8 min read

Mise en Цен

The latest consumer price index and inflation data release in the US has many, myself included, apoplectic at the disconnect between the manner in which inflation indices are constructed, what comparative year-on-year and month-on-month measures are indicating, and what's actually driving inflation. Textbook appeals to hot labor markets driving up wages or notional "overheating" are beginning to make less sense in an American context where rising interest rates are driving consumers out of the housing market and onto the rental market. Housing drives up services' share of the inflation print, which at 0.1% m-o-m suggests an underlying annualized rate of just 1.4% instead of the scarier 8.3% topline figure. For anyone talking up how sticky core inflation is, housing in my view is central to the story as it matches median CPI and is most exposed to rate hikes' short-term effect on the cost of buying a home:

For all the doom and gloom about another 75bps rate hike from the Fed – something that will send commodity prices down further and squeeze emerging markets as the dollar strengthens yet more – there's also evidence that inflation is narrowing. Hence why rent I think is really the core story that the Fed's hawkishness and ongoing handwringing obscure as goods inflation has largely receded:

The US data release offers an excuse to try to think about what exactly is happening across the Russian economy that's yielding the apparently "positive" indicators about its relative performance in the face of economic blitzkrieg. After all, the statistical indicators analysts depend upon see frequent changes in methodology and have their own path-dependent idiosyncrasies that shape how the country's bureaucrats and observers such as myself structure economic reality.

Rosstat is apparently toying with its real income metrics and planning to incorporate cashbacks, cashless transfers, investment earnings/financial asset values, and bonuses into its calculations. For lack of a better word, it's transparent bullshit. January-May data for real incomes marked a y-o-y decline of 7.2%. Any 'recovery' since is weak and deserving of scrutiny. Look no further than VEB's latest report detailing that GDP actually grew 0.6% in July:

Evaluation of GDP, monthly data for y-o-y growth

But based on the retail data available, that recovery is not much of a reflection of the strength of domestic demand. The Central Bank's latest release about regional economies had some useful comparisons, but given how flubby all the data is, I just pulled the national stats that reflect July data releases (the recent report dropped on the 8th of September):

All data is y-o-y as of July except for Real Wages (June). Retail = turnover

These figures are expected to account for what VEB sees as a 0.2% growth for the month of July. How exactly that's the case is an open question. As we can see here, retail's in the range of 8-10% down and hasn't significantly recovered since July with what we have in hand. Housing completions are an interesting metric given the government estimated that construction demand was contracting 10-20%, not growing (as suggested by the data here) in the last 2 months. To me, that suggests that firms are racing to finish things that were already under construction and promised to solvent buyers in order to get ahead of the expected demand hit from falling incomes and mortgage issuances. The nominal increase in the amount of money held in escrow could, in theory, point to strong housing market, but from what I can tell suggests things are getting steadily worse. Escrow is a contractual arrangement whereby third parties receive and disburse money for transactions between buyers and sellers conditioned upon the fulfillment of certain conditions, such as clearing background and credit checks and 'successful' inspections of properties. If people are putting out more cash in escrow and housing completions are up, I'm guessing that's largely a reflection of a backlog from prior orders and pressure on companies from up above to deliver things for which they've already bought the commodity inputs like rebar, concrete, lumber, and drywall. Mortgage debts are climbing while incomes are declining too. In other words, I suspect that housing demand still running thanks to the mortgage subsidy schemes adopted since 2020 is propping up a decent amount of consumption on paper with mounting financial risks from general economic contraction. Inflation may be slowing down from its peaks above 15% y-o-y, but mortgage debt seems set for a more gradual return to (relative) stagnation.

The Rosstat labor market data for jobs by sector from 2017-2021 goes a great deal towards explaining why the inflationary risks and demand profile for the Russian economy are so strange in light of the Bank of Russia's view that the economy overheated last year:

y-axis = thousands of jobs

Between 2017 and 2021, the economy lost a net total of over 3 million jobs from a shrinking workforce, anemic growth or contraction, and excess mortality. Here's a snapshot from Our World in Data to drive the point home that Russia's disastrous response to COVID has had critical and negative effects on its macroeconomic stability and ability to prosecute the invasion successfully, whether from a manpower and resourcing standpoint or from the perspective of the institutional chaos of the regime's handling of domestic affairs:

Cumulative Excess Deaths Per Million People

The mortgage boom coincided with a massive increase in deaths among people of both retirement and working ages, with a considerable number of pensioners working part-time, sometimes within the informal/grey market economy. Though Prime Minister Mishustin and his team in the cabinet conceived of the low-rate mortgages backed by state money provided to derisk them to banks as a demand-side measure propping up construction, they unwittingly unleashed a shift in spending preferences and priorities. With the pandemic affecting so many people's daily lives and livelihoods, regardless of whether or not they trusted "the science" and vaccinations, buying homes became a safe investment for a variety of reasons. Home prices were steadily rising, yes, but more fundamentally ensuring one's family has a roof over their head and furnishing a home were concrete bits of private/personal life many could shape with so much in the air. This is a comparatively recent development in Russia given that the housing market was dominated by individuals and families inheriting their Soviet-era apartments for a long time. Consumers purchasing new homes taking out mortgages was steadily normalized over the last 15ish years after the surge in incomes from 1999-2008 and some regulatory changes.

The mortgage subsidy program in 2020 laid the foundations for a very different political economy of housing in Russia, one where homeowners would have political cause to seek the appreciation of newly acquired assets by restraining new builds, greater exposure to interest rate fluctuations by way of debt-financing for purchases, and more. Buying new homes also often means buying a bunch of durable goods to furnish those homes – microwaves, television sets, new couches and other furniture, and more. Much of the technical stuff is imported or dependent on imported components. But doing up one's kitchen or bedroom with contractors and the like isn't so much. If I had to guess, more consumer spending has rotated defensively towards homes and related purchases, all the more important as going out becomes more difficult as incomes fall, costs rise, and mpre people are forced to retreat into their private lives to cope with the political situation. That may partially explain the category breakdown of the relative performance of different parts of the Russian economy, suggesting that Q4 is when the pain really starts. The sheer number of productive workers lost in the last 5 years is a much bigger problem for labor-intensive industries like construction or services like hospitality. Let's say the economy grew 0.2% in July. That's nowhere near enough to sustain any momentum to overcome the additional shocks to exporting industries that began to take effect in August and the psychological impact of events in Ukraine.

Growth in July likely correlates to bringing forward activity planned just before the invasion, particularly for construction which was beset by long delays and occasional troubles procuring materials in 2021. August might show some minor nominal improvements, but as real incomes continue to decline or otherwise remain lower, debt is what's going to prop up consumption. In August alone, 1.97 million people took out new credit cards (about 3% of the workforce). Rising employment will hit a wall as retail and other service sectors inevitably do less business, factories struggles to maintain full output unless their supply chains are wholly domestic, and construction demand gives out. Slowing inflation also increases the strain of using debt in real-terms, the same phenomenon we saw play out from 2016-2020. Timing and composition are everything when unpacking topline data. Seems that both have given us a weird picture of what's going on.


  1. The government's got a new target to double the ruble's use for external trade settlements from 19.5% to 40% by 2025. The use of 'neutral' currencies is expected to rise from 1.6% to 20% over that time as well. The question, as always, is how. Doing so under conditions in which the government is avoiding issuing ruble-denominated debt will be quite difficult since trade partners need some kind of ruble-denominated safe asset to hold so they can recycle any surplus or trade earnings . . . unless Russia starts producing more stuff.
  2. The reignition of fighting between Armenia and Azerbaijan can conveniently be linked to events in Ukraine, but almost certainly has its own momentum and logic separate from Russia's performance in the war. However, the additional reports of shots fired between border guards in Tajikistan and Kyrgyzstan speaks to an underlying reality accelerated by the invasion: Russia has been losing influence and power to shape the security environment across the South Caucasus and Central Asia slowly, but steadily since annexing Crimea.
  3. The Ministry of Finance is now pushing to slap export duties onto fertilizer, a development that parallels early reports of interest in Moscow cutting a fertilizer deal next to the grain deal with Ukraine to export via the country. The maneuver would raise just 100 billion rubles while threatening the industry's investment plans and margins. It also exposes how stupid the gas cutoff to Europe has been – fertilizer is now one of the only ways they can realize any of those tax revenues from a natural gas input.
  4. Since the crisis began, Sberbank is reporting that its large corporate clients have cut their FX holdings by 94%. Where cash was about 40% of the bank's largest clients' portfolios at the beginning of the year, now it's about 4%. Now that trade earnings for companies are the only source of USD, Euro, lira, or CNY liquidity, there's no point holding that cash in the bank for planning purposes. Everything gets recycled. That also means borrowing more in rubles, which may be contributing to the credit expansion we're seeing at the moment, but that would also run into purchasing power issues since the real exchange value of a ruble and any FX in Russia are not directly reflected by the official exchange rate.

Like what you read? Pass it around to your friends! If anyone you know is a student or professor and is interested, hit me up at @ntrickett16 on Twitter or email me at nbtrickett@gmail.com. Always happy to look at any freelance opportunities pertaining to Russia, Eurasia, energy and commodities, or my old love foreign policy.

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