the patriotic bubble and an uncertain future

Despite Western sanctions, consumer prices continued to decline in August and the ruble remained strong. The price of crude oil is decisive, although it is moderating due to lower demand from China. Silence from economists and experts linked to the Kremlin. In the coming months – from September to December – the future of the country is at stake, with global consequences.

Moscow () – While Western sanctions are beginning to seriously undermine many sectors of the Russian economy, the population has been living for three months in an illusory bubble of patriotic well-being. According to the latest surveys, in the month of August, the prices of the most common items in shops and markets also fell steadily, and the exchange rate of the dollar and the euro was around 60 rubles (compared to 80 before war). This is an unprecedented phenomenon in the last century. And while it inspires widespread optimism, the real tests that lie at the door have yet to be overcome.

Meanwhile, the Russians are enjoying a summer of calm and relative prosperity, after the panic of the spring at the start of the war. Currency support policies keep the “strong ruble” safe from measures restricting its international transactions, and reserves of Western goods have not yet been exhausted, although they are running low. McDonald’s and Starbucks have been replaced by domestic variants, which try to offer coffee and burgers on the same level.

Deflation is triumphantly calculated and announced by the Rosstat statistical institute, no longer month by month, but week by week. Economists wonder how long the idyll will last, and try to avoid the curses of detractors and the ecstasy of state experts. Obviously, the main indicator of the Russian economy is the price of a barrel of oil: it is currently around 95 dollars, and for the first time it falls below the level before February 24. The reason for this drop is mainly attributed to lower demand from China, which is dealing with new restrictions due to Covid. This also indicates that high oil prices are not as binding a factor as once thought.

The demand for crude oil depends on many circumstances, and a recession process will begin in the world’s main economies -a prospect that is certainly likely-, so the price of a barrel will fall a lot and for a long time, putting Russia in a real crisis. Ural oil is currently selling for $65 – about the same price as in 2021, when it averaged $69 – and has not benefited from the rises of recent months. The so-called “crisis premium” is missing, despite the fact that the dependence of European countries on Russia remains very strong in this sector. And all this happens before the foreseeable winter cataclysms.

For several months, unlike what happened in previous years, the government has not released the State budget and fanciful hypotheses flourish in this regard. For example, it is not known how much Russian military spending actually amounts to. In principle, it is estimated that the July budget will be 15% higher than that of 2021, when the deficit was set at 900 billion rubles. Therefore, the increase could exceed 10 billion by the end of the year. It will be difficult to cover such an abyss by avoiding the massive issuance of currency, which would cause the inevitable rise in prices. This is a reasoning that is based on the usual processes, but the truth is that Russia had never seen such a deficit.

It should be noted that the huge increase in spending in July was accompanied by a sharp drop in revenue. Russia’s inflows were down 26% from last year, including receipts from oil exports. Furthermore, gas sales to Europe will also fall sharply in the coming months. In turn, VAT plummeted 42%, and experts do not know what conclusions to draw; Probably neither will the representatives of the Ministry of Finance in Moscow, forced to remain silent and maintain a facade of optimism

September data is expected to provide some clarity, at least as far as tax revenues are concerned. Generally, when there are extraordinary currency issues, inflation shoots up after two or three months. On the other hand, falling oil and gas prices would force the ruble to weaken against the dollar, euro and yuan. Between September and December 2022, in short, the future of the Russian economy will be understood, and also the global consequences.

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