The Duran Podcast - Collective West hopes RUSSIAN economy will overheat and CRASH

Episode Date: November 3, 2024

Collective West hopes RUSSIAN economy will overheat and CRASH

All right, Alexander. Let's talk about the Russian economy. We touched on this briefly in a video we recorded a couple of days ago. But I think we can get into some more depth as to what's going on in Russia and with the Russian economy. Just to recap what we talked about in the last video where we discussed the Russian economy, there is the belief in definitely in Ukraine, definitely in many, media outlets in the Collective West that just give it another year in Russia and the economy will collapse the sanctions need time to work. And there are many analysts out there, many reports that have come out in the past couple of weeks, which claim that the Russian economy is overheating and that the Russian economy in the next year in 2025 will begin to unravel. Let's discuss. What are your thoughts on those statements? Right. The first thing to say is that, of course, there is always going to be some people, the people who basically supported the sanctions in the first place, some of them who invented the sanctions in the first place,

who will look at any problem in the Russian economy, attribute them to sanctions, say that sanctions are working and therefore must be continued and must be, in fact, intensified. and that all we have to do, they've been saying this for years, mind, not going all the way back to 2014. All we have to do is to tighten up the sanctions a little bit more and the whole thing will finally collapse like a house of cards and that that is really the whole story. Now, it must be said that for the first time,

there are also other voices starting to appear in the West that are starting to push back on this, including there's a big article in the French media, I think it was Le Monde, which said, look, this isn't at all true. On the country, the country's adjusting well to sanctions. It is, in fact, booming. And that is the actual correct truth.

What we have this year is very rapid growth in the economy. Putin gave an address, recently to the economic wing of the Russian government. He said that the economy is growing at a rate of about 4% this year. And what is underpinning this growth is a massive investment boom. Investment in the economy is rising very, very fast. And partly it's driven by earnings because the economy is booming, demand is. booming, real wages are growing, all of those things. There's a major demand stimulus that exists

in the economy. And at the same time, the other thing that's making possible this investment boom is very, very high corporate borrowing and lending, which is growing at well over 20% a year at the moment. So this is a major, huge investment. investment boom, which is underway. And if you look at where the investment is going, it's going principally into manufacturing. It's going into industry. It's going into factories, into expanding plant, into buying machinery, into where they can, taking on extra workers. And that is a problem, because, of course, there's a general shortage of workers. We've discussed that already. And that is causing wages to increase and that is putting pressure on price, inflation and that kind of thing.

Now, an investment boom on this scale inevitably leads to overheating. Nobody disputes that there is an element of overheating within the Russian economy. There are arguments about how strong it is and whether this level of overheating is dangerous or not, whether in fact the overheating on the contrary is necessary in order to enable the economy to get through the transition. But what basically is happening is that as companies invest in increasing factory space, invest in buying machinery and things of that kind, producers of machinery, of construction materials, of workers to work these factories, there are

inevitably supply bottlenecks because they can't keep up with the demand, and that translates into higher prices. And that results in turn in inflation. Now, the central bank is looking at all of this. They say we got this investment boom underway. We have inflation higher than we want. We see a gap between what the economy can produce and what the level of demand in the economy is. That is translating into higher prices. We have a target, an inflation target,

to 4% prices to increase by 4% a year. We are seeing prices at the moment rise at more than double that level. What we need is to cool things down because this is ultimately dangerous. It could mean that eventually the economy starts to burn. The fever becomes too high. Retrenchment starts to come in.

companies start to suddenly cut back on investment. And the result is that we have a recession. That's, you know, one possible product of overheating. So what we need to do is to slow the economy down. We need to reduce the investment boom and we need to bring things back into balance. So what the central bank is doing is it is trying to slow the economy and to bring the investment boom back under control. And that's why they've pushed interest rates up to 21%, which is roughly double the existing level of inflation. Real interest rates of around 10%, which is extraordinarily high. And the central bank is saying it's going to keep interest rates high at this level for a while, at least two years, because that's how long it will need to bring the

economy fully back into balance. Now, there is another school of thought, and it is becoming more powerful. And it has its centre in the economics ministry, which has always been in tension with the central bank. But it's for the first time in this argument, the finance ministry, which has historically allied itself to the central bank. On this occasion is backing the economics ministry. They're saying that what the central bank is doing is that it is using interest rates to try to choke off this rise in borrowing and lending and the investment boom, which is ultimately the main growth driver, which is in fact what is making possible. There's a re-industrialization program, which is what the country most needs. And that ultimately, what will happen is that once the

extra plants and the extra machinery is delivered, output will grow. That will satisfy demands. And when that happens, inflation will not. naturally begin to fall. So there is this argument playing out in Russia at the moment. For the time being, Putin, as he has consistently done ever since he became president of Russia, he's backing the central bank, and he's specifically backing Nebula, in whom he has immense confidence, as he has done at every turn in the economic cycle, basically since he appointed her back in 2013. Putin is somebody who, more than anything else, prizes economic balance. And he wants both spending to be brought under control.

Now, when I say brought under control, the budget deficit is small. It's about 1% of GDP, not the 6% of GDP we have in front. answer, other countries in the West, but he wants a certain increase in taxation, a return to the so-called budget rule, which means that the government spends money based on oil, on revenue from the non-oil and gas sector, saves any proceeds from the oil and gas sector. and he supports the policy of higher interest rates for the moment. He wants everything to go back into balance. But he's doing that because Nebula is promising him

that the high interest rates will not lead to a recession in Russia and that if there is any risk of recession, she will cover them. That's she made perfectly clear in her interview. So we're not going to see a crisis in Russia. We are seeing a very important economic debate playing out. Both sides want growth, the economics ministry and the industry ministry, and to some extent the finance ministry, want to go all out for growth.

The central bank, as it always does, wants instead a more balanced approach to the economy, It wants perhaps lower growth in the short term, but it believes that if you deliver lower growth at a stabbler rate of prices, that that growth will be more sustainable over time. And that is the entire story of what is going on in the Russian economy. We're not going to have a collapse next year. We're not going to have a collapse the year after. We're not going to have a collapse in five years or ten. The economy actually overall, if you go behind this debate and look beyond the inflation, numbers, which are high, but not by Russian standards, I should quickly add, unusually high. If you look behind the numbers, what you see is that the productive forces in the economy have been going stronger. Industrial expansion is continuing very, very fast. The central bank is concerned about overheating a balance. The economics ministry wants growth to

be higher still. There is always a debate about these things in Russia. But at the end of the day, whatever happens, the government has the means to keep everything under control and to keep the economy moving forward. Yeah, it sounds to me like Nabulina, the central bank and Putin, who will probably opt for her side, that they want growth, but they want a more stable and steady, predictable growth, which is if you follow Putin, Putin likes predictable, steady, stable things. While the economy ministry wants to strike now that things are hot, right? They want to put the foot to the pedal and go a little bit faster. The problem with, I understand where the economy ministry is coming from. But I think we get to the underlying problem that Russia does have and is not going

to be solved anytime soon, which is the demographics problem. I mean, and this is not a function of the war either, though. The war does make things more difficult. But Russia does have this demographics problem where, you know, even if you go quickly in the economy, you always read it to the issue of of what about workers? What about people? I mean, Russia's unemployment level is already, from what I understand it, at a historic low. I mean, they just don't have enough people to work various jobs and people that are working right now in Russia are commanding very good salaries. How does this get solved? Well, the demographic issue. I mean, it's something that's going to take a lot of time. If you go about it in a traditional sense, policy,

of creating families and increasing birth rates, all these things. I mean, this is long, long-term stuff, which I know Putin is thinking about. Absolutely, he's thinking about. But how do you deal with the short-term? You're absolutely right. And Putin does have policies which look to this for the long-term.

But, of course, the interesting thing about those policies, those long-term policies is that they, of course, in the short-term, actually increase the problems. in the labour market, because to give an example, Russia has extremely generous maternity leave provisions. And that is a good thing, because, of course, it means that women are able to look after their children when they're born and they've got a long period of time. I think it's up to three years to look after their children and they have a job to return

to. And it does encourage women to have more children. And it does all sorts of things. So there's all kinds of benefits that go without a sort of. well. But of course, in the meantime, during those three years, they're not in the workforce. And so you can see the problem. So what will solve the democratic problem in the long term, in the short term, exacerbates the labor shortage. Nobody, by the way, in Russia, is talking about easing off on the supports for families. On the contrary, there is. There is a

a general consensus, which extends right across the system, the central bank, the economics ministry, all of them. If they all agree about one thing, it is about whether it is about the need to keep those programs continuing in place in order to solve the democratic problem in the long term that way. But the long term is 20 years off. So you're 20 years before you start to see, Even if the birth rate increases today, it's going to be at least 20 years before you start to see extra workers starting to appear in any number. So what do you do? Well, there are two lines of thought. The one which is supported by Putin himself is that you increase automation in the economy.

And by the way, Russia does a lot of that already. There's an awful lot. I mean, digitalisation and those kind of things exist on a very, very big scale. I've already spoken about the fact that there is an investment boom underway. That's partly a product of buying machinery in order to replace workers. I mean, there is that. There are programs about having robots and all of that kind of thing to increase productivity in factories. The problem is that takes time also.

And, you know, we're looking at at least a five-year period before those kind of investments start to carry through. So the economics ministry says this is why we need to keep the investment growing because we need higher investment in order to press forward with our automation faster. The central bank comes back and says, and by the way, I think on this, the central bank is probably right. Well, you say that. And of course, you are right. But this is going to solve the problem in only five or ten years' time. And by the time you get to that five to ten years, because people, because inflation will have grown even further and real prices will have grown even further. And demand will be even higher.

We won't have actually solved the problem then. We'll just have the same problem at an even higher level for a higher industrial productive source, but with all the major problems that an inflationary brink brings with us. So we've got to slow things down and though they will never say publicly a normal Putin. What they will basically say is, look, the only way to deal with this problem in the end is by having more workers. And that means fewer people in the army, which in practical terms isn't possible until the Ukraine war is over. That's a medium term solution.

And the shorter term solution has to be bringing in more people from Central Asia, Iran, potentially North Korea and that kind of thing. And I think that there is a lot of resistance to this idea in Russia itself, unsurprisingly, but I suspect that soon or later it will come. Right. Let's talk about oil. And there's a report that came out a couple of days ago from Le Monde, which basically said that the whole $60 price cap that was placed on Russian oil is a failure.

It has not worked. And any more efforts from the collective West to try and stop Russian. oil from hitting the markets is just going to boomerang back at the collective West. So basically they said that the whole idea of hurting Russia's war machine, as they would phrase it, by going after Russian oil has failed. Now, the Financial Times, they put out an article where they talked to people that claim to to have some insight as to what Trump's plan is going to be for winding down the conflict in Ukraine. I personally don't believe these people have any idea what Trump's plans are,

but these are the claims that the Financial Times makes. And one of the people that was interviewed in this article from the Financial Times, I believe a member of the House in Florida, he said that what Trump is going to tell Putin is either you get to the negotiating table and we wind down this war and you negotiate based on the terms that Trump is going to present, which Russia will never go for. It's basically a Minsk 3. But anyway, you either get to the negotiating table or the United States is going to drill and drill

and lower the price of oil and destroy your economy. What are your thoughts on Le Monde and the Financial Times' article, which claims that one way to really crush the Russian economy is to bring oil to $40 a barrel or whatever. Whatever the Financial Times said, I think it said $40 a barrel. What are your thoughts there? Strait forward. Straitfully, the Le Monde is obviously right.

I mean, I would point out that Le Monde is only catching up with what we were saying a couple of years ago about the $60 price gap. I mean, it's been an absolute disaster, by the way. It's completely and utterly failed. But if it was that easy for the United States to swamp the world with oil by increasing output and flooding the world with oil and forcing the oil price down in that kind of way and destroying the Russian economy in that fashion. The current bunch, the Biden administration, would have already done it. I mean, they've been trying to push the oil price down relentlessly. Obviously, they have their policies in the United States, which stood in the way of increasing oil output to some extent.

But nobody should overstate the importance of this. I appreciate this is a big talking point in the United States. But it isn't really, in my opinion, quite as serious been issues of people. imagine. And even if all of the stops were pulled down and the United States went all out to produce as much oil as it could, as quickly as it could, which would be a mistake, by the way, just saying. But even if the United States were to do that, it would still take several years for this to have a significant effect in the oil markets. So this is a complete misconception. But I mean, the other big misconception, and this is a misconception I've discussed many times,

is that oil plays a diminishing part in the Russian budget anyway. If you're looking at budget revenues as a whole, the revenues from the oil and gas sector account for something like a fifth of total budget revenues. That is the so-called consolidated budget, which is to say central, the federal government's budget, plus that of the regions, which is also distributed out of the total revenue. But even the federal budget, which is the part of the budget, which has relied most on oil and gas revenues, the proportion there is falling fast. as well. And part of the reason why the budget has relied historically on oil and gas revenues is because of the nature of the Russian tax system, which after the period of the 1990s, the government deliberately sought to keep low in order to help enterprise, but which over

the last couple of years, the tax system is being reformed. And the result is that reformed and in some places raised, just to make that clear. But not, you know, to dramatic levels. But the result is that that is bringing in extra revenue to the budget, which makes the revenue from the oil and gas sector significantly less important. So this is, this is again looking back. backwards, the extent to which some people in the West remain frozen in their understanding of the Russian economy and assume it is still what it was like sometime around the year 2000 is baffling. It is a constantly evolving and changing and developing thing. It is very different from that today.

Yeah, McCain's a gas station masquerading as a country. Well, you would have thought after, it's stuck, it's stuck. You would have thought that after all that has happened, people would know better. I mean, the economist, the economist has a piece in which they admit in one place that Russia is outproducing the West in every sector of, you know, weapons production, which speaks of a huge military industrial, in fact a huge industrial complex.

And at the same time, you find in other places in the economies, they still latch on to this thing about, you know, the gas station masquerading as a country and all of those things. And, you know, you still read people who say that

it's only got the 15th biggest economy in the world based on normal values. And they ignore the fact that the World Bank and the IMA say it's actually the fourth biggest economy in the world, bigger than Japan's. So it's very difficult in the face of this willful refusal to look at the facts to understand the realities here. And however obvious the realities are, people continue to deny them. it goes all the way back to the point that you made at the start of the program,

that because inflation is now 8% instead of 4%. By the way, I mean, can I just say, you know, inflation in Russia for merely the entire period post-the-Soviet collapse has been much higher than 8%. I mean, 8% is, I mean, this is a country. The Soviet Union started to experience inflation. problems in the late 1960s and they continued to build right through the 70s. Then they burst into open in the 1980s and then we had periods of hyperinflation to major periods of hyperinflation at the beginning and end of the 1980s.

And then throughout the 2000s, inflation was at around 12% a year, sometimes higher. Gradually, Nebula and Putin have brought it down. down first to single figures, and then Nebula had brought it down to 4%, and then for a time it was even at 2%. And now, because the economy is surging, the way that we've discussed, it's gone up. But this is not an unusually high rate of inflation for Russians. For Russians, what they notice is that their wage packets are growing faster than inflation is. So real living standards are rising.

And because Putin and Nebula have this focus on preserving macroeconomic stability, they will make sure that despite the fact that inflation has gone higher, it will never get out of control and will be first capped and then eventually brought down again. no matter what happens. By the way, I ought to say that in the argument between the economics ministry and the central bank, I lean definitely towards the central bank. I have been critical in the past. I've always felt the central bank, I used to think the central bank,

if I do think that the central bank in the past kept interest rates too high for too long. This was in the 2010-2016 period. I think at the moment, interest rates have gone very, very high. I don't believe that Nebula really is going to keep this level for as long as she is saying, though I understand why she is saying it. But I think that in this kind of situation that we see today, when there is an investment room,

it is better to keep it under control than to let the things rip in the way that the economics ministry wants, though I always understand where the economics ministry is coming from. And it is always healthy to have debates like this. I wish we had debates like this in the West, just a second. Yeah. Just a small clarification. I think you said the hyperinflation was early 1990s and late 1990s, right?

Not 1980s. Yeah. Yeah. That's right. 1990s. Reasonable. I mean, we all understand what happened in the 90s, right? Exactly.

Which is something that Russia and the Russians have stated they will never go back to that again. Exactly. I mean, Putin is important for people to realize that. Yes. The people making decisions in the collective West. Yes. Because they're itching to get back to the 1990s. Exactly.

They want to get back to the 1990s. But the Russians are. The Russians will never let it happen. And that means that, I mean, Putin will never go. go where someone like Erdog 1, for example, went in which he basically kept interest rates low all the time. And the result was that inflation simply took off into the stratosphere. They will never allow that to happen in Russia. All right. We will end the video there.

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