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Vladimir Putin is running Russia’s economy dangerously hot

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The history of inflation in Russia is long and painful. Following the revolution of 1917 the country dealt with years of soaring prices, and then faced sustained price pressure in the early period of Josef Stalin’s rule. The end of the Soviet Union, the global financial crisis of 2007-09 and then Vladimir Putin’s first invasion of Ukraine in 2014 also brought trouble. Fast forward to late 2023, as the war in Ukraine nears its second anniversary, and Russian prices are once again accelerating—even as inflation eases elsewhere (see chart).

image: The Economist

According to figures published on December 8th, inflation in November was 7.5%, year on year, up from 6.7% the month before. The central bank dealt with a spike in early 2022, soon after Russia invaded Ukraine for a second time. Now, though, officials worry that they may be losing control. At the bank’s last meeting they raised interest rates by two percentage points, twice what had been expected. At their next one on December 15th a similar increase is on the cards. Most forecasters nonetheless expect inflation to keep rising.

Russia’s inflation of 2022 was caused by a weaker rouble. After Mr Putin began his invasion the currency fell by 25% against the dollar, raising the cost of imports. This time currency movements are playing a small role. In recent months the rouble has actually appreciated, in part because officials introduced capital controls. Inflation in prices of non-food consumer goods, many of which are imported, is in line with the pre-war average.

Look closer at Mr Putin’s wartime economy, however, and it becomes clear that it is dangerously overheating. Inflation in the services sector, which includes everything from legal advice to restaurant meals, is exceptionally high. The cost of a night’s stay at Moscow’s Ritz-Carlton, now called the Carlton after its Western backers pulled out, has risen from around $225 before the invasion to $500. This suggests that the cause of inflation is home-grown.

Many economists blame government outlays, which are soaring as Mr Putin tries to defeat Ukraine. In 2024 defence spending will almost double, to 6% of GDP—its highest since the collapse of the Soviet Union. Mindful of a forthcoming election, the government is also boosting welfare payments. Some families of soldiers killed in action are receiving payouts equivalent to three decades of average pay. Figures from Russia’s finance ministry suggest that fiscal stimulus is currently worth about 5% of GDP, a bigger boost than that implemented during the covid-19 pandemic.

This, in turn, is raising the country’s growth rate. Real-time economic data published by Goldman Sachs, a bank, point to solid growth. JPMorgan Chase, another bank, has lifted its GDP forecast for 2023, from a 1% decline at the start of the year, to 1.8% in June and more recently to 3.3%. “Now we confidently say: it will be over 3%,” Mr Putin recently boasted. Predictions of a Russian economic collapse—made almost uniformly by Western economists and politicians at the start of the war in Ukraine—have proven thumpingly wrong.

The problem is that the Russian economy cannot take such rapid growth. Since the beginning of 2022 its supply side has drastically shrunk. Thousands of workers, often highly educated, have fled the country. Foreign investors have withdrawn around $250bn-worth of direct investment, nearly half the pre-war stock.

Red-hot demand is running up against this reduced supply, resulting in higher prices for raw materials, capital and labour. Unemployment, at less than 3%, is at its lowest on record, which is emboldening workers to ask for much higher wages. Nominal pay is growing by about 15% year on year. Companies are then passing on these higher costs to customers.

Higher interest rates might eventually take a bite out of this demand, stopping inflation from rising more. An oil-price recovery and extra capital controls could boost the rouble, cutting the cost of imports. Yet all this is working against an immovable force: Mr Putin’s desire to win in Ukraine. With plenty of financial firepower, he has the potential to spend even bigger in future, portending faster inflation still. As on so many previous occasions, in Russia there are more important things than economic stability.

 

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Vladimir Putin is in a painful economic bind – The Economist

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Vladimir Putin is in a painful economic bind  The Economist



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Which items will be tax-free under the Liberals’ promised GST/HST break?

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The government on Thursday announced a sweeping promise to make groceries, children’s clothing, Christmas trees, restaurant meals and more free from GST/HST between Dec. 14 and Feb. 15.

“Our government can’t set prices at checkout, but we can put more money in people’s pockets,” Trudeau said at a press conference announcing the measures.

The government says removing GST from these goods for a two-month period would save $100 for a family that spends $2,000 on those goods during that time. For those in provinces with HST, a family spending $2,000 would save $260.

Thursday’s announcement also included a rebate for Canadians who worked in 2023 and made less than $150,000, totalling $250 per person.

Here are the items that will be GST/HST-free if the Liberals’ legislation passes.

Groceries

Many grocery items are already tax-free. The Canada Revenue Agency considers most food and beverages to be “basic” grocery items, such as produce, bread, cereal, canned and frozen food, eggs, coffee, milk, and meat.

However, certain categories, like carbonated drinks, candies and snack foods, are taxed.

The government’s tax break will apply to certain items that normally are subject to tax.

These include prepared foods such as vegetable trays and pre-made meals, as well as snacks such as chips, candy and granola bars.

Carbonated beverages, water bottles fruit juices and juice crystals are included, as are ice cream products and baked desserts like cakes and pies.

The government says its tax break will mean “essentially all food” will be GST/HST-free.

Alcohol

The tax break will also apply to alcoholic beverages below seven per cent alcohol by volume, including beer, wine, cider, and pre-mixed drinks.

Normally, all alcoholic drinks are taxed.

Restaurants

Restaurant meals will also be subject to the tax break. It will apply whether you’re dining in, taking food to go, or ordering delivery.

Children’s items

Children’s clothing, including baby bibs, socks, hats and footwear, will qualify for the tax break. So will children’s diapers and car seats.

Children’s footwear and clothing used exclusively for sports or recreational activities will not be included in the tax break. This includes costumes.

Children’s toys will be included in the tax break as long as they’re designed for use by children under 14 years old. These could include board games, dolls, card games, Lego, Plasticine and teddy bears.

Printed goods

Print newspapers will be included in the tax break, but electronic or digital publications will not.

Most flyers, magazines, inserts and periodicals will be excluded.

Printed books will be included in the tax break, including religious scripture. Audio books where 90 per cent or more of the recording is a reading of a printed book are included.

Printed items that aren’t subject to the tax break include magazines where advertisements take up more than five per cent of total printed space, sales catalogues and brochures, books designed for writing on, event programs, agendas and directories.

Other

Christmas trees, natural or artificial, will be included in the tax break.

Puzzles and video game consoles are also included.

This report by The Canadian Press was first published Nov. 21, 2024.

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In Russia's War Economy, The Warning Lights Are Blinking – Radio Free Europe / Radio Liberty

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In Russia’s War Economy, The Warning Lights Are Blinking  Radio Free Europe / Radio Liberty



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