This year’s St. Petersburg International Economic Forum (SPIEF) opened with an ominous symbol of the state of things: a Ukrainian drone strike on an oil terminal and other infrastructure. It was a fitting image for what followed. Although Elvira Nabiullina missed the proceedings to attend the funeral of her colleague Aleksei Mozhin, it is hard to see how the Bank of Russia could have played any constructive role in the economic plans the technocrats gestured toward. For instance, Deputy Prime Minister Aleksandr Novak repeated a lie now more than a year old: that the government is overseeing a “controlled cooling” of the economy after its furious nominal wartime growth. What exactly they are controlling remains an open question.
Broadly speaking, four clashing “realities” were on display this week, each offering a different and unresolved angle on the wartime economy. From the very top came Putin’s defiance. Speaking to journalists, he claimed that “we are fighting for the health of the Russian economy as a whole” by struggling to avoid the hyperinflation of 30−70 percent that unnamed countries (which do not exist) are apparently suffering. Of course, the war will not end until the entirety of Donbass is captured, and nothing else will change until then. His response to recent grim forecasts was that Russia has grown 10 percent in recent years while Europe has grown just 3 percent. Setting aside whether the average Russian has benefited from that 10 percent growth by any meaningful metric, the public view from the top remains hostage to spin. Even as Vnesheconombank signals layoffs—a poor leading indicator, given its role in financing national projects—all we heard was the usual refrain: accept what we have done for you, and know that any pain you feel is only to avert an even greater catastrophe. It’s not our fault, but we are getting back to growth.
Then came the assertion of macroeconomic normalcy, led by Finance Minister Anton Siluanov, who is tightening the budget rule that—for now—continues to funnel more energy earnings into state spending. “We’ve come to an understanding that we need to return to the predictable ruble policy we had before,” he said. “The exchange rate will be more predictable. Therefore the budget is the main thing.” If the budget is to be normalized alongside the budget rule in order to prevent further ruble appreciation, new spending cuts will follow. Oil-and-gas revenues were still down 30 percent year-on-year despite the rise in prices since late February—roughly 3 trillion rubles. For now, Siluanov promises the budget deficit will rise only slightly above the 1.6 percent of GDP target the ministry set earlier.
These targets look far less convincing by Q4 unless economic activity returns to expansion. Revenue growth has been driven mainly by higher VAT collections, which have risen naturally because of persistently elevated inflation. Officials are privately warning the Kremlin that military spending is unsustainable, yet the opposite is true politically. If that money stopped flowing at the current scale to the relevant industries and interest groups, the scramble for state resources would intensify dramatically. If the Finance Ministry truly wants to balance the budget within three years, spending will have to fall. Raising taxes at this stage of the economic cycle would only provoke more inflation, curb investment, or squeeze incomes.
Outside Siluanov’s Treasury perspective lies the “virtual economy” view inside the government, which is constrained by the chronic lack of money for new initiatives. Novak’s recipe for growth—increased labor productivity, technological change, an improved business climate, and labor reallocation—is cheap talk. Some productivity gains have come from tight labor markets pushing businesses to invest in IT, but outside the white-collar sector—precisely the part of the economy where workers are now struggling most—those gains have come mainly from making people work harder, longer, and under greater pressure as prices rise. There is no point pretending technological change is a real driver: Russia does not invest meaningfully in R&D, and its businesses cannot compete with Chinese manufacturers without heavy protection.
The business climate cannot improve under the current political system, which is now locked in disequilibrium. The war has reshaped the foundations of the regime’s economic structure, one that requires resources to be continually diverted to military industries and the “winners” of the conflict. Reallocating labor would demand administrative capacity that the regime and the state neither possess nor have developed, given their preference for market mechanisms. It does not help that Duma Speaker Vyacheslav Volodin voices a consensus in favor of raising levies on migrants seeking work permits, even as the government claims it wants qualified foreign applicants. Novak’s “real” drivers of growth are virtual because the proposed solutions are, largely, virtual. Putin was talking about the “quality of cadres” in the labor market as an efficiency driver back in 2015. To borrow the ugly lingo of our times, this is neo-Soviet slop that pretends better management can somehow fix systemic problems.
Finally, there is the economic view from the private sector, which is struggling to make itself heard in an increasingly tense political environment. Sber CEO German Gref did his best to make two salient points this week. Interest rates in the 10−12 percent range have become a psychological barrier to business investment that cannot be overcome without a change in political direction. The lower inflation falls, the more punishing those rates become in real terms. That barrier would matter less if growth were red-hot and prices were still rising at the pace of 2023−2024. But rates cannot fall further without provoking more inflation, because the supply side of the economy—especially the labor market—is already stretched to the limit. When Gref urged political leaders to reconsider their approach and support business—because businesses of all sizes are the foundation of the state—he was appealing to their survival instinct. If these imbalances and needs are not addressed, things will only get worse.
Unfortunately for the regime, all four realities are fundamentally at odds. The Kremlin will not be able to spin its way out of its mistakes. Macroeconomic normalization through the budget will require spending cuts that would deepen the emerging recession, with no self-correcting dynamic available to the wartime economy. The cabinet’s growth prescriptions are little more than administrative band-aids for structural imbalances it cannot fix. Businesses cannot invest until financial conditions ease and the tax and political burden on them is lightened; yet the moment those things happen, the underlying imbalances worsen and interest-group politics turn nastier. Only total mobilization could break these impasses—uncomfortably, and at the cost of national quality of life, real-term growth, and political apathy. Until then, officials remain stuck playing show and tell: little to show, and nothing to tell.
