see, the count is already in the trillions.”

Everything for the front, everything from the budget!

Such a reorientation of the economy required money, of course, government money. In 2022, budget expenditures turned out to be 7.4 trillion rubles higher than planned. And although approximately 770 billion of them are “paper” (this is how the deferment of social contributions for businesses is formalized, explained Finance Minister Anton Siluanov), even without them the discrepancy is gigantic - almost 30%. Previously, Vladimir Putin, who for more than 20 years had been distinguished by extreme caution and moderation in matters of budget policy, did not allow himself anything like this. Despite record oil and gas revenues, Russia ended 2022 with a deficit of 3.3 trillion rubles instead of the planned surplus of 1.3 trillion. Compared to 2021, revenues increased by 10% and expenses by 25%.

The difficult budget situation triggers a vicious circle in the economy. To plug the hole, the government demands money from businesses. Last year, Gazprom paid a one-time production tax of 1.2 trillion rubles. In this case, the state wants to collect 300 billion from large businesses one-time. “There are already serious problems with money in the country, so they started shaking business like crazy,” Deripaska said. Money is needed, so new bills will be issued. All this increases the state's share in the economy at the expense of the private sector. What an investment this is!

Since May, the Ministry of Finance has classified reporting on budget execution even for large items. The main purpose of this is to prevent society from assessing the cost of the war.

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It is impossible to calculate it: military spending is distributed across different items. In addition to national security, they exist in the economy (investments in military-industrial complex enterprises, subsidies for import-substituting industries), and in social policy (payments to war participants and their families, expenses for refugees), and in housing and communal services and infrastructure projects (in occupied territories), and even in healthcare (treatment of the wounded). According to the 2022 Budget Law, total spending on the army (3.5 trillion rubles), national security and law enforcement (2.8 trillion) should have amounted to 6.3 trillion. In the fall, the Ministry of Finance predicted spending on the army was already 4.7 trillion; together with the security forces, the figure is already 7.5 trillion. This year, spending on these two items should amount to 9.4 trillion.

This year the budget deficit continues to grow. Siluanov promises to keep it within 2%, but experts do not understand how he can do this. The debate is only about how much spending and the deficit will increase. It is financed mainly by issuing domestic government debt, which is mainly purchased by state banks with money from the Central Bank. Such a scheme could lead to higher inflation, economists say , another way to shift the burden of war onto the population.

I estimate the cost of the war for the federal budget alone at 10 trillion rubles in 2022—almost a third of its spending, or 6.6% of GDP. To this we must add the expenses that were borne by regional budgets (one-time payments and other measures to support the mobilized), business (purchase of raw materials and components for the military-industrial complex from offshore accounts), and sometimes the population (assistance to the army, supplying the mobilized with equipment). This is why the dynamics of GDP and private consumption are increasingly diverging.

Military share of the economy

Between 1934 and 1938, German military spending increased from about 5 to 15% of GDP, and the USSR from 5 to 10%. In 1939–1945, up to half of the GDP of the warring countries went to war: 50% for Germany, 45% for Great Britain, 44% for the USSR, 32% for the USA. However, then states did not spend as much as they do now on social purposes. Pensions, benefits, infrastructure, education, healthcare required much less funds from budgets: welfare states had not yet been built.

During the Cold War, military spending accounted for about 10% of American GDP. In 1980, UK military spending was 5% of GDP, Korea and Taiwan - 6-7%.

The collapse of the USSR and the end of the Cold War allowed developed countries to significantly reduce defense spending. In total, the military budgets of the EU countries for 1960–2020 decreased from 4 to 1.5% of GDP, and the USA - from 11–12 to 4%. This provided a great peace dividend: economic growth accelerated sharply and the population's well-being increased. In recent decades, defense spending in most developed countries has amounted to 2–3% of GDP.

The Russian economy is capable of withstanding several years of military spending of 6–7% of GDP and about 10% of GDP of total spending on war. But this will require a noticeable increase in taxes and a reduction in spending for “peaceful purposes.” But even if the economy collapses, the regime can survive longer, as the experience of Venezuela shows. 10% of the population has emigrated, a shortage of even essential goods, sanctions and other things have not yet deprived Nicolas Maduro of power.

If the war-ending crowd needed a populist slogan, this might be it. Over the course of 2–2.5 years of war, the federal budget will spend on it an amount equivalent to the entire debt of the population to the banking system (26.8 trillion rubles). What would you prefer: that the taxes collected by the state go to the war or to the state to pay off the entire debt of the population to the banks? It would be like the biblical year of debt forgiveness. The move is completely insane - and yet much more meaningful than how the Russian authorities are going to spend this money.