Deep Dive
Shownotes Transcript
Welcome back. I'm Max Bergman, director of the Stuart Center and Europe-Russia-Eurasia program at CSIS. And I'm Maria Snegovaya, senior fellow for Russia and Eurasia. And you're listening to Russian Roulette, a podcast discussing all things Russia and Eurasia from the Center for Strategic International Studies. Hello, everyone, and welcome back to another episode of Russian Roulette.
We have a real powerhouse duo of economists lined up for today's episode, or as I like to call it, the battle of central bankers, because both of our guests actually have experience working at this established institution. First, I'm thrilled to welcome back a friend of the pod at this point, Sergey Alexashenko. Sergey is an established economist, former chairman of Merrill Lynch Russia. He also served as Russian Deputy Minister of Finance from 1993 to 1995.
and first deputy chairman of the Russian Central Bank from 1995 to 1998. Sergey, welcome back. Maria, thank you for having me here. But I have to tell you that central bankers is a family and we do not fight one with another. Exactly. It's out of our policy. Well,
Absolutely. Not possible. And with Sergei, I'm not in the controversy in most questions. Interesting that you felt the urge to make this disclosure at the very beginning. All
Alright, but also joining us today is Alexandra Prokopenko. Alexandra is a fellow at the Carnegie Russia Eurasia Center in Berlin. From 2017 to 2022, Alexandra worked at the Central Bank of Russia and at the High School of Economics in Moscow. Alexandra, great to have you with us today, even if it's not going to be a heated conversation.
Well, it's not going to be a battle here, but it definitely would be a fruitful conversation. Thanks for having me here. Awesome. Let's jump right in. Today, as our audiences may have guessed,
We are going to focus on the recent economic news from Russia, including Russia's continued inability to bring down domestic inflation, the new 2025 budget draft which was just released, the Kremlin's spending priorities, and altogether what the existing economic challenges mean for the regime going forward and of course the war Russia is waging in Ukraine.
To begin, I'd love to give each of you the opportunity to describe Russia's current state of affairs when it comes to domestic price increases and the general spending, perhaps, that is actually one of the leading causes of the situation for our listeners. Alexander, why don't we start with you?
Sure. So the biggest point is that the inflation in Russia is non-monetary origin and actually inflation is the major sign of overheating the economy. So now the economy continues to grow at the expense of government spending, which means budget and credit impulse, which credit impulse was provoked by budget spending.
and spending of people accordingly, because we now witness wage raise not only in military industry complex, but it's spread within the whole economy.
So a good example I'd like to bring here is a situation in the Kurgan region, which is one of the most depressed regions in Russia, which was before the war, one of the most depressed regions in Russia. But now salaries raised up there since the beginning of the war up to 30%.
and consumption surge. And well, it's not worth it to mention that Kurgan region is the home of Kurgan MASH Zavod, which produce infantry fighting vehicles. And the enterprise now works 24-7.
So this very well illustrates how domestic demand, driven by budget expenses, impacts GDP. So the economy is still overheating. There are indirect signs that show that, well, probably very reluctantly, the economy is beginning to slow down. But the main question here is, is it really a slowdown or the influence of some external factors, for instance, shocks,
from the supply side. So what we see? We see the decline in demand for rebar and steel plate from the construction site.
And these are definitely not the effects of the withdrawal of preferential mortgages. We'll see these effects later. Cargo, especially on the railroad, is slowing down, which to me seems a bit odd during a so-called special military operation since the railroad is the main route for sending stuff to the front line. At the first hand and on the second, via railroad, coal, oil and other goods go to Asia.
What we don't see at the same time is a slowdown in output in industries other than oil production. So there was, in military industry, there was a slowdown in August, but it's still unclear is it something systemic or related to some temporary shocks. But in oil production, yeah, we see the decline in output. It's also unclear is it because of stagnation of oil prices and agreement, an OPEC Plus agreement or something more significant.
So here we are. And now the Russian government releases a new budget draft, which, well, from my point of view, promised the economy another year of high key rate and probably high inflation. So altogether, it seems that there are more bad news for the Kremlin that start showing up. Sergey, to what extent do you agree with this assessment?
I don't want to disagree with what Alexandros said, because definitely it's based on numbers and it's stupid to discuss about numbers. I would try to give some qualitative views. First of all, really inflation is high, but I have concerns that Rostat, Russian statistical agency, underestimate consumer inflation.
If you look on Russian GDP data for the first two quarters, you will see that GDP deflator as general price index in the whole economy is 15% the second quarter to the second quarter of the previous year. So having about 8% in consumer prices, it is strange. It's doable. It's doable if you have for ordinary people, for households, something to consume.
Rostat reports that households' incomes are growing by 5-7% year to year, and it seems it is supported by data on nominal wages. Nevertheless, if you look on the data on Russian domestic food and non-food production, it's growing not fast, while import is slowly but steadily declining. So for people to increase their living standards, they have to purchase more.
If inflation is low and incomes are high, that means there is no demand. If there is no demand, something is not very good in the economy. That means all those data slogans about rising living standards is a miracle. So I have concern. I have concern about inflation data. It seems to me it is higher than we see in the Rostat report. Another interesting point, and it is very important, we have to remember that since Putin became the president in 2000,
He is the proponent of very tough monetary and budgetary policy. It's his memories of the crisis of 1998,
And if we look on the data for 2023 and 2022, we may see that the budget expenditures, budget deficit was financed to a significant extent by the monetary finance of the central bank, one way or another. Either it was a use of national welfare fund resources, or it was devaluation. In both cases, it is printing money.
This year in 2024, let's say starting from the mid 2023, central bank stopped printing money for the use by the Minister of Finance.
military expenditures, although they are inflating wages and inflating inflation, we may say, yeah, they are financed by ordinary tax revenues. So what we see, what we see in the economy is financing of the war by reducing all other budgetary expenditures in the real term. And that is very important. Yeah, it helps Kremlin or economic team of Kremlin to keep macroeconomic situation under control. And we should not underestimate that the
budget is rather strong. Yeah, we may discuss why it is strong. Is it strong forever? Is it dependent on oil prices? Or is it dependent on the policy of the Ministry of Finance, which increases tax burden by one percentage point of GDP every year by imposing new taxes? Nevertheless, budget is strong and it does not require monetary financing. That's why it is anti-inflationary impact. Of course,
Alexander, I did not mention, but we have to say that the central bank is in a desperate situation because according to the constitution, according to the law, it is the agency that should fight inflation. Inflation is steadily going up and the central bank can do nothing. Because if it is the minister of finance, not the minister of finance, Putin, who finances the war by extra billions,
of rubles, central bank cannot stop it. In my mind, the rising of the key rate or interest rate of the central bank from 16 to 18, then to 19, and nowadays central bank promises, okay, 20 or 20 plus, it doesn't help to fight inflation, but it creates pressure on non-military sectors of the economy.
Thank you, Sergey. And actually, the central bank trying to fight inflation was the next question I was going to ask. So, Alexander, maybe you can comment on that. Sergey also flagged, I like the tweet, which you discuss how Nebulina looked and they look a little dark. They didn't look very happy during these conversations, public appearances, apparently, but they may know something that we don't.
And it's clear, right, that, Alexander, as you flagged, given the nature of where inflation is coming from, right, it's unclear. It's unlikely that raising the bank's key interest rate to even 19% is going to help. But maybe it will, given that they keep raising it. So what is your take on the issue?
So first, I wouldn't call what's going on what was described as monetary financing of the economy, but we won't stop there. Second, I rather agree that central bank is desperate in terms of inflation. But I would say that there is not so many tools at the disposal of the central bank right now. So Nabulina is not responsible for the pace of state expenditures.
She can take them into account, but she has no decisive voice at the government meeting or in Duma meeting. So the problem here is that, well, it's better to describe the problem here as the battle between right and the left hand. So Nabulene with her mandate is fight against inflation and the only tool for the central bank, if central bank to inflation targeting is the key rate.
Well, okay, there could be some macro prudential regulation towards credit, but in terms of price targeting, it's only the key rates. So Nabiulina can rise or decline the key rate accordingly plans of the government. So and here the government increasing the part of spending which
is non-productive. So, well, Nabiulina has, she's more or less in the corner and there is nothing else she can do in this kind of situation. The key rate works over the whole economy, but Russian economy fulfilled with different kind of subsidized programs, which are not also a theory of responsibility of Nabiulina.
And the key question here is, okay, Nabulin is raising key rate, but the government introducing more and more subsidized programs for industry, which makes the credit less responsive to the key rate. And now what we see from the budget that the expenditures, the military expenditures are on their peak.
Last year, we suppose that defense and military spending will be peaked in 2024, and it was 10.4 trillion rubles this year. But next year, they will be higher. And combined with expenses on national security, they will hit 8% of GDP, first time since collapse of Soviet Union.
And this part of expenditures are less sensitive to the key rate movement. And we also need to keep in mind that key rate works not immediately. So there is a lag in the action of key rate from three to six quarters.
So that's why I'm saying that it's a debate. Is the economy cooling down or the economy is senseless to the key rate? So it's still unclear. And with continuing pace of state expenditures, of course, the only thing Nebulina can do is continue to raise key rate in the hope that this level would be dramatic for the economy. The economy activity will slow down significantly or almost stop.
And this will help to term inflation because the whole economy pays inflationary tax. And for the thriving, for sustainable development, it's not good. And well, yeah. And also based on, please correct me if I'm wrong, Sergey, based on what you said, they're also shifting to financing military expenditures through tax revenues primarily. So will that help tackle inflation in the long run?
If you finance budget deficit, if you finance budget or expenditure from tax revenue, it is anti-inflationary measure. If you finance deficit by issuing state bonds, which are purchased by banks and which leverage them with the central bank and receive credits, okay, it's inflationary.
Yes, but OK, it's not a battle, it's a conversation. But I disagree with Alexandra's ideas about the potential of the Central Bank of Russia. I think they have some other instruments. In my view, the policy when the Central Bank increases its key rate by one or even two percentage points, it's inflationary policy.
Because in their statements in press conferences, Nabiullina and her deputies, they raise concerns.
They announced, OK, we see inflationary pressure, inflationary pressure is growing. We see so-and-so and so-and-so, the terrible factors. And that results that business, which is not military related, and that should be sensitive to the key rate, they say, OK, if central bank says that inflation will go up, maybe it's time to get credit under 16 or under 17 or under 18%.
And if you look on the statistic of the central bank, you will see that new credits, companies, real sector received 17 to 18 percent. And they feel themselves normal because they anticipate that the central bank will increase rate to 20 percent on the next meeting. And that's why if if Nabilina wants to shock the economy, if Nabilina wants to send a really warning signals that we will fight inflation, she should jump from, OK, 19 to 25 percent.
Saying it's not about current inflation. If she wants to send a signal, the signal should be strong. It's first. Second, I completely disagree that the key rate is the only one instrument in the hands of the central bank. And there is another one much more influential because finally the mechanics of the key rate of interest rate of any central bank is to reduce the demand for credit.
And that could be reached if the central bank will increase reserve requirements, just limited credit expansion by commercial banks. If you look on the statistics, you will see that despite what's going on with the key rate, the amount of new credits provided by banks to the real sector and households, it's enormous. It's from 1.5 to 2 trillion rubles per month, despite what is the level of the key rate.
So I believe that the central bank has some instruments. Why they don't use them, it's a question. Maybe they don't understand it. Maybe they're afraid of something. Maybe they're not very decisive. But still, if there is a will, there is a way. I believe there is a way, but that doesn't mean the central bank agrees with me. Alexandra, would you like to answer? We are not in the controversy with Sergey. So, well, actually, we...
I'm not standing at the point, is Nabiulina right, raising rate by 1% or 2%. I do not work in central bank and I do not watch on this in terms of right or wrong. And raising key rate up by 25%, by 30%, or like central bank of Turkey by 50%, it's still movement of the key rate. So here Sergi and I are not in the controversy. The subject here is that, well,
Well, it's a matter of step Central Bank could make or couldn't. And from my point of view, probably it's not a lack of agency of only Central Bank, but also a government who operates as facilitators only working with Kremlin priorities and has no solid voice in terms of budget spreading.
And first time for a long time, we see how military spending is extremely high, but other budget items like education, health care, but also social policy and actually security, national security are declining both in nominal and in real terms. First time because of the Kremlin priority. And Kremlin priority right now, what we see is...
continue the war regardless of ending the war in Ukraine. And what I see that Russia is seriously entering period of strategic reconstruction of its military potential. It could last up to eight or 10 years, according to my colleagues from Carnegie Endowment for Peace in Washington.
So this means that there is no shortcut and the robust economic condition in Russia will allow Putin at least in 2025 and possibly in 2026 to sustain this kind of expenditures, reducing the others, regardless of the key rate, regardless of the central bank and government, who provides also a narrative about social stability and social priorities of the
The current economic policy is simply lying. A very important point, Alexander. Thank you. This is exactly where I want to take this conversation. Ultimately, we want to know how sustainable is this situation. And just for our audiences, a couple of days ago, the Russian government released its 2025 federal budget figures, where the actual numbers to military and defense spending are even higher than what was previously reported by Bloomberg at 6.3% of Russia's GDP.
About a third of budget and when combined with national security and law enforcement nearing 41% of total spending at the expense, as Alexander pointed out, of social spending, which previously they managed somehow to preserve, but apparently no more.
Do you think this is sustainable? Also, are the numbers correct? Because we're hearing that there's published budget numbers and then there are also always classified budget numbers. So maybe we don't know fully what's going on. And really, can the Kremlin pull this off? Maria, it's a good question, but Devel is in details.
First, Alexander was completely right, saying that the key message of next year's budget is to increase military expenditures by reducing all others in nominal or in real terms.
And that is definitely a key component of the budget. Nevertheless, I prefer to be more cautious in saying it is unstable, it is record high, it is so 25% increase in military expenditures. First of all, we compare when we see numbers 25% increase in military expenditures, we compare plan for 2025 with a plan for 2024.
Nevertheless, if you look with more attention to the data that Minfin provided, this year it did not provide its forecast of the execution of the budget for the whole year. Nevertheless, they provided the overall amount of expenditures, that is 2.6 trillion rubles extra expenditures. So compared to the plan.
That means, in my guess, that at least half of those extra expenditures should be allocated to military expenditures. And that means that the real increase will not be 25%. It will be something like, I don't know, 15%, for example. And next, if we take into consideration that GDP deflator is 15%,
and military expenditures to the real fact of 2024 will increase by 15%. That means in real terms they will be stable. So we have no precise numbers for the execution of the budget for 2024, but I believe that the real increase will be less than we can guess looking on the plan numbers of 2024. Nevertheless, it is a very important indicator if my assessment is correct
And if military expenditures next year will increase, let's say, 15 percent or even 17 percent compared to the effect of this year, that means that Russian military companies cannot produce more.
If you have stagnation in real terms, you have some increase in wages, you have some increase in payments to the families of the soldiers killed in action, or wounded, and so on and so forth. So it seems to me Russian budget cannot purchase more weapons in real terms, in real money, than it purchased in 2024. And that's, it seems to me, that's a very important signal. And it contradicts
to what we may see based on the initial 25% increase. As well, I will be much more concerned about saying that we have decreased significant increase in social expenditures. First of all, it is subsidies to the pension fund. Once again, on the surface, it is true.
If we look at the numbers provided by MinFIN, we see that the subsidies to the pension fund are declining. Nevertheless, we have to remember that last year, in 2020 and the end of 2022 and 2023, Russian companies repaid back their deductions in pension taxes that they did not pay during COVID time.
So in COVID time in 2020, 2021, Russian companies were deducted on their will, were deducted to pay contributions to the pension fund. Nowadays, they have to repay it in 2022 and 2023. And pension fund accumulated significant extra reserves that were just cash in insect pounds. Second, we should not forget that the Minister of Finance
is a beneficiary of high inflation. And for the second year in a row, they index pensions lower than the inflation rate.
And that means that the revenues, that the amount of pension tax or social contributions is growing in path with the growth of wages. That is wealth above inflation. While expenditures, amount of pensions, is growing much slower than inflation because indexation is below inflation level. And that increases once again. It increases reserves, accumulation of resources in the accounts of the pension fund.
And that's a very simple budgetary mathematics. If you put yourself in the shoes of a minister of finance, okay, if you see that the pension fund has, I don't know, one and a half, two trillion rubles just sitting in their accounts, why should not you reduce subsidies?
Because it is you, it is Minister of Finance or Minister of Economy or Government, but not pension fund, who decides the level of indexation. And that's why, for me, this decline in subsidies to the pension fund is a temporary factor linked to the extra reserves in the account of the pension fund. So I'm not so worried about this data.
Interesting. Particularly interesting what you said about the military expenditures. Essentially, they're stagnating potentially rather than increasing, right? In real terms, yes. In real terms, yeah, yeah. Alexander, do you agree with that? I have an impression that it's a slightly different take on this issue. So...
So when I'm talking about revenues, I'm operating figures provided by Finmin. And as Sergey, absolutely correct, pointed at the beginning of his take that Finmin put on their tables their assessments on 2024 without additional spending they want to put in the fourth quarter of 2024.
We don't know where this spending goes, but yeah, it's highly likely that it's something related to the war. There is no other source of demand within Russian economy as the war.
But it's all about terminology. In real terms, military expenditures, they could be less than 25%, but they are not stagnating. They are still growing. But what is important, and I'm here also coping with Sergey, that other expenditures are basically declining. And the real losers here is the public sector, which was underfinanced.
And on the Finmen, on bureaucratic language, they were overfinanced before the war. So now there is no underfinancing because of inflation and because of stagnation of this kind of expenditures. But it's like some sort of restoration of justice or whatever, how they call it. So the public sector is the biggest losers there because wages there are not growing over inflation anymore.
There is a big choice for people, for instance, working in internal security to continue to work on the low payment jobs or instead go to the war as volunteers and have this massive one-off payments or go to work as drivers, as workers, as blue-collar workers to military industry complex and get more salaries rather than working in internal security or in internal public sector.
And this will, well, for now, it's not so crucial. But for the future, this can cause massive problems within the economy. For instance, accidents in infrastructure, we already see growing number of accidents in infrastructure in Russia and Ukraine.
Also, we can see some growing numbers of natural disasters like wooden fires and the firefighters are heavily underfinanced and all this because of war. And then this trend continues. And this is actually the most disturbing thing for me. Very important point. Thank you, Alexandra. So we kind of tend to ignore these issues, right? That obviously this is not just a reduction in social spending. That's actually something that ordinary Russians will feel firsthand.
On that same topic, what it is that the ordinary Russians can feel and how sustainable in general these expenditures are, is my question about the oil price dynamic. Maybe somewhat ambitiously, the Russian budget is, my understanding, based on 69.70 dollars per barrel.
oil price expectation. But recently, for example, today, right, the oil price for euros is about $67.6 per barrel. And there are some anticipation that potentially it might decline. Do you think this assumption of this level of the oil prices is sustainable?
Or will it be an issue in the short term or maybe more of a long-term issue? Or do you think it's just not going to be an issue for the Kremlin at all? It's quite feasible given these assumptions. Maybe, Sergey, to you. Maria, we have to remember that Russian budget is not financed in dollars but in rubles. And there is a conversion instrument from dollars into rubles and it's called the exchange rate.
So what I see from the budget of 2025, it is rather sound. Budget deficit is half percentage point of GDP. And moreover, Minister of Finance wants to allocate half percentage point of GDP to its resource, the National Welfare Fund. And that means that budget has some protection because this donation to the National Welfare Fund is extra oil revenues.
I think that no one in our podcast or just in the whole world can foresee oil prices for the next year, even for the next months. But my feeling is that more fluctuation of oil price up to the level, let's say up to $55 per barrel, could be compensated by the devaluation of the ruble. And that will provide more revenues for the Minister of Finance.
And it will increase the ruble amount of National Welfare Fund because bulk of its investment is in Chinese renminbi or in gold that is, let's say, linked to the exchange rate as well. So if oil...
price falls below, let's say 50, that may cause some problems, not in the budget itself, but let's say in the rest of the economy, in the real sector of the economy. But my feeling, what I see from the previous examples, from the previous cases, let's say up to $55 per barrel is a good price for Russian Minister of Finance and for the Russian economy.
I see. What about, and we're nowhere near even $55 per barrel anytime soon, probably. Alexander, what are your thoughts on that? Do you agree? Any other risks for the budget that we do not maybe anticipate, but they're not obvious right now, but they may be the case going forward?
So I very much agree with Sergey and I just add that under current exchange rate, $20 fall in oil prices would lead to 1.8 trillion rubles, near $20 billion fall in revenues. And that's equivalent to about 1% of Russia GDP, which can be covered by the inevitable weakening of ruble or from other stashes.
for National Welfare Fund, or the government could, I don't know, introduce a new law that they will cover deficit from whatever, from accounts of Surgutneftegaz. And since there is no procedure which prevents this law from being something mandatory, it's not possible yet, but I wouldn't exclude this kind of budget craft at all. So...
They can be quite creative, yeah. And they are not at the point that they should brainstorm heavily. But since we're seeing decline in other kind of spending except military, well, they're quite closer to this point because of these priorities, which makes the economy more vulnerable to external shocks.
So for now, sanctions actually protecting economy from direct external shocks. And the major channel of transmission that shocks is oil prices, as we discussed. So here there is a big room for uncertainty. But also there are a lot of indirect and also external vulnerabilities. For instance, in...
if there would be a hard landing of Chinese economy, which as we know are not in the best shape for now. So this could have spillovers on Russia, not only by decreasing the amount of Russian hydrocarbon export, but also by decreasing import to Russia, which now is critical for our Russian economy, since China providing a lifeline to Russia. Or there can be some changes in sanctions framework.
which would be dramatic for Russia, or the problem with transactions, sanctions made a bottleneck in terms of payments and transactions would worsen, which is also a kind of possibility. So here is some room for external shocks. And of course, as I said, there are also increasing risk of internal shocks in terms of underfinanced infrastructure,
A very important point. Thank you, Alexander. And I wanted to flag to our listeners in the policymaking community that effectively the only source of external shock left for Russia is the oil prices, perhaps encouraging them to give this particular issue a little bit more thought.
I wanted to conclude our conversation today with perhaps like a broader question about what all this means for the war going forward. In the analytical community recently, I've seen two alternative takes on what these inflated military expenditures actually mean for Russia going forward.
For example, there is recently a publication in Business Insider that says that the war with Ukraine is actually the only thing preventing the Russian economy from going into recession because this essentially military expenditure provides this impulse, the Keynesian driving impulse in order to keep going. But there is an alternative take and it, for example, is represented by Ukrainian Defense Intelligence Chief Kirill Budanov.
who says that this military expenditure is not sustainable for Moscow and that will inevitably force Russia to end the war by mid-2025 due to this negative effect on the Russian economy and most notably the labor shortages. Bazumay understanding was his point that the Kremlin cannot mobilize more men because it will be at the detriment of the economic stability. There won't be just enough people to work.
I'd like to gather your opinions on that. So is the war or these military expenditures now necessary for sustainability of the Russian economy? Or is it rather a burden on the Russian economy, which inevitably will lead the Kremlin to end the war in the long term? Sergey, maybe let's start with you and then Alexander. Maria, let me first start with Kirill Abudanov. I never heard he is an economist.
And I never read any of his economic analysis. So let's forget about this. Let's forget about this. It's not serious. As to the military expenditures and the war and the Russian economy after the war, it's the question of the chicken and egg. We should not forget that the Russian economy is a market economy.
The market economy is searching and proving the equilibrium by changing prices, relative prices in the economy. Today, the Russian economy is overheated, but nevertheless it is balanced.
And of course, with, in my view, the budgetary expenditures of 2025, rather sound, and the Russian Minister of Defense, Putin himself, may be sure that they have enough money to pay what is included into the budget for the next year. That means that it's not an obstacle to continue the war next year. The year after the next,
Once again, of course, we may discuss different black scenarios, black swans that will hit Russian economy. But if they hit, there will be problems. If they will not hit, there will be no problems. But we cannot predict black swans. And the problem of sustainability that only military expenditures support Russian economy, to my mind, it is a false story.
We can definitely say if the war ends, if and when the war ends, and if and when Kremlin decides to stop financing soldiers with tremendous salaries, will stop or reduce significantly purchase of their arms or weapons, artillery rounds, shells and missiles and so on, definitely there will be a
Temporary decline in the Russian economy. Because Russian economy will lose a significant portion of its consumption from the public consumption from the government. And it will take some time.
I don't know, two quarters, three quarters, five quarters for the Russian economy to adjust to a new situation. So if the war ends, there will be a recession, but not vice versa. If the war continues, I do not foresee a recession.
Thank you, Sergey. And Alexander, to you, with one additional clarification about the labor shortages, to what extent do you think that is also an additional constraint for Putin? Maybe he doesn't want to announce a new mobilization wave because he doesn't want to take out the labor from the economy and therefore contributing to certain negative trends.
I see. I don't think that any kind of economic problems are considered Putin as constraints to slow the war, to end the war. So this decision will come not from the economy if he decides to stop the war. And the situation on the labor market is quite tight.
So the unemployment rate now is 2.3%. It is a historical low record. We can say it one more time. But where is the bottom? I mean, when we saw 2.4%, it was the lowest level in the history, 2.5% before. So this means that there is not enough workforce within the economy where there are three major forces who are competing for people, first and for the most, it's army itself.
Second, it's military industry complex who need new workers. And we saw that they actually built some new facilities. And this limitation from the workforce prevents military industry complex to increase output. And third is the rest of the economy where workers also required.
I see here a quite disturbing trend in terms of raising nationalism within Russia and all this anti-migrant rhetoric, which now became common for most Russia regions. And on the regional level, regional governors prevent migrants from working in different consumer sectors.
for instance, in taxi, in restaurants, in social sector and in leisure, which raised me the question, and so who will work there, since there is not enough workers within the economy itself. But it's definitely not a limitation for Putin, for instance, to announce a new mobilization. So mobilization are highly linked issues.
to Putin's plans towards Ukraine, which are still unclear. Probably for me. I don't know, does Putin want to get this so-called Donetsk, to liberate or to annexate actually Donetsk and Lugansk regions and then to stop, or he wants to seize Kiev as it was in 2022. So this link to mobilization and how many personnel he needs to achieve his goals.
But what Sergei absolutely correctly said, that the economy will meet a recession soon.
when the government, when Kremlin decide to switch economy from war footage back to the civil one. And this would be another structural shock for the economy, which as I think, well, it's definitely will happen one day. But for now, we see consistent supporters in government circles of this idea of demand management through the budget channel, where military spending will be the main driver of economic growth.
And while this idea is quite popular in the Kremlin and also in government. And the problem here is that the source of domestic demand is finite. It's not indefinite. And it could be calculated when domestic demand will dry up.
But the external demand, the export portfolio of Rostec and other companies, well, their perspective to me looks quite grim since Russian economy is heavily under-sanctioned and exports doesn't work on temporary schemes, on smuggling semiconductors and chips.
So probably companies are now okay in fulfilling domestic needs, but expand their portfolio with export ones and continue to rely on military industry output as a driver of the economy. Well, it looks to me quite unlikely. Mm-hmm.
Thank you very much, Alexander Sergis. It looks like we agree that unfortunately for now, the situation appears to be quite sustainable for the Kremlin, even if there are some negative signs of our hidden emerging and the war overall appears to remain the driver of the economy rather than a significant burden on it.
So we'll keep watching. And unfortunately, we're going to have to leave it here due to the time limits. We did not get a battle of central bankers as Sergey has predicted, but we got an occasional dispute. That's fine with me.
Serge and Alexander, thank you both again for joining us today. And thank you always to our listeners tuning in. In case you haven't already, please do not forget to subscribe to our show and please give us this five-star rating. Additionally, be sure to check out our sister podcast, The Eurofile, wherever you get your podcasts. See you next time.
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