Living in a Wartime Economy

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‘Life Continues’

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What’s the war doing to Russ= ia’s economy? Sergei Guriev on the impact of sa= nctions on everyday life, Putin's war machine, and the stability of his= regime.

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Vitolda Klein

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The wealthiest countries in the= world moved, at the recent G7 summit in Hiroshima, to impose new sanct= ions on Russia. Their original sanction= s, leveled immediately after Russia invaded Ukraine last year, included= freezing state assets abroad, cutting off Moscow from the international pa= yment system, and seizing the foreign property of Vladimir Putin’s as= sociates and Russia’s oligarchs= .

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But the new sanctions show resilie= ncy in the Russian economy since: Moscow has managed to evade them by impor= ting goods through neighboring countries and allies, and also by using dece= ptive shipping technology to sell oil at prices higher than the limit set b= y the West. The International Monetary Fund is meanwhile predicting a sligh= t rise in Russia’s GDP this year, and its inflation rate is 2.3 perce= nt—lower than almost every Western country’s. Still, it’s= tough to get a clear picture of the Russian economy, because Moscow is mak= ing increasingly more data classified, and Russian banks have stopped publi= shing a lot of financial information. So how do things really stand?

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Sergei Guriev is the provos= t of the Paris Institute of Political Studies (Sciences Po), the former chi= ef economist at the European Bank for Reconstruction and Development (EBRD)= , and the former rector of the New Economic School in Moscow. Before fleein= g to France in 2013, Guriev was a speechwriter and advisor to the former Ru= ssian president Dmitry Medvedev. As he sees it, Russia’s economy is b= attered but not broken. The country is much more isolated than it was befor= e the war in Ukraine, yet it’s still trading with China and other cou= ntries. In local stores, people can’t get top-quality Western goods a= nymore, but the shelves aren’t empty. Still, Guriev says, the sanctio= ns are causing a meaningful shortfall in government revenues. So it’s= unclear how Putin will end up balancing spending between the war and prior= ities at home, and how popular feelings will end up responding—to the= war, and to Putin himself.

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Michael Bluhm: Many economi= sts saw the sanctions imposed after the invasion as unprecedented and tough, but it’s clear Moscow has b= een able to dodge some of them. What effect are they having on the Russian = economy?

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Sergei Guriev: Suppose, in = a parallel universe, Putin invaded Ukraine in February 2022, and the West s= aid, We’re busy with other things, so we’ll do the same thin= g we did in 2008 when Russia invaded Georgia: We won’t level any sanc= tions. If that’d happened, Putin would have had hundreds of billi= ons of dollars in Russia’s sovereign wealth fund. He’d have no = constraints on buying important military equipment. He could import America= n, French, or German equipment and produce more guns and rockets with the c= ash in the sovereign wealth fund. The war would have turned out very differ= ently.

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The sanctions have significantly l= imited Putin’s ability to kill Ukrainians; they’ve changed the = game; they’ve kept him from winning the war.

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At the same time, the Russian econ= omy isn’t in ruins. Putin is still in the Kremlin, and the war contin= ues. Russia has a lot of resources and a lot of borders it can use to evade= sanctions. It has a lot of competent policy-makers too. And the world is not united: The West is united, bu= t other countries say, It’s not our war; we’re happy to cont= inue trading with Russia.

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As you say, Russia has been able t= o dodge sanctions, but they’ve still brought a lot of costs for Russi= a: There’s a cost to buying second-rate technology. There’s a c= ost to buying European goods through India or China. There’s a cost t= o going through shadow banks and the informal sector—economic activit= ies that aren’t formally registered. There’s a cost to buying o= utdated oil tankers and losing oil in transit. All cross-border transaction= s are more expensive for Russia now.

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All that adds to the financial bur= den of the war—which means Putin has less money to kill Ukrainians. A= nd this is the goal of the sanctions. We know he won’t change his min= d, but we can change what resources he has.

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In December, the West enacted an e= mbargo on oil imports to Europe and a price cap of $60 a barrel for Russian= oil sales worldwide. These sanctions arrived late, but they were as signif= icant as they were unprecedented. They reduced Putin’s oil and gas re= venues, and that’s had a major impact, with the Russian budget now fa= cing a huge deficit.

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Inflation isn’t out of contr= ol. The declines in GDP and living standards have been very limited. But al= l that’s because Russian policy-makers are more competent than policy= -makers in Iran or Venezuela. Yet have sanctions limited Putin’s fina= ncial and technological capacity? Yes, they have.

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Bluhm: You mention the cap = on oil prices set by the West. Russia has long depended on exports of oil a= nd natural gas for a lot of its revenues. The volume of energy exports has = fallen since the war began, but higher oil and gas prices have meant only a= modest decline in revenue. Still, some= have said that cutoffs in gas production could present long-term probl= ems for the industry. What’s the state of Russia’s energy secto= r right now?

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Guriev: At the beginning of= the war, Russian oil production went down by about 20 percent, but the ris= e in oil prices after the invasion compensated for the drop. Global oil pri= ces are lower today than a year ago. That’s bad for Putin.

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Now, the goal of oil price cap isn= ’t to reduce Russia’s oil exports. The West wants to maintain t= he supply of oil on the global market to avoid an explosion in prices. So t= he goal is to keep Russian oil on the market—but at a lower price. =09=09=09=09=09=09=09=09=09=09=09=09=09=09=09

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And it’s working. In the fir= st quarter of 2023, the Russian state budget’s oil and gas revenues w= ere 40 percent lower than a year ago.

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For Russia, gas is much less impor= tant than oil. In the year before the war, gas-export revenues were about a= third of oil-export revenues in the Russian budget. The main thing is oil.=

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Gas was, it’s true, an interesting story, because Putin beli= eved he could use gas exports to Europe as a weapon to force the West to gi= ve up sanctions. Last summer, Putin reduced gas supplies to the West—= but he lost the bet. Europe used to import 40 percent of its gas from Russi= a; now it’s about 5 percent—and Europe is okay. For example, Ge= rmany now imports zero Russian gas, zero Russian coal, and zero Russian oil= —and it hasn’t had an economic recession.

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Peter Burdon

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More from Sergei Guriev a= t The Signal:

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“The economy won&rsq= uo;t be fully isolated. Whatever happens, China will continue to trade with Russia. But Russians will= be driving Chinese cars—and that’s a big disappointment for a = lot of Russians. Their country’s automotive industry is in terrible s= hape. As for everyday life, even if consumption is 10 percent below pre-war= levels, it’s not a disaster. There is no famine. There is no real in= terruption of normal life. The Russian government is now facing a major def= icit, so it’ll have to do something serious, like austerity measures&= mdash;cutting spending, for instance—which’ll have a negative i= mpact on growth. The government might borrow from domestic banks, but that&= rsquo;ll have a crowding-out effect—meaning, there’ll be fewer = loans and higher interest rates for the private sector. All that’ll e= ventually have a negative impact on growth too. Nobody’s happy in Rus= sian business today, except for weapons producers.”

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“Putin started the w= ar saying, I will not resort to mobilization; only volunte= ers will fight. But there are no volunteers who want to fight this war = without pay. That should be extremely clear. Some people say the war is ver= y popular in Russia, but we haven’t seen anyone who wants to fight in= it without being paid a lot of money. In September 2022, Putin said, Ac= tually, I don’t have enough money to pay very much, so I’m mobi= lizing the Russian population—which is to say, forcing Russians t= o go to war. This changed how the war is fought, because draftees aren&rsqu= o;t very skilled—and they aren’t very motivated. The budget def= icit is also affecting Russia’s material capabilities. Yevgeny Prigoz= hin, the head of the Russian mercenary organization Wagner Group—whic= h has done most of the recent fighting for Russia—just recorded an an= gry video of himself saying, I lack ammunition. There’s a massive = shortage. I call on the minister of defense and all authorities to provide = me with more. Wagner is the best-equipped group out there. If he compla= ins, you know Russia is facing real economic constraints. Which is extremel= y important for the war. Every dollar Putin doesn’t get is one less d= ollar he can spend producing weapons, buying Iranian drones, buying North K= orean rockets, and so on.”

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“A ‘spin dicta= tor’ like Putin would rely on hidden repression, hidden cens= orship, and the manipulation of information—but doesn’t engage = in open, mass repression. That’s completely changed now. During the f= irst week of the war, he closed all remaining independent media, introduced= open censorship, and arrested people for protesting the war—even peo= ple who’d just held up empty sheets of paper or laid flowers at the m= onuments of Ukrainian writers. Putin has shifted to a mode of governance no= w under which people are scared. Their fear is public. And he’s makin= g this shift very clear; he’s using very different language, talking = about going after fifth columns and national traitors, which was Adolf Hitl= er’s rhetoric. We don’t know whether this regime will ultimatel= y collapse. But we shouldn’t think Russians love this war just becaus= e they don’t show up in the streets to protest.”

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= Continue reading ...

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The Signal explores urgent qu= estions in current events around the world—to support it and for full= access:

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