08/24/2022, 11.11
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Russia's War Economy: A Patriotic Bubble and Uncertain Future

by Vladimir Rozanskij

Despite Western sanctions, consumer prices are down and the rouble remains strong. The price of crude oil is decisive, which is however slowing down due to lower demand from China. Silence from Kremlin-linked economists and experts. Between September and December the country's future is at stake, with global consequences. 

Moscow (AsiaNews) - While Western sanctions are beginning to seriously undermine many sectors of the Russian economy, the population has been living in an illusory bubble of patriotic prosperity for three months now.

According to the latest surveys, the month of August, after the two previous ones, has also seen a steady drop in the prices of the most common items in shops and markets, and the exchange rate of the dollar and euro around 60 roubles (compared to 80 before the war). A phenomenon that has never happened in the last century, which instils a general optimism but has yet to pass the real tests at the gates.

In the meantime, the Russians are enjoying a summer of tranquillity and relative affluence, after the panic of the spring at the start of the war: policies to support the currency are keeping the 'strong rouble' safe from measures limiting its transactions internationally, and reserves of Western products have not yet been depleted, although they are beginning to run out. McDonald's and Starbucks have been replaced with domestic variants, which try to offer coffee and hamburgers of the same level.

Deflation is calculated and triumphantly announced by the statistical institute Rosstat no longer month by month, but week by week; economists wonder how long the idyll can last, trying to avoid the curses of the naysayers and the ecstasy of the state experts. Obviously, the main indicator of the Russian economy is the price of oil per barrel, which currently stands at around , falling for the first time below its previous level on 24 February.

The reason for this drop is mainly attributed to lower demand from China, which is struggling with new restrictions from Covid, and this also means that high oil prices are not as binding a factor as previously thought.

The demand for crude oil depends on many circumstances, and if a recession process begins in the world's major economies - a fairly likely prospect - then the price per barrel will fall by a lot and for a long time, really putting Russia in crisis.

Urals' oil currently sells at , more or less the same as in 2021 when it averaged , without therefore having gained from the rises of the past months: the so-called 'crisis premium' is missing, even though European countries' dependence on Russia in this sector is still very strong. And this is before the expected winter cataclysms.

The state budget has not been illustrated by the government for a few months now, unlike in previous years, and imaginative hypotheses flourish about this. For example, it is not known how much Russian military expenditure really amounts to. In principle, it is estimated that the budget in July was about 15% higher than in 2021, when the deficit was set at 900 billion roubles, so the increase could reach over 10 trillion by the end of the year. It will hardly be possible to cover such a chasm by avoiding massive money issues, which would lead to the inevitable rise in prices, but this is according to customary processes, whereas such a deficit in Russia had yet to be seen.

In July, the huge increase in expenditure, moreover, was accompanied by a sharp drop in revenue, 26% less than last year, including revenue from oil exports, and gas sales to Europe will also fall sharply in the coming months. In turn, VAT has plummeted by 42%, and the experts do not know what conclusions to draw; probably neither do the representatives of the Ministry of Finance in Moscow, who are forced into silence and token optimism.

Some clarification is expected from the September data, at least as far as tax revenues are concerned. Inflation following extraordinary currency issues usually takes two to three months to spike, and falling gas and oil prices should also force the rouble to weaken against the dollar, euro and yuan. Between September and December 2022, in short, the future of the Russian economy, and the global consequences thereof, will be understood.

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