Let’s talk about the Russian Economy! I want to try give you an overview of some to the choices Russia has in some basic terms, and without pulling out too much reference material, so hopefully it will be easier to comprehend. (So the opposite of usual, but you know how I love a reference) But none of the options are good. And we’re going to be looking at the broad picture, so there may be some outliers that buck the trend, but we’re talking in the general overall picture that I’ve observed. You’re going to see a lot of things are…conflicting…I’ll explain. Perhaps one of the best examples of this is that Russia is currently experiencing what is essential STAGFLATION. Which is something that was once believe to be impossible. Both stagnation and inflation at the same time. And as I’ve said before, it’s always possible that Russia finds a new, previously unseen way to screw up their economy. I suggest the term Contraflation, but they never let me name anything. What I have told you before is that Russia has choices, but none of them are good, there are consequences. And Russia is constantly working to make it look like things are better than they are, sometimes THAT may be the priority over anything else. I like to describe the Russian government as unchecked predator in the Russian Economic ecosphere. In those situations, there are still limits to what the predator can do, unfortunately that limit might be the extinction of another species. And the predator will not stop themselves. So let’s start with some basic facts: The Russian government is struggling with income. And, believe it or not, this isn’t new, but things got much worse. Back at the other place, I did a giant thread that outline the different phases of the Russian Economy since 2022. Phase 1: Russia is running on the things they stockpiled for the war, and their old soviet stock piles. Minimal costs incurred. Phase 2: Russia has to start investing on buying new things to sustain the war. Either in upgrading remaining Soviet Stockpiles, or buying drones from Iran or ammunition from North Korea. Much More expensive. It was around this time that Russia really had to start searching for funds. Phase 3: Secondary Sanctions. This really packed a punch, and although Russia still manages to evade sanctions often, it means that it often comes at much higher costs and often lower quality goods & longer time to acquire it. I’m going to say we’re now in Phase 4: Biden’s farewell sanctions + Trump. Remember that the Russian government has really been searching for income since Phase 2, and they’ve been accomplishing much of that from taking bigger cuts of the non-oil & gas sectors. Now oil & gas is taking a dive. There’s a lot of problems here, and they’ve been somewhat hidden. This entire time, new sanctions have continued to roll out. More sanctions mean more increased cost. On top of that Russia has been trying to do whatever is necessary to continue the war. So they’ve already been making huge cut backs to spending (not that things were in good shape before this) and they’ve been sucking the value out of the regular economy for some time. Keep in mind, a lot of the businesses in Russia are actually owned/majority owned by the government. They’re treating them as another resource. And at they keep nationalizing stuff, so the amount of stuff they control keeps growing. And their war chest is basically tapped.
So how can Russia fix this problem of low oil prices which is significantly reducing their revenue? One option that is being floated, FREQUENTLY, is adjusting the exchange rate, which the government still has the ability to do. I’ve seen numbers in Russian media suggesting adjustments of anywhere from 100 to 130 rubles per dollar. So…if that will fix the problem, and they have the ability to do it, then why haven’t they yet? Actually why is the ruble actually stronger than ever! Like I said, there are consequences… Russia doesn’t make as much stuff as they would like people to believe. In fact, a lot of stuff is very barely made in Russia, but still called domestic. And, as I warned you last year, Russian agriculture is in a lot of trouble. There are very few things I’ve seen the Kremlin worry about, and food prices are one of them. Russia has already essentially exhausted their stockpiles of the previous year’s harvest. They’re relying on imports for a lot of basic foods and food is a big portion of an average Russians budget. So, by further STRENGTHENING the ruble, Russia can provide *some* relief on those costs, or at least try to make the pain slow down. Thus, if they say that “official” inflation is improving, it may just be because of them manipulating exchange rates. So, does that make sense? Russia can choose to keep the ruble very strong to try to contain high costs on imported foods and thus perhaps make their “official” inflation numbers better than they should be OR Weaken ruble, and refill the governments budget from oil & gas sales. But not both. We’re going to have a lot of, “but it gets worse”… Remember, Russia still has choices to make, so we can’t 100% predict what they’re going to do, thus we don’t know exactly what kind of disaster we’re left with, but you can see how they’re getting pinned in. I going to say that there is a good chance that they try to keep the ruble strong long enough for the harvest to come in (perhaps July) in hopes that it provides some relief. ROMIR stopped publishing this, possibly (likely) due to pressure from the Russian government. But, if you look at all the years on the graph, you’ll see that, up until 2024 there was still some relief, even if it wasn’t much in the fall, UNTIL 2024.
Here is the most recent “deflator” index. The base point on this index is 2019. So the prices in 2019 would be 100% romir.ru
It was around the time I started to see Russia no longer conform to previous rhythms that I said that, when people look back at this and evaluate it, they may say that this was the beginning of the decline. And I’ve seen nothing to disabuse me of that belief. Things have continued to decline, and they’re getting worse. The Russian government is not helping. And they’re sending conflicting messages. The Russian government is essential enforcing price controls in Russia. Often when you see mentions of the FAS (Federal Antimonopoly Service) that means, they’re about to do a pressure campaign that results in price controls. Another way they did it was through export quotas. And we’ve seen how this ends, with empty shelves. On top of that, they’ve been INCREASING taxes and fees on practically everything. Remember they’ve really been pushing this since Phase 2 (2023). Meanwhile, the expenses are increasing. So people start making cuts, doing what they can to try to survive. For some farmers, that meant going without things like fertilizers, and the prices for those skyrocketed. The results of that, is much lower yields. And then, on top of that, Russia decided to put seed quotas in place to force people to use domestic seeds. The problem there is, they’re crap. And the yields are significantly lower. So you’ll hear Russia say that they’ve increase the area planted, but that doesn’t mean that they’ll end up with a bigger crop or that the quality will be any good. Russia has once again experienced a severe frost. I’m not if we know the full extent of it yet, but…right now, it’s not looking like it’s as bad as last year. But… Lukashenko is suggesting that it will be a problem. Note: Belarus has not been immune to some of these seed problems either
‼️ Belarus: “"There's still time." Lukashenko urged everyone to plant potatoes” Sounds like he doesn’t think Russia harvest will be very good after all. He also suggested people plant onions & carrots fontanka.ru
Belarus without potatoes. What a time to be alive.
‼️ “Lukashenko explained the potato shortage in Belarus by its sales in Russia” Potatoes have reportedly begun to “begun to disappear in local stores” 🥔 “Lukashenko noted his readiness to "endure a month" without potatoes.” interfax.ru
So, a lot of these farmers in Russia are going under. The ones that haven’t are barely holding on. As you can see, under these circumstances, where you have to plant a bigger area to get close to the same yields, that requires more work. The labor shortage continues to be a major problem, and Russia is at risk of losing a million migrant laborers simply because they can’t pay them enough. Putin had suggested that Russia would solve its labor problems through robots and mechanization. But…. The farmers have already been bled dry of profits and they barely scraping by. They can’t afford to mechanize things more. And as a result, the agricultural equipment industry in Russia is collapsing. That’s the opposite of mechanization. And you’re going to see the same thing is true for other businesses. Even if they could get another loan, which is difficult, it’s hard to do anything with the key rate is 21% And it’s not like they’re making the choice NOT to take a loan at 21%, many of the loans were variable rate. The loan is already on the books. And they have also be subject to price controls, and increased taxes. They can’t afford to invest in those upgrades even if they COULD get their hands on the equipment. So all of these groups are turning to the government to ask to be bailed out, and one of the main things they ask for is SUBSIDIZED LOANS! But guess what! The government income is plummeting, and now they’re having to cut the budget even more, and some of those cuts are to subsidized lending. So instead of fixing the problem, it’s getting EVEN WORSE! So here’s another thing I want you to realize when visualizing this. It’s like, when these things recede, they raze it to the ground. When it goes down, it won’t be easy or perhaps even possible to revive it. Like an extinction event. The population of Russia is shrinking, and much of the existing population is aging out. So, when these farms in Russia go under, they may be dilapidated, etc. It’s very likely that no one comes behind to pick up the farm. How do you think ghost towns happen? There’s not a “it was a bad year, we’ll get through it” type situation. There is a lot of stuff that is at it’s end of life, & due to Russia being Russia, when it fails, there just may not be enough capacity in the whole world to fix it quickly even if people wanted to bail Russia out (they don’t) A good example of this is Russian Railways locomotive problem. They should have been replacing their locomotives a long time ago, but they kept putting it off, and then they didn’t even maintain the ones they had correctly. Now, the locomotives may fail so fast that it will take years to fix. I did this little sketch to show how as this capacity shrinks, the whole thing will be strangled, so even if the economy improves, there’s a limit to how much it can improve. Because their locomotive availability is still gettin worse.
So, let me give you a hypothetical sketch. So if the economy is the leading cause, then there still exists this reduction in loading capacity problem that hasn’t been fixed. That means that even if the economy improves, it will be strangled by the reduction in capacity.
Russian Railways is another good example of how they’re exhausting their options. The government leaned on Russian Railways to pay out dividends last year, but the government need to turn around a try to give the money BACK to Russian Railways in order to try to fix the locomotive problems. They made Russian Railways pay 11 billion rubles to the government in dividends, but then turned around and searched for money buy locomotives. The government said they could only find 15 billion to give back to Russian Railways, but that was BEFORE they needed to amend the Federal Budget. So who knows how much, if anything, Russian Railways will get. Huge sections of the economy are getting squeezed this way. The RSPP, often referred to as the “oligarch’s union” has been complaining about people not paying their bills, and one of the biggest offenders? State-corporations. We’re beginning to see businesses buckle. They’re all asking to be bailed out, but the government can’t save everyone. Here is one of the weirdest contradictions. I’m seeing Russia pull both a 1918 while also trying to do the 1990s at the same time. They’re both, nationalizing everything AND talking about privatizing more things. You can imagine how those things are contradictory. Privatizations, because they need the revenue, so they’ll try to sell off assets. But also, remember all the capital they squeezed out of all these businesses? Well that’s a problem, and this is how they thing they can fix that. But who in their right mind would buy it? And with what money? Russia has been burning bridges with the international business community. They’re toxic. So no matter how much Russia tries to say otherwise, foreign businesses aren’t returning, and China isn’t investing in the grand scheme, they’re disinvesting. I wrote a really good thread that outline the multiple different ways Russia has done this, so I won’t go into all the details, you can just read this if you haven’t.
‼️ Russia: “Russian officials have begun calling Western businessmen with requests to return to Russia” Looks like at least one transnational refused to even take a call from an official in the Russian Cabinet. Time for a thread 🧵 moscowtimes.ru
The overall result is that not only have they burnt bridges, investing is Russia is incredibly risky and very unlikely to be profitable. The businesses there already aren’t profitable, foreign investors will just be treated worse based on recent experience. Same cost control stuff will apply. AND the Russians that did buy out the foreign companies that left DO NOT WANT THEIR COMPETITION TO RETURN. So you get this weird news cycle where Russia will both say the foreign companies definitely want to come back, but that Russia won’t LET them come back if it hurts Russian businesses. And when cornered, they finally admit that no one has applied to return. If you read through that thread I shared above, think about how much work and effort it would take to get foreign investment to return in any grand scheme. It’s not going to be a palatable to leadership. Think about how Syria is getting sanctions lifted
Now, another thing to keep in mind, is that Russia probably playing a much bigger game of “move the assets” than people think. Just like the problem with Russian Railways and making them pay out dividends. So let’s go back to our basic, “low government revenue” problem. I told you that there were some limits in the ecosphere, but unfortunately it might be the extinction of a species. And that they were somewhat pinned in. Here’s what I mean… If Russia weakens the ruble, they bring in more rubles per barrel and increase their oil & gas revenue BUT they will likely cause inflation and food prices to increase. This may push even more businesses to bankruptcy as expenses increase. Russia loses Non-oil & gas revenue and people are hungry. Russia leaves the ruble strong, but increases their non-oil & gas revenues through more taxes and fees. Business likely go bankrupt, reducing the non-oil and gas revenue Russia decides to force the Central Bank to lower the key rate, thus lowering expenses. Inflation continues to skyrocket Russia decides to cut even more spending. They’ve already cut a lot, that means that they can’t even bail out businesses in trouble that they need, more go bankrupt, they lose non-oil & gas revenue. Also they already stopped buying medicine Ok…so let’s say they give up on trying to reduce the deficit, and instead focus on trying to pay for it. They can get a loan, or use the the National Welfare Fund. Here’s where it gets fun! Nobody is giving Russia a foreign loan, so they’re stuck with domestic loans. That’s what the OFZ thread is all about. Right now the government is struggling to get enough in loans in order to cover their bond related expenses, let alone pay for anything else. I checked and, of my current projections, about 80% of those expenses are already locked in. So lowering the key rate won’t make it go away.
Here is my updated chart of the projections. Remember, they need to get the black line (revenue) above the bars (bond expenses) before they can use the funds for anything other than bonds.
And they had this problem last year, you can see it on the left. At the very end of the year, they pulled out all the stops to place some very big, very expensive bonds. AND they pulled 1.3 Trillion rubles from the NWF.
And if you look at my graph on the right, you can see a faint lower blue bar graph that lower than the rest, that’s the same values as the blue line on the left.
So who bought these bonds? As it turns out, a lot of these bonds were bought by STATE MAJORITY OWNED BANKS. For example: Sberbank And guess who specifically owns Sberbank! The National Welfare Fund! They own 50% plus 1 share. Look at how much they owned.
‼️ Russia: “Sberbank increased investments in OFZ in 2024” To 4.9 Trillion Rubles moscowtimes.ru
So much at just one bank!
4.9 Trillion OFZ (face value) at the end of 2024 would equate to over 21% of the total OFZ in circulation. Sberbank is a Russian State Majority owned bank, with the Russian Minister of Finance in a leadership position.
They aren’t alone, VTB also bought quite a bit, and the National Welfare Funds also own quite a bit of VTB, although Sberbank is the largest illiquid asset the NWF holds. Here, you can see all the illiquid assets in the NWF
Here is everything that is reported to be in the National Welfare Fund as of the end of April 2025.
We’ve now seen the same game with VTB that we saw with Russian Railways. VTB is having trouble with capital (but they still bought up the governments bonds) The Government announces they’re going to essentially bail out VTB using some of the meager remaining liquid assets Then, they lean on VTB to pay out dividends that will be sucked up from the NWF and applied to the budget as revenue. And the process starts again! Much of these remaining liquid assets have already been earmarked for things, and those things often include propping up this ILLIQUID assets, and trying to save projects that lost foreign financing. So what happens to the ILLIQUID assets when the LIQUID assets are gone?
So…getting a loan is…challenging. And the current projections suggest that the remaining liquid assets of the NWF, some of which they already need for other things, aren’t enough to cover the total deficit alone. So if the government wants to bail some of these businesses that are going bankrupt out, where does the money come from? The NWF is on the verge of going empty. Who is going to buy the bonds? Ok so….what if they just, get the Central Bank to print money (even thought they sort of already are, but what if they went all in on that) The M2 money supply has already been increasing at double digit rates. Imagine what happens to inflation if they go all in? Then we’re back to the weakening the ruble problem from the beginning. The other thing about these swings in exchange rates…in makes importers/exporters very nervous, and they may stop trade all together. Which is a problem when you need FOOD. So, now let say that Putin magically convinces someone to bail Russia out (unlikely) Trump is working on tanking the global economy, and Russia is continuously burning bridges. So who would or could bail Russia out? I think I’ll stop here. This has been a long thread. But do you see what I mean when I say there are not good choices? IT WILL GET WORSE ~ The End ~