Back in the spring of 2022, Russia’s financial system seemed certain to collapse under the weight of the war in Ukraine and Western sanctions. Many feared a banking panic and shortages of basic goods, but the steps taken by the central bank and government economists sufficed to avoid disaster.
Today, there is relative calm on the Russian financial market, but the threat of overheating is increasingly tangible. Inflation remains far in excess of the target rate of 4 percent, and GDP is growing rapidly. Salaries have soared in banking, oil and gas, and IT; unemployment is low; and interest rates are high. So will this feverish growth be followed by a recession, and what might the next crisis look like, given the militarization of the economy?
Economic crises occur for various reasons, including financial bubbles that grow until they burst, growth funded through volatile foreign investment, and inefficient distribution of capital by financial institutions and mounting losses among their borrowers. All these can bring about a cycle of growth, overheating, crisis, recovery, and ultimately renewed growth.
A crisis is more likely when growth is not accompanied by a commensurate increase in labor productivity. If consumer savings grow but the technological potential of manufacturing does not, eventually a crisis comes along to resolve this tension through the depreciation of savings.
During periods of growth, no one pays attention to mounting losses or inefficiencies. But over time, the economy becomes increasingly fragile, enough that even a minor concern might suffice to make the average investor start worrying about their savings, which then triggers a crisis.
At the heart of virtually any crisis that befalls a market economy is short-term consumer and corporate debt. The main source of any bank’s problems is the fact that depositors may at any time withdraw money from their accounts. When many attempt to do so all at once, banks may struggle to come up with the funds to pay customers.
Runs on banks are often sparked by bad news about the economy, public finances, or the banking sector. When many banks suffer runs at the same time, in a banking panic, the measures they take only deepen the crisis. As banks liquidate positions to generate funds with which to pay depositors, selling securities or currency, those assets depreciate and the downward spiral continues.
The origins of the crisis lie in the depositor or investor’s decision to withdraw their money. They opt to do so because they feel they have safer options, from keeping their savings in cash to converting them into a foreign currency.
This is not so relevant to Russians. Almost two-thirds of the banking sector’s assets are on the books of state lenders, while the rest are insured, effectively making all of it state obligations. In these conditions, why withdraw your savings when Sberbank offers a 14 percent interest rate and mobile banking services?
Converting savings into dollars would be an option if not for the various restrictions imposed by both Russia and the West since Moscow’s full-scale invasion of Ukraine. Memorably, in 2022, it was easier for Russians to sell their homes than withdraw dollars from their own accounts.
Neither a run on the banks nor an outflow of investors, then, seems likely in Russia given the alternatives. Yet this does not mean there is no risk of a crisis. Rather, the sources of danger are different.
In the Soviet Union, there was no possibility of a banking panic either. But that did not stop the country from experiencing periodic crises accompanied by the depreciation of savings, like after the currency confiscations of 1947 and 1961, or the freezing of deposits in 1991.
Russia’s economy today is far more flexible than the Soviet one. Parallel imports and import substitution, while technologically regressive, have made up in part for the government’s failures and the economic fallout from the war. There has even been noticeable growth, albeit not without increased inefficiency.
As the war goes on, not only will material resources be spent on the conflict, they will also be misappropriated along the way. Crime is on the rise, and the black market for firearms is booming. In addition, favorable loan terms are being offered to those who have fought in the war—at the expense of other borrowers. All of this, along with the various exceptional benefits extended to certain categories of individuals and enterprises, contributes to inefficiency and undermines the financial system from within.
With time, the burden of war and the appetite of those enriched by the conflict will become too much for the market to handle. Officials will try to manipulate statistics, introduce price controls, and subsidize in secret. At some point, the imbalances will rise to the surface and force the state to retreat from its commitments to its people. It does not really matter whether this takes the form of confiscations, the removal of massive subsidies, price increases, or an indefinite freeze on deposits and pensions.
Whether or not the mythical goals of the “special military operation” are achieved, Russia’s financial system will not provide savers with long-term stability. That much has been clear since before the invasion. Funded pension schemes have been frozen since 2014, noncontributory pensions were subsequently cut, and in 2018, the retirement age was raised. The burden on the pension system will only increase in wartime, while its sources of funding will shrink, making further pension cuts inevitable.
In addition, efforts to minimize financial losses are contributing to overheating. Wary of investing in Russian financial assets, consumers are spending on real assets instead, driving up inflation. Take the real estate market, where a consumer who buys an apartment usually also takes out a mortgage, which may well be subsidized by the state. Such handouts will be far more difficult for the government to claw back.
Accelerating inflation, growing consumption, and high savings rates reflect the desire of consumers to spend rather than save. Russians do not and cannot blindly trust their country’s financial system. In the past two years alone, they have lost easy access to global financial markets, seen Russian stocks lose much of their value, and watched as goods disappeared from store shelves or soared in price in a matter of several months.
Some are finding ways to make money in wartime Russia, but no one views the country as a safe place to keep savings. Ultimately, it is only high savings rates and a lack of alternatives that are keeping the last remaining investors in the Russian financial market.
