Stagflation in Russia Likely as Kremlin Redistributes Businesses to Avoid Discontent

Executive Summary:

• Economists predict a slowing of Russia’s civilian economy next year with a strong inflationary trend. This will elicit dissatisfaction, not only among ordinary people, but also among the industrial elites.
• To ease this pressure, Russian authorities have turned to economic blackmail in the form of a redistribution campaign, seizing and transferring property from dissenting businessmen or those who fled Russia to individuals more loyal to the regime.
• This practice has managed to prevent mass discontent among business elites and returning soldiers, but in the long run a campaign of “de-privatization” is likely to exacerbate tensions and resentment.

Despite some growth in the Russian economy during the first years of the full-scale invasion of Ukraine, surging defense spending, high inflation, and relatively stagnant civilian production have led economists to predict that the country will enter a period of stagflation in the near future. Together with concerns over the state of the economy, the Kremlin fears the growing dissatisfaction among big business as well as former front-line soldiers and is trying to forestall potentially disastrous outcomes.

For example, the reported growth in the output of basic types of economic activity (essentially, the rate of change of total production of goods and services across the economy) shrunk from 4.1 percent in July to 1.7 percent in August. The Russian Central Bank and S&P Global business surveys also record a deterioration in assessments of current business conditions. There are also early warning signs that private consumption may also be slowing down (Re-russia.net, October 14).

This comes at a time when inflation remains high and shows signs of intensifying. Prices in September were 8.63 percent higher than they were at the same point in 2023. More importantly, prices for basic goods for popular consumption have increased at a higher rate than other items. Since January 2024, prices for the following goods and services have risen:

• For bread, by 11 percent;
• For butter, by 21 percent;
• For milk, by 11 percent;
• For potatoes, by 47 percent (90 percent of which occurred by the beginning of the summer);
• For public transport, by 6.5–9.5 percent; and
• For medicine, by 8.6 percent.

Experts predict that increasing state budgets and a weakening ruble will only spur inflation further (Istories.media, October 21).

A survey by the independent research organization “Levada Center” showed that when asked what the main event of 2023 was, 38 percent (a plurality) of respondents said “price increases for housing and communal service [fees], and the dollar exchange rate” (Levada.ru, December 22, 2023). In an RTVI News interview, Moscow State University professor Natalya Zubarevich also suggested that Russians are primarily concerned about rising prices (YouTube/
RTVI News, September 21).

The Kremlin is less worried about the dissatisfaction of the masses than it is about potential discontent from two specific groups: soldiers returning from the front and big business. Those who were drafted for combat or who signed contracts at the beginning of the conflict and are now returning from the front most clearly see the worsening of their economic situation. This is made more stark by the fact that the signing bonuses to be gained from joining Russia’s war effort are several times higher than they were at the conflict’s start (see EDM, October 24). Likewise, big business will be the first to feel the effects of an economic slowdown amid the growth of military expenditures. Representatives of the Russian opposition note that it is only the military (and possibly the business elite) who are capable of carrying out a “palace coup” in Russia (YouTube/Mikhail Khodorkovsky, October 21).

Obviously, fearing the appearance of too many unhappy people with military experience, the Kremlin assiduously avoids declaring a new wave of mobilization (which would necessarily include the major urban centers) and the return of those previously mobilized from the front (see EDM, October 10). Instead, Putin’s regime is trying to overcome its manpower issue by attracting mercenaries and foreigners to the front, most notably North Korean soldiers. While some experts suggest that the North Korean arrivals are combat-ready storm troopers, independent analysts underscore that 12 thousand men, few of whom speak Russian, are likely too small a number to meaningful affect the battlefield (Istories.media, October 22).

Russian authorities are also taking steps to keep big business leaders under control by reevaluating the infamous privatizations of the 1990s. Earlier in the year, there were instances of the “nationalization” of Russian-owned companies to the benefit of the security forces (see EDM, May 2). In view of this, fear and alarm among Russian business leaders who might be effected by a “re-nationalization” of their assets have grown to the point that Putin personally had to deny that reports of such a review of long-privatized assets was true (Lenta.ru, April 25).

In 2023, the head of the Ministry for Economic Development, Maksim Reshetnikov, called a review of the results of the 1990s privatization drive “a road to nowhere” (Forbes.ru, September 11). This contrasted with a recent interview with Ministry of Finance deputy Aleksey Moiseyev, in which he directly acknowledged that property could be seized if it was “incorrectly privatized,” the current owner “cannot effectively manage the property,” or “directs the funds earned in Russia to support the armed forces of Ukraine.” Moiseyev emphasized, however, that unlike past nationalizations, the properties seized in these instances would be immediately put up for sale in a simplified process, rather than transferred to the government (Kommersant.ru, October 18).

The Kremlin-affiliated Telegram channel “Nezygar” provided an explanation for this interview, noting that “a new distribution of property is looming in Russia.” The channel’s authors opine that the implied re-nationalization would be aimed at returning important industrial assets (valued today at 1.2 trillion rubles, or $12.3 billion) privatized from 1990–2010 to state control. Nezygar further suggested that the properties belonging to “‘relocants’ from the Special Military Operation who as a rule speak negatively about state policy” will instead “be used in favor of residents loyal to the government.” At the same time, the authors of the channel openly refer to what is happening as “de-privatization” and suggest that oligarchs like Petr Kondrashov, Mikhail Prokhorov, and even Roman Abramovich may soon fall victim to it (Т.me/russicaRU, October 22).

Such a policy, despite its illegality, can be quite effective. The Kremlin deprives entrepreneurs who either have shown disloyalty or are expected to do so of assets and levers that they could use to influence the regime. At the same time, the seized property is used to bribe remaining business leaders and can—to some extent—guarantee their loyalty to the government.

This scheme, like any repressive machine, has an insurmountable drawback: eventually it will begin to affect even those loyal to the government. Radicals, including pro-war military analysts, increasingly speak against capitalism as a whole and call for a wholescale diversion of resources toward war and the Orthodox Church (Topwar.ru, October 20). In the same vein, owners who employ (and frequently exploit) foreign labor are branded as agents of Western intelligence (Topwar.ru, October 22). As a result, the flywheel of repression—designed to ensure the loyalty of some at the expense of others—eventually may turn against big business as a whole.