On April 15, President Vladimir Putin held a meeting with senior government officials on the economy. According to the report, he had noted a 1.8 % decline in GDP in January and February. It is unclear why, by mid-April, he was not presented with data for the full first quarter. That would have made it unnecessary to cite additional public holidays in the first two months of the year. As it stands, the question arises: could the quarterly figures be even weaker?
On the day of the meeting, there were no comments from participants in the discussion with the President, suggesting little to add.
The authorities’ communication on an issue that, according to surveys, is of greatest concern to the public fell short.
A few days later, some clarifications from participants began to emerge.
Speaking at a forum in Vsevolozhsk on April 17, Maksim Reshetnikov, Economic Development Minister, said the economy had exhausted its reserves.
‘As is often the case during periods of structural change, new opportunities emerge in some areas, while in others businesses are forced to adapt or even scale back activity. This is necessary to reallocate what is now the most critical resource in the economy, namely, labour,’ he said, as cited by Interfax.
The minister pointed to new taxes as adding to the burden on businesses and stressed the need to help companies adapt. He did not explain how this could be achieved in the absence of reserves.
On the same day, at a separate forum, Elvira Nabiullina, Head of Central Bank, offered her own assessment of the situation.
The head of Russia’s financial and economic authorities unexpectedly promised to bring inflation down to 4 % by the end of the year. The remark passed largely without comment, drawing little reaction from either supporters or critics of the government. It did, however, prompt some puzzlement as to why the Central Bank head had shifted into a more optimistic predicting, departing from her typically hardline monetarist stance.
For most economists, it is clear that reducing inflation to 4 % while maintaining current growth rates would require far-reaching structural changes. Price pressures are driven by excess liquidity not matched by the supply of goods and services. Inflation is also fuelled by state spending channelled through soft budget constraints for state-owned enterprises.
The mixed nature of the economy, particularly in its less developed regional segments, leads to a contradictory response to policy signals from the centre.
Elvira Nabiullina again argued that Russia’s economy is facing a labour shortage for the first time in its modern history. She has made this point repeatedly over the past two to three years, while avoiding discussion of job cuts across multiple sectors, hidden unemployment, reduced working hours and unscheduled leaves, affecting industries from metallurgy and railways to AvtoVAZ, KamAZ, hospitality and retail.
What kind of labour shortage is this, the author asks, when layoffs are taking place on such a scale?
For some, this model of structural adjustment may appear healthy and market-driven. The argument is that there is little to worry about: with unemployment at historic lows, a laid-off engineering worker or aircraft engineer can simply move into services, and the problem is solved.
The result would be streets filled with as many as 300,000 couriers delivering pizza or shawarma. A historically unprecedented form of employment and structural transformation in play.
Indeed, stifling industry, agriculture and construction through high borrowing costs and higher VAT, eroding household purchase power and curbing aggregate demand could, in theory, bring inflation down to 4 %. But even that looks doubtful. The risk of stagflation has not gone away, and inflation is more likely to settle at around 5–5.5 % than fall any further.
A dogmatically rigid monetary stance risks choking off the investment and business climate. Weak demand is a poor incentive for investors.
In macroeconomic policy, the repeated forecasting errors of key institutions, the Central Bank, the Ministry of Finance and the Economic Development Ministry, suggest that certainty is elusive. A more pragmatic approach would be to rely on working hypotheses rather than on hard evidence, which, as events show, is often lacking.
Would it not be more sensible for policymakers to subject ‘Nabiullina’s hypothesis’, that a high key rate will inevitably bring inflation down to 4 %, to a rigorous annual review? The findings could then inform adjustments to the tools of macroeconomic policy.
Instead, the approach often amounts to patching up problems for those who manage to reach decision-makers first. These fixes are ad hoc, lack coherence and, taken together, risk doing more harm than good.
One further point. The pandemic and sanctions have disrupted global supply chains and restricted trade in critical goods, from microchips to rare earth elements, from aircraft and spare parts to labour mobility.
In response, many countries have embarked on a new wave of industrial policy. Its defining feature is the development of strategically important industries with full or near-full production cycles, driven by military and geopolitical pressures.
A new wave of industrialisation cannot be driven by the spontaneous decline of uncompetitive sectors. Industrial priorities are not shaped by negative incentives alone.
The US has already experienced a large-scale offshoring of manufacturing. The result was job losses across the Rust Belt and the rise of ultraconservative voters that backed Donald Trump. He is now seeking, through unprecedented tariffs and other incentives, to lay the groundwork for a revival of traditional manufacturing, as well as the development of shipbuilding, energy for AI, data centres and advanced semiconductor production.
Assuming that Russia can achieve technological sovereignty without a coherent industrial policy, with monetary and fiscal tools aligned to its priorities, is an irresponsible illusion.
That, in turn, presupposes rebuilding a functioning institutional framework, from customs to the courts, so that capital can be channelled into productive investment in priority sectors.
ORIGINAL: NG/Konstantin Remchukov: Nabiullina’s Thesis Falters in Russia’s Mixed Economy
