Russia’s Trickle-Up Economy

Somebody might want to remind Anton Siluanov that Russia’s got elections coming up.

United Russia – the ruling ‘party of Putin’ that isn’t allowed to use the Russian president’s name or likeness as it campaigns to keep control of the State Duma in September – has never been less popular than it is now. And it’s no wonder: While Putin gets the credit for Crimea, Syria and restoring Russians’ pride in their country, United Russia gets left holding the flag for the flagging economy. And so uninspiring are the party’s leaders, that Putin’s handlers are evidently concerned that United Russia’s unpopularity might rub off on the president himself; hence the ban on even using Putin’s name.

But Finance Minister Anton Siluanov doesn’t have time for the niceties of electoral politics. He’s got an economy to run. And in a statement today, he’s made it abundantly clear that improving the welfare of ordinary Russian citizens – the sort who usually vote for United Russia – isn’t among his top priorities.

What Siluanov said was that neither the Finance Ministry, the Ministry of Economic Development or the Central Bank have any particular interest in seeing the ruble strengthen (as it has, slightly, on the back of rising oil prices). That’s textbook economics: if your currency rises, the competitiveness of domestic industry falls. But Russia’s not a textbook economy.

Ever since the combination of sanctions and cheap(er) oil sent Russia’s economy into a tailspin, the government has set its sights on import substitution, hoping that domestic industry would begin producing the things Russian consumers and companies were no longer able to buy (either because they had been banned by one side or the other, or because they could no longer afford them). But that didn’t happen. Instead, Russian producers and the remaining importers and distributors – many of whom enjoy protected competitive positions – just sat on the market, allowing the newly limited supply to boost prices and margins. And with base interest rates at 11% or higher, potential new market entrants face prohibitive barriers. As a result, even the government has seen its procurement costs jump by as much as 40%; the effect on ordinary consumers is similar and has led to a drop of consumption deeper than the drop in per-capita incomes. This compounds pressure on the budget, which is already sacrificing pensions, salaries and social services. In the now immortal words of Prime Ministry Dmitry Medvedev, “There’s no money, but you guys hang in there.”

The right thing to do would be to recognize that import-substitution is failing and allow the ruble to grow. That would clip the wings of Russian industry, but it wouldn’t be more than profiteering concerns deserve. It would, however, allow Russian consumers to cope a little better with the double austerity being imposed by the government and the market.

Instead, the government is opting for what amounts to an additional tax, taking even more money out of the pockets of ordinary Russians and channeling it up into the coffers of business. It’s bad economics. And it’s even worse politics.

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