Just as the dust from the turmoil in Russia caused by the surge in fuel prices and the disappearance of gasoline and diesel from retail shelves settled, the country wars Ukraine was hit with a new calamity – chicken eggs hit a record high in prices. This topic even came up during the so-called ‘direct line,’ an annual press conference with Russian President Vladimir Putin, where he responds to questions from citizens and journalists. This issue appears even more pressing, considering that sharp questions at events featuring the Kremlin dictator are typically avoided. However, the issue with eggs is just the tip of the iceberg that Russia's economy is about to collide with, much like the Titanic hitting an iceberg.
On December 14, Russian President Vladimir Putin mantioned that he inquired with the Minister of Agriculture, Dmitry Patrushev, about how things were going with his ‘eggs.’ This was a vulgar joke in Putin's typical style, as in colloquial Russian, ‘eggs’ can also refer to testicles.
The thing is, the Russian president had to respond in this manner to a very uncomfortable question about the sharp increase in the price of chicken eggs in Russia and the resulting panic.
The Kremlin's master is typically shielded from uncomfortable questions, but occasionally, concerned citizens manage to pose some. Following that, Putin promptly resolves the stated issue with a single show of willpower.
It was the same this time.
‘Not long ago, I was talking to the Minister of Agriculture, asked him how things were with his eggs. He said everything is in order,’ Putin mentioned during that ‘direct line’, responding to a pensioner's question about the high prices and scarcity of chicken eggs.
It is entirely possible that Vladimir Putin was not even lying – after all, it is quite likely that Dmitry Patrushev's eggs are indeed in order.
Cannot say the same for the rest of Russia. According to Russian Federal State Statistics Service (Rosstat), egg prices in Russia have surged by 46.2% since the beginning of this year, reflecting the national average. In some regions, however, the price hike reached 60-70%.
The surge in egg prices has triggered panic among the population, prompting citizens to buy eggs in hundreds. As a result, in many regions, including the Belgorod Oblast, a prominent hub for poultry farming in Russia, restrictions on individual purchases have been introduced.
In Crimea, which Russia has been unlawfully occupying since 2014, prices for eggs reached nearly a record 200 rubles per dozen. Local retailers switched to piece sale, presumably to make it less intimidating for buyers. Moscow has also employed a similar ‘marketing move.’
However, all this so far has done little to alleviate both the rising egg prices and their availability on store shelves.
Well, Russians owe Vladimir Putin for these ‘golden’ eggs, as he decided to attack Ukraine. As known, sanctions was imposed on Russia after this decision, significantly escalating the production costs of eggs and various other commodities.
By the way, back in the summer, chicken meat in Russia also hit record-high prices – its cost rose by approximately 20%, whereas the average, at least officially reported, inflation was several times lower. Even then, one could predict the current surge in egg prices because eggs and chicken are closely related.
But the Russian authorities did not pay attention to such 'trifles' in a timely manner. As well as to the ‘unexpected’ surge in gasoline and diesel prices at the end of summer – in a country often referred to as a ‘gas station.’ When the situation began spiraling out of control, and fuel shortages affected the capital region, the government temporarily banned the export of automotive fuel, managing to alleviate the deficit, albeit with difficulty.
In the realm of eggs, the Russian government has taken a similar path by restricting their export from the country. Additionally, authorities have eliminated import duties on eggs and facilitated their import from Turkey (there is also information suggesting Russia will procure eggs from Iran). This move is likely to dampen any frenzy, although foreign eggs, considering logistics costs, are unlikely to be cheaper than Russian ones, thus preventing a price drop. However, this step has seriously irked domestic producers within Russia, who perceive it as a threat to their interests.
Clearly, the deficit will eventually be overcome through a combination of imports and increasing domestic production. However, this will likely lead to overproduction and excess inventory, causing eggs to spoil. In essence, it's a typical Russian business scenario.
By the way, other food products are gradually disappearing from the shelves as well. Public posts from the Russian city of Voronezh showcase videos of massive queues for fish, along with photos revealing empty supermarket shelves. However, it's not surprising—last year, Russians stood in lines for bread reminiscent of queues at the Mausoleum, a cult communist structure housing the body of Vladimir Lenin, a key landmark of the USSR.
The Economics of War
During the aforementioned pseudo-press conference, Vladimir Putin asserted that unemployment in Russia has dropped to 2.9% this year, marking a historic low for the country that initiated a bloody and treacherous war against Ukraine.
Indeed, he remained silent on the acute shortage of labor in Russia—a situation that, notably, partly arose from his own actions. Approximately a million relatively young and healthy men are either still fighting in Ukraine or have already returned, as ‘200ths’ (military code word used in the Soviet Union and the post-Soviet states referring to the transportation of military fatalities) or bearing the scars of war as disabled ‘300ths.’ About the same number were compelled to emigrate to avoid ending up in the trenches and later becoming Cargo 200.
According to various estimates, Russia is currently facing a labor shortage of approximately 2 million workers. By 2030, this deficit could swell to around 4 million, as projected by the consulting firm ‘Yakov and Partners.’ Industries such as manufacturing, logistics, and trade are expected to experience the most significant shortages. Importantly, migrants will not resolve the issue, as their majority engage in unskilled labor and can only address 10% of the shortfall, as highlighted by the company.
The labor shortage, in turn, could result in a slowdown of economic growth and an acceleration of inflation, as employers are compelled to increase wages for workers without a corresponding boost in labor productivity.
Yet, Vladimir Putin assures that economic growth is on track, emphasizing this during the ‘direct line’ press conference. According to him, Russia's GDP will grow by more than 3% by the end of 2023. Regrettably, it must be acknowledged that, in this instance, the autocrat has not strayed from the truth.
Just six months ago, leading global analytical services and international financial organizations were forecasting stagnation for the Russian economy, with even the Russian government projecting a very modest growth of up to 2%. However, current assessments have been revised, and growth within the range of 3-3.5% now appears quite realistic.
However, this rapid growth is almost exclusively tied to the military-industrial complex, or more broadly, to the ongoing war.
According to Maxym Oryschak, an analyst at the Ukrainian company Center for Exchange Technologies in Kyiv, the government investments increase in the military-industrial complex over a limited period can indeed have a positive impact on economic development. This is reflected in several economic indicators in Russia.
‘However, at the same time, the Russian economy is beginning to experience the initial negative effects of the prolonged delay in returning to market-oriented policies,’ the expert noted in a conversation with Apostrophe.
According to The Economist, Russia's 'war economy' is displaying overheating. Alongside unprecedented investments in the military-industrial complex, substantial amounts are being distributed to both conscripted and contracted individuals—those presently engaged in combat and those who have perished in the so-called ‘special military operations.’ It is noted that for some deceased individuals, the payouts are equivalent to the income their families could have earned over 30 years.
‘The data from the Russian Ministry of Finance indicates that fiscal stimuli account for approximately 5% of the GDP,’ The Economist states.
And such ‘investments’ undoubtedly spur the pace of economic growth in Russia.
‘Their economic expansion relies on state investments in the military-industrial complex, a sector that doesn't manufacture goods but consumes a substantial amount of money, often freshly printed,’ Serhii Fursa, an investment banker and financial analyst, explained to Apostrophe. ‘As a result, this contributes to inflationary pressures and can lead to crises, like the current egg shortages and past diesel crises. When the economy is thriving, these issues are non-existent. Essentially, by infusing a heap of money— not investments, but government funds—you can achieve a numerical GDP growth, but it does not necessarily indicate a robust economic situation.’
In the realm of defense sector, expenditures on it are set to exceed 6% of Russia's GDP by 2023, representing close to one-third of total budgetary outlays. Looking ahead to the 2024 budget, there's a planned uptick in these expenses to nearly 8% of the GDP, accounting for around 40% of all budget allocations.
In addition, Putin’s Russia allocates huge amounts of money to subsidize the occupied Ukrainian territories. Another question is how much of this money ends up in the pockets of officials and contractors associated with them.
Economists, including those within Russia, warn that an overheating Russian economy tilted toward militarism poses significant risks.
Below is a chart where the indicators from 2019 are set at 100%. The green line represents the civilian sector, while the orange line represents the military-industrial complex.
‘The Russian economy appears resilient to a minor mobilization. However, the trade-off will be escalating prices, a diminished range of products in stores, and a continued decline in people's quality of life,' Russian expert Nikolay Kulbaka cautions.
He believes that the price hike will not be limited to military goods but will also extend to civilian products. The militarization will lead to a reduction in civilian production, and demand for these goods will remain high. The contraction in product variety will necessitate an increase in imports, which, due to the weakened ruble, will be prohibitively expensive.
In the middle of this year, Russia experienced a sharp devaluation of its national currency, and by late summer to early fall, the dollar's exchange rate rose to 100 rubles or even higher at times. Only stringent currency restrictions and a rapid increase in the benchmark interest rate over a short period allowed for a modest strengthening of the ruble. Back in the summer, the Central Bank of Russia's interest rate stood at 7.5%, and due to the weakening ruble (as well as rising prices), it was raised several times. In the regulator's meeting on December 15, it was once again increased—to 16%. However, this hasn't proven very effective, and the exchange rate still hovers around 90 rubles per dollar.
A high-interest rate is detrimental to economic growth. However, with government expenditures maxing out to fuel the defense industry, stagnation is unlikely. On the flip side, the cost of loans will rise, further fueling inflation.
According to official statistics, as of November, the year-on-year inflation stands at 7.5%, significantly surpassing the earlier projections by the Russian government. However, the actual price surge appears even more substantial. Research firm ‘Romir,’ which calculates inflation based on the real consumer basket, reveals that from March 2022 to October 2023, prices in Russia surged by 48%.
Back to the Stagnation
As the year draws to a close, the current situation is relatively clear, but the question arises: what will happen next?
‘The most ‘interesting’ phase will likely unfold after the conflict (i.e. the war against Ukraine – Apostrophe), when an ‘economic hangover’ sets in, revealing that civilian production is barely holding on and incapable of meeting the country's needs. Meanwhile, the military-industrial complex struggles to produce anything other than munitions and tanks, which, in times of peace, are in surplus and unnecessary’, - pro-Kremlin Telegram channel ‘Temporary Government 2.0.’ concludes.
The foregoing suggests that the war will persist indefinitely, as it is not in the interest of the Russian authorities to halt the militaristic fervor. However, this is far from accurate, given that the crisis is already eroding the Russian economy.
Russia faces significant indebtedness levels, and any uptick in interest rates induces stress. An intriguing scenario unfolds in the construction sector where there іs a surplus of unsold apartments. Residential construction is underway at a brisk pace, but the interest rates on real estate loans are increasing. The simultaneousness raises questions about the coherence of these trends and why they carry on without heeding cautionary signals remains unclear. This is likely an attribute of an overheated economy too. A real estate downturn could affect banks. They will save the banks, but, again, by printing money, which will accelerate inflationary processes’, Serhii Fursa explains.
Additionally, serious threats to the Russian military-industrial complex are already apparent.
‘Due to the lack of competition and an excessive influx of ‘easy’ money, it is inflating and losing efficiency. Russia is currently at the point where further expansion of the military-industrial complex will result in increasing costs and structural problems’, Maxуm Oryshchak explains.
According to the expert, after the GDP growth at the level of 3-3.5% this year in Russia, there will be a slowdown - to 0.2-0.8% in 2024 and 1-1.5% in 2025.
‘Low economic growth rates will be accompanied by relatively high inflation, reaching 7.5-10% in 2024 and 6-8% in 2025. Additionally, there will be elevated interest rates of around 9-12%, hindering normal business development,’ Oryshhak says. ‘Such parameters essentially signify stagnation, accompanied by a gradual decline in the standard of living for the population. Despite this, Russian authorities aim to sustain high employment levels to mitigate the risk of growing social discontent. In these conditions, the Russian economy will become more primitive and less technologically advanced.’
The scenario mirrors the final years of the USSR, where an abundance of weaponry, still globally employed, coexisted with a scarcity of consumer goods on store shelves. Make your own inferences, as the parallels are evident.
