I posted a scary comment today by bne IntelliNews columnist Les Nemethy that basically says stagflation is here and the economic situation is already running out of control.

Things in Russia are worse than they seem, but that is not all due to the war. Russia’s economy officially contracted by 4% in June, but the cash flows through the Central Bank of Russia (CBR), a good proxy for economic activity, were down by 7.6% in the same month. Despite the seemingly positive economic numbers released by Rosstat recently, the economy is hurting more than it shows.

The Kremlin and financial management team are doing a good job of applying bandages to soothe the worst pain and the regular people are still relatively content, taking the latest of many many shocks in their stride. Putin’s war-time propaganda seems to have effectively steeled the population to bear a bit of pain for the sake of the Motherland.

Not so in many other countries. Inflation is out of control nearly everywhere (see the Hungarian report in today’s list and Moldova just announced inflation there has hit a 23-year high this morning). Emerging Europe is actually ahead of the developed part in terms of tightening, as central banks bite the bullet and aggressively hike rates. Ironically the only place in Europe where inflation is now falling is in Russia.

The US is now slipping into recession with inflation over 8% and growth a negative 1.6% in the first quarter. The Fed is unwilling to tighten because that will cause a nasty recession just ahead of elections next year. I read that every president that contested an election during a recession has lost.

Elsewhere there have already been cost of living riots in Albania and other poorer countries in southeastern Europe are also seeing dissent. Even in the UK things have become so bad that people are reducing the amount of food they eat. And in Africa, which we now cover (take a two week trial here), we are seeing an increasing number of food and fuel riots as poor people sink below the surface thanks to rising costs.

Worse than that there is an increasing amount of talk that Germany’s economic model – buy cheap Russian gas and use it to make cheap, quality widgets for export – has been permanently broken. The country has already launched a campaign to get business and the population to reduce energy use and is revving up to introduce energy rationing this autumn. If Russia doesn’t turn the gas back on after the Nord Stream 1 repairs are finished on July 21 – something that looks increasingly likely – then it will need to.

A broken Germany is a mind bogglingly dramatic change if it is borne out. (Germany has the option of course to switch over entirely to cheap green energy, which it will do eventually but it will take time.) It will wreck all of Europe due to the knock-on effects.

These are seismic changes and clearly the next few years are going to be very unpleasant indeed. But what did everyone expect? Declaring economic war on Russia just as the world was already suffering from a polycrisis (the coronavirus has not gone away yet) was asking for trouble and Russia is showing that it is not going to be a pushover in this part of the conflict. The assumption that the west could attack Russia without doing any damage to itself is frankly naïve but spawned from the decades of belittling Russia and its economic power. It may have an economy smaller than that of California’s but taking it out of the global supply chain has a much bigger impact it seems. Just how bad it will get remains to be seen. Check back here in November when we are all freezing in unheated homes – well, it won’t be that bad, but you get the point.

Finally, to highlight another harbinger of doom, Fitch downgraded Belarus ratings to one notch ahead of default. This follows Russia’s default and traders report more and more emerging market bonds are getting into trouble. Some good news is Naftogaz paid its $36mn bond coupon after all yesterday. There were some concerns that it would at least ask for a restructuring to “preserve cash” but made the (right) decision to ante up in the end. I make our report, behind the paywall, available here for you. This will come up again when Kyiv has to make a much bigger $2.2bn redemption payment on a sovereign bond in November.

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