Beating the heat
Beating the heat
As the Russian economy overheats, the Central Bank considers a key rate hike
Hello from the Bear Market Brief.
This week in the news:
The Central Bank will discuss a key rate hike during its next Board of Directors meeting later this month.
President Putin traveled to Kazakhstan for a leaders’ summit of the Shanghai Cooperation Organization, a Chinese-led regional bloc.
Online and electronic voting will be the default options for Moscow’s City Council elections in September.
Ukrainian commander-in-chief Oleksandr Syrskyi published a Facebook post detailing the situation on the frontlines.
— Sara Ashbaugh, Editor in Chief
Looming monetary and fiscal policy changes
The Central Bank of Russia will discuss raising rates in July in response to growing inflation. Experts surveyed by Reuters are also expecting a rate hike. Earlier, the Bank’s Board of Directors rejected calls to raise its key rate by up to 200 basis points (to 17% or 18%). However, inflationary pressure has grown since then. According to the Ministry for Economic Development, as of July 1, yearly inflation was 9.22%, up from 8.61% a week prior. Although this is, to some extent, due to the annual indexation of utility tariffs, the Central Bank is also going to raise its 2024 inflation forecast “significantly” (in April this was 4.3-4.8%). Both industrial output and retail turnover grew in May due to rapidly rising wages in some industries—triggered by labor shortages—and state spending. Amendments adopted to Russia’s 2024 budget this week also reflect the effects of the economy overheating, with expenditures expected to rise by 522 billion rubles ($5.9 billion) with expected fiscal receipts slightly lowered. The Bank expects the economy to start slowing down in the third quarter. However, rate hikes can also further dampen investments that the Russian government needs to underpin its pivot to Asian markets.
Meanwhile, the government submitted its amendments to the tax reform, which is currently being discussed by the State Duma in the second reading. The amendments mostly add clarifications and introduce smaller changes to the original bill. As announced earlier, regions will be able to introduce a tourist tax from 2025 on, however, under the new rules proposed by the government, the base rate of the tax would not be 65 rubles ($0.74) per room, but a set percentage of the cost of living, with the possibility of increasing it in later years (no more than 1% in 2025 and no more than 5% from 2029). Regions will also be able to introduce tax breaks for small IT-companies at their own cost. The amendments also specify that income from transactions involving digital financial assets is taxed similarly to income from securities (that is, 13% or 15%); that microenterprises with a yearly income below 60 million rubles (approximately $682,000) are automatically exempt from paying VAT; and introduces a single-payment fixed personal income tax for the owners of five or more so-called controlled foreign companies.
All in all, the amendments do not change the core of the tax reform, which is expected to bring an extra 2.6 trillion rubles ($29.5 billion) next year, mostly to the federal budget. However, the changes do reflect a degree of concern with the state of regional and municipal finances. The bills may still change in the coming weeks before the vote in the Duma takes place.
— Andras Toth-Czifra
Hungarian Prime Minister Viktor Orban made a controversial trip to Russia this week to meet with President Putin. He can be seen here arriving to Moscow in a photo he posted on X. The trip is part of Orban’s so-called “peace mission,” which also included a visit to Kyiv to speak with Ukrainian President Volodymyr Zelenskyy. This comes just days after Hungary took over the EU presidency, which rotates among EU member states. Other EU leaders heavily criticized Orban’s decision to go to Russia, stressing that Orban had no mandate from the EU to negotiate with Putin. Orban defended himself, however; “You cannot make peace from a comfortable armchair in Brussels,” he posted to X. (photo: @PM_ViktorOrban / X)
Shanghai Cooperation Organization
President Putin traveled to Kazakhstan this week for the 24th annual leaders’ summit of the Shanghai Cooperation Organization (SCO). The SCO was established in 2001 by Russia, China, Kazakhstan, Kyrgyzstan, Tajikistan, and Uzbekistan to address security concerns in Central Asia. Since then, the group has expanded; India and Pakistan joined in 2017, Iran in 2023, and Belarus became the newest addition to the bloc during the Summit this week. The group also has two observer states (Afghanistan and Mongolia) and 14 “dialogue partners” (including Turkey, Saudi Arabia, and the United Arab Emirates). In the past, China and Russia have disagreed on the organization’s priorities; while Russia emphasized its anti-terrorism efforts, China has been more focused on economic cooperation. Both agree, however, on the group’s role as a counterweight to U.S. hegemony in international affairs.
This year’s summit took place on July 3-4 in Kazakhstan’s capital city, Astana. It culminated in the adoption of the Astana Declaration, a document confirming the group’s commitment to global peace, security, and stability. Members also approved the initiative “On World Unity for a Just Peace and Harmony,” advocating a multipolar world order. Putin gave a speech at the Summit in which he called for “a new architecture of cooperation, indivisible security, and development in Eurasia, designed to replace the outdated Eurocentric and Euro-Atlantic models which gave unilateral advantages only to certain states.” He also touched on the war in Ukraine, saying that discussions of global security would have to wait until after the U.S. Presidential elections in November.
In addition to the multilateral discussions, Putin also held bilateral talks with several state leaders on the sidelines of the Summit, including Turkish President Recep Tayyip Erdoğan and Chinese President Xi Jinping. Putin praised Chinese-Russian relations in a televised statement ahead of their meeting, saying the partnership was experiencing its “best period in history.” The two leaders last met in May, when Putin traveled to Beijing and the pair signed a joint statement “on deepening relations of comprehensive partnership and strategic interaction.”
— Sara Ashbaugh
Electronic voting for Moscow
After years of gradually rolling out electronic and online voting, Moscow will almost entirely ditch paper ballots in its City Council elections in September. Voters wishing to use printed ballots will have to contact their territorial electoral commission and request it before the vote. Otherwise, they can cast their votes through the city’s public services system online or via voting machines in polling stations. The Central Electoral Commission—which weeks ago still denied that paper ballots would be abolished in Moscow—gave ecological reasons to explain the decision. The authorities are also reducing the number of polling stations.
Electronic and online voting have already been de facto established as the norm in Moscow. In last year’s regional and municipal elections, 80% of Moscow voters cast their votes electronically, while in the other regions where this was a possibility, only 10-20% of voters did so. This is in spite of the fact that online voting has been riddled with irregularities and intransparency over the past years, with votes cast electronically significantly skewing towards the Kremlin’s preferred candidates and with few opportunities for observers or voters to verify that their vote has not been tampered with. As we warned last year, “evidence suggests that the system can be used to make previously used methods of electoral manipulation (such as pressure by superiors, increasing the turnout of reliably pro-government voters, keeping the electoral process hidden from observers, etc.) more effective and less reliant on local officials.” The gradual rolling out of electronic voting in Moscow has also led to authorities pushing for similar changes in other regions.
Electoral watchdog Golos warned that the changes will not only further erode the legitimacy of elections in the Russian capital, but may also raise the risk of election-day conflicts in polling stations.
— Andras Toth-Czifra
Multiple regions have declared states of emergency as summer wildfires rage in Russia’s Far East. More than 100 wildfires are currently active in the Sakha Republic, which announced a state of emergency last month. The Tyva Republic followed suit, with at least 23 active wildfires in the region. As climate change causes temperatures to rise in the Arctic, boreal forest and tundra are increasingly at risk. The Russian Emergencies Ministry reported that, over the past week, 2,200 people were evacuated and 75 died due to more than 500 active wildfires across the country. (photo: Russian Emergencies Ministry)
Ukraine’s commander-in-chief on the situation on the frontline
On Wednesday, Ukraine’s commander-in-chief Oleksandr Syrskyi published a Facebook post describing the frontline situation. Over the past week, General-Colonel Syrskyi visited almost all brigades fighting along the eastern frontline, including those in the Pokrovske, Kurakhove, Vremivka, Toretsk, Kramatorsk, and Vovchansk directions, as well as those near Kharkiv. He wrote that overall the intensity of the fighting has mostly decreased, with the exception of the Toretsk direction. Additionally, the situation in the Pokrovsk direction remains difficult, with Russians rotating their units to continue their offensive.
The commander-in-chief noted that the primary challenge for commanders at all levels is staffing units and subunits with motivated and well-trained personnel. Another significant issue is ensuring the provision of modern electronic warfare equipment and military air defense systems capable of effectively countering enemy drones.
Lastly, General-Colonel Syrskyi identified immediate next steps following his frontline visit. He wrote that the General Staff of Ukraine’s Armed Forces is now working on proposals to improve the tactical medicine system and integrate it into the Medical Forces Command structure. This will enhance the speed and quality of medical care delivery within Ukraine’s military. Additionally, the General Staff is adapting the basic training program for service members to operate effectively under conditions of drone dominance on the battlefield.
— Lisa Noskova
On the podcast
Why has the Global South, historically on the receiving end of colonialism and imperialism, maintained what might be called a neutral stance towards Russia's war against Ukraine? Ivan Grek, Director of the Russia Program at George Washington University’s Institute for European, Russian, and Eurasian Studies, joins Aaron Schwartzbaum to discuss.
Quickfire: Regions
For the second time, the Tomsk City Duma did not support a proposal by the Prosecution to introduce legal changes that would automatically strip “foreign agents” of their mandates in the local assembly. Earlier, the State Duma adopted a law forbidding people labeled “foreign agents” by the Justice Ministry to stand for or serve in elected office; in practice, this gave the Ministry the right to deprive any elected representative from their mandate. However, in the Tomsk assembly, the governing United Russia party does not have a majority and the “systemic” opposition parties in the city have so far sided with the opponents of the law. In 2020, Tomsk was one of the examples of cities with successful cooperation between grassroots opposition campaigns and existing opposition structures, which also resulted in the election of several independent deputies to the city council. Regional authorities have since scrapped direct mayoral elections in the city and sentenced independent deputy Ksenia Fadeeva to 9 years in prison.
The regional assembly of the Republic of Khakassia asked the federal government to transfer 14 billion rubles ($159 million) to the Republic (5 billion rubles of this in the form of a loan) in order to cover current expenditures. Altogether, the regional government is expecting the region’s so-called own revenues (fiscal revenues not including federal transfers) to be 25% below what was planned this year due to a significant drop in corporate income tax revenues from the region’s struggling coal and aluminum sectors. The region is headed by Valentin Konovalov, a Communist politician who last year successfully rallied local elites behind him to see off a challenge from Sergey Sokol, a former Duma deputy supported by the Kremlin. However, United Russia took control of the regional legislature and appointed Sokol its Speaker; following this, pressure increased on Konovalov and his supporters to negotiate a modus vivendi with the federal authorities. From Sokol’s reaction, it appears that United Russia will use the situation to further undermine Konovalov’s support in the region.
The religious authorities in Dagestan and in Karachay-Cherkessia have temporarily prohibited the wearing of the niqab veil, a garment worn by some Muslim women. Dagestan’s head, Sergey Melikov, also criticized the wearing of the veil, calling it “unusual” in the Caucasus. In the Republic of Kabardino-Balkaria, the authorities reportedly pressed charges against “sharia patrols” enforcing religious garb. The bans follow terrorist attacks by radical Islamists in Makhachkala and Derbent last week and, in general, a heightened anxiety about Islamist terrorism in Russia after three attacks this year. Alexander Bastrykin, the head of the Investigative Committee, earlier proposed a countrywide ban on the niqab, only to be rebuked by Chechnya’s head, Ramzan Kadyrov. It is also questionable whether such bans will have an impact on Islamist terrorism, which Bastrykin blamed on immigration, even though the known Dagestan terrorists were locals and some of them had connections to the region’s elite.
— Andras Toth-Czifra
Quickfire: Ukraine
On Monday, Russia attacked the Myrhorod military airfield in Ukraine’s Poltava region. Russian media reported that five Su-27 aircraft were destroyed, while another two were damaged during the strike. Ukraine’s Air Forces did not provide an official statement on the damages sustained to the airfield as a result of the attack. However, Ukraine’s former Air Force spokesperson Yurii Ihnat confirmed that there were “some losses” without specifying how many aircrafts were damaged. “There was an attack. There are some losses, but not the ones the enemy claims,” Ihnat wrote on Facebook. News of the attack sparked public outrage on social media, with people criticizing the Air Force for failing to protect the airfield despite advance warnings of a Russian strike.
On Wednesday, Russia carried out a deadly attack on Dnipro, killing five people and injuring at least 53. As a result of the strike, stores, schools, and hospitals were all damaged. Ukraine’s Air Force reported that on July 3, Russia launched a large-scale strike against the Dnipropetrovsk region. During this assault, Ukrainian defenses successfully intercepted an Iskander-K cruise missile, four Kh-59 guided aerial missiles, five Shahed-type drones, and one Orlan reconnaissance drone. “Only two things can stop Russian terror—modern air defenses and long-range weapons,” President Volodymyr Zelenskyy said following the attack.
— Lisa Noskova