Why Putin's Economy Will Not Withstand The Pressure

6-9 months left.

I was disappointed to find that our Ukrainian expert community failed the expertise exam, commenting on the increased CBR rate of 21%. Against the background of stupid citations of the mantra of the oprichniks of Putin's personal banker - Nabiullina, that all this is only for the sake of fighting inflation, it should be explained what is actually being done "under the skirt of the CBR rate".

Monetary tax

The significant increase in the CBR rate in 2024 is precisely due to the fact that the Russian dictator is catastrophically short of funds for the war. This is how their public finance system works, and usually the biggest failure in the liquidity of the federal budget happens in the first quarter.

If the prices for Russian oil will remain at the level of about $60, then in February-March there are glaring problems with the deficit of rubles for payments to state employees and the military. To prevent this from happening, Russian citizens and business (borrowers) were de facto taxed with an additional tax. From the growth in the level of rates, banks' incomes will also increase by leaps and bounds. This percentage syndrome was already experienced by the Russian Federation in 2022, but then, at the request of industrial lobbyists from the military-industrial complex and extractive industries, the process was curtailed, or rather postponed for a rainy day.

Russia is not Ukraine

Let me quote the classic of the twentieth century in reverse. Kuchma's "formula" is also valid for the banking system: the Russian banking system is different. 75-85% of the banking system of the Russian Federation (by assets and deposits) are state-owned banks. Officially, they have about 50 state-owned banks. In addition to 5 large ones, there are also state-owned banks of state-owned banks (some nesting dolls), daughters of state-owned corporations such as Rostec and VEB, banks of local authorities and the so-called illegitimate daughters of state-owned corporations in the banking sector of the Russian Federation, which everyone knows about, but in the capital of which the state participates 0% (for example, Absolute Bank (Russian Railways) or ICB (Rosneft). Therefore, without taxes, there is a clear vertical of state control over the sector, such as the State Bank of the USSR 2.0.

The five major state-owned banks (Sberbank, VTB, PSB, Rosselkhozbank and Gazprombank) now account for about 60-65% of the system's assets, that is, they are the foundation of state control that increases the manageability of the system. So that your illusions of the marketability of this education completely disappear, let me remind you that Sber controls an old friend of Putin's from his work in St. Petersburg – German Gref. VTB is run by an experienced KGB officer, Andrei Kostin, who in Soviet times held positions in the Ministry of Foreign Affairs of the USSR, where civilians were simply not appointed. PSB is a specialized bank of the Russian defence industry, they had this idea after 2014: to collect all the sanctions risks in one bank, but localization was unsuccessful due to the greed of Gref, Kostin and the leadership of Rostec.

In general, the Russian Agricultural Bank does not hide that it is under the control of the Patrushev family, whose son recently headed the Promsvyazbank, and then was both the agrarian minister and the chairman of the supervisory board of the Russian Agricultural Bank. Well, Mr. Akimov from Gazprombank is generally a white bone of Soviet intelligence, still "guarding" the gold of the Communist Party of the USSR on accounts in Switzerland. VEB, which is not a bank (in fact, it is, because its activities are regulated by banking legislation where it does not contradict the special law), is generally a projection of the government of the Russian Federation in the banking system of the Russian Federation.

So even without any taxes (under the influence of double control over state banks), the revenues generated by state banks and quasi-state banks in 3-6 months will go to the federal budget, from where they will be allowed to finance the war.

The price

Another reason why the CBR chose the rate hike is the problems with the ruble exchange rate. The Russian Federation has been short of dollars and euros for a long time, and now there is also a shortage of yuan. The situation could be corrected by the People's Bank of China by expanding the swap for the Central Bank of China, but it is in no hurry to do so, especially after the visit of European leaders to the PRC.

The monetary tax of the Russian Federation also has a flip side of the issue – it is a zero profit of the Central Bank in 2025 and an increase in the cost of borrowing from the Ministry of Finance of the Russian Federation. But both minuses are significantly less plus from the growth of net interest income from state-owned banks. The Ministry of Finance of the Russian Federation will pay for its Federal Loan Obligations in a year, but borrowers through state banks can be milked every month. It turns out that a high real interest rate gives not only a temporary advantage in federal budget revenues, but also arranges a certain gap in liquidity in favor of state employees. I would compare such a monetary holiday to a party with excessive alcohol consumption. The war will receive its monetary injection in 3-6 months, but the payback will come in 6-9 months. The reckoning will come in the form of a significant cooling of the Russian economy, and with low oil prices, this is fraught with a protracted economic crisis in the Russian Federation.

The fact that Vova Putin included two channels at once, which will put pressure on the real sector: increased taxes and interest on loans, indicates that the Russian economy is already drowning in the requests of the military and simply does not pull the war. Stories of our political scientists that, they say, the economic crisis in the Russian Federation will not entail a revolution – these are the stories of non-economists. In fact, the Russian Federation has not been in crisis since 2014 during the war.

I do not know about the revolution in the Russian Federation, but as the economic stranglehold in the Russian economy drags on, its power will be less categorical in negotiations. It is obvious that the current steps of economic power in the Russian Federation are simply a postponement of the end of the war on the terms of Ukraine. Perhaps they have hopes for the outcome of the US elections, but rather their actions are fueled by the illusion that the West will be the first to get tired of the war, rather than a pack of their corrupt officials and lured oligarchs.

Here are two conclusions:

The Russians have switched from inflating shock to supporting strategies for pants named "Maybe" because they traditionally rely on this Russian "Maybe". The FSB is responsible for "Maybe" under Putin. This is not the first time that the Russian economy has been saved by high oil prices, which may not be the product of market chaos. For example, you can give weapons to the Houthis so that they hit the tankers not from the Russian Federation, but from the Middle East. Or you can persuade Iran to start a new mini-war in the Middle East. I do not know what other recipes are in the "culinary" book of the cannibalistic Patrushev family, but it turns out to be some kind of controlled "Maybe".

Ukraine needs to try to adhere to the "formula" that Kuchma derived: "Ukraine is not Russia", and in the banking sector. Unfortunately, in the banking sector, we are increasingly beginning to resemble the Russian Federation: a large share of state-owned banks in assets, talk about the privatization of state-owned banks with an increase in their number, attempts to control the entire banking vertical by individuals, etc. Ukraine managed to jump off the needle of a double burden in both the monetary and fiscal environment, but this was done by 75% thanks to the systematic "barking" of the professional community, including me. If we had kept silent in 2022/2023, we would now have the same picture as in the Russian Federation.

Therefore, so far, Kuchma's "formula" has been formally observed and this is a kind of mini-success that needs to be strengthened. However, we will talk about the problems of Ukraine separately. Hold on, we'll be fine.

Vitalyi Shapran, Facebook

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