War tax on Russian citizens makes up 20% of their money
The freezing of the Central Bank of Russia's (CBR) reserves has brought down the Russian ruble by about 20% in a matter of days, which means an increase in the cost of living of no less than 20% in the very near future.
The depreciation of the national currency is not only visible when an individual buys foreign currency. The depreciation of the ruble also means higher prices for bread in Russia, which in recent years has become a major exporter of grains worldwide. Yes, Russia has a surplus of grain, but on the condition that Russia buys seed grain, agricultural machinery and chemicals, means of transport, etc., from abroad; the same applies to grain storage facilities, bakeries and shop equipment. Of course, a large part of the entire chain of means of production needed for bread is directly produced by Russia itself, but that does not remove the questions of how large the import sections are for the production of these means of production many times over, while one machine is used for the production of the next machine up to the machines used for the production of food. It is impossible and pointless to calculate the share of imports in all these production chains for bread production in Russia. All that matters is the end result, which will inevitably be visible in the new bread prices within a few days.
A rise in the cost of living of only 20% is the most modest possible effect of the sanctions against the CBR, which Elvira Nabiullina, President of the CBR, used on Monday to explain the doubling of ruble refinancing interest from 10% to 20% per annum. She did say that it was necessary to compensate people for inflation expectations, not for inflation itself, but that was just an evasive and polite reply. Unfortunately, an employee cannot go to his employer and get a double pay rise because he expects prices to double. No businessman would pay for such expectations, and neither would the Russian state if it did not realize that 20% inflation is not an expectation, but a fact.
The 20% refinancing rate should also have prevented that embarrassing situation for Russia last weekend, when Ukrainians were queuing up where people were being given guns to fight the Russian invaders, and Russians were queuing up where they could still buy US dollars or at least withdraw Russian rubles from Russian banks.
The refinancing rates set by the central banks are very close to the yield on deposits in the currencies issued by the central bank. If the European Central Bank and the US Federal Reserve give out euros and dollars respectively to banks for free, this means that euro or dollar depositors receive nothing for their deposits but pay a premium for keeping their money and servicing their accounts. Against that background, a yield of around 20% is very, very high.
Nabiullina's speech and other official sources did not reveal what part of the approximately USD 660 billion equivalent stock of gold and foreign currency is now frozen abroad and cannot be used to keep the ruble at the level desired by the state through the sale of foreign currency. Commentators friendly to the authorities suggested that only the equivalent of 20-30 billion dollars had been lost, while those not so friendly reckoned that it could be 200-300-400 billion.
Yesterday (Tuesday) there were confirmations on the internet from independent financial service providers that commercial banks had indeed started offering deposit rates at the 18-20% level or at the 20-22% level (in smaller, more cash-hungry banks). The comment is, however, that banks have not been willing to enter into such deposit agreements for even a year, which would allow them to receive the interest promised in the advertisements. Banks only attracted money for 3-6 months at that price. However, against zero, deposits in rubles were made so profitable that even Ukrainians should have left the queues for the guns and queued up to buy and deposit rubles. Territorial political circumstances made it impossible to do just that, but the Russians themselves are said to have responded to the offer.
The CBR's decision to raise refinancing rates has a number of side effects, or proofs of the saying that it does not matter which finger one bites because they will all hurt. The CBR's decision was immediately criticized by economists who call themselves leftists or communists. In their view, the Soviet Union was great, lending money to companies at only a token interest. Such cheap credit was the only way to develop the economy! But a 20% refinancing rate for commercial banks, which means that banks will lend to non-financial companies or consumers at 30-40-50%, which will kill the economy. Raising the refinancing rate is more harmful than sanctions against Russia.
Questions remain as to why the generous Soviet Union went broke, and why it is not a boom but an economic crisis in Europe, the US and also in China, where money is printed and distributed in unlimited quantities to the demanders.
It is just as easy to predict the bankruptcy of the Russian economy from the point of view of the right, because Nabiullina promised to lend the banks precious money in the amounts that the banks would demand. In practice, the regulations limiting refinancing to a certain ratio to the value of bank assets will be abolished. The same abolishes the requirements for banks to continuously revalue assets and to make provisions to cover problem loans. In this respect, Nabiullina was no different from her ECB counterpart, Christine Lagarde, who also proposes that banks should take the money and give as much as they can to everyone, as problem loans can be covered by future borrowing from the CBR.
The sharing of money, albeit expensive money, but without limits in Russia has prompted a discussion about whether inflation there will stay within 20%. Of course, it will not, but opinions are divided as to whether it will stay in the double-digit range, i.e. up to 99%? It is nice to smile at the misfortunes of our neighbors, but the concern remains that not fighting in Ukraine does not guarantee that Latvia will escape the threat of similar inflation.