The Kremlin is tightening the screw to save the economy. “We discussed with Putin for many hours”

Ashley Davis5 days ago

0 36 6 minutes read

Tatiana Rybakova is a Russian journalist and publicist who analyzes the political and economic situation in Russia.

Russian Prime Minister Mikhail Mishustin came to the State Duma to deliver sad news to parliamentarians. – We discussed with Putin for many, many hours how to finance the emerging budget deficit, he said. Hearing these words, the president of the central bank, Elvira Nabiullina, who was present in the room, reacted with a sarcastic smile.

Mishustin should know that talking about the budget deficit in the future is at least a slight misunderstanding. Last year, the deficit in Russia reached record levels, exceeding all possible limits. This year it will be even bigger – everything indicates that it will increase to 10 trillion rubles (PLN 476 billion). But I won't nitpick. The most important thing is that Mishustin admitted that there is a deficit, but there are no plans on where to get the money to cover it, despite many hours of meetings with Putin and Nabiullina.

In short, a budget shortfall can be covered in one of three ways known in the world. The first is the devaluation of the national currency and the depreciation of existing debt. This is an acceptable behavior for Putin's main, not very wealthy, electorate – importers suffer the most from the devaluation, which makes imported goods more expensive. And the main consumers of imports are the middle and upper classes. Less wealthy citizens buy domestic products regardless of what is available. In theory.

In Russian practice, even native potatoes were derived from Dutch varieties, despite all advances in breeding. Those from domestic varieties did not grow, or they did, but by spring they rotted because the breeders did not learn how to grow longer-lasting potatoes.

In Russian cars, the only thing that is domestic is the nameplate. It is better not to look for other domestic traces on products – if they are found, they were most likely produced in accordance with the famous saying: “it can be done [lepiej]but why?” Our entire import substitution program is so rigorous that even his most spectacular successes are hidden for fear of public reaction – this is apparently why Russian planes that replaced previously imported models are hidden in factory hangars.

This is why each devaluation of the ruble inevitably translates into price increases. This applies to goods that are in mass demand – for example, handbags or chocolate, for which the wealthier part of society is able to go to Dubai (now they can also go there to see the explosions). Inflation is already a problem in Russia — yes, it is slowing down, but prices are somehow constantly and noticeably increasing.

Even the pro-Kremlin Center for Macroeconomic Analysis and Short-Term Forecasts, which constantly argues that the central bank should reduce the interest rate, does not expect inflation to fall below 5 percent by the end of the year. This means that the central bank will most likely continue its restrictive monetary policy, which Nabiullina does not hide (and probably did not hide during her meetings with Mishustin and Putin).

It is difficult to devalue the ruble when the country is virtually cut off from the global currency market. Nobody in Russia needs dollars or euros – they can't buy anything abroad anyway. The pseudo-dollar games that started on the stock market are for speculators. And the yuan is an inconvertible currency – the Chinese Communist Party does not allow its exchange rate to be manipulated.

So taxes

There is also a second way to fix the deficit – increasing revenues. Since there is nothing to stimulate economic growth – and there is no point, since all resources, material, financial and labor, are currently being taken from the civilian sector and given to the military – the authorities can only increase taxes and other fees.

The problem, however, is that people and businesses are getting poorer faster than fees are rising. As a result, it turned out, for example, that the total budget deficit of Russian regions in 2025 increased 3.6 times compared to the previous year (by over 1 trillion rubles, PLN 47.7 billion) and reached 1.5 trillion rubles (PLN 71.5 billion). One of the main reasons for this state of affairs is the increase in corporate income tax and personal income tax rates from 2025. These taxes go to regional budgets, but the difference between the previous rates and the new ones was taken over by the federal budget – precisely to finance last year's deficit.

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And business has been actively shrinking over the past year – apparently underestimating the beneficial combination of expensive borrowing and higher taxes.

What's more, wage growth has stalled and even declined in some places – a shift to shortened workweeks, furloughs without retained pay, cutting bonuses, allowances and bonuses – all of these practices are spreading like wildfire across the country. As a result, the regions suffered double losses: due to the decline in economic activity, tax revenues have decreased and an increased share of those taxes that exist have been taken over by the central government.

This year, the situation in the regions will most likely worsen. Since this year, VAT has also increased – and this is a way to slow down consumer activity. Moreover, the most prosperous small companies were forced to pay VAT by lowering the threshold for simplified taxation.

VAT goes to the federal budget, and taxes from the simplified tax system, patents and self-employment tax – to regional budgets. This means that the regions have lost twice: not only will economic activity slow down further, but the best local entrepreneurs will now pay taxes not to the local treasury, but to the federal government. And many of them probably won't survive.

Still not enough

However, this is not enough for the authorities. They are still wondering what else can be done.

You can reduce your expenses. Finance Minister Anton Siluanov has already announced tightening budget regulations – the limit price of crude oil is currently $59. (PLN 218.7), may be reduced. According to this principle, only the revenues from oil exports that are below the border price will be transferred to the budget. Anything above will go to the National Prosperity Fund. Currently it is almost empty, but it was from this “pocket” that the government found it easiest to finance unforeseen military expenses. At the same time, Russian oil is currently sold at around $40. (PLN 148) per barrel – it is obvious that none of this goes to the fund.

There are cuts left – but where to make them? For example, Rosneft's director general, Igor Sechin, is seeking to revive the Eastern Oil Chemical Company project with a “modest” value of 1.5 trillion rubles (PLN 71 billion) – roughly the same as the total deficit of regional budgets. Who would dare to disturb such a noble endeavor of such a respected person?

Therefore, the only option left for the Ministry of Finance is to take out the debt. He can do this easily. First, banks – the main buyers of sovereign debt – are either state-owned or subject to state supervision. It will be difficult for them to reject the proposal of the Ministry of Finance. They have no reason to do so either: they immediately pledge the purchased government bonds to the central bank and receive the cash. Although these operations do not directly increase inflation, they do increase it over the course of a year. Secondly, this debt is expensive for the state due to the high interest rate of the central bank, which – and here the circle closes – cannot be sharply reduced due to the threat of uncontrolled inflation.

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Apparently it's about how to choose the least bad of these variants, The heads of the government and central bank talked with Putin “for many, many hours.” Judging by the lack of optimism in Mishustin's voice, it seems like they haven't found a solution. However, this work is hard – pulling the hippopotamus… that is, the budget out of the swamp.

I will sarcastically point out that for the last four years, Russian politicians have been driving him there with loud laughter and cheerful whistles, repeating: “we will not haggle over the price.” Well, if your merchant class wants to break the dishes in the inn – go ahead. Just please pay the bill! And now you don't have to look embarrassed in your pockets – after all, these are not your pockets, but the pockets of business and society.

Ashley Davis5 days ago

0 36 6 minutes read