After Russia’s invasion of Ukraine in February, the Russian economy seemed headed for collapse. International sanctions have threatened to strangle the economy, causing the price of the ruble and Russian money markets to fall. Ordinary Russians seemed to be in a position of deprivation.
More than 8 months after the war, this situation has not materialized. In fact, some knowledge suggests that it is quite the opposite, and the Russian economy is doing well. The ruble has strengthened against the dollar and Russian GDP has declined, the contraction possibly limited to less than 3% in 2022.
However, look at the moderate figures of GDP contraction and inflation, and it becomes transparent that the damage is really serious: the Russian economy is destined for a long era of stagnation. The state was already intervening in the personal sector before the war. This trend has only intensified and threatens to further stifle innovation and market efficiency. The only way to maintain the viability of the Russian economy is through primary reforms, which are not in sight, or through an institutional disruption similar to what happened with the fall of the Soviet Union.
Some of the false impression of what sanctions against Russia would accomplish can be explained in part by unrealistic expectations about what economic measures can do. Simply put, they are not the equivalent of a missile attack. Yes, in the long run, sanctions can weaken the economy and reduce GDP. But in the short term, all we can expect is a big drop in Russian imports. It is natural for the ruble to rather weaken as demand for dollars and euros falls. If it would have been spent on imports is redirected to domestic production, GDP really deserves to accumulate rather than fall. The effect of sanctions on intake and quality of life takes longer to be felt in the economy.
At the beginning of the war, in February and early March, the Russians rushed to buy dollars and euros to protect themselves from an imaginable fall of the ruble. Over the next 8 months, with the increase in Russian losses in Ukraine, they bought even more. Normally, this would have caused a significant devaluation of the ruble because when other people buy foreign currency, the ruble plummets. However, due to sanctions, corporations that imported goods before the war stopped buying foreign currency to finance those imports. As a result, imports fell by 40% in the spring. One of the consequences was that the ruble strengthened against the dollar. In short, it’s not that sanctions haven’t worked. On the contrary, its short-term effect on imports has been strangely strong. No such drop in imports was expected. If Russia’s central bank had expected such a big fall, it would not have imposed serious restrictions on dollar deposits in March to save it a cave. in the price of the ruble.
Economic sanctions, of course, have had other immediate effects. Limiting Russia’s access to microelectronics, chips and semiconductors has made the production of cars and planes nearly impossible. From March to August, Russian car production fell by 90% and aircraft production similar. The same applies to arms production, which is, of course, a very sensible precedent for the government. Expectations that the industry’s new routes through China, Turkey and other countries that are not part of the sanctions regime would make up for the loss. of Western imports have been shown to be incorrect. The abnormally strong ruble is a sign that the backdoor import channels are not working. If imports came to Russia through hidden channels, importers would have bought dollars, reducing the ruble. The long-term suitability of Russia’s high-tech industry is disastrous.
Even more important than Western tech sanctions is the fact that Russia is undoubtedly entering a steady stage where political cronies are consolidating their grip on the private sector. It took a long time to do it. After the 2008 global currency crisis hit Russia harder than any other G-20 country, Russian President Vladimir Putin became a large nationalized company. In some cases he placed them under the direction of the government; in other cases, he placed them under the consistent view of state banks. To remain in the government’s smart grace, those corporations were expected to have surplus personnel on their payroll. Even corporations that stayed consistent with the personal were forced to ban layoffs. This has provided economic security for other Russians, at least for now, and this stability is an essential component of Putin’s pact with his constituencies. But an economy where corporations can’t modernize, restructure and lay off people to increase profits will stagnate. Not surprisingly, Russia’s GDP expansion from 2009 to 2021 averaged 0. 8% over the previous year, which is a decline from the constant period of the 1970s and 1980s before the fall in Soviet Union.
Even before the war, Russian corporations faced regulations that disfavored them from investment. High-tech industries such as energy, shipping and communications, meaning those that would have benefited the most from foreign generation and foreign investment, faced the greatest constraints. To survive, corporations operating in this area have been forced to maintain close ties with government officials and bureaucrats. In return, those government protectors made sure those corporations faced no competition. They banned foreign investment, passed laws imposing heavy burdens on foreigners doing business in Russia. and opened investigations against corporations that operate without government protection. The result was that government officials, army generals and high-ranking bureaucrats, many of whom were friends of Putin, have become billionaires. The popular way of life of Russians, on the other hand, has not taken a step forward in the last decade.
Since the beginning of the war, the government has further tightened its control over the personal sector. Starting in March, the Kremlin enacted laws and regulations that give the government the right to close businesses, dictate production decisions and set costs for manufactured goods. The large mobilization of army conscripts that began in September gives Putin another power to wield over Russian companies, because to maintain their workforce, business leaders will have to negotiate with government officials to make sure their workers are exempt from conscription.
To be sure, the Russian economy has long operated under the influence of the government. But Putin’s recent maximum moves are taking that to a new level. As economists Andrei Shleifer and Robert Vishny have argued, the only thing worse than corruption is decentralized corruption. It’s bad enough when a corrupt central government asks for bribes; It’s even worse when several other government offices compete for donations. In fact, the higher expansion rates of Putin’s first decade in power were due in part to the way he centralized force in the Kremlin, stifling competing predators such as oligarchs operating out of government. However, the emphasis on creating personal armies and regional volunteer battalions for their war against Ukraine creates new centers of strength. This means that decentralized corruption will resurface to the fullest in Russia.
This may create momentum reminiscent of the 1990s, when Russian business owners relied on personal safety, mafia ties and corrupt officials to stay in newly privatized companies. Criminal gangs that employed veterans of the Russian war in Afghanistan offered “protection” to the highest bidder or just looted successful businesses. The mercenary teams Putin created to fight in Ukraine will play the same role in the future.
Russia can still win a victory in Ucrania. No you know what victory would look like; Perhaps the permanent profession of some ruined Ukrainian cities would be presented as a triumph. Alternatively, Russia could simply lose the war, an end result that would make it more likely that Putin would lose power. A new reformist government could take power and withdraw its troops, repair and negotiate a lifting of sanctions on industry.
Whatever the outcome, however, Russia will emerge from the war with its government exercising authority over the personal sector to a degree unprecedented in the world, with the exception of Cuba and North Korea. The Russian government will be omnipresent but at the same time not strong enough to protect corporations from mafia teams composed of demobilized infantrymen armed with weapons acquired in the war. Especially in the beginning, they will target the most successful corporations, either nationally or locally.
For the Russian economy to develop, it will need not only primary institutional reforms, but also the kind of blank slate with which Russia discovered itself in 1991. The collapse of the Soviet state rendered obsolete the establishments of that time. A process of building new institutions, expanding state capacity and reducing corruption followed, until Putin went so far as to force and dismantle commercial institutions and establish his own sponsorship formula. The lesson is grim: Even if Putin loses steam and a successor ushers in vital reforms. , Russia will take at least a decade to return to the levels of personal sector production and quality of life that it experienced just a year ago. These are the consequences of a disastrous and misguided war.