Budget holes, weakening ruble: is Russia’s economy on the brink?

The author of the Resurgam Telegram channel discussed the issue.

The Russian Ministry of Finance has reported an unexpected budget deficit, signaling deeper economic troubles.

Currency intervention and ruble stability  

The Central Bank of Russia (CBR) is intervening in the currency market, using yuan reserves to stabilize the ruble. While recent efforts improved the exchange rate from 15.5 to 14.88, it remains significantly weaker than earlier levels of 13.2 in October or 12.6 in September. Current tax payments offer short-term support, but long-term ruble stability depends on the CBR’s reserves and capacity to manage market pressures. If the ruble weakens further after this temporary relief, it will indicate dwindling reserves and limited options.

The ruble’s value reflects broader economic challenges, akin to symptoms revealing a patient’s overall health. A full diagnosis requires assessing multiple factors.

Falling corporate profits  

According to Rosstat, corporate profits in the first nine months of 2024 dropped 19.1% compared to the same period in 2023. Despite nominal GDP growth, declining profits undermine investments, banking activity, and consumer spending, signaling economic fragility. 

This trend also affects government revenue. The Finance Ministry reported a 7% shortfall (357 billion rubles) in income tax collection due to falling corporate earnings. Finance Minister Anton Siluanov admitted the shortfall was unforeseen and warned of additional budgetary gaps.

Declining profitability and economic overheating  

A study by a pro-government think tank, CMAKP, revealed that profitability across major industries has fallen below the yield on federal bonds, making investments in business expansion less attractive than holding securities. This dynamic stifles economic growth and increases the risk of stagflation—a condition of stagnant growth paired with inflation.

Risks and scenarios  

The economy faces critical risks, comparable to overloading a system beyond its capacity. Current policies, like raising interest rates, are short-term fixes that fail to address underlying issues. Persistent instability and reduced business confidence suggest that efforts to manage overheating are faltering.

Potential outcomes include:  

• Controlled stabilization: Unlikely while war expenses persist, as they continuously add strain.  
• Stagflation: The most probable scenario, marked by prolonged economic weakness and reduced productivity.  
• Systemic collapse: A more severe possibility if compounded by external shocks or unresolved structural problems.

In summary, Russia's economy shows signs of strain across multiple indicators—currency instability, falling profits, and reduced business investment—pointing to deeper, systemic challenges.