by John Helmer, Moscow
@bears_with
No government can survive when it fails to control the cost in blood on the battlefield and the cost of potatoes, butter and bread on the home front. The combination at the same time is politically lethal.
US President Lyndon Johnson learned this between 1965 and 1968, when the rate of domestic inflation was quadrupling and the Killed in Action (KIA) numbers in the Vietnam War jumped ninefold. On March 31, 1968, Johnson announced he was withdrawing from the presidential election later that year.*
President Vladimir Putin has managed the KIA half of the lethal equation by fighting a limited expeditionary campaign in the Ukraine, restricting the General Staff’s resources, plans, targets and operations; attacking with standoff, mostly airborne weapons; shifting the casualty burden of ground fighting to socially marginal groups; and keeping the majority of voters out of the line of fire. His success is in high and stable voter support.
For the time being, the president has escaped public blame for the inflationary surge in food prices over 2024. According to one report, beets were up by 71%; potatoes by 65.4%; eggs by 48.5%; garlic by 41%; salt by 27%; vegetable oil by 24%; butter by 22%. According to the AB Centre calculation, the price of potatoes jumped 65.2%; olive oil, 35.5%; butter, 35.2%; garlic, 24.7%; beets, 22.7%.
The state statistics agency Rosstat claims that the overall, official inflation rate for the country was 8.6% for 2024, while retail food price inflation, according to Rosstat was 9.5%. No one believes this, according to consumer polling and expert analyses. Consumer anticipation and expert forecasts are for the surge in food prices to continue this year at rates, depending on the food item, of between 50% and 100%.
Sergei Glazyev, a well-known public economist, presidential candidate in 2004, and a senior official of the Eurasian Economic Commission, is blunt on his attack. “Rising prices are hitting everyone’s pockets and making everyone poorer. Both citizens and businesses. Only banks are swollen with money.
“The Bank of Russia’s policy is driving the economy into a stagflationary trap, in which falling production, devaluation of the ruble and rising inflation are mutually reinforcing: an increase in the key rate [21%] compresses production lending, which leads to lower volumes and higher production costs, the technical level and production efficiency decline, the competitiveness of the economy decreases, which is offset by the devaluation of the ruble. That then causes a new surge of inflation, which the Bank of Russia is trying to pay off with another increase in the key rate. After ten years of ineffectual targeting of inflation, it is clear that the continuation of this insane policy has no prospects.” https://t.me/glazieview/6705
Mikhail Delyagin, deputy chairman of the State Duma Committee on Economic Policy, is just as scathing. He says the official rate of inflation for 2024 was not 8.5%, as the government insists, but closer to 19%; he warns it may reach 29% this year. The Central Bank interest rate of 21% is to blame: “this, in my opinion, is more destructive than the use of tactical nuclear weapons. But there is some good news. If tactical nuclear weapons are suddenly used against us, it will certainly be a severe shock and many people will die, but for the economy as a whole it will not be a greater shock than the policy of Elvira Sakhipzadovna Nabiullina. And [Finance Minister] Anton Germanovich Siluanov, who should also not be forgotten.”
“However, as we know, at the December 20 [2024] meeting, the Central Bank did not raise the key rate to 23 percent once again, as many, including me, expected. This is probably a good signal, because by raising the key rate in conditions of a shortage of money supply, the Bank of Russia thereby accelerates inflation. So far, Elvira Sakhipzadovna has refused to further accelerate inflation, but there is no guarantee that she will not return to this practice at the beginning of next year.”
So serious has been the failure of Central Bank Governor Nabiullina to halt inflation, and so widespread is public suspicion of her competence and intentions, on January 13 the Central Bank issued a public release denying that Nabiullina is planning a freeze on Russian individual savings by blocking withdrawals from bank accounts. “It is quite obvious that in any market economy, of which bank lending is an integral part, such a step is unthinkable,” the Central Bank has announced on Telegram. “Firstly, it will immediately undermine confidence in the banking system and put an end to lending to the economy. Secondly, freezing deposits will not help reduce inflation. People will rush to invest money not in deposits, but in goods and real estate with the corresponding sad consequences for rising prices.”
National polling of public attitudes towards leading officials has never identified Nabiullina positively. In open-ended questioning of those whom voters trust, Nabiullina’s name has not come up. Instead, she appears fifteenth on the countrywide list of officials and politicians who are distrusted – she ranks equal to the Kremlin spokesman, Dmitry Peskov; State Duma Speaker Vyacheslav Volodin, and the Mayor of Moscow, Sergei Sobyanin.
No critic of the domestic inflation and Central Bank policy mentions President Putin. He is understood, however, to be Nabiullina’s protector against her domestic critics. In the past month, however, he has been pressed to qualify this.
At his press conference on December 19, the day before the Central Bank met to decide whether to raise the interest rate to 23%, Putin said: “Only yesterday, while preparing for today’s event, I talked to the Central Bank Governor, and Elvira Nabiullina told me that the inflation rate has already reached about 9.2–9.3 percent year-to-date. That said, salaries have increased by 9 percent, and I am talking about an increase in real terms, minus inflation. In addition, disposable incomes have also increased. So, the overall situation is stable and, let me reiterate, solid.”
The Kremlin record claims there has been no official meeting between Putin and Nabiullina since September 2019.
At his December press conference, Putin acknowledged “there are certain challenges with inflation and with the economy heating up. Therefore, the Government and the Central Bank have been seeking to ensure a soft landing.” Asked by a reporter what the interest rate decision would be, Putin added: “she does not tell me what the rate will be. Perhaps she does not know this yet, because they discuss it at the board meeting, their Komsomol cell, and make the final decision in the course of the discussion. I hope that it will be balanced and will meet today’s requirements.”
“Balance” is Putin’s term for satisfying each of his oligarch, military, and voter constituencies at the same time as they contradict and oppose each other.
For timely release of data on Russian inflation with accurate analysis, follow the Sovereign Economy Telegram platform:
Source: https://t.me/suverenka/12754
Source: https://t.me/suverenka/12974
The top chart illustrates runaway food price inflation which the Central Bank has been unable to control. The bottom chart shows the impact of the Central Bank’s key interest rate depressing new credit for all categories of borrowing except car loans.
The gap between the government’s inflation target and the year-end outcome is obvious. So too is the gap between the impact of the Central Bank’s 21% interest rate and food price inflation which is not responding to credit controls. The vigorous domestic debate on what and who is to blame, and what is to be done, has not been suppressed.
President Donald Trump tried to exploit this by announcing this week: “Russia is kinda in big trouble. You take a look at their economy, you take a look at their inflation in Russia. I got along with [Putin] great, I would hope he wants to make a deal.”
Nabiullina (right) has blamed the rise of Russian incomes for stimulating demand faster than producers can supply their products. Her critics, including liberal market think tanks like the Gaidar Institute, point out that the food price explosion is responsible for about 40% of the rising inflation rate. For that reason, the Gaidarites acknowledge that consumer inflation is at least 40% impervious to the measures of the Central Bank because the latter aim at reducing credit-fuelled demand, when food is purchased from salary, not on credit from banks.
According to the data reported by RANEPA, a government economic policy think tank, “after utility tariffs were indexed by 9.9% in July, their contribution to annual inflation began to exceed the contribution of non-food products. Although if we consider the situation as a whole for 2024, the weight of non–food products in the consumer basket is still higher (34%) than services, about 28%. But both fall short of eating.”
Nabiullina was opposed to the Special Military Operation (SVO) from the beginning. Reportedly, she tried to resign in protest in March 2022 as the deadline for her retirement or reappointment approached. Putin then “balanced” her third-term reappointment with restrictions on the General Staff’s operations in the Ukraine.
Since 2022 Nabiullina and her supporters have blamed the war for the demand push on prices. This has turned the domestic policy debate on inflation into a fight over defence spending and the objectives of the war. In this fight, US warfighters in Washington view Nabiullina as a useful advocate of the end-of-war terms which Trump is proposing to Putin – she is one of the reasons for Washington’s confidence Trump will succeed.
Source: https://www.chathamhouse.org/
A paper published on January 10 by Chatham House, the British warfighter, advises Trump to exploit the Nabiullina opportunity. “The consequence of such high interest rates is that the economy will slow, perhaps very sharply. Putin therefore faces an acute dilemma: to back the central bank’s effort to keep inflation low at the risk of a recession; or to keep the economy on fire and let inflation rip. It is this dilemma that gives leverage to the incoming Trump administration. By acting to restrict Russia’s access to foreign exchange, the US can heap more pressure on the rouble and make Putin’s choice a more painful one.”
At the State Duma, Nabiullina’s line that the war is the cause of inflation is repudiated by Delyagin. “The share of residents with incomes of 150-200 thousand rubles increased by only 1.1%, and with earnings over Rb200,000, by no more than 0.5%. At the same time, to the contrary, the number of the group which receives Rb100,000-Rb150,000 monthly decreased by 1.8%. At the same time, the majority of our compatriots — 66% of them — earn up to 40,000 rubles a month.”
“Generally speaking, people who participate in the Special Military Operation, as we are told, receive more than 150,000 rubles a month. With a small caveat. They use this money to buy the necessary equipment for themselves — let’s say it’s politically correct. In some cases, at least… In other words, many of them have significantly increased their expenses. Therefore, the increase in welfare in their case may not be so noticeable. These words are confirmed by many soldiers who are on the line of contact today: ‘We mainly buy generators, gasoline, tools, building materials, uniforms (it doesn’t always) happen — we burned out in position, literally and figuratively; we buy more food, cigarettes; we discount for battery needs every month. There are no canteens at the front, we get canned food and each squad cooks for itself…They probably tell you beautiful things on TV, but there’s not much that’s beautiful here,’ says one of the combat commanders.”
In Delyagin’s analysis, “in general, at least two-thirds of the country’s population does not have significant savings, and therefore they are completely defenceless against any negative development. And, of course, there will be more and more of them in the conditions of military operations. 5% of Russians are poor: they don’t even have enough money for food…16% is enough for food…even buying clothes is a problem. 40% have money for food and clothes, but face difficulties when buying durable goods. Both of these categories live in poverty: its level is 56%. Such data come from two years ago. And it seems that they are most likely still relevant. If the situation hasn’t worsened.”
A month ago, Delyagin escalated his attack on Nabiullina. “It is impossible to slow down the car by stepping on the gas. Similarly, it is impossible to stop inflation by actions which only accelerate it. Nabiullina herself admits that inflation is caused by non-monetary reasons which have nothing to do with the key interest rate. And raising the key interest rate to combat inflation today is the same as giving one person a pill to make another person’s headache go away. She herself admits the absurdity of her policy.”
“One of the government agencies has reported that a reduction in inflation to [the Central Bank target of] 4% was possible with a key rate of 52%. But then, then, of course, they denied all that. But this fully characterizes the Central Bank’s policy…it’s clearly about slowing down the economy, not inflation. The fact is that an increase in the interest rate in conditions of a shortage of money accelerates inflation, rather than slows it down. When the rate rises, inflation accelerates, which is statistically well confirmed. It is very difficult to slow down the car by accelerating it at the same time.”
“In order to really limit the growth of inflation, it is necessary to ensure the growth of business activity so that goods are produced in Russia, and not in China. To do this, we need to lower the interest rate by making credit available, as well as limit financial speculation.”
Left: Mikhail Delyagin; right, Sergei Glazyev.
Glazyev, who led and lost the fight to replace Nabiullina at the Central Bank in March 2022, has retained his post as the minister-level commissioner for integration and macronomies at the Eurasian Economic Commission. That too is a Putin appointment; it keeps Glazyev out of direct involvement in Russian economic policymaking.
Notwithstanding, Glazyev continues in speeches, papers, and social media appearances to target Nabiullina and exploit Putin’s worry at the rise of voter hostility. There have been multiple failures of state regulation and not only at the Central Bank, Glazyev has argued. Accordingly, he advocates much more state action than he knows Putin is willing to accept. Full mobilization of the war economy, in fact.
“The main factors of inflation,” Glazyev has written, “ranking them by their contribution, are:
1. Cost inflation due to faster growth of transport and energy tariffs (the area of responsibility of the Federal Antimonopoly Service of the Russian Federation) amounts to at least 60% of the growth in the consumer price index (CPI). Thus, the increase in the cost of freight transportation in 2022-2024 is more than 20% per year, the increase in the cost of fuel and electricity exceeds 12% per annum.
2. The devaluation of the ruble in 2024 is responsible for 30% of the CPI growth, as technological and consumer imports account for up to 40% of the turnover. It is estimated that a 10 ruble depreciation to the dollar leads to a 2% increase in inflation.
3. An increase in the key rate of the Central Bank of the Russian Federation by 1% leads to an increase in cost inflation (forced price and tariff increases) by 0.24%, reducing demand-side inflation by only 0.2%, that is, the net effect of a further increase in the key rate is negative. The increase in the rate from 7.5% to 21% led to an additional increase in prices of at least 0.6%.
The contribution of the consolidated budget deficit, which is within the generally accepted norm, is much less than these three factors.”
FIVE-YEAR TRAJECTORY OF THE CENTRAL BANK’S KEY INTEREST RATE, 2020-25
Source: https://tradingeconomics.com/russia/interest-rate
Glazyev’s analysis of the causes of rouble devaluation accuse Nabiullina of encouraging currency speculation and the drain of Russian capital offshore. “The main factors of devaluation (ranking by contribution):
1. The refusal of the Central Bank of the Russian Federation to protect the stability of the ruble, prescribed by Article 75 of the Constitution of the Russian Federation. The Bank of Russia has placed the ruble’s exchange rate in the hands of speculators, both our banks and Western players (Forex market). The manipulative nature of trading is proved by the difference between the Forex and interbank market rates, which reached 6 rubles (5%) on November 27, 2024.
The contribution of this factor is 60%.
2. Export of private capital (absence of currency control), first of all, reduction of external corporate debt (by $200 billion over three years). Reduction of the standard for the mandatory sale of foreign currency earnings. The contribution of the factor is 30%.
3. Valuing the savings of businesses and the public. The contribution of the factor is 10%.”
FIVE-YEAR TRAJECTORY OF THE ROUBLE-USD EXCHANGE RATE, 2020-25
Source: https://tradingeconomics.com/russia/currency
Glazyev and Delyagin both advocate the state takeover of commercial banking by a new scheme of regulation and state bank operations: “To get out of the stagflationary trap, it is necessary to stabilize the ruble exchange rate and deploy targeted lending channels for the manufacturing sector, as well as suppress non-monetary causes of inflation by immediately taking the following measures:
1. Fix the currency position of commercial banks by blocking their speculative game against the ruble.
2. Restore the mandatory rule for 80% sale of foreign exchange earnings by exporters.
3. Cancel insurance of foreign currency deposits by the Deposit Insurance Agency, switching from the population’s demand for foreign currency to its sale.
4. Stop quoting the dollar and the euro by the Bank of Russia and the Moscow Stock Exchange, nationalize it, cracking down on speculative hype and manipulation of the ruble exchange rate.
5. To introduce a direct quotation of the ruble to the yuan and the currencies of other major partners, and to set the limits of fluctuations in the ruble exchange rate by the decision of the Central Bank. Create a distributed foreign exchange reserve in quoted currencies.
6. Resume the currency and credit swap between the central banks of Russia and China, and agree on the same with India.
7. Complete the transition to national currencies in foreign trade.
8. Include a special instrument for refinancing banks in order to lend exports at a rate of no more than 5%.
9. Block the channels of capital outflow for non-trading operations, including capital withdrawal in the interest of non-residents from unfriendly countries in accordance with the decrees of the President of Russia on the protection of the country’s financial system.
10. Fill the NWF [National Wealth Fund] with gold and other inflation-proof assets.”
“The launch of a refinancing mechanism for the manufacturing sector requires:
1. Deployment of special bank refinancing tools for lending purposes: investments provided for by national projects and state programs; expenses incurred by enterprises in order to fulfill government orders; expenses of the Russian Government for the purchase of goods of domestic production in the State Reserve; working capital of enterprises for the purchase of domestic equipment; leasing of machinery and equipment of domestic production; mortgages and housing construction; investments in the creation of import-substituting industries; investments in deepening the processing of raw materials; investments in infrastructure development;
investments under the SPIC and other investment agreements with the participation of the state;
innovative projects; investments in the creation of new technological industries; state development institutions.”
“The rate for final borrowers on these refinancing instruments should not exceed 2%, and for banks – from 0.5% to 1.5% – the administration by banks should apply the intended use of loans. Participating banks should be fully responsible for the targeted use of allocated loans and monitor their spending by borrowers.
2. The introduction of the digital ruble for foreign trade and credit transactions, including those carried out through the above-mentioned special refinancing instruments in order to automatically monitor the targeted use of loans.
3. Termination of the Central Bank’s deposit operations and issuance of bonds, which suck money out of the economy and cut off bank credit from the manufacturing sector.”
The Communist Party (KPRF), which currently holds most of the opposition seats (57) in the State Duma, has been more reluctant than Delyagin and Glazyev to attack Nabiullina directly, and also less capable of producing for voters an alternative plan for state action to cover the entire economy. Compared to the non-communist opposition, the KPRF is more timorous as nationalizers and state planners. In November, for example, Sergei Obukhov called for state price regulation for “essential products, such as bread, milk, sugar, and baby food.”
Left, source: https://kprf.ru/activity/prices/230255.html ;
right, KPRF deputy Dr Sergei Obukhov. He is Deputy Chairman of the State Duma Committee on the Development of Civil Society, and Secretary of the Central Committee of the KPRF.
Obukhov has echoed Delyagin and Glazyev in attacking monopoly manipulation of the retail prices for foodstuffs, but he has directed his remedy at urging the government to intensify the efforts of the Federal Antimonopoly Service (FAS) to combat cartel pricing.
“A gentleman’s agreement has been concluded with the heads of the retail chains not to raise retail prices for bread too much. It would seem that the problem has been solved? Unfortunately not…Based on the same answer, it follows, literally, that ‘… the food retail markets are generally competitive with a large number of participants.’ In other words, in order not to be defeated in a tough competition, companies which have concluded such ‘gentlemen’s agreements’ can break them at any time. This is the macroeconomic landscape we currently have. Everything is more or less fine in it, except for inflation, which is a catastrophic situation.”
“Why the president considers the fight against inflation a priority and why he gave the regulator full carte blanche is understandable,” Obukhov says. “We don’t want to end up like in Turkey. Recall that after an unsuccessful experiment with low rates and high inflation, they have been keeping the rate at 50% for almost a year and have so far only been able to reduce inflation from 70% to 50% in annual terms. So Turkey still has a long period of extremely tough PrEP ahead of it.”
“It is also appropriate to recall the price that had to be paid for stopping inflation in the United States in the early 1980s. Inflation there was comparable to ours in terms of level, but it lasted longer, so high inflation expectations managed to gain a foothold (this has not happened in our country yet, but it is about to happen if inflation is not stopped soon)… It is clear that we certainly do not need to bring our inflation to the state of the USA in the 1970s or of modern Turkey: we do not want a 50% rate for years or a recession with 10% unemployment. The longer the decisive fight against inflation is delayed, the more costly it will be. But it’s not just that. Right now, the president has other reasons for resolutely fighting inflation, including political ones.”
“After all, in the near future – in the autumn of 2026 – we will have elections to the State Duma, and with such inflation, it will be very problematic for the ruling party to successfully participate in these elections. People feel inflation in their refrigerator, and economic growth figures, even if they are very impressive, are still a feature from the TV. No slowdown in economic growth or even a recession will worry the population if it is not accompanied by mass unemployment, but this certainly does not threaten us in the foreseeable future. So the authorities may well go to the polls with a high key rate and low economic growth rates, but not with such inflation as it is now. After all, in the end the refrigerator always wins over the TV in shaping public opinion.”
[*] The lead image is a cartoon by John Fischetti in the Chicago Daily News, September 9, 1969. Richard Nixon had won the election of November 1968, but a year into his term he was facing the same lethal combination as President Johnson the year before of mounting war casualties and rising consumer inflation.
