RUSSIAN Economy in CRISIS as Inflation RISES & Vehicle Sales CRASH as Impact of Sanctions Hits Home

Hinzugefügt: 2026-06-01

[00:00:03]Hi, welcome back to Joe Blogs. This video is the next in a series looking at the financial implications of Russia's invasion of Ukraine. And in today's episode, I want to talk to you about Russian inflation, what's going on with regards to the commodity markets, and the Russian car industry. One of the problems with regards to monitoring exactly what the impact of all of the sanctions are on the Russian economy is that we're now receiving very limited information from Russia. They've cut back on all of the data that they're prepared to release to the west because they claim that it exposes them to potential more sanctions. They don't want to be giving information that can be used against them. That's the theory.

[00:00:40]But the problem that we have is that the information that's coming out is very selective and it's making it more difficult to establish exactly what's going on. But the data that Russia is prepared to release is the inflation figures. And we've now seen the latest figures which show that inflation is currently running at 13.5%.

[00:00:57]So in today's episode, we'll go through exactly what's been published. We'll look at what's going on with interest rates because normally there is a very close relationship between what's happening with inflation and what's happening with interest rates. And as you'll be aware if you follow the channel, the general theory is that if you've got high rates of inflation, you should be increasing your interest rates to discourage spending and bring inflation back down. But the exact opposite is happening in Russia right now. So we'll go through some of that detail. We'll then look at some figures that have been released by Australia looking at some specific commodities and forecasting what's likely to happen to those prices over the next 12 months and that will have an impact on all economies around the world because these commodities are related to energy prices, so really important part of the makeup of inflation. So we'll have a look at what's expected to happen to those prices. We'll then have a look at what's going on in the car industry in Russia because this is a really important sector for Russia. Over the last 20 years, Russia has developed a variety of joint ventures with big car companies. They've opened plants, they've worked on design of new vehicles. There are a lot of people employed in the sector in Russia. And since the start of the war, this industry has been heavily impacted because most of the western brands who had facilities and operations in Russia have decided either to pause them or close them or just walk away entirely.

[00:02:17]And that's had a big impact, but there's also some other impacts in terms of the global supply chain, not being able to import foreign vehicles, and all of those issues relating to the affordability of new cars from the Russian people who are suffering as a result of the sanctions. So, there's a lot going on in the car industry, and this was worth over $9 billion to Russia in 2021. So, I'll give you an update on the latest figures and we'll talk about some of the issues that Russia is facing. And then finally today, I'll wrap up with my summary, so what I think the implications of all of the issues we're discussing in this video are for the Russian economy and for the global economy. So, before we get started on all of that, if I ask you for a thumbs up at some point video if you're enjoying the content. Please subscribe if you haven't done so already. I'm on that push for 200,000 subscribers. So, if you could help, that'd be great. Don't forget I always include chapters in these videos. So, if you don't have time to watch the whole thing front to back, you can just pick out the sections that you'd like to watch. And if you'd like to support the channel, please have a look below where you'll find links to YouTube super thanks and membership as well as buy me a coffee, Patreon, and Amazon shopping links. And as always, thank you so much if you have supported the channel. I really appreciate it. It does give me that extra lift, so thanks again.

[00:03:29]As you'll be aware if you follow the channel, it's difficult to be able to report directly on what's going on in the Russian economy right now because Russia has decided not to release economic data because they believe that the information being provided potentially leaves them at risk of more economic sanctions. But Russia is releasing a limited amount of information. And one thing that we are receiving is consumer price index data.

[00:03:53]And one thing that is still being made available is consumer prices or inflation. And the latest data has now been published which shows that the annual rate of inflation is now running at around 13.5%.

[00:04:04]However, consumer prices are reported to have risen for the second consecutive week, which is the first time that this has happened since May. We have a look at this chart, it shows the official movement in inflation rates in Russia over the last 12 months. So you can see that in March, which was the first full month after the invasion started, inflation shot up from 9.2% to further in April to almost 18% and since May the Russian authorities have reported a steady monthly reduction in inflation. Now as you'll be aware, most economists believe that there's a direct link between the rates of interest and the rates of inflation. And usually when you have high levels of inflation, central banks will increase interest rates to discourage spending and therefore reduce prices. If we look at what's happened in Russia during the course of 2022. At the start of the year rates were running at around 8.5%.

[00:04:56]After the invasion started, the Central Bank raised rates to an emergency level of 20% and then over the course of the last 6 months we have seen a steady reduction in those rates and the official lending rate in Russia is now 7.5%.

[00:05:13]So it's actually lower than it was at the start of 2022 despite the fact that Russia is still in a war situation and actually things are starting to get worse with regards to the mobilization and the losses and all of the other factors that we've been discussing over the last few weeks. So if we jump back to the inflation figures, the period from March through to August that we can see the large increase in inflation here represents the exact same period that the Central Bank initially increased interest rates to 20% and has now subsequently reduced them to 7.5% and all of that has happened over a 6-month period. Now, the thing with interest rates is that when you make a change, you want to step back and give it some time for everything to feed through because it generally takes time for consumers to realize what the difference is. So, if you've got an increase in your mortgage costs, you only see that at the end of the month when your mortgage is charged and then you realize that you've got less money and then if the interest rates are increased again, then it hits you again later. And so, it takes time for people to change their spending patterns. What we've seen happening in Russia is chaotic. Interest rates are increased from 8% to 20% and then subsequently reduced back down to 7.5%. So, in reality, it's very difficult for Russian consumers to actually know what's going on cuz by the time you've got one statement telling you that your mortgage interest has changed from 8% to 20%, it's then back down to another level.

[00:06:42]So, I don't actually think what's going on right now in Russia is having a direct impact on inflation because consumers are all over the place.

[00:06:50]They've genuinely will not know what their mortgage payments are from one month to the next because they've been moving so rapidly.

[00:06:59]But if we take a step back from all of the detail for a moment and just look at the bigger picture, inflation in Russia right now is running at double-digit levels. 13.5% is a high rate of inflation and that's actually a reduction from where it's been in every month for the past 6 months. And when you get that compounding interest, when it's month-on-month double-digit inflation, that means that prices are getting out of control. They are growing at a faster rate than wages are increasing. So, the cost of living is going up, the standard of living is going down. And the latest figures we've seen show that inflation is now rising again and the traditional way of dealing with rising inflation is to increase interest rates. Now, the Central Bank have just slashed their rates from 20% to 7 and 1/2% but what are they going to do next? If they follow traditional economic theory, they should start increasing rates again. But this just shows that what's going on in the economy in Russia is completely chaotic right now. They can't reduce rates from 20% down to 7 and 1/2% and then put them back up to 10% because consumers will be very confused and nobody will know what's going on and it shows that there's no consistent policy and they don't seem to have an end game as to what they're trying to achieve.

[00:08:14]Reducing interest rates dramatically over the past few months should lead to an increase in spending which would potentially lead to an increase in inflation. That's exactly what we've seen in Turkey over the last 12 months.

[00:08:28]Turkey's been reducing its interest rates and as a direct result of that, inflation is now well above 80%. So, as I said at the start of this piece, we're not actually getting a lot of detailed information through from Russia. We're getting bits and pieces here and there and having to piece together exactly what's going on. But when you look at what's happening with regards to the interest rates in the country and inflation, the words and pictures don't really match. A massive reduction in interest rates should lead to higher inflation. We're seeing reducing inflation albeit it's leveled off at the moment and then when you factor in all of the economic sanctions that have been applied against Russia, the cost of imports has risen because they've got a limited number of markets where they're able to buy products from and so they're having to pay more for those imports and that's not really reflected in the figures that we've seen. I would have expected to see inflation rising at much higher levels in Russia right now because of what's going on in the economy. So, it tells me that prices are either being subsidized centrally by the government to keep them at lower levels or these figures are not 100% accurate.

[00:09:35]The automotive industry in Russia has been heavily impacted by the sanctions applied by the West. Russia does have a variety of its own brands with the most famous being Lada, but over the last 20 years or so, the industry has really grown through a series of joint ventures. A lot of the multinational car companies saw Russia as an attractive market both for sales and also to set up facilities and prior to the invasion of Ukraine, a number of big players had production lines in operation. Following the announcement of the invasion on the 24th of February, all of the Western car brands suspended their operations in Russia and many of them have subsequently pulled out entirely. This has had a triple whammy impact on the Russian car industry. Firstly, the number of cars that Russia is producing has fallen dramatically because these plants have all been closed or suspended. Secondly, the Russian industry is unable to source essential parts and equipment for the completion of new cars. The automotive industry is a true global supplier and specialist parts and equipment are produced in plants all over and shipped backwards and forwards. And the imposition of the sanctions has meant that Russia has been unable to get a lot of those vital parts and therefore it hasn't been able to complete the production of the cars that are still operating. Because if you're unable to get your specialist brakes or your steering wheel or your chassis, then that means that you can't complete the building. It's a very difficult and complex operation to be able to replace a specialist part. And the third major impact on the industry is that the importation of all cars from the West has now stopped. And that's meant that dealerships in Russia that were focused on overseas brands are no longer able to source any of those cars and therefore have no business. This chart shows the automotive sales volume in 2021 and 2022. The 21 figures are in gray and the 22 figures are in blue. Now if we start off by looking at January and February, you can see that the sales figures in both months in 2022 were actually below the 2021 levels. And this was as a direct result of the problems that were being experienced in the automotive sector as a result of the COVID pandemic. The closure of a lot of factories all around the world led to a shortage of microchips. And as we've discussed before on the channel, microchips today are used in a variety of different industries, so they are in hot demand. And as the volume of microchips that were available reduced, this had a really negative impact on the car industry. And a lot of car manufacturers were unable to actually complete the production of their vehicles because they couldn't get hold of one or two essential chips. So, this shows how sensitive the manufacturing process can be. If you're missing one single component, that can stop you from completing that car and therefore not being able to sell any of those vehicles. So, at the start of 2022, the industry was already on the back foot because of this ongoing shortage of microchips. However, if you look at what's happened following the invasion of Ukraine, sales for the automotive sector in Russia have fallen off a cliff. In March 2021, around 150,000 units were sold in Russia. However, in 2022, the figure had fallen to around 55,000.

[00:12:46]In April, sales fell to around 35,000 units. And in May, it was down to around 25,000, which represented a year-on-year fall of around 80% in sales volumes. Now, you can see that in June, July, August, and September, there has been a gradual increase. However, the figures for September are around 60% lower than they were for 2021.

[00:13:12]And this industry is an important contributor to the economy of Russia. In 2021, total sales came in at more than 9 billion dollars. And it's estimated that for 2022, that figure could be as low as 4 billion dollars. So, at face value, it looks like a five billion dollar hit to the Russian economy. But, the actual situation is significantly worse than that. Because hundreds of thousands of people were employed in this sector, their livelihoods, their income, their wealth was entirely dependent on this sector. Now, when a lot of the overseas manufacturers such as Ford, General Motors, Renault decided to close all of their plants, that meant that all of these people's jobs were suddenly at risk. Now, the Russian state has nationalized some of these enterprises.

[00:13:56]But, the problem that they've got is it's not as straightforward as just re-employing all of the staff and carrying on building these brands.

[00:14:03]Firstly, the overseas brands won't allow you to use their mark anymore. So, you're going to have to change the cars that are coming off the production lines. And secondly, as I mentioned a moment ago, you just can't get the parts and the equipment to actually complete the vehicles. So, there's a real logjam in terms of actually being able to make anything. So, that means that all these people who were previously employed by overseas companies no longer have a job.

[00:14:27]And so, they're having to be state-sponsored. So, the actual impact on the economy is much greater than just the loss of sales. It's the loss of income for all the people who were working in it. And then, the associated ripple effect because those people spend in their local economy and increase the volume of money. And if they're not spending, then it will have the opposite impact on the local economy, which will start to contract.

[00:14:50]And in terms of what are the most popular car brands in Russia right now?

[00:14:53]Well, this is really down to the choice of what's actually available. If we look at this list that shows the top-selling cars for September 2022, you can see that right at the top of the list is the Russian brand Lada, which currently has a 44% share of all cars being sold.

[00:15:09]Hyundai is the second most popular brand with 8.3% Russian brand GAZ has a similar percentage. The Chinese brand Haval has around 7.3% Kia, which is South Korean, has around 7.1% share. The Russian brand UAZ holds around 5.4% and Chinese brand Geely has a similar figure. So, you may not be familiar with many of these brands.

[00:15:31]They're not household names. They're not big sellers outside of Russia and China.

[00:15:36]But from Russia's perspective, this is what life looks like in the new world.

[00:15:40]The Western sanctions that are applying against the Russian economy mean that they're no longer able to access a lot of the household familiar brands, such as BMW and Ford and General Motors and Daimler. So, they're now predominantly going to have to focus on Russian and Chinese cars.

[00:15:58]And from the economic perspective, it's likely that that will have a damaging impact on the Russian economy because there isn't massive global demand for the export of Russian cars. And one of the other really important factors here is that car manufacturing is a really high fixed cost business. It costs a lot of money to set up the plants, to do all the design work, to get everything in place. And in order to make a profit, you need to sell large volumes of those vehicles. That's how the car manufacturing industry works. So, the problem that Russia has is they're going to need to hit really big volumes of all of their car companies in order to make profit. And because their markets are now much more limited, it's going to be more difficult. And they will struggle to be able to maximize their profits in China because China is a cost-sensitive market. And if they're wanting to buy premium brands, it's unlikely that it will be Russian imports. It's more likely to be German and American cars that will attract the premium.

[00:16:56]As part of its latest quarterly report, the Australian government has released commodity forecasts for the period through to June 2024. And this chart shows the forecast for five set And this chart shows the forecast for five different commodities: iron ore, liquefied natural gas, coking coal, thermal coal, and lithium. The blue bars that you can see on the chart represent the periods of June 22. The red bars represent the forecast for the period through to June 23 and the green bars the year to June 24. Australia is currently ranked as the world's largest exporter of iron ore, coking coal, liquefied natural gas and lithium and is ranked second in terms of thermal coal.

[00:17:37]The report has taken into account all of the sanctions that have been applied against Russia and expects that exports of crude oil, coal and liquefied natural gas will become stranded as a result of the sanctions and this will drive up global prices. Iron ore is Australia's top resources export but the government expects revenue to drop in 2023 and to fall further in 2024 even though volumes are expected to rise and this will be as a direct result of a softening in the property market in China which has been a big driver of demand for iron ore and that demand has been pushing up global prices historically. As that demand starts to fall we will see global prices for iron ore starting to come back down. And the forecast revenues for coking coal which are also expected to fall in 23 and 24 are linked directly to the reduction in iron prices as a lot of it is used in heavy industry. So the forecast increase in revenues in Australia for LNG in 2023 are a result of an increase in demand and also an increase in global prices.

[00:18:40]And a similar situation is expected for thermal coal which is used in power stations around the world so it will be an alternative to gas. Now one of the most interesting findings from this report is that as a result of the energy crisis that's currently gripping the world, the Australian government is expecting a huge increase in a drive towards renewable energy and batteries and lithium is an important component in many of those batteries so it sees a big increase in demand and a big increase in price for lithium. So the overall summary from these forecasts is that for the next 12 months, we're expecting to see increases in prices in liquefied natural gas, thermal coal, and lithium.

[00:19:19]All of which are really important to the energy sector globally. Prices are forecast to come down for iron ore and coking coal as a direct result of the contraction of the property sector in China, which has been fueling demand for those products globally. So, the key takeaway here is that unfortunately for the next 12 months or so, it's likely that we will see prices of critical commodities remaining high all around the world. And of course, that's bad news for global inflation, which is already running at record levels in a lot of countries today. And that inflation is likely to persist even if we see increases in interest rates because the demand and supply for these products is global.

[00:20:00]So, what's the summary and conclusion today? Well, I wanted to post this video for a number of reasons, but what's going on with regards to Russian inflation is really quite puzzling.

[00:20:10]Because as we've discussed many times before, if you've got high rates of inflation, then the way to tackle that is to increase your interest rates. And what we saw at the start of this war was entirely in line with that theory.

[00:20:22]Inflation in February was 9.2% and it jumped to 16.7% in March. And in direct response to that, the Russian Central Bank increased interest rates from 8.5% to 20%. So, that was a really aggressive way of trying to tackle the massive spike in inflation. Now, inflation actually increased in April, but that's not unexpected because as I mentioned earlier in the video, it takes time for an interest rate change to feed through.

[00:20:49]People need to find out what the new mortgage payments are, they work out their budget, they work out that they need to cut back on spending. And over the following few months, we saw inflation starting to come back down gradually. So, it was coming back down by around 1% per month. So, the strategy was working in terms of increase interest rates, everybody then has to reduce their spending, and inflation comes back down. But, what the Central Bank has done over the last 6 months is really, really unusual, because they have cut that interest rate back from 20% down to 7.5%.

[00:21:25]So, it's actually now lower than it was before the war started. Now, usually one of the reasons why a Central Bank will cut interest rates is if it wants to boost the economy. It wants to encourage people to spend because the economy is slowing down. Now, that is obviously happening in Russia. We have seen a massive contraction in the economy. But, what we haven't seen is a massive reduction in inflation. So, the Central Bank has slashed interest rates, but the rate of inflation is currently at 13.5%.

[00:21:54]So, that's actually incredibly high. So, what we're now seeing is that inflation is starting to go back up again at the same time as the economy continues to contract. And the problem that the economy's got is that a lot of the contraction is being forced upon it by the sanctions. So, changing the rate of inflation in the country won't have any impact on the growth because external factors are strangling growth. But, the rate of interest will have a direct impact on the rate of inflation, and it seems really, really bizarre that the Central Bank is cutting that rate of interest whilst inflation is still so high. And my gut feeling this whole situation is that the figures that we're receiving are not giving us all of the data that we need. Russia is selectively releasing information to the market, and one of the reasons that it's releasing inflation data is that that is something that people can calculate. People in Russia can report what the price of a tin of beans or a loaf of bread is, and that can be measured month on month. So, it's relatively easy for market commentators to be able to work out what the rate of inflation is because everybody knows what the price of all of these items is, and so you just have to feed it into your spreadsheet and wait for the results to spit out. So, Russia is taking control of that information flow and handing everybody what it says is the official rate of inflation. But, the words and pictures don't really match. Why would you introduce a huge hike in interest rates to try to address rising inflation and then follow that up with a massive reduction in rates whilst inflation remains high. It just doesn't make any sense. So, either the authorities in Russia are subsidizing a lot of these prices to try to keep inflation to what they see as an acceptable level, even though there's a lot of external pressure for these prices to rise higher, or the data that we're getting just isn't accurate. But, one way or another, it doesn't feel right that what the Central Bank is doing and what these figures are saying seem to give us two completely different messages. Now, in terms of what's going on with regards to the automotive industry in Russia, there are some serious problems in this sector. This was a big employer historically, and Russia was developing all of its brands and all of its business, all of its technology, all of its learning through joint ventures. So, this is a great example of how an interconnected world can work really well. After the breakup of the Soviet Union in the early '90s, Russia had a relatively small, inexperienced car industry, and it was able to develop and nurture that industry over the last 20 years alongside some of the big global players. And what's happened since the invasion of Ukraine is all of those players have pulled out and left Russia on their own. And the problem you've got today is that it's very difficult to be a global player if you're just working in isolation, because you don't get the benefit of all of the technological developments, all of the experience of all of the designers, and you don't get the global market. And that's the biggest problem that Russia's facing right now. When it was working with all of the big boys, it was able to sell cars all over the world and also import all of the big brands into Russia. Right now, Russia can't import any of those brands and it doesn't have the export markets. And for something like car manufacturing, you need to be global.

[00:25:06]You need to be getting volume of sales to make profit for make it a viable entity. So, Russia is really suffering right now. It's also suffering from the fact that it can't source certain parts and equipment to be able to complete those cars. And there's lots of stories circulating about cars being sent off the production line without certain braking systems or airbags or various things that they just can't source. So, they're just removing those pieces of equipment from the cars and sending them out semi-built. So, if you're a consumer in Russia, that's an unsatisfactory outcome because you're getting a substandard product even though you're still having to pay full price for that.

[00:25:43]But, the bottom line here is that this will have a big impact on the Russian economy. It will see a massive fall in revenue from the automotive sector. And as I mentioned earlier in the video, it's not just the sales of those vehicles. It's all the associated salaries and everybody that's related to the industry who will suffer and that then means we see a general contraction in the economy because people have got less money to spend and so you have a contracting impact. And then finally today, we've had more bad news in terms of commodity prices. The price of liquefied natural gas, coal, and lithium is expected to stay high for at least the next 12 months. And all of those prices feed into the energy sector and will further fuel high inflation. We've got problems with inflation all across the world right now. We need to bring inflation back down, otherwise we're going to see more and more increases in interest rates, which is going to cause more pain for everybody with debt and cause more problems with regards to the global economy. So, the fact that commodity prices are staying high is good if you're a producer of commodities. So, from an Australian point of view, it's a benefit because they can sell more at a higher price.

[00:26:47]But, for everybody else, for all of us consumers, it's bad news because those high prices will need to be passed on by the users of those commodities. Those users are the energy companies, so therefore our energy bills will continue to stay high, and that means less money for us, less disposable income, and the higher cost of living. So hopefully you've enjoyed today's video, you found it interesting, informative, and thought-provoking. If you've liked what I've said, then please give me a thumbs up, and don't forget to subscribe if you haven't done so already.