Money for Nothing
Nicholas Trickett’s economic summary of the week (November 2 — 6)
The Bank of Russia has recently indicated that the economy may be approaching a state of overheating, despite a decline in annual industrial production. Demand has risen, but supply has not kept pace, leading to the economy being on a path toward excessive growth. This has resulted in the Bank lowering its forecast for annual industrial production to a decline of 0.2%, down from previous projections of 0.6%.
Furthermore, the Bank's GDP growth forecast now sits at 0.5%-1%, with the lower bound approaching 0%. This situation raises concerns about the link between state spending, budget deficits, and inflation, as the Russian government's role in allocating resources becomes increasingly mechanical.
In an effort to maintain budget levels, the 2027 budget will cut social outlays by 15%, with spending held at these lower levels through 2030. This is due to the belief that the private sector will not provide additional investment, as companies are experiencing difficulties due to high interest rates. The social-spending cuts will negatively impact consumption, exacerbating the pressure on those dependent on benefits.
Additionally, there are discussions about cutting the Duma's staff by 15%. In this environment, MinFin's plan to transfer frozen funded-pension assets into a long-term savings program may appear suspect. While no one loses anything on paper, these transfers amount to 6.6 trillion rubles, with 3 trillion rubles coming from the Social Fund and managed by VEB.
This program essentially converts pension assets into deposits with the Bank of Russia, providing additional guarantees but run by a non-accountable institution to VEB.
The government is attempting to generate capital for lending to regime priorities without creating actual wealth, by moving administrative costs off the Social Fund's balance sheet and giving VEB's chair, Igor Shuvalov, new funds to support lending for "technological" projects. This approach creates capital out of nothing and offers some protection to affected pensioners, making the arrangement politically acceptable.
The transfer includes only the funded components of pension plans accumulated from 2002 to 2013 by people born in 1967 or later, which is a significant but not earth-shattering amount. However, it shows the government's desperate search for money to keep rents flowing through the system.
Written by urgent.news from Riddle Russia's reporting — not their text. Machine-written — may contain errors; check the original before relying on it.
