August 10, 2022

1. Is the budget in trouble?

2. The President keeps his word

3. Do not quit your job!

4. Wartime budget: Raise taxes, cut expenses

5. Non-stop punishment

6. A challenging experiment

7. Mosaic

Is the budget in trouble?

The Russian Ministry of Finance published a preliminary estimate of the federal budget execution in July, curtailed even more than before regarding the amount of data. Since April, the RF Ministry of Finance has stopped publishing data on budget expenditures by individual items; this time, the Ministry of Finance has not posted data on the receipt of certain types of taxes, or on the sources of financing the budget deficit. Nevertheless, even the truncated information allows us to state that the federal budget faced severe problems in July.

First, overall budget revenues fell sharply. July is the quarter’s first month when, traditionally, non-oil-and-gas tax revenues increase. For example, these revenues were up 49% in July 2019 compared to June; 2020, by 13%; and in 2021, by 69%. In July 2022, non-oil-and-gas revenues were 24% lower than in June. Given that 35%-37% of the total amount of non-oil-and-gas revenues are VAT revenues, which reflect the general dynamics of economic activity in the country, this may indicate an accelerated economic recession.

Second, federal budget expenditures in July increased by a quarter compared to last year’s July and compared to the average level of expenditures in the first half of the year. But this growth does not seem exceptional: In the first seven months of this year, budget spending is 21% higher than last year’s, due to increased military spending and accelerated inflation.

Third, in July, the budget deficit amounted to about 900 billion rubles ($15 billion), which is the highest since 2011 – with tax revenues Minfin could finance only two-thirds of July expenditures. The reason is apparent: Falling incomes and rising expenses. Most likely, the bulk of the deficit was funded by reducing the balances in the accounts of the Ministry of Finance, which did not have to use the funds of the fiscal reserve, the National Welfare Fund (NWF). Two days earlier, the Finance Ministry said that the National Welfare Fund had increased by 1.4 trillion rubles in July, while it had decreased by 12.5 billion in dollar terms. In about two weeks, the Ministry of Finance may publish more detailed data on the state of the NWF, which will allow us to understand whether its funds were used to finance the budget deficit in July.

As has happened before, I am not ready to draw global conclusions from one month’s data, and I suggest waiting for further data to allow me to take a more definite position.

The President keeps his word

Last October, after it became known that Novaya Gazeta Editor-in-Chief Dmitry Muratov had been awarded the Nobel Peace Prize, Vladimir Putin was asked to assure that Muratov would not be declared a foreign agent. Under Russian law, receiving money from abroad can be grounds for such a label.

Look, if he does not violate Russian law, and if he does not give a reason to be declared a foreign agent, it will not happen. And if he uses the Nobel Prize as a shield to do something that violates Russian law, he will do it deliberately, either to draw attention to himself or for some other reason. Irrespective of any merits whatsoever, everyone must understand clearly: Everyone must obey Russian law.

Many took this as an open warning to the Nobel laureate at the time. Ten months had passed. Dmitry Muratov did not become a “foreign agent.” Instead, the Kremlin decided to liquidate his brainchild, Novaya Gazeta.

After the Russian army invaded Ukraine, Novaya Gazeta received six notices from the Prosecutor General’s Office and Roskomnadzor (Russian media censor), demanding that it remove materials with “unreliable information of public importance.” In March, after the law on criminal liability for spreading fakes about the actions of the Russian Armed Forces was passed, the newspaper removed materials related to the conflict in Ukraine and stopped covering it. Later, after receiving two warnings from Roskomnadzor for not labeling foreign agents in its stories, Novaya Gazeta suspended its print paper and online versions until the war was over.

Novaya Gazeta employees who left Russia created the publication Novaya Gazeta Europe. In April, Roskomnadzor restricted access to its website. The journalists who remained in Moscow launched a new project,  the online Novaya Story - Gazeta. A week after, censor blocked access to its website, claiming that it published untrustworthy information of public significance.

In early July, Novaya Gazeta was fined 300,000 rubles for defamation of the army. The court did not specify which of the six notifications from the Prosecutor General’s Office was the basis for this decision. Today, the court fined the newspaper again, 350,000 rubles, charging it with “abuse of mass media” and “publication of untruthful information of public significance under the guise of truthful information” and using the General Prosecutor’s Office notice as the basis.

Next week, Dmitry Muratov will have a preliminary discussion in court with representatives of Roskomnadzor, which has filed a lawsuit to revoke the newspaper’s license for “failure to provide [Roskomnadzor] with the editorial board’s charter within the time frame established by the law on mass media.”

Do not quit your job!

A month ago, a law was passed in Russia, which many have called “the law of mobilization economy.” I was pretty skeptical of this document, judging it as legally sloppy. At the same time, it contained norms that allowed the heads of enterprises engaged in arms production to impose additional requirements and restrictions on their employees. And these norms of the law began to work.

Since August, the Rostec State Corporation has banned key employees from taking vacations; the decision is motivated by the need to fulfill the state defense order. The corporation does not have a clear list of who is subject to this restriction; heads of departments are given the right to make such decisions themselves.

Rostec accounts for about 40% of arms production for the Russian army. According to Andrei Yelchaninov, the First Deputy Chairman of the Board of the Military and Industrial Commission of Russia, Vladimir Putin is ready to increase spending on purchasing armaments this year by 25%-30%, due to the need to “replenish the used-up inventory.”

Enterprises’ work intensity has certainly increased: Reserve capacities are loaded, and all accumulated technical and human resources are used to meet the increased demand for defense products from the Defense Ministry and other security agencies. Processes are being optimized everywhere, additional staff is being hired, and two-shift work is being organized for senior executives; some defense enterprises are already working in three-shift mode. Most enterprises are currently working two shifts.

Wartime budget: Raise taxes, cut expenses

Minister of Finance of Russia Anton Siluanov discussed the budget projections for 2023-2025 with the primary recipients of budget funds and warned about a possible tightening of budget policy.

The country is facing new challenges, and we need to orient budget policy toward fulfilling these priorities. On the one hand, we must not compromise macroeconomic stability based on financial stability. On the other hand, we must fulfill all the undertaken obligations and ensure the implementation of the set goals in the economy and social sphere.

According to Siluanov, the planning period is characterized by high risks to the balance of the federal budget; the Ministry’s budget requests stated the need for additional financing of about 5 trillion rubles annually (20% of the 2022 budget). The minister announced his intention to “mobilize revenue sources” (read: increase taxes) and “optimize expenditure commitments on the principles of increasing their effectiveness to facilitate the rapid adaptation of the economy and restructuring of economic relations” (read: carry out the sequester of budget commitments).

Non-stop punishment

On March 14, Marina Ovsyannikova, editor of Channel One’s newsroom, appeared in the studio behind the host during a broadcast with a handwritten anti-war placard. The broadcast was immediately interrupted. Ovsyannikova was detained at the exit of the building and taken to the police station. The next day the court found her violating the law on conducting public events and fined her. Ten days later, the court found her guilty under the “fake news law” (“public dissemination of knowingly false information about the use of the armed forces of the Russian Federation”) and fined her again.

Four months later, on July 28, another court again found Ovsyannikova guilty under the “fake news law” and fined her. The reason for the punishment was her interview outside the court building, where the question of Ilya Yashin’s arrest was being decided.

This morning, police searched Ovsyannikova’s apartment and detained her on new charges under the same “fake news law”: On July 15, after the Russian military shelled the Ukrainian city of Vinnytsia with rockets, Ovsyannikova led a solitary picket with a sign that read: “Putin is a murderer. His soldiers are fascists. 352 children died. How many more children must die for you to stop?”

Tomorrow a court in Moscow will decide on a measure of restraint. The charge under the “fake news law” threatens Ovsyannikova with up to 10 years in prison.

A challenging experiment

Anatoly Aksakov, Chairman of the State Duma Committee on the Financial Market, said that he hoped a law on the legalization of Islamic banking in Russia would be adopted at the fall session of the State Duma. According to him, Dagestan and Chechnya are being discussed as pilot regions, but Tatarstan and Bashkiria show great interest and activity. Also according to Aksakov, these regions should be included in the experiment on Islamic banking, which may start as early as 2023.

I will watch with interest the course of such an experiment. Before the crisis in 2008, many global investment banks considered the possibility, but they could not combine the requirements of supervisory authorities and the requirements of Islam. The main obstacle is that Islam forbids lending. The only way for banks to lend money to borrowers is to participate in the capital, which is seen by Russian banking regulation as a high-risk operation subject to much stricter restrictions.

Mosaic

The Bank of Russia published an estimate of the RF balance of payments for July, which strongly surprised analysts: The balance of current operations and the trade balance increased by a quarter compared to the monthly average of the second quarter. This is possible only in the case of a surge in exports or an even sharper drop in imports—but the operational statistics said neither of the two.

Slovak company Slovnaft and Hungarian MOL agreed with Russia’s Transneft and Ukraine’s UkrTransNafta that they would pay for Transneft to transport Russian oil to Hungary and Slovakia, which was stopped on August 4.

In the second quarter of 2022, a record number of migrant workers entered Russia—the Ministry of Internal Affairs’ migration statistics show this. In April-June this year, their number reached 3.12 million people, more than during the same period in the past six years. Three-quarters of those coming to Russia indicate that they come to work. Interest in working in Russia on the part of labor migrants from neighboring countries increased markedly due to the strengthening of the ruble.

After restrictions on flights abroad by Russian airlines, Turkey has strengthened its position as the primary vacation destination for Russians. Until recently, the main obstacle for arriving Russians was the inability to use bank cards issued by Russian banks. Now this problem has been solved: Five Turkish banks have signed an agreement with the Russian payment system Mir, and two banks have started servicing these cards in Turkey, including cards issued by the largest Russian banks, Sberbank and VTB, which are under sanctions from the United States and the European Union. 

The Uzbek embassy in Russia warned its citizens against taking part in hostilities on the territory of foreign countries. This statement followed an appeal by the head of the Uzbek diaspora in Perm to form a volunteer battalion and support the special operation in Ukraine.

The embassy reminded that the country’s legislation treats mercenary and illegal participation in military conflicts or military actions on the territory of a foreign state as a criminal offense punishable by up to 10 years in prison. The embassy warned that criminal charges would be brought against “all persons without exception” and called on Uzbek citizens “not to give in to provocation and to exercise caution.” 

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[1] The Russian Ministry of Finance cannot achieve expenditures equability: Traditionally, each December, expenditures are 2-3 times higher than the average level, which leads to a budget deficit in these months.