PUTIN UNDER PRESSURE

What a fascinating day or so it’s been!

Yesterday Putin did something he hasn’t done for a couple of years, and did his three hour marathon annual press conference, where he’s asked carefully curated and approved in advance questions by Russian and international media.

The fact that he did this tells you something very important. First, he wants things to seem like they used to be and as normal and nonthreatening as possible. This whole press conference was a ‘look at me, there’s nothing to see over there’ moment. It was the art of Putin using his, “don’t look me at me I’m shy” routine, while using his arms to welcome you closer and to make sure you’re looking right at him. The calm voice, the almost untroubled by the world or its concerns approach, even in the most serious of matters, is all part of the comfortable old Uncle Vladimir approach we used to see. And that was entirely the point of it.

From his rambling nonsense about if he could hit Kyiv with an Oreshnick missile, to the ongoing war, it was all largely content free. Except in one area: the general economy.

I had a bet with a friend who follows Russian economics that they would not increase interest rates today. They would keep them at 21%. And that’s what happened. This morning he said, ‘I cannot believe they didn’t hike them to 23%, if they don’t they’re asking for trouble, inflation is going to sky rocket next year’.

Russia works on a slow roll politically when it’s in dictatorship mode. From the days of the Emperor’s who were technically autocratic one man rule to now, you cannot manage a state as complicated as Russia on your own. You have to delegate. Those delegated with the authority of the Emperor have wide leeway to get things done, but they always know they could make a mistake and lose Imperial trust and be out of the door, or these days fall out of a window. So they generally keep things safe, but when they feel really duty bound – and some do, they’ll say something out loud and hope it gets heard and the sky doesn’t fall in.

Last month a former General and a Putin favorite made it clear his company, Lukoil, was on its knees, and that if he was, so were many others, and especially smaller businesses. The increasing interest rates were making it impossible to function commercially – even those in the weapons industries were under pressure and no longer making a profit.

On Tuesday, a delegation of State Duma deputies went public – no doubt egged on by someone in one of the ministries, saying that the Bank of Russia under the tutelage of Elvira Nabiulina – one of Putin’s most trusted professional intellectuals – was and had made mistakes. She is a woman who famously uses her brooches to signal what the state of the economy might be. Once explaining that they were ‘indicative and not absolutes’.

The bank should not increase interest rates any more and it was the banks fault – hers especially – that things were as bad as they were. They almost suggested, but didn’t go that far – that she should be moved on and someone else take the reins. the fact you know that’s what they meant but they didn’t say it, tells you that they were given plenty of leeway to speak. It would be entirely Russian if Putin himself had ordered they be allowed to offer this message. Day 1 of the preparation. Whatever Elvira Nabiulina had planned, she would already know by now what today’s announcement was going to be.

Then yesterday Putin went into the economic details, quite deeply for him.

“There are some issues here, namely inflation, a certain overheating of the economy, and the government and the central bank are already tasked with bringing the tempo down,” said Putin.

Putin said he had a conversation with the central bank’s governor Elvira Nabiullina before the phone-in, who had warned him that inflation will be 9.2%-9.3% in 2024, well above the central bank’s estimate of 8.5%. That means things will stay bad, or get worse. Who’d have thought?

Putin said, “that as a result of the tight monetary policy and government measures to cool the economy down, economic growth rates will come down in 2025 from this year’s 4%“. He means GDP – which is only a viable measure how of well a country is doing when it’s not in war economy mode being force-fed lard while trying to stop it getting fat. It’s not a viable figure.

“I think the (growth rate) next year should be somewhere around 2-2.5%, a sort of soft landing in order to maintain macroeconomic indicators,” Putin added. That’s still wishful thinking and he’s still talking the GDP figure of a fake economy that’s far from normal.

INFLATION IS A BAD THING

Putin said that, “the central bank could have used instruments other than the key rate earlier to cool down the economy, while the government could have worked with different sectors of the economy to boost supply“.

The point here is that the key interest rate IS the best measure of cooling down an economy where inflation is soaring. Russian inflation figures – the public ones – are not healthy, but we know they’re four times what they pretend they are. Because nobody in a normal economy uses 21% interest rates to nail a 9% inflation rate, even a persistent 9%. At best interest rates might reach 6%.

As for the government working with different sectors of the economy to boost supply? What sectors of the economy that haven’t been switched to military production, or aren’t sanctioned in one way or another? What exactly does or did Russia ever produce domestically that anyone wanted to buy? The collapse of the Rouble wrecked any chance of getting imports from China or anywhere else – and even then they’d have used up by now valuable foreign currency.

At this point Putin walks into cloud cuckoo land:

“In Russia, the situation is normal, stable, we are developing despite everything, despite external threats and attempts to influence us…

Of course, inflation is … an alarming signal…“

“There are some issues here, namely inflation, a certain overheating of the economy, and the government and the central bank are already tasked with bringing the tempo down….

There are subjective (reasons for rising prices), and there are shortcomings on our part. For example, some experts believe that the central bank could have started using certain tools that are not related to raising the key rate more effectively and earlier. Yes, the central bank started doing all this somewhere in the summer, but, I repeat, these experts believe that this could and should have been done earlier…“

What he means here is that more should have been done to stabilize the currency, because much of the inflation is at least partly down to devaluation of the rouble. Yes the bank did do its best to hold the rouble up, but it it burned through $220 billion in gold bullion and some $100 billion in foreign currency over a six month period and it got it nowhere. And it never would have. It was a temporary stay, because the fact is nobody wants to buy or use roubles. That’s why they had to stop trading it, because they reached the end of the line, if they’d have spent any more on a dud currency, the country would have been in a massive banking crisis, which is what started to happen when the trading was halted. Everyone rushed to get their money out of banks and buy foreign currency already heavily restricted. Stopping trading was the last resort.

Note too how he blames experts and not himself, or the real cause; the war.

Putin said that, “Western sanctions, as well as this year’s bad harvest due to extreme weather in many agricultural regions across Russia, were also to blame for high prices. Stubbornly high inflation, driven in recent months by soaring food prices, has hit Russians’ pockets. Latest inflation data showed prices for tomatoes rising by 4.1% and prices for cucumbers by 10% during one week in December“.

Note that ‘one week in December‘ line. This is food inflation and this is what’s hitting Russia hard, because 30% of its population are below even what Russia regards as its poverty line. In the west they’d be classed as destitute.

UNPACKING WHAT PUTIN HAD TO SAY

The fact that he personally acknowledged the problems goes down well in Russia, its the old “the Czar knows and he’s making those profiteering landowners do something about it” thing that the Russian public have fallen for for centuries. They did not previously consider him responsible for it, but I don’t think that’s the case now.

Everyone in Russia knows that losing Syria was bad and it’s still humiliating as airlifts of equipment are nowhere near done. The EU is offering a huge aid carrot – and the stick is ‘get rid of the Russian bases and it’s yours’. Putin has no carrots left to offer.

What did Putin say about Syria? Basically that the terrorism was over, therefore Russia didn’t need to be there any more so what does it matter. “It’s not necessarily a bad thing“, he said. Tell that to the Z-bloggers and the Milbloggers and the millions of Russians who for fifty years have known about the prize bases in Syria and how important they are. So for a change he lied blatantly on something all of Russia knows is a bad thing. Which to Russians, for once makes them aware he does lie, and if he lied about this in his press conference what else did he lie about? He undermined his own credibility.

The fact that Putin went on the conference, then tried to make everything seem normal when nothing at all is really normal, speaks volumes. He needed to go out there and try and calm everyone down. He knew the next day there would be good news which would make everyone sigh with relief for another month, unaware that they will have to pay for it with ever rising prices.

This morning the rates were fixed at the current 21%. Putin overruled his chief economist for popularity and to stymie a potential revolt in the oligarchs who while mostly powerless are more than a little restless. And they’re obviously telling him that.

Some of them are facing the loss of the companies they built.

TRANSPORT SHOWING THE STRAIN OF WAR

Russian transport is showing a massive decline in air travel as it takes more and more aircraft out of service due to parts shortages. Russia depends on internal air travel, its a nine time zone country, air travel is the only way of getting about long distances quickly.

The rail system is suffering from parts shortages, rolling stock destruction through partisan action, direct strikes and lack of investment.

The trucking industry can’t get the diesel spares, brake pads, drive systems and support it needs to function properly in the civil market, partly because of sanctions and partly because what they can get the military takes.

Sea transport had its worst week so far. This week alone now, four tankers have gone down or run aground. It’s the tip of the iceberg. Sooner or later there will be a major disaster.

OIL & GAS INDUSTRY

GAZPROM made profits of $16 billion in 2022. Its forecast for 2024 is a loss of $12.2 billion – as the state is the largest shareholder, it means the state will have to bail it out.

Rozneft and Lukoil haven’t seen an improvement in their share price in five years, both are losing money.

Things are so bad, with the refineries in such a mess and the production industry short of investment, shipping the oil expensive and dangerous, losses spiraling, that there’s talk of a merger of all three or – and this is now confirmed as on the cards by a statement saying they could not confirm it wasn’t being discussed, that it would simply be best to nationalize the whole lot.

THE ARMS INDUSTRY

Russia has a huge problem here in two ways. Firstly arms manufacturers feel they have no say over their companies and are just managers, the state controls what they make and how much they make it for. They’re not making any money, they can barely pay their wage bills, and are saddled with compulsory loans at high interest rates they have to pay to make the weapons the state orders. Once the war is over they’ll be left with the bill and none of the profits to pay for it. And they’ll have to find new markets for manufactured goods nobody much wants – f they can afford to convert back to what they used to do.

Secondly the state itself has a problem with its reputation. Russia sold billions a year in weapons overseas. Its kit was seen as second best but it was way cheaper and could be purchased in volumes. It also didn’t much care who it sold what to as long as they could pay, and everything had a reduced spec ‘export version’. Russian arms were a crucial element of the autocrats and dictators of the world. It’s what they could pay for and there was plenty of it.

Those arms exports have stopped dead. The war consumes everything Russia can make . And even if they started again tomorrow, the buyers are now looking at equipment that, to be fair, hasn’t exactly performed as they expected, and is proving to be outdated by the very war they’ve been used to fight in. The irony is the Ukrainians are the ones with the best drones, best counter drone systems, best artillery, and they’ve learned what works and what doesn’t far better than the Russians have. Ukraine has the weapons of tomorrow. Russia, well it just doesn’t. And its Ukraine that’s making so many drones its looking at opening export markets even during the war.

CONCLUSION

Pressure, more and more pressure. Putin is starting to feel it a lot more than he has. He knows the public are, his ‘experts’ and economists are running around the economy control room pressing buttons to solve one thing while all the red alerts start flashing somewhere else.

The ‘overhating’ of the economy is causing cracks to appear, smoke is coming out of the cracks, the interior is glowing red hot, the demand levels for more just don’t stop, from the population and from the war.

War has always been like that. It never has enough, it can never consume enough, you can never build or make enough to feed its insatiable demand. The only way to solve Russian woes is to stop the war. And Putin can’t because he doesn’t know when to stop. The pressure is on him. He either ends the fighting or he blows up the economy. It’s a question of which comes first. That’s finally dawning on everyone in Russia. Slowly everyone is starting to understand, the cause of their problems is the war. Until they stop it, nothing gets better. And they may be too late anyway. The there’s what comes next and that really won’t be pretty.

The Analyst

MilitaryStrategy.bsky.social