Boris Kagarlitsky
Translated by Dan Erdman
It is a fact well-known to the kings of the 16th century that wars are expensive. Most inconveniently, revenues fall at the same time as consumption rises. The English kings did not lose the Hundred Years’ War on the battlefield, where their archers (together with the Norman and Gascon militias) continued to prevail over the French knights, but they were forced to reduce, and then completely curtail, military efforts because the money in the treasury ran out, and the London merchants who controlled Parliament were unwilling to agree to new taxes. In many cases, even the wars won turned out to be a disaster for the state. It is enough to recall the participation of France in the American War of Independence. After the victory, it turned out that the treasury was empty, and an attempt to change the tax system to correct the situation led to a revolution. However, Britain faced the same problem a decade and a half earlier, deciding to force the American colonies to reimburse the military costs of protecting them from the French and Indians, after which the settler riots began, ending with the Declaration of Independence.
But those were the days of the silver coin. In the era of paper money, the situation did not improve. All the powers that fought major wars in the 20th century faced either skyrocketing inflation and the depreciation of money, or a sharp increase in public debt, and more often both at the same time. This applies to both winners and losers. It is important to understand that measures to ration food and other goods, the introduction of cards and centralized distribution were introduced not only to cope with shortages, avoid starvation, or stop production, but primarily in order to prevent soaring prices and curb inflation. But for the most part such measures were still carried out too late, when both the shortage of goods and the depreciation of money had already become a reality.
The current conflict is no exception. As we can see, all parties directly or indirectly involved in it are already experiencing financial stress. Western Europe has seen a serious rise in prices. Ukraine is not particularly affected by inflation, but the external debt is growing rapidly. We will find out how this whole story will affect the United States much later, while the situation for them develops as in the 20th century, when the overseas power rather benefited from the conflict in Europe. The dollar is not going to collapse, no matter how much our patriotic economists wish it would. But the US Congress still needs to allocate very large amounts of money, even if military orders revive production.
What do we have? According to the latest data, the stress on the Russian budget is growing. Oil and gas revenues from January 2022 to January 2023 fell from 795 billion rubles to 486 billion rubles, and non-oil and gas revenues from 1293 billion rubles up to 931 billion rubles. At the same time, consumption increased from 2024 billion rubles up to 3117 billion rubles. This is, of course, provided that we are being told the whole truth about expenses and incomes, which is not entirely obvious. The possibilities of external financial borrowing for Russia are now extremely limited. If someone gives money, they will do so only at very high interest rates.
In general, history repeats itself.
The policy of the Central Bank and the Ministry of Finance is still focused on curbing inflation at any cost, using the previously accumulated financial reserves. But they melt. Prices are still rising, and the actual rate of inflation appears to be far greater than the authorities are willing to admit. The latter, however, is not so important. Now inflation is under control, even if from the point of view of our individual pocket the situation does not look so optimistic. The problem is different: what will the Russian economic authorities do when it becomes impossible to maintain the current state of affairs? In principle, it is possible to work effectively with inflationary financing of government spending, and it is possible as well to introduce rationing. But the people who make up the backbone of the economic bloc in the government of the Russian Federation, brought up on the most primitive schemes from economics textbooks, are simply incapable of doing such work.
Therefore, there is a risk that we will end up with exactly what they fear most in the world - deficits and uncontrolled inflation. There is still some distance to the point of no return. Just as last summer’s sanctions-fueled supply crunch signaled the start of more serious problems to come, but did not (and should not) lead to a complete collapse of the economy, the current budget crisis only heralds far greater difficulties in the second half of this year. There is still time. But it is unlikely that it will be reasonably used by the current government. After all, this power in itself is our biggest problem.
Isn't it possible that NATO, with its anti-Russian policies, would have pushed another conflict if Ukraine weren't so strategically perfect? The U.S. has consistently pushed anti-Kremlin insurrections in the Slavic countries (the Maidan, the Georgian conflict) Any dramatic change in the world order will shake economic strategies and confidence. Russia is working toward a new, equitable multinational relationship with its allies, as Western countries are no longer trustworthy or willing to co-exist. It is hard here in the States, as food, gas and rents are skyrocketing. Political policies are not popular and crime is surging. People simply want peace - but governments power. Hopefully both can win when negotiations are successful. Thank you for your submission.