8 min read

Nobody Knows You When You're Down And Out

One of the hardest things as a Russia watcher or analyst tracking the country's economy is taking the news and data we have in hand seriously, but not literally.
Nobody Knows You When You're Down And Out

One of the hardest things as a Russia watcher or analyst tracking the country's economy is taking the news and data we have in hand seriously, but not literally. Survey reviews for political viewpoints are notoriously all over the map because of the reticence of individuals to reveal their own true feelings, preference to mirror what is defined as a socially acceptable and shared viewpoint, or otherwise lack of a clearly articulated vocabulary for dissent because of the general apathy and immobilization the regime generates, deploys, relies upon. Business surveys offer a slightly improved degree of 'objectivity' – who benefits from lying about the state of their order book!? – but suffer the same problem. Policy officials are now lying about what they themselves expect and have gone so far as to change the methodological calculation of basic figures like inflation multiple times this year alone. The Bank of Russia's August surveys tell an interesting picture when it comes to the expectations game:

Expectations for Changes in Costs of Production in the Next 3 Months, Black = business expectations Purple = inflation 3-month moving average
Assessment of Change in Demand for Production (net responses, positive - negative), Red = business expectations Blue =actual demand

In the last week, the inflation print was actually deflation of 0.16% down to 14.31% in annualized terms. The Ministry of Economic Development appears to be low-key touting this as Maxim Reshetnikov tries to cover his own *** by talking about the economy returning to sustainable growth by 2024 in their target scenario assuming all goes to plan. What exactly that growth can sustain is, of course, for them to know and us to find out. One of the reasons I did not have a base case for Russia attempting a mass invasion of Ukraine – by January, I was more thinking there'd be an escalation to seize Donbas but nothing else – was that few analyses seemed to be in the weeds enough to grasp how much COVID scarred the Russian economy and just how much of the damage was self-inflicted. Whatever we thought scarred over has been ripped open with fresh wounds from the post-February 24th sanctions. Consider the artificially low unemployment rate widely expected to rise this fall:

Rosstat data on unemployment rate (%) by month

One of the more bizarre shifts in thinking from the technocrats who are now scrambling to hide the damage from the boss came in the second half of 2021 when they considered the labour market. Kirill Tremasov, director of the Bank of Russia's monetary policy department, went so far as to suggest in a December interview last year that labour market analyses showed the economy was overheating and growing "above" its potential. His statement may make sense to an economist wedded to the Phillips Curve assuming a relatively stable relationship between employment and inflation, but there's good reason to believe it's not that straightforward.

The Bank of Russia's shift on employment basically began to postulate that the economy would overheat at higher relative levels of unemployment compared to the pre-pandemic economy. These assumptions can mean several things, but most starkly suggest 1) significant loss of working age Russians to COVID had a big impact on labour markets 2) long COVID has probably had an impact on labour markets 3) the degree of underinvestment in infrastructure and productive capacity since 2010 (but really back to 1999) has finally created a persistent feedback mechanism by which incremental increases in aggregate demand have begun more inflationary over time. Pension reforms technically expanded the pool of available labor, though so many Russian pensioners are still working in some capacity or trying to supplement their pensions, especially in conditions where they don't track inflation, that one imagines that could have played a role in driving up inflation. I'm quite skeptical, however, given that pensioners are also likely not consuming as much and often own their apartments from the Soviet period. They were also the likeliest to die during the pandemic (and to this day) from COVID.

When we talk about higher inflation over the last few years (invasion aside), we're not talking about commodity prices feeding through to every sector like in 2020, nor did anything done in 2020 or 2021 constitute a major stimulus when examining spending as a % share of GDP. In absolute terms, the country didn't spend that much more than Austria, a nation of just under 9 million people, and the World Bank's December report pointed to a lot of the problem:

Inflation in Annualized Terms
New Deaths per Million from COVID
Industrial Capacity Utilization

First, Russia's inflationary wave prior to the invasion matched that in almost lockstep with other emerging markets. Employment levels may play a role, but the story really seems to be driven dominantly by commodity prices and supply chain snarl snarls affected by various bullwhip effects, climactic events, tight foreign labor markets, and general disruptions. Unlike most other major economies, the country lost control of COVID in the last part of the year and it almost certainly affected the labor market and inflation, driving more people out of the workforce from death or medical complications. And finally, industrial utilization was surging when COVID began to run rampant and imported inflation linked to global commodity price levels/supply chain disruptions with large effects on an economy so dependent on value-added imported inputs. That surging utilization corresponded to an increase in capex, which probably accounted for a lot of the "over-performance" in the first months of the war. However, that increase in capex was from a woefully low base given the economy's needs and capacities.

Worse still, the current unemployment rate of about 3.9% is not a useful measure of the state of things. The number of factories that have resorted to furloughs or reduced shifts and throughput and growing evidence that wage arrears are slowly becoming a systemic problem suggest that the rate of employment is increasingly distinct from the rate of gainful employment or productive activity. If you had companies pouring in resources to catch up to 'hot' demand on the Russian market from 2021 in H1 2022, those investments are going to collapse in value as domestic consumption begins to reflect rising levels of official unemployment this fall. Business expectations may be improving right now, but there is zero evidence that federal policy akin to a major stimulus plan is going to materialize to smooth out the volatility in end demand they've struggled to manage since the end of 2020. Bank of Russia surveys on consumer inflation reflect just how weird the picture has become for businesses that, apparently, inherited an overheating economy before the war changed everything:

Black = Annualized Inflation (official) Blue = Public Inflation Expectations (annualized) Brown = Public Observed Inflation

These gaps are huge and interesting to unpack. My main working theory is that actual inflation levels are higher because price signals aren't capturing enough. Furloughs whereby wages get cut each month change the effect of employment on inflation accurately, for instance. Interruptions or the loss of certain kinds of goods necessarily suppresses demand if there aren't any decent domestic equivalents in the short-run. Deflation certainly is happening across major items like food, but it's also happening because so much demand is affected.

Higher observed inflation probably reflects the hidden costs of bidding on scarce goods and various unexpected knock-on effects. Insurance rates have to be rising if policies are covering cars without airbags, planes are short of spare parts, and you get the sense that safety regulations are taking a backseat to making everything appear to function at the moment. One imagines that prepayments become more prominent for businesses trying to hedge against rapid cost increases. I haven't spent enough time in communities where it would apply in Russia, but I'm curious about whether predatory rental markets for appliances popping up the way they have in places like the south side of Chicago might emerge in the months and year ahead. The more the regime's remaining technocratic core turns to statistical gimmickry or wonky, statist market-based interventions lacking decent institutions and policy frameworks to hide how bad things are, the harder it will literally become to determine who's down and out. That's a terrible sign of things to come for Russian politics. As my man Zack de la Rocha once said, "hungry people don't stay hungry for long." They may not storm the barricades, but elites face the difficult task of sating their own appetites while Putin's system decays, betrayed by the fallibility of its godhead in peace and war.


  1. The Wall Street Journal is reporting that the G-7 are likely to unveil plans for a price cap on Russian oil tomorrow, a development that's bound to raise some really interesting questions about how exactly they intend to administer it in the first place. A price cap will ease some of the pressure on global supply insofar as it will allow Russian producers to continue to produce, and nominally reduce the GDP hit expected. EU bans, however, trump that so at this point, it's likelier an assurance measure around inflation.
  2. Gazprom has announced it's building another small gas pipeline to China branching off the existing one linking gas fields in Sakhalin to Khabarovsk and Vladivostok. The pipeline is backed by an agreement with CNPC to supply 10 bcm of gas annually for 25 years with construction slated to start in 2024. Add that to the 50 bcm annually expected via the Power of Siberia 2 and the Mongolian route. That's still less than 1/3rd what Europe bought pre-COVID.
  3. MinPromTorg is banking on a program of subsidized mortgages holding rates at 3% for innovative companies will boost investment and jobs. As far as supply side measures go, it's quite a weak one. Russia's industrial parks have always drawn investment through preferential measures, but those measures are often gamed.
  4. According to Rosstat, real incomes fell just 1.3% y-o-y for H1 2022 based on their release of June data. Average wages are now just above 66,000 rubles a month. Nominal wages have risen 12.2%, which makes that gap believable based on the topline CPI number. However, that very likely does not capture whose wages are rising that much in nominal terms or the gap between pay rises with people staying in jobs or quitting and leaving. Government employees also get taken care of first usually. So I suspect that figure is a bit low, especially with the growing commonality of informal work to make up difference as the economy slows more.

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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