What economic problems await Russia in 2024

Inflation is already becoming a political rather than an economic problem for the Russian Federation.

2023 was a turning point in the history of sanctions against Russia. Russia will see its main economic problems in 2024. Of course, there were expectations that they would worsen in 2023, but let's not forget that sanctions are not the only factor affecting the Russian economy. We need to look at Russia's relations with countries that do not impose sanctions, and a certain redistribution of Russian expenditures, including military production.

If we look at the numbers, in 2022, over 11 months, the trade balance was positive at around $290 billion, meaning that Russia exported 290 billion more goods abroad than it imported, thus covering its foreign exchange needs. Of course, these were budget revenues. In the first 11 months of this year, the trade balance was about $109 billion. That is, it has decreased by more than half.

The problems of the Russian Federation are not only eggs, but also individual industries.

For example, the withdrawal of Western car manufacturers and the Chinese entry into the sector has yet to restore the Russian automotive industry. On the contrary, the factories transferred to Russian hands are not performing as expected, and some are being re-profiled.

There are significant problems with the functioning of the aircraft industry. For Russians, it has become a strange thing (I'm being ironic) that the production of medium-haul aircraft, such as the Sukhoi Superjet and so on, depends on imported parts by about 60-70%. The localization of this production is, to put it mildly, a challenging, time-consuming, and costly business. Therefore, these are economic problems, and by and large, if we look at the latest political statements of both the Russian government and President Putin, everyone says, "Why do we need these sanctions when we have been cooperating so well?" This suggests that they also recognize their economic problems. So, the sanctions don't work, but let's please lift them.

The price ceiling on oil has worked and is still working, although we have achieved 100% of the desired result. There is a scheme where, on the one hand, there is a shadow fleet; on the other hand, there are several intermediaries. One shows that it exports oil at the price ceiling, then somewhere, this oil is reloaded onto some cunning tanker without a transponder, and then they get the corresponding profit. But when we look at this scheme, we also have to understand two things. The first point is that even if the oil is resold at a premium, not all of this premium goes to the budget or Russian companies. The intermediary companies are usually not Russian companies, although they may have Russian capital. So, they keep a significant part of these additional margins for themselves.

The second point. Our partners have discussed imposing an embargo on selling tankers directly to Russia to reduce all possible and impossible opportunities to form this very shadow tanker fleet. But there were problems there. Some countries, such as Greece and others, said it was unnecessary to hit so hard, particularly on their own economic interests. It was decided that the sale of tankers to the Russian Federation, at least by the countries of the pro-Ukrainian coalition, should be public, if not licensed, and it should be clear who sold what directly to whom. Furthermore, the countries agreed to intensify the exchange of information on using their fleets and use these third-party vessels from third countries to minimize the possibility of avoiding oil price restrictions.

But the question remains. We also have to talk about the fact that different price processes are taking place in the global market today. For example, the price of coal is rising significantly, and coal and oil are commodities that are not precisely similar, but they are both hydrocarbons. This is how the price of oil goes up.

When we discussed the sanctions issue, we discussed the need to expand the sanctions regime in depth and breadth. By depth, we mean new sectors, segments, etc.; by breadth, we mean the inclusion of other countries in the sanctions restrictions. For example, let's look at the 12th package of sanctions. It is crucial that it includes Switzerland, which is not formally a member of the European Union but has specific economic relations with it.

As for India's relations with Russia, there are two things to note here. First, India pays Russia in rupees for fuel and lubricants. The rupee is a non-convertible currency, so formally, there are exports that can be converted into dollars, but then it is very, very difficult to use these rupees. At recent gatherings in the Russian Federation (open government meetings, meetings of the president with businesses, etc.), businesspeople raised the issue of how they have a large amount of rupees, but cannot utilize them in any way. Many people were asking where the central bank is looking, where Elvira Nabiullina is looking, and several times, it was said that certain working groups and commissions had been set up to resolve this issue, but as far as I understand, this issue has not been resolved to the end.

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When we are talking about the same ban on exporting Russian diamonds when this package was being formed, the story was as follows: The Group of Seven gathered, which accounts for about 70% of global diamond consumption today. They considered issues related to tracking the movement of diamonds so that the ban would work. As far as I know, there were also consultations with India, and, in fact, India made one of the proposals on how to prevent these diamonds from entering the market. Why? Today, India accounts for at least three-quarters of the world's diamond processing, primarily when it comes to jewelry. So, of course, work is being done, but so far, we cannot say that India was on the side of darkness. Now, it has moved to the side of light. This is a problem for diplomatic efforts on the part of Ukraine and, of course, our partners in the pro-Ukrainian coalition.

The situation with the ruble. It's hard to say how they will address the inflation issue in the future. The advice is straightforward: they should not have started the war or engaged in this imperial nonsense that they have been doing for many years. If you want to be an empire in a positive way, you have everything to do it. You have large deposits of all kinds of natural resources; you have all sorts of opportunities, and so on. Become an economic empire. Show that you can be an economic hub, not just trade in fossil resources. But this is a political and evaluative question.

Now, Russia has significant problems with inflationary processes. First of all, inflation is fueled by the fact that the Russian ruble is devaluing. There are various jumps, but we see a process of devaluation. Devaluation means increased imports. The Russian Federation cannot do without increased imports because certain goods that used to be produced at the same foreign facilities are not produced today or are produced less. In short, all of this is related to the so-called import substitution, which also works to drive inflation. Another issue is the record military spending higher than any time since the Soviet Union. The situation with military spending is, in principle, straightforward. You spend money on things that do not improve the population's welfare. You produce tanks, shells, ammunition, some military equipment, and so on, but this is a minus from your consumption because a tank does not increase your welfare.

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On the other hand, people who work in the military-industrial sector, the army, receive the corresponding expenses and payments, and with these payments they go to the consumer market. The consumer market does not react to the same extent as military spending increases. There are many, many reasons for this. That is why today's inflation is becoming less of an economic problem than a political one for the Russian Federation.

Putin is running for the next election, and of course, no one wants Putin's election to be accompanied by stories where every hour, another percentage point of inflation and price growth ticks upwards. This is a problem for the Russian economy, which, from my point of view, is not only of military origin but also of structural origin. The Russian economy remains largely unreformed in terms of structure. Although much has been done in the activities of banks, financial markets, and so on, this cannot be allowed. Still, experience shows that the great war and everything happening today in this clan-oligarchic society is depriving Russia of normal medium- and long-term development prospects.

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