Speaking at the All-Russian Forum on Infrastructure for Entrepreneurship Support «My Business» in Vsevolozhsk, Minister of Economic Development Maxim Reshetnikov spoke plainly about the situation facing business. «When we understood that yes, of course, everyone has a labor deficit—of course finding labor is difficult, pay is rising—but nevertheless, we could make do because there were reserves somewhere in the economy. Now we’re seeing these reserves are largely exhausted. The situation is really such and macroeconomically significantly more complex.»
To translate, Reshetnikov effectively admitted that business is in an impossible position.
Opora Rossii’s members are hoping for an interest rate cut from 15% down to 14%, with president Aleksandr Kalinin suggesting this would send a positive signal. But there are no reserves of productivity or labor left to draw from. Rate cuts now can only provoke inflation without more people entering the workforce. If we believe the topline inflation figures closer to 5% in annual terms, then something is fundamentally broken when unemployment is close to 2%. Aleksandr Shokhin from the Russian Union of Industrialists and Entrepreneurs is joining his compatriots in calling for a 1% cut. No one can answer anymore what exactly business is supposed to do with lower interest rates. Build for consumers who are getting poorer each month? Compete with cheaper imports from China? Tighten the labor market further and compete with wartime bonuses?
Putin’s recent haranguing of the cabinet and technocrats was both pointed and hollow compared to past iterations of the Kremlin playbook of blaming the government for its own refusal to govern. When Gennady Zyuganov, the normally staid leader of the communists, outright tells the Kremlin they aren’t listening and that «if you don’t urgently take financial-economic measures and others, then by the fall, what happened in 1917 awaits us,» there is clearly something shifting behind the scenes. The question is what exactly is shifting within the balance of economic interests and what indicators the Presidential Administration is actually looking at when they decide what collateral damage is acceptable.
March data from Rosstat shows industrial production returned to expansion, marking a 2.3% increase year-on-year which lifted Q1 output to 0.3% net growth. These increases included some consumer industries. Of course, pulling textiles out as an example, the marginal growth it registered was probably linked to a January 1 ban on the purchase of foreign clothing for the armed forces. But setting aside the snark, that «growth» is essentially stagnation and still ultimately dependent on military orders and the scramble to meet market demand resulting from the energy market shock. It’s interesting to note that applications for cash loans are up 52% and credit card applications are up 102% year-on-year, while the positive producer figures do not correspond to strong consumer data. This is a dynamic reminiscent of 2010−2013: credit expanded despite weakening growth or, as is the case today, an emergent recession. Unless there are signs that wages are rising in real terms, this looks more like households getting desperate and turning to credit just to stay afloat. These loans aren’t secured by anything.
Expanding credit is typically pro-cyclical. It normally corresponds with an expansion of economic activity. But these figures raise an important question for observers trying to understand what exactly is breaking within the Russian economy. As long as the military-industrial complex and its adjacent industries receive subsidized credits, there is an expansionary bias built into the system. Some of this is propped up by families of volunteers spending their bonuses on big-ticket purchases; some of it is also propped up by the middle-class «winners» of the war whose businesses have benefited from sanctions arbitrage. But the situation is a reminder of the limitations of orthodox renderings of economics in general, and among Russian specialists in particular.
Money is created whenever someone borrows from a bank. You apply for credit or a loan, and suddenly you have money in your account that you can spend. People and businesses borrow to buy things. Those things don’t cost more because there is some magical «supply» of money dictating how much consumers will pay for them. Rather, every good and service has its own price dynamics—dynamics that bleed together most during structural shocks where the cost of labor, energy, and food rise. When prices are going up, people need to borrow more to afford buying things—until they can’t. Where it gets tricky in a wartime economy is that low levels of inflation (at least compared to the highs of 2023−2024) can actually be negative for borrowing. Higher inflation encourages more people to borrow if they believe their wages will rise faster in nominal terms, such that the real cost of what they owe will diminish steadily over time. In 2018−2019, now-presidential economic advisor Maxim Oreshkin even warned that inflation was falling too far below the 5% target and might harm borrowing.
This dynamic brings us back to Reshetnikov’s comment that there are no longer any reserves for business to call upon. Labor costs are sticky when you’re out of new people to hire. That makes labor-intensive businesses more dependent on being able to maintain price increases to stay afloat. This is why services—particularly things like hospitality, barbershops, and nail salons—have much stickier upward price effects on inflation. If there are no means of expanding production due to labor shortages, any decline in interest rates will only spur borrowing insofar as businesses attempting to expand would increase competition over the country’s scarcest resource: people. What may look like pro-cyclical indicators of consumers spending more may actually just reflect inflation, or a period in which those whose wages rose in 2023−2025 are trying to maintain their relative gains.
And all of this precedes the basic fact that any time there is a consumer credit expansion in Russia, imports go up because domestic businesses aren’t competitive in a lot of key areas. Chinese factories are way ahead when it comes to automation. An increase in imports would be manageable this year under an energy shock scenario that prolongs sky-high oil prices, but would again come at the expense of greater inflation unless those imports support highly productive civilian businesses.
We can’t know what indicators the Kremlin is looking at to determine its pain threshold for the war. Similarly, we don’t know what inflation actually is now—somewhere higher than the official topline figure close to 5% annually and definitely not as high as 15%. What we do know is that, qualitatively, there is not a compelling reason to believe that signs of an increase in consumer borrowing correspond to meaningful demand growth for most goods and services. That borrowing is increasing while the scale of disruptions to payment systems and economic activity linked to internet shutdowns is also expanding suggests something weirder is taking place. We are supposed to believe real disposable incomes rose 7.4% last year? That is absurd. If it were true, there would be no recession and business investment would not be suffering so terribly.
It should be taken seriously when someone in the Duma invokes the specter of 1917 and revolution in wartime. The calls are coming from inside the house that the economy is hurtling into darkness. It appears they finally have the Kremlin’s attention. Whether the boss can make any decisions is another matter entirely.
