This week Russia’s central bank held an extraordinary meeting to discuss the level of its key interest rate after the Russian ruble fell to its weakest point in almost 17 months. The meeting decided to hike the bank’s interest rate for borrowing to 12% (up from 8.5%) in order to support the ruble.
The currency has been steadily losing value since the beginning of the year and has now slid past RUB100/$. That’s down 26%. The main cause of this decline is the fall in oil export revenues and the rising cost of military spending to prosecute the war against Ukraine.
When the Russian invasion began in February 2022, the ruble dropped to a record low of RUB150/$. Rich Russians took their money out to the tune of $170bn, most of which ended up in Europe’s property and banks.
Russia: net foreign capital flows $bn quarterly
Weeks after Russia invaded Ukraine, a US official predicted that sanctions would cut Russia’s GDP in half. But that proved nonsense. It fell just 2.5%. That’s because the central bank introduced capital controls that stopped the flow of money from rich Russians out of the country. And as the price of energy rocketed over the next year, the ruble gained strength and reached a seven year high. Export revenues rose, while the sanctions and falling domestic demand led to a drop in imports, so Russia’s trade balance and current account rose sharply, bolstering the ruble. Two-thirds of the trade surplus was due to rising export revenues and one-third due to falling imports.
It seemed that sanctions on Russian banks and companies and a ban on using Russian energy had failed to bring the Russian economy to its knees. Russia was able to reroute its energy exports into Asia (if at a lower price) and find ’shadow’ shipping to deliver it.
But energy prices have slipped back in the last six months and the price cap on Russian oil imposed and enforced by the NATO allies has had some effect in reducing export revenues, while the costs of the war have increased. The 2023 defence budget is planned at $100bn, or one-third of all public spending.
Government spending on the war, RUB bn
Russia’s national output rose 4.9% in Q2 2023 compared to the same period in 2022. That sounds good, but much of the rise in output has been in the production of military equipment and services. The output of “finished metal goods” ie weapons and ammunition, rose by 30% in the first half of the year compared with last. Production of computers, electronic and optical products also rose by 30%, while the output of special clothing has jumped by 76%. By contrast, auto output is down over 10% year-over-year. Russia is now a war economy. Russia has been able to import many of the goods that the West has banned—from iPhones to cars to computer chips—but it does so via third countries, a roundabout way that increases prices.
Immediately after the start of the invasion real wages for the average Russian fell sharply as the domestic economy dived. But energy revenues came through and low domestic demand kept price inflation low. As Russia workers were more and more employed in arms production or in the army, wages rose. In May 2023, real wages were up 13.3% year-on-year. Such an improvement no doubt helps keep support for the Putin regime.
But in recent months the energy revenue bonanza has fallen back. Russia’s energy export revenues are expected to decline from $340 billion in 2022 to $200 billion this year and next. Russia’s current-account surplus shrank to $25.2 billion in the first seven months of the year, an 85% fall compared with the same period last year.
At the start of the war, Russia had a large stock of financial assets ‘for a rainy day’. But it is now raining, if only as a drizzle. Russia’s National Wealth Fund (NWF) had savings and assets worth 10.2% of GDP at the beginning of the invasion. But that is now down to 7.2% as rubles lose value and war spending rises.
And the domestic civil economy and production is suffering. Sanctions are blocking technology imports and other key manufacturing parts. Some 65% of industrial enterprises in Russia are dependent on imported equipment.
But the impact of sanctions is slow burn. It may weaken Russian productivity and domestic production over the long term, but it is not going to stop the Russian war machine now and energy revenues to finance it. That could only happen if fast-growing Asia led by China and India refused to buy Russian oil and gas, but the opposite is the case – they are buying more at cheap prices.
Russia’s war machine will continue but as emigration of skilled workers and capital owned by richer Russians accelerates, it is weakening the currency and reducing available skilled labour in production.
Inflation had fallen in the last year due to the collapse in domestic demand and imported goods. But if the currency continues to dive, then it will start to rise, increasing the pressure on the central bank to raise interest rates to support the currency and try to curb inflation. A stronger ruble and higher interest rates would mean lower foreign currency revenues and a weaker domestic economy. That will hit Russian households hard.
As it is, potential average growth is probably no more than 1.5% per year as Russian growth is restricted by an ageing and shrinking population, with low investment and productivity rates. The profitability of Russian productive capital even before the war was very low.
The economics suggest that Putin can continue the war against Ukraine for several years to come, even taking into account the collapse in the currency and rising inflation and interest rates. Of course, that does not take into account political developments (like the Wagner revolt or gains by Ukraine’s NATO backed army). They could threaten Putin’s rule. And there are presidential elections in Russia next March – as supposedly there are in Ukraine. Both Putin and Zelensky must face the voters – at least theoretically.
But the underlying message is that the weakness of investment, productivity and profitability of Russian capital, even excluding sanctions, means that Russia will remain feeble economically for the rest of this decade.
Michael Roberts Blog 
What Ukrainian gains are being made militarily as if late?
As far as we can tell, not much.
Since this blog focuses primarily on political economy, I’ll try to be as brief as possible on the military side. According to the information currently available, Ukraine began this counteroffensive in June this year, but from the beginning of the fighting, Ukraine met significant resistance: Contrary to Western media propaganda, in the first half of this year, the traditional NATO members only provided about 100 tanks to Ukraine, this number is far from enough, as compared to the second half of 2022, the former Warsaw Pact countries sent more than 400 tanks to Ukraine, while Russia repaired and produced about 600 tanks in the first half of this year.
A bigger problem than tanks is the auxiliary equipment: Due to prolonged Russian strikes and lack of supplies, Ukraine’s field air defence systems based on various types of SAM have collapsed, while IFVs to carry infantry and engineering vehicles to clear minefields are severely insufficient. Artillery shells are also inadequate, making Ukrainian artillery firepower completely unable to counter Russian artillery strikes or clear Russian minefields effectively.
As a result, the entire Ukrainian counterattack was initially a disaster: the armoured units carrying out the offensive were crippled by mines and then quickly destroyed by Russian artillery, helicopter gunships and drones. Based on various graphic evidence, the Ukrainians lost more than 400 to 600 armoured vehicles and more than 10,000 soldiers in the first two weeks of the counterattack. Later in the battle, Ukraine focused more on fighting Russian artillery, which resulted in the loss of Russian equipment, but this loss did not change the quantitative comparison of Russian and Ukrainian artillery.
When time cames to Arugst, Ukraine has used half of its power: the 9th Corps, on this front to seize about only 300 square kilometres of land, and has made some advances on the border of Donetsk and Zaporozhy, essentially removed a Russian salient there. However, heavy losses made it became impossible to Ukrainians to continue the offensive against the main Russian defence line, which was constructed of various static fortifications. As a result, the 10th Corps, the general reserve of the campaign, had to be used to sustain the offensive, as evidenced by the new Ukrainian losses of M1126 in recent days. However, even if Ukraine can make a breakthrough against Russia’s defences, it will be difficult for Ukraine to expand its gains due to the lack of follow-up troops. According to the original Ukrainian plan of this battle, the goal of the counterattack was to completely cut off the Russian landline from Kherson to Donetsk, but that now seems all but impossible.
At the same time, the Russian army in the direction of Kharkiv also continued to be active; after half a month of fierce fighting, Russia regained half of the ground lost in September last year. If Ukraine in the direction of Zaporozhy impact momentum is completely exhausted, then from the early autumn to the muddy season of the offensive initiative may return to Russia.
In conclusion, it is a terrible replay of the battle of Kursk in the summer of 1943; after 80 years, Ukraine played the role of the German army; even though Ukraine was much weaker than Germany, they still rushed into Russian defensive positions, and quickly losing its ability to continue the offensive while it does not prepare well. The troops, who had only six months of emergency training, performed worse on the battlefield and suffered more losses than Germany. As a result, some observers see the Ukrainian counteroffensive as more akin to Operation Spring Awakening in 1945, when well-armed recruits ran headlong into a death trap set by the enemy and finally been crushed.
Forced to ask: Doesn’t a wartime economy usually include tax increases; savings bonds drives bordering on forced sales; price controls; rationing; subsidies for essential goods; tax exemptions to promote useful investments; capital controls; direct government investment in critical war production; government coordination of large parts of the industrial economy; draft exemptions for skilled labor etc.?
Zelensky has already declared there will be no parliamentary and presidential elections in Urkaine, as it is under martial law. Besides, numerous parties have been banned anyhow. Given the last polls suggested a comfortable majority (around 80%) approve of Putin personally, it’s not clear why Putin *wouldn’t* want to strengthen himself politically with yet another electoral victory. Why is it important to suggest Putin will suddenly do something so unlikely?
Would it possibly be best to either refer to all governments or administrations as “regimes,” or none, rather than reserving the use of the term “regime” for the designated enemies?
Steve yes and both Russia and Ukraine have many of those ingredients. And I agree it’s Zelenskyy that looks to avoid an election in March even though he has banned all opposition parties and would win anyway. Putin has locked up his main opponent and so will win also in March.
who is his main opponent?
The Russian Federation is in a typical war economy mode.
This is a very good example to illustrate why war doesn’t promote the development of the productive forces: war destroys old fixed capital, it doesn’t create new technology to replace it except in war industry.
Only a Kondratiev Cycle can develop the productive forces. Evidently, a Kondratiev Cycle is not a true cycle, because if it was a true cycle, it would be guaranteed to happen within the limits of capitalism, therefore ending History, which would contradict Marx’s theory (which we know with an 100% certainty is an absolute truth; it is a Law).
Since the Russian Federation cannot ignite a new Kondratiev Cycle in and by itself, it is impossible for it to initiate a “miracle” after the Ukrainian War is over. However, it is important to highlight the fact that it is a very important factor to do so in China because of its military industry, which created the hypersonic missiles, which opened the door to end the American Empire’s dominance of the seas by turning the aircraft carrier useless.
The Russian Federation failed its people, but it succeeded in keeping the engine of History going during a period where it seemed the USA would be a 1,000-year empire. It did so by continue to promote the development of the productive forces in the military sector of the economy.
–//–
As for the relations of production within the Russian Federation, I have formed an opinion on Putin’s role in History.
Putin will certainly enter History as one of the great transition leaders of 21st Century. But he’s only that: a transition leader/statesman.
In my opinion, Putin’s greatest weakness is his anticommunism. From an analysis of his many speeches that touched the subject, we can see that he sees communism as strictly an ideology that can be easily substituted with Orthodox Christianity. In this specific sense, he is from what the West would call the far-right side of the political spectrum.
As such, he fails to see the connection between communism and the unprecedented development of the Soviet Union, which catapulted the Russian people from one of the most backwards, primitive peoples of the world to the most developed and enlightened in just 29 years. Putin sees that as only an accident; in his mind, ideology is merely the tool for the psychological control of the masses — in this sense, he’s a dyed-in-the-wool liberal.
The Russian Federation, as an experiment, has definitely failed. The USSR turned Russia into a superpower in just 29 years in the most difficult conditions possible. What has the Russian Federation achieved in 32 years, and under infinitely better conditions? The numbers speak for themselves, we don’t need opinions to see clearly which nation and which mode of production was superior.
The only way out for the Russian Federation is to admit its mistakes; admit it is itself a mistake; restore the USSR to the extent it is possible to do so (because the original one cannot ever be fully restored); restore the socialist system; reform this restored socialist system to the extent it is necessary to survive and continue to develop (i.e. imitate the Chinese model the most it can). The other path is the barbarian path: a return to an Yeltsinite neoliberal which will turn the Russian Federation into a worse Brazil.
What if the things has pushed so far and “There Is No Alternative” times coming again, just in opposite direction of that of baroness Tatcher? In conditions where the existing liberal ideology is clearly collapsing, economically, politically, militarily, culturally and is no longer an attractive or feasible alternative, is it possible for capitalism to flourish again, this time in the global south? What if this is no longer possible given the material conditions prevailing in today’s world? In this case, is the ideological preference of an individual irrelevant, even for the Russian leader? While combined west is going “managerial revolution” road to nowhere, is it inevitable or possibly at all. that the rest of the world should go this way?
” reform this restored socialist system to the extent it is necessary to survive and continue to develop (i.e. imitate the Chinese model the most it can). ”
The “Chinese model” is the product in large part of more than $2 trillion in FDI. Annual amounts have been on a downward slide since 2005. Now does anyone think that the bourgeoisie of the advanced countries, with or without China, are going to invest another $2 trillion when global trade growth rates are slowing? in the face of overproduction?
Obviously, it is much harder to do it without the FDI. But the USSR did it with almost zero FDI (it never reached the levels of 1913 again).
FDI accelerates the chronogram and reduces the suffering of the transition process, but it is not conditio sine qua non.
Isn’t it somewhat misleading (politcally, economically, militarily, and even morally) to refer to Russia’s forced military response to the US of NATO’s aggressive expanson eastward –culminating in the facistic transformation of Ukraine into a barren land grabbing investment opporunity and its people into cannon fodder– an “invasion”? of “Ukraine”?!
An invasion is what it is – the justification can be argued about.
The “invasion” was US/NATO”S: Victoria Nuland’s boasted 5 billion dollar fascist coup and nazi war on the people of Donbass–the (open secret) clear and stated purpose of which was the destruction of Russia, at the cheap cost of Ukrainian lives. If Putin had responded immediately there would have been no question about who “invaded” whom nor the clear “justification” (self defence) for a Russian military response.
Putin wanted to make a deal. The Russian people would have jailed him had he continued to dither.
Only if you look at the invasion in a vacuum without considering any historical implications
Hi, Michael, thanks for the article.
I have a question about this: «Inflation had fallen in the last year due to the collapse in domestic demand and imported goods. But if the currency continues to dive, then it will start to rise, increasing the pressure on the central bank to raise interest rates to support the currency and try to curb inflation.»
Does it means that interest rates raising should be considered an effective way of curbing inflation in Russia (in opposition to USA’s case, let’s say)?, or the point in opposing the interest rates raising politic is not about final effectiveness but the consequences (recession) for the general conditions of the working class?
Sorry if I’m not being clear…, English ain’t my first language. Let me know, please, if I should reformulate in a better way.
Thanks a lot in advance. Regards!
I think I get you Rivera. The Russian central bank is raising rates in order to attract currency holders to keep their money in rubles and hold up its value. By doing so, the higher cost of borrowing will hit households and businesses. That wont get inflation down if the ruble continues to weaken. But it will exert downward pressure on economic activity.
Thanks a lot for your answer, Michael.
Kind regards.
VK not strictly true about a war economy not propelling production forward. Let me round off Michael’s analysis. He discusses controls on capital exports as well as import reductions. They are connected. When Putin announced restricting the oligarchs flight of capital this received a broad welcome from the population pissed off with the super rich cavorting overseas and buying up not only mansions but football clubs. The oligarchs then had no choice but to invest this money in Russia via import substitutions and buying up foreign firms operating there on the cheap. Thus the effect of the war was to boost manufacturing, and not only arms production, but consumer goods as well, many of which had been imported before. This continued the trend established when the embargoes were first introduced. As a result Russia is a more rounded economy though the slow down in growth shows import substitution no longer has the oomph it once had.
But these policies have nothing to do with the act of war itself. Putin could have enforced these policies during peacetime.
When I say war I say war in the literal sense: the act of war itself. The act of war in itself only destroys, never creates. If war created new technologies, we would be in a much more futuristic stage of the development forces by now, because Antiquity and Feudalism were littered with wars.
Besides, the very top of the oligarch chain was never restricted (Potanin, for example, was exempt from day 1 — but, to be fair, he was also never sanctioned by the West). The elite of the Russian oligarch class is above this conflict: they still enjoy full freedom and power of their social class, both in Russia and in the West.
There is only one man those oligarchs really fear: Lenin. During the meeting between the oligarchs and Putin so as to inform them about the start of the war (24 February 2022), Potanin told him not to enforce any expropriations and capital controls because that would mean the invocation of “the ghost of Lenin and the 1917 [October] Revolution”. Putin agreed with him and assured him and his class that was a measure forced by the West against his will.
Dear Michael, thank you for the post!
What do you think of the thesis of a successful “military keynesianism” in Russia?
In the end the sanctions worked as a form of capital control. A number of oligarchs were clearly unnerved hy the unbridled and in some cases illegal seizure of their assets.Until they are given iron-clad exempipons it would be very surprising if they move large amounts of wealth outside the country.What is not remarked upon is the failure of Putin to confiscate and nationalize western corporate assets at a time when the west was confiscating Russian ones.Clearly a reverence for private property that does not bode well for any progressive illusions one might hold about the BRICS. It should be noted that one can see the same thing with the recent coups in Africa where despite their supposedly anti-western nature we see no calls for expropriation of imperialist econo,ic interests.
As a good englishman is biased against Rusia anda Nato is losing. Nato información is false
It is the heathen graeconics who gave the ruskins their religion who control word oil through shipping: https://www.helleniscope.com/2024/11/25/greek-shipowners-defy-the-failing-sanction-against-russia-once-again/