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\t\t\t\tHow the Kremlin Decided to Sacrifice Small Business to Pay for War
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Rising fuel prices are driven and will continue to be driven by international sanctions that limit exporters\u2019 revenues, as well as Ukrainian drone strikes on refineries and other oil-and-gas infrastructure.\u00a0<\/p>\n
A fresh tax rise (of two percentage points on VAT to 22%) will not cause only a short-term uptick in inflation, as Nabiullina says \u2014 it will simply increase inflation in a way that would not otherwise have happened. Only an expansion of domestic production and imports could offset that rise. There are no signs of that happening at any point in the future.<\/p>\n
You can\u2019t explain the contradiction between the Central Bank\u2019s words and actions with economic factors. But you can easily explain it politically. The draft federal budget for 2026 and for 2027-2028 clearly shows that revenues have no chance of matching expenditures. Expenditures have been cut to the minimum \u2014 the barest social spending so people won\u2019t revolt, investments delayed or reduced. It\u2019s all war, all hardcore \u2014 there\u2019s no time for indulgence now.<\/p>\n
They can\u2019t raise revenues enough to satisfy the government\u2019s military appetite. The decision to raise VAT horrified small business owners, who responded by saying they\u2019d close up shop. They reacted so abruptly that the government had to figure out how to boil that frog slowly, lowering the income threshold at which one must start paying VAT, gradually.\u00a0<\/p>\n
Moreover, they won\u2019t make village shops pay VAT \u2014 I hope \u2014 and they probably won\u2019t force truck drivers to either, so my protagonist Sasha<\/a> might still be able to feed his family.<\/p>\n But there\u2019s simply not enough money. Exporters, instead of complaining that trade is falling due to sanctions, complain that the ruble is too strong. That\u2019s understandable: complaining about the war is a criminal offense, while complaining about Nabiullina \u2014 whose rate policy strengthens the ruble \u2014 is safe, easy and socially acceptable.<\/p>\n It\u2019s not that there\u2019s nothing to complain about. Tight monetary policy really does slow the economy and industry. But there\u2019s a nuance \u2014 it largely slows the civilian sector of the economy. The defense sector and government procurement operate under different rules: loans at 2-8% per annum with restructuring options, advance payments on state orders, and price increases, among others.<\/p>\n But the military-industrial complex is being slowed down, too! The only thing still growing is drone production, a simple assembly-line industry hidden in the category \u201cother transport equipment.\u201d When it comes to producing shells, let alone rockets and tanks, you need new workshops (which need to be constructed), high-precision machines (which must be imported) and people (who must be recruited and trained).<\/p>\n And when the pro-Kremlin Center for Macroeconomic Analysis and Short-Term Forecasting writes that Russian industry is between stagnation and recession, it is wrong in only one respect: Russian industry, and the economy as a whole, sits between stagnation and stagflation \u2014 a combination of stagnation and high inflation. I wouldn\u2019t exclude the possibility that the Russian economy will manage to combine an economic downturn, a recession, with high inflation.<\/p>\n Is this the end of the Central Bank\u2019s independence? When a company is doing well, shareholders tend to turn a blind eye to managers\u2019 quirks. When things go badly, people start looking for someone to blame. And if you can\u2019t name the real culprit, all anger falls on a scapegoat.<\/p>\n The Central Bank has become such a scapegoat. On the one hand, you can lambast it as much as you like. On the other hand, as people in the corridors of power say, Elvira Nabiullina has one boss \u2014 President Vladimir Putin. So there is no doubt that any abuse won\u2019t stick to her.<\/p>\n However, shortly before the rate decision, a very unpleasant signal arrived for Nabiullina: the leash the Kremlin gave her to act independently was being tightened. The Finance Ministry prepared draft amendments<\/a> to the law \u201cOn Currency Regulation and Currency Control,\u201d which record the possibility of the president issuing decrees, alongside federal law, to regulate relations in the currency sphere in Russia \u2014 in particular to unilaterally introduce restrictions<\/a> on citizens’ foreign currency transactions.<\/p>\n \t\topinion \t\t\t\tCan Russians Be Trusted With Dollars? The Finance Ministry Doesn’t Think So. The second reason to be alarmed is that this change puts the Finance Ministry at odds with the Central Bank. The reason is clear: the Finance Ministry is responsible for the unbalanceable budget and stubbornly flat revenues. Nobody can rein in a president hell-bent on war. But they can put pressure on the Central Bank to loosen the reins of monetary policy.<\/p>\n Yes, cutting the rate in current conditions will spur inflation. But the Central Bank, not the Finance Ministry, is responsible for inflation.<\/p>\n The end of the cooperation between these two agencies is a bad sign. As one economist wittily explained to me, a ship can sink in different ways. It can capsize, dragging everyone down at once, or it can slowly settle to the bottom while keeping stability. While the Finance Ministry and the Central Bank worked in tandem, the ship of the Russian economy sank evenly. Now it might capsize.<\/p>\n So the Central Bank went into the rate meeting with such a set of starting conditions before making a concession by lowering \u2014 a quarter of a percentage point \u2014 because a larger reduction against a two-digit rate would have looked like mockery.<\/p>\n And the signal is very clear: Nabiullina had to give in. She did so with all the dignity she could muster. So much so that when a journalist asked about the ruble\u2019s exchange rate in the event the war ends, she replied:\u00a0\u201cAny scenario that implies an improvement in external conditions will be disinflationary. That will contribute to us being able to lower the key rate faster.\u201d<\/p>\n You couldn\u2019t be clearer about what exactly was behind the bank\u2019s rigidity. Putin did not give Nabiullina carte blanche so she could explain to him the harm the war does to the Russian economy. He gave it so she could ensure he could wage that war. And if he decides he can continue the war without the Central Bank\u2019s help, then no economic considerations will stop him from withdrawing his patronage.<\/p>\n Unfortunately, there is a high probability that he will decide so. If the Central Bank loses independence and shifts to a policy of fiscal dominance, prices will rise, businesses will close and citizens will have a much greater motive to support the war. After all, the army will feed you and give your family a hefty package of benefits if you die.<\/p>\n \n\t\t\t\t\t\t\tThe views expressed in opinion pieces do not necessarily reflect the position of The Moscow Times.\n\t\t\t\t\t\t<\/p>\n A Message from The Moscow Times:<\/p>\n Dear readers,<\/p>\n We are facing unprecedented challenges. Russia’s Prosecutor General’s Office has designated The Moscow Times as an “undesirable” organization, criminalizing our work and putting our staff at risk of prosecution. This follows our earlier unjust labeling as a “foreign agent.”<\/p>\n These actions are direct attempts to silence independent journalism in Russia. The authorities claim our work “discredits the decisions of the Russian leadership.” We see things differently: we strive to provide accurate, unbiased reporting on Russia.<\/p>\n We, the journalists of The Moscow Times, refuse to be silenced. 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Remind me later.<\/p>\n