By Igor Lipsits for The Times of Moscow
In December 2024, the Central Bank did not change its interest rate — 21%, although according to market logic, it should have been raised. One could argue that the Central Bank saw signs of a credit collapse, which allowed them to keep the rate as is, but it is quite possible to assume that Elvira Nabiullina surrendered (possibly temporarily) in the battle against a whole front of opponents in the government, State Duma, and major businesses of the country.
And in terms of bureaucratic life, this is quite understandable. It's strange to fight alone against a legion of enemies. Success in such a situation is unattainable. But the president can say that conventional thinking prevents the Central Bank from making the right decisions. There’s even talk of resignation, and resigning in modern Russia is an extremely dangerous thing: as soon as you're out of power, it's quickly revealed that you have a "dossier" full of compromising material, and you’ll soon find yourself in completely different places.
But the fact that Nabiullina surrendered is a significant moment. It's the clear end of the year and, at the same time, the end of the period when the market economy in Russia was still trying to survive under the conditions of war.
Price Regulation
What does the government plan to do now? Mikhail Mishustin is trying to seize the initiative in managing financial and economic processes. It sent a chill down my spine! The wording is absolutely fantastic: the government wants to switch to auditing price formation in key industries to combat inflation! The prime minister literally said: "I would like to separately highlight the need for sectoral analysis of supply and demand. It is necessary to very carefully monitor prices in the domestic market. They and their dynamics determine the level of real income of citizens."
At this rate, we might easily end up with a Soviet-style State Pricing Committee. What is sectoral price formation (audit)? It's control over production costs in all sectors and the creation of profitability at all stages of production and marketing. Here’s how Maxim Shaskolsky, head of the Federal Antimonopoly Service, describes this work: “We are constantly working with major federal retail chains to reduce the average markup level. Over the observation period from August 2021, these markups decreased by 16%: from 22% to 6%” (it would be more accurate to say “decreased by 16 percentage points,” but this is how the head of the FAS put it, so I reproduced it this way). In a market economy, companies (that are not natural monopolies) achieve such results by encouraging competition. But is Russia’s economy still a market economy?
So, you start with the audit. Then, using the existing provisions of the Russian Tax Code (articles 40 and 105.7), you calculate economically justified prices. After that, these prices are implemented through a directive method — or you punish those who don't comply.
And I understand where the idea to effectively bring back the State Pricing Committee comes from. The authorities have decided that market economy be damned! No joy from it, just problems. It’s time for more direct, tougher decisions. And along with this, Sergey Glazyev’s joy: there’s a need to switch to direct financing of projects in the most significant industries through the treasury.
Do you understand how wild this is? As soon as I start direct lending at the minimum rate from the treasury, no one will use this money for its intended purpose. It will immediately be sold on the money market at a different, higher rate to those who are not allowed to access the "subsidy counter." It will simply turn into speculation with financial resources. This will be the most profitable business in Russia.
Only an abstract theorist like Glazyev could think that by giving state money, the recipients of the preferential loan will use it to build a business and spend it on production. Nonsense, no one will do that! In Russia, business is done by people who have become virtuosos at deceiving the state to fill their own pockets (just as well as the pockets of the officials who control them).
In three years, the entire resilience of the Russian economy has been exhausted, everything that was built before the war is gone, and now everything is falling apart, which causes panic. It's funny that the "Russian optimist" economists (Alekshanenko, Inozemtsev, Nekrasov) were still writing in November in their report "The Reliable Rear of the Dictator: The Russian Economy Amid War": "Overall, the medium-term future of the Russian economy can best be described as growth without development. The Kremlin and foreign experts’ attention is focused on the growth of quantitative indicators, which will most likely continue due to the high level of militarization of the economy and military budget expenditures. The expected GDP growth of 3.9–4% in 2024 will cause euphoria in the Kremlin and surprise in the West."
But by the end of December, it became clear to even the president of Russia that these predictions were false, and he said: "The Russian economy is expected to slow down in 2025, with the growth rate slowing by about half," and one of the authors of the mentioned report — Sergey Alekshanenko — urgently posted a video on his TG channel with the title "Russia! Stagflation is here, open the gates!"
The government cannot accelerate economic growth, and rapidly rising prices pose a threat to political stability in the country. And here, there’s no time for the independence of the Central Bank — I believe Nabiullina was pressured and realized that continuing to "spit into the wind" is dangerous, so she made a pause. I think it will last until February. If the government fails to slow price growth (which is likely), she will strengthen her bureaucratic position, and then in February, the interest rate may rise. If she doesn’t, Mishustin will strengthen his position as the "savior of the economy," and then whether the Central Bank keeps the rate or not won’t matter so much: the money will flow more and more through the treasury (let’s not forget that huge opportunities for kickbacks for state officials open up here...).
At the same time, they will introduce price regulation. Notice: Mishustin has directly stated that he urgently needs the help of the Federal Antimonopoly Service and the prosecutor's office in the fight against prices. What kind of market economy is this? A market mechanism where prices are regulated with the help of the FAS and the prosecutor’s office? And not just for natural monopolies.
By the way, about natural monopolies — or tariff deregulation
Vladimir Putin and the government are sounding the alarm about rising inflation. At the same time, they are making decisions that directly contribute to accelerating price growth.
The Federal Antimonopoly Service (FAS) has actually stopped regulating the tariffs of Russian Railways (RZD). Previously, this was one of the key mechanisms of a market economy — the regulation of natural monopoly tariffs. The FAS allowed these tariffs to rise annually at the inflation rate, usually 1-2 percentage points below inflation, to prevent inflation from being further fueled by transport costs.
RZD has succeeded in changing this position: the company will now independently adjust its tariffs in line with the growth of its internal costs. That is, starting from January 2025, RZD will use a so-called composite index ("price pressure index" or "price load index") to calculate the level of tariff adjustments — an indicator that takes into account the growth rate of the monopoly’s costs for key expenditure items and integrates these indicators into an overall index. In other words, the system of regulating monopolies, which was based on the "inflation minus" principle, will be replaced with a system where the tariffs of the monopoly are essentially unregulated. Now, Russian Railways will simply inform the regulator how much money it needs for the upcoming year. This shift in regulatory principles is actually just as important as the actual rate of growth.
In fact, Russian Railways is taking the tariff regulation function from the FAS and transferring it to itself. This will lead to the uncontrolled growth of railway tariffs, which will cause an increase in the transport component of all prices and accelerate inflation.
More specifically, military cargo will travel at the lowest tariff, while other cargo will be charged the maximum. Railway workers will proudly proclaim: we are patriots, the most important thing for the country is that we transport goods cheaply, but the rest, well, sorry, we need to survive somehow.
Shippers and passenger companies, stunned by the increased tariffs, will go to the Ministry of Finance demanding subsidies — but they won’t get them: there is no money for this.
And if monopolies can do whatever they want with prices, as long as they pay tribute to the war and its needs, inflation in Russia from such price dominance of natural monopolies will only accelerate. And no key interest rate from the Central Bank will stop this kind of inflation.
So, starting next year, it seems we are moving towards administrative regulation of inflation. That is, price setting. And price setting is the destruction of the market economy, its very core.
Price regulation in retail
And look at what else is happening. Prime Minister Mishustin, by his decree, has allowed regional authorities to enter into agreements with producers and retail chains to stabilize prices on any goods important for Russians: “The agreements being considered must include, among other things, methods to stabilize prices for goods on the domestic market. This includes reducing prices, not increasing them, and introducing maximum (limit) sizes of trade markups. Exceptions will remain for goods that already have state price regulation.”
As a result, “about 30 regional retail chains in Russia have decided to limit markups on socially significant goods to no more than 5%. The Federal Antimonopoly Service (FAS) will oversee the implementation of this decision.” But this could drive retailers to operate at a loss.
It is clear that the “socially responsible margin” will initially be set only for the group of most in-demand products: basic bread, eggs, vegetable oil, chicken, milk… But this is the same road to nowhere. The retailer starts with a narrow range of products with regulated markups, and then sets higher margins on everything else. This creates a huge gap between the “social” goods and all the others. And the population starts to grumble because there is no “social” loaf of bread at 10 rubles! It was snatched up by crafty old ladies in the morning. Other products—with compensatory markups—now have “bite-sized” prices!
Then the population demands the expansion of the list of “social” goods—and you can’t stop, otherwise, the most terrible thing happens: public discontent!
Then the chain of events goes like this: the retailer demands subsidies from the region—how else can they survive with lowered markups? No one will subsidize them; the region, burdened with many obligations, has no money for this. So the retailer starts closing stores or even going bankrupt. And then, logically, we move to the nationalization of retail: abandoned stores will be transferred to the state.
In the Soviet Union, price regulation began with bread. But when you regulate the price of bread, regulation inevitably follows down the chain: you begin regulating the price of flour, then grain, water, electricity... And then you’re off “dancing on the parquet,” without stopping. The result is always the same: the retailer remains without profit, stores close, bankruptcies, nationalization.
So this is a turning point.
"Idiots, idiots, idiots!"
This is not just Nabiullina giving up. It means that the country's leadership has realized that it cannot keep the economy afloat within the market mechanism, in the market system. So, what remains? Administrative decisions, "protecting the interests of the population." Hence the discussion about introducing ration cards for socially vulnerable groups. I can't raise pensions, but I can give out cards.
Or they will introduce, like in the Soviet era, food orders at enterprises and budget organizations. On Fridays. "Our governor is such a guy—he organizes great orders!" The people will be happy. Real life will finally begin!
Someone gifted me a wonderful dialogue, and now I love quoting it.
"— Well, now that the Bolsheviks, with the help of the NEP, have finally defeated hunger and filled the stores, they will never cancel the NEP. Are they idiots or what? — Idiots, idiots, idiots..."
What is the public's feeling? That the shelves in the stores fill up on their own. But who will actually fill them if retailers go bankrupt? Bureaucrats? They are currently cornering themselves, trying to combine market and administrative economic management. This will likely cause the economy to go haywire. And neither Nabiullina nor anyone who replaces her will be able to do anything about it...
Note that the head of the Bank of Russia has already said: we understand that the key interest rate isn't working very well, so other decisions are needed. The first: macroprudential regulation—that is, she plans to raise the reserve requirements for banks so they lend less. The second, even worse: direct regulation of corporate borrowing.
The Central Bank has already done this with consumer lending. If a borrower’s debt load exceeds 50% of their monthly budget, they cannot get a loan from a bank, only from a microfinance organization. The same will happen in the corporate sector—they will directly determine how much money a bank can lend to a borrower. This is, again, the Soviet Union, a credit plan, pure state regulation from the Central Bank, regulating credit circulation between banks and corporate borrowers. There is absolutely nothing left of a market economy here. Yes, and it's hard to even call such a borrower "corporate" anymore. A firm fulfilling a state defense order or providing components for such products is forced to comply, or else face criminal charges. What kind of market economy is there when a business owner is deprived of freedom of choice in the most important matters—what to do, whom to sell to, and at what price?
So, if we put this all together, it turns out that there are already many symptoms of the death of the market economy in Russia. How far Russia will go down this road depends on how long the war continues. And you know, I wouldn't rule out that in this backward movement from a market economy, there is also a hidden desire among some close to the government to carry out a massive redistribution of property. Through bankruptcies, including, but in favor of "certain people."
Especially since there is an example—of taking the property of foreign investors, from which those same "certain people" have made excellent profits.
To summarize: Nabiullina’s decision to leave the interest rate unchanged at 21% is not just a decision by the Central Bank’s board of directors. It is the practical conclusion of the path we have been following since around 1988, with the reformist decisions about the development of cooperative businesses (including private banks) made by Mikhail Gorbachev and Nikolai Ryzhkov. (Both of them passed away during the war.) It was from this point that the construction of a market economy in the USSR, and later in Russia, began.
And now, nearly forty years later, the trend has reversed. The command-administrative system is returning in all areas of the economy. However, this time, without the long-lost ability to plan, and also—without the prior total nationalization of all enterprises, which the state plan (Gosplan) used to enforce as a law, mandatory for execution. Therefore, the chances of success for such a hybrid economic model, in my opinion, are minimal.
