Moscow Wants Russian Society to Pay for War in Ukraine (Part Two)

*Read Part One.

Russia’s war of aggression against Ukraine is creating a myriad of problems for the Russian economy. While the Russian state budget is experiencing a deficit, the Russian Central Bank posted some uninviting news: its annual deficit for 2022 was 27 times higher than in 2021 (Kp.ru, accessed April 24). Meanwhile, the traditional tools of macroeconomic stabilization that Moscow has used in the past have not alleviated these dire straits. For example, prospects are dwindling for the oil and natural gas sector to become a game-changer in stymying economic decay. Thus far, the Kremlin’s decision to reduce the extraction of oil by 500,000 barrels per day has had little influence on both the price of Urals-grade crude—which, in early April 2023, had decreased in value by another 3.4 percent dropping to $47.85 per barrel (Minfin.gov.ru, April 3)—as well as the Russian ruble, which remains weak relative to the US dollar, euro and yuan (1prime.ru, April 5; The Moscow Times, April 6). Overall, between January and March 2023, energy-related taxes collected by the Russian state collapsed by 46 percent, and taxes for those economic sectors that do not deal with raw materials (which may be seen as even more alarming) fell by 9.1 percent; whereas, budgetary expenses grew by 1.5 times (Sovross.ru, March 7).

Moreover, it seems that the Russian private sector is losing confidence in the Kremlin’s ability to stabilize the domestic economic situation, withholding investments in some of the strategic projects (natsionalnyje projekty) that were announced by Russian President Vladimir Putin in 2018—including combating poverty, investing in technological development and infrastructure, as well as addressing the demographic situation (The Moscow Times, March 22).

Thus, in combatting the negative impact of the war against Ukraine and Western sanctions, Russia—in addition to its trust in trade with China—is primarily considering two options. The first is the introduction of a quasi-windfall tax—de facto one-time-payment—aimed at compensating for the growing budget deficit (see EDM, April 12). Apparently, the Russian authorities are convinced that large businesses (especially those in the realm of energy and raw materials) have managed to accumulate substantial amounts of financial resources but may be unwilling to disclose these gains to state scrutiny. It has been reported that, during the first year of the so-called “special military operation,” large businesses in Russia received more than $220 billion, of which up to one-third was never reported to the state. According to Oleg Vyugin from the Moscow-based National Research University Higher School of Economics, some Russian oil companies may have created a shadow fund abroad to avoid contributing to the state budget (Ng.ru, March 19).

In terms of the second measure—which in fact consists of two steps—the Russian authorities are considering placing the burden of the war directly on the Russian population’s shoulders. First, the government may opt for a tax hike, though, earlier, Russian Finance Minister Anton Siluanov dismissed such a prospect (Lenta.ru, February 21). Nevertheless, this scenario was recently forecasted by Russia’s largest private bank, Alfa-Bank (The Moscow Times, April 5). Second, the Russian Ministry of Finance has begun working on a program that aims to attract so-called “long money” (long-term maturity deposits), which would provide the Russian economy with much-needed liquidity. This in turn could be used by the Ministry of Finance to revitalize the Russian economy. As noted by Russian Deputy Finance Minister Alexey Moiseev, the main condition here is that investments should be made for no less than 15 years—though the money could be withdrawn earlier by men at age 60 and women at age 55. Participation in the program will be of an “exclusively voluntary nature.” Furthermore, Moiseev stated that those Russian citizens who agree to take part in the program will have to sign an agreement with a private pension fund (Minfin.gov.ru, March 28).

Overall, Moscow’s top financial authorities are optimistic that the program could become a key factor in revitalizing Russia’s ailing financial sector. For example, Siluanov, when asked about the much-needed financial means necessary to ignite Russian economic growth, stated, “The financial market is one of those sources we did not activate in previous years. Now, this option is becoming much more viable.” He also noted that companies within Russia’s private sector could join the initiative or launch similar initiatives of their own. In a related comment, First Deputy Prime Minister Andrey Belousov expressed his desire to attract financial means from the Russian population as a way to replace foreign investors that have abandoned Russia due to the West’s economic sanctions (Ng.ru, March 29).

That said, Russian experts have expressed doubts that such an initiative will ignite interest within a large segment of the Russian public. After all, as noted by members of the Russian expert community, previously, similar initiatives resulted in nothing but disillusionment and a lack of trust among Russians. According to some Russian sources, none of the previously launched “quasi-pension” initiatives—such as “individual pension capital” or “private retirement plan”—have worked out as promised. According to the head of macroeconomic analysis at Finam in Moscow, Olga Belenkaya, “It is quite dubious that there is a considerable part of the [Russian] population that does not have a necessary level of financial means and a significant safety net for the next one to two years to be able to commit to long-term investments.” She also noted that, in 2008, the Russian government had already launched a similar program that was “frozen” in 2014. Moreover, Belenkaya hinted that, due to the rather tumultuous financial situation currently in Russia as well as the unpredictability of Moscow’s macroeconomic policies, investors are likely to be reluctant to commit to the current program. The previous bitter experience with such an approach—which translated into the de facto seizure of private money by the state—is, according to TeleTrade analyst Aleksey Fedorov, one of the primary factors that poses a challenge in selling the aforementioned initiative to the Russian public (Ng.ru, March 29).

In conclusion, two aspects should be highlighted. First, the true state of the Russian economy may be far worse than currently presented by both Russian and some international outlets. In truth, the Kremlin may be coming to a point of desperation in attempting to find additional sources of income. Second, if Western sanctions are kept intact, Moscow may have to introduce some unpopular measures—such as tax hikes, mandatory quasi-windfall taxes on businesses and “voluntary” investment programs to strip the population of its savings—which, along with the setbacks in Ukraine, could lead to widespread social unrest and destabilization within Russia.