The state will set prices, the Central Bank will distribute loans, and the Ministry of Finance will directly finance the Military-Industrial Complex. These are not strange fantasies, but decisions arising from documents that have already been adopted by the Russian government. It seems that the Russian market economy has cracked too much this year.
Nabiullina's decision not to change the interest rate is the end of the market economy in Russia.
In December 2024, the Central Bank did not change the interest rate - 21%, although according to the logic of the market economy it should have been increased. Of course, we can say that the Central Bank saw symptoms of a credit collapse and this allowed it to leave the rate as it is, but it is quite possible to believe that Elvira Nabiullina has surrendered (perhaps temporarily) in the fight against a whole front of opponents in the government, the State Duma and big business in the country.
And in the logic of apparatus life this is quite understandable. It is strange to fight alone against a whole legion of enemies. Success in such a situation is unattainable. But the president can say that stereotyped thinking prevents the Central Bank from making the right decisions. And resigning in modern Russia is an extremely dangerous thing: as soon as you are no longer in power, it turns out that there is a good "bag" of compromising information about you, and you quickly move to completely different places.
But the fact that Nabiullina surrendered is a significant moment. This is both the end of a very clear year and the end of the entire period in which the market economy in Russia was still trying to somehow survive the war.
Price regulation
What will the government do now? Mikhail Mishustin is trying to seize the initiative in managing financial and economic processes. I get chills! The wording is absolutely fantastic: the government wants to move on to auditing pricing in the main sectors of the economy in order to combat inflation! Literally from the mouth of the Prime Minister it sounds like this: “I would like to draw attention to the need for sectoral analyses of supply and demand. Here it is necessary to carefully monitor prices in the domestic market. The level of real incomes of citizens depends on them and their dynamics.
It is easy to get to the Goskomtsen [State Committee on Prices - my note] on the Soviet model. What is a sectoral analysis (audit) of pricing? Control over production costs in all industries and the formation of profitability at all stages of production and promotion of goods. Here is how Maxim Shaskolsky, head of the Federal Antimonopoly Service (FAS), describes this work:
“We are constantly working with the largest federal retail chains to reduce the average aggregate level of markup. These markups for the monitoring period since August 2021 have decreased by 16%: from 22% to 6%“ (it would be more correct to write, of course, “decreased by 16 percentage points“, but as the head of the FAS said, this is how I reproduced it). In a market economy (which are not natural monopolies), such a result for companies is obtained by encouraging competition. But is the Russian economy still a market economy?
So start with an audit. Then, using the existing provisions of the Tax Code of the Russian Federation (Articles 40 and 105.7), you calculate economically justified prices. And then you introduce these prices by a directive method - or punish those who do not comply with these prices.
And I understand where the idea came from to return the de facto State Committee on Prices. The authorities decided that the market economy as a whole should be burned at the stake! There is no joy from it, only problems. It was time for more direct, tougher solutions. And then Sergey Glazyev received a joyful package: it is necessary to switch to direct financing of projects of the most important sectors of enterprises through the Ministry of Finance.
Do you understand what kind of wildness this is? As soon as I start issuing direct loans with minimal interest from the Ministry of Finance, no one will use this money for its intended purpose. They will immediately be sold on the money market at another, higher interest rate to those who are not allowed access to the “compensation counter“. Speculation with monetary resources will simply begin. This will be the most profitable business in Russia.
Only the abstract theorist Glazyev can think that he is giving state money, and the recipients of preferential loans used it to build an enterprise and spent it on production. Nonsense, no one will do this! In Russia, business is done by people who have masterfully learned to deceive the state in order to fill their pockets (as well as the pockets of the officials who control them).
In three years, the entire resilience of the Russian economy was exhausted, everything that was built before the war was exhausted, and now everything is falling apart, and this causes panic. It is funny that the economists “Russian optimists“ (Aleksashenko, Inozemtsev, Nekrasov) wrote back in November in their report “The Dictator's Reliable Rear: The Russian Economy Against the Background of War“:
“In general, the medium-term future of the Russian economy can best be described as growth without development. The attention of the Kremlin and external experts is focused on quantitative growth, which is likely to persist due to the continued high level of militarization of the economy and military budget spending. The expected GDP growth of 3.9-4% in 2024 will cause euphoria in the Kremlin and surprise in the West.“
But already at the end of December, the fact that these forecasts are incorrect became clear even to the President of Russia, and he stated: “It is expected in 2025 The Russian economy will slow down its growth rate by about half, and one of the authors of the aforementioned report, Sergey Aleksashenko, has urgently started posting a video on his Telegram channel titled "Russia! Stagflation has come, open the doors!" The government cannot accelerate economic growth, and too rapid price increases threaten the country's political stability. And this is not about the independence of the Bank of Russia - Nabiullina, it seems to me, was pressured and realized that it was already "dangerous to spit in the wind", and therefore she took a break. I think - until February. If the government fails to slow down price growth (and it will most likely happen), it will strengthen its apparatus positions and then in February it is possible to raise interest rates. If it fails, then Mishustin will strengthen his position as the "savior of the economy" and then whether the Central Bank will keep the rate or not will not matter much: the money will flow through the treasury (let's not forget that there will be huge opportunities for civil servants to receive bribes...).
And at the same time, they will introduce price regulation.
Note: Mishustin directly stated that he needs urgent help from the FAS and the prosecutor's office in the fight against prices. What kind of market economy is this? A market mechanism when prices are regulated with the help of the FAS and the prosecutor's office? And not only for natural monopolies.
Speaking of natural monopolies - or tariff deregulation, Vladimir Putin and the government are ringing the alarm bell about rising inflation. At the same time, they are making decisions that directly contribute to the acceleration of price growth.
FAS has practically stopped regulating tariffs on Russian Railways. Previously, the FAS was one of the main mechanisms of a market economy - the regulation of tariffs for natural monopolies. The FAS allowed these tariffs to increase annually at the rate of inflation and usually by 1-2 percentage points below inflation, so that it would not be further accelerated by transport costs.
RZD [Russian Railways] has pushed for a change in this position: the company will now change tariffs itself - in accordance with the growth of internal costs. This means that “from January 2025, RZD will use the so-called composite index (“price pressure index“ or “price burden index“) to calculate the indexation level - an indicator that takes into account the growth rate of the monopolist's own costs for the main cost items and integrates these indicators into a common index. In other words, the regulation of the monopoly, which was envisaged by the system based on the principle of “inflation minus“, will be replaced by a system in which no one will actually regulate the monopoly's tariffs. Now JSC “Russian Railways“ will simply tell the regulator how much money it needs for the next year. And this change in the principles of regulation is actually no less important than the growth rates themselves.
In other words, Russian Railways is practically taking away the tariff regulation function from the Federal Antimonopoly Service and transferring it to itself. This will lead to the fact that the level of indexation will no longer depend on the efficiency of Russian Railways, which contradicts the entire logic of regulating natural monopolies.
This means that now an uncontrollable increase in railway tariffs will begin, which will lead to an increase in the transport component in all prices and to an acceleration of inflation.
To be more precise: military cargo of Russian Railways will move at the lowest tariff - and the rest at the maximum. Railway workers will beat their chests: we are patriots, we transport cheaply for the country, and the rest, well, I'm sorry, we have to survive somehow.
Shippers and passenger companies, stunned by the increased tariffs, will go to the Ministry of Finance to ask for subsidies - and they will not receive them: there is no money for that.
And if the monopolies can do whatever they want with prices, if they pay a tax to the war and its needs, then inflation in Russia will only accelerate due to such pricing power of natural monopolies. And such inflation cannot be stopped by any key interest rate of the Central Bank.
Regulation of retail prices
And look what else is happening. By his decree, Prime Minister Mishustin authorized regional authorities to conclude agreements with manufacturers and retail chains to stabilize prices for all goods important to Russians: “The agreements under consideration must contain, among other things, ways to stabilize prices for goods on the domestic market. This includes their reduction, non-increase, introduction of maximum (limit) sizes of trade markups (surcharges). An exception will remain for goods for which state price regulation has already been introduced“.
As a result, “about 30 regional retail chains in Russia have already made a decision to limit markups on socially significant goods to a level of no more than 5%, and the Federal Antimonopoly Service (FAS) will control the implementation of this decision. But it is precisely in this way that retailers can be led to trade at a loss.
So, starting next year, it seems, we are moving to administrative regulation of inflation. That is, to price setting. And setting prices is a destruction of the market economy, of its very essence.
It is clear that the “socially responsible margin“ will initially be set only for a group of the most popular goods: ordinary bread, eggs, vegetable oil, chicken, milk... But this is just the same one-way road. The retailer starts with a narrow assortment with regulated markups, and then sets a higher margin for everything else. There is a gigantic gap between “social“ goods and everything else. And the population begins to rebel, because the “social“ bread for 10 rubles is no more! Flexible old women took it away in the morning. And the other products - with compensatory increased markups - with “biting“ prices!
And then the population demands an expansion of the list of “social“ goods - and it is impossible to stop, otherwise the worst will happen: people's discontent!
And then the chain of events is as follows: as a result, the retailer demands subsidies from the region - otherwise how will he survive with low markups? No one will subsidize him, the region, burdened with a mass of debts, has no money for this. Then the retailer begins to close some of his stores or even go bankrupt. And then the next logical step is the nationalization of retail trade: the abandoned stores will be handed over to the state.
In the Soviet Union, they started with regulating the price of bread.
But when you regulate the price of bread, other regulations inevitably appear along the chain: you start regulating the price of flour, then grain, water, electricity... And then you continue to “go along the chain“, without stopping. The result is the same: the retailer is left without profit, the stores are closing, going bankrupt, nationalized.
So this is a turning point.
„Idiots, idiots, idiots!“
It is not simply that Nabiullina is giving up. It means: the country's leadership has realized that it cannot keep the economy in the market mechanism, in the market system. And then what is left? Administrative decisions that „protect the interests of the population“. That is why there is talk of introducing cards for the socially disadvantaged strata of the population. I cannot raise pensions, but I give out cards.
Or they will introduce, as under the Soviet government, food orders at the enterprise and in budget organizations. On Fridays. „Our governor is such a person - he will organize good orders!“ The people will be satisfied. Real life will finally begin!
Someone gave me a wonderful dialogue, I love to quote it.
„- But now, when the Bolsheviks have finally defeated hunger with the help of the NEP and filled the shops, they will never cancel the NEP. Are they, what, idiots, or what?
- Idiots, idiots, idiots...“
What do people feel? That the shelves in stores are filling up by themselves. And who will really fill them if retailers go bankrupt? The officials? Now they are driving themselves into a dead end, trying to combine market and administrative management of the economy. The economy will probably collapse. And Nabiullina or anyone else put in her place can do nothing about it.
Note that the head of the Bank of Russia has already said: we realize that the key interest rate is not working very well, and therefore more solutions are needed. First: macroprudential regulation - that is, she is thinking of increasing the required reserves of banks so that they lend less. The second, which is not good at all: direct regulation of lending to corporate borrowers.
The Central Bank has already done this in the area of consumer lending. If the borrower's debt exceeds 50% of his monthly budget, he cannot take a loan from a bank, but only from a microcredit organization. In the corporate sector, it is the same - they will directly determine how much money the bank can lend to which borrower. This is again the Soviet Union, the credit plan, purely state regulation by the Central Bank, regulation of credit turnover between banks and corporate borrowers. There is absolutely nothing of a market economy here anymore. Yes, it is difficult to call such a borrower with the word “corporate”. The company fulfills a state order for defense products or components for such products, and you cannot refuse, you will be held criminally liable. What a market economy when the owner of the company is deprived of freedom of choice in the main thing - what to do, to whom and how much to sell!
So. If you add all this up, it will turn out that in Russia there are already many symptoms of a dying market economy. And how far Russia will go on this path depends on how long the war will last. And you know, I do not exclude that in this movement back, away from the market economy, there is also a desire of people close to power to carry out a large-scale redistribution of property. Among other things, through bankruptcies, but in favor of absolutely “certain people“.
Moreover, there is an example - in the form of confiscation of property of foreign investors, on which these “certain people“ have made excellent money.
***
In summary: Nabiullina's decision not to change the interest rate, but to keep it at 21%, is not just a decision of the Central Bank's board of directors. It is the practical end of the path we have been on since 1988. since, with the decisions on reforms for the development of cooperative business (including private banks) by Mikhail Gorbachev and Nikolai Ryzhkov. (Both died during the war.) This was the beginning of the construction of a market economy in the USSR, and then in Russia.
And now, almost forty years later, the trend has reversed. The command-administrative system in all spheres of the economy is returning. However, without the long-lost ability to plan, as well as without the preliminary total nationalization of all enterprises, which allowed the Gosplan to become a law, mandatory for implementation. That is why the chances of success of such a hybrid version of the economy, in my opinion, are minimal.
author: Professor Igor Lipsits
translation: Nick Iliev