VADIM, A AUTOMOTIVE PARTS merchant from a Russian provincial town, never supported the war. Indeed, he largely supported the Western sanctions against Russia: how else to stop the “monsters” determined to destroy his country, as well as Ukraine, if not by putting themselves in their pockets? But when the West’s measures hit the parts supply it needed from its distributors, it followed business logic and sourced it wherever it could. The search led him to Turkey. A network of intermediaries offers him various schemes for delivering his goods at a handling cost of between 2 and 4 dollars per kilogram. Today they arrive in batches, often in bags labeled “personal effects”, three to four weeks after ordering. Vadim asks no questions, provided the price is right. He understands that the same goes for customs officers.
Vadim’s workaround reflects a larger story, as Russia reverts to primitive means of fending for itself. Tough EU and US sanctions, introduced following the invasion of Ukraine last February, were meant to isolate the Russian economy. But with only half the world observing the measurements, the reality was always going to be more complicated. Traders from friendly countries like Turkey, Kazakhstan, India and China are now making it easier to import the restricted goods that Russia needs, for a certain price. In September 2022, Russian imports in dollars exceeded their average monthly value for 2019. And these countries also absorb a significant share of the commodity exports that Russia once sent to Europe, at a steep discount.
This allowed the Kremlin to avoid an economic disaster. GDP contracted just 2.2% last year, shattering many economists’ expectations, made in the spring, of an annual decline of 10% or more. Uncomfortable, perhaps, but far from enough to cripple Vladimir Putin’s war effort. Unemployment remains low, although many people are paid less. Property prices have stopped rising, but there are no signs of a crash. Consumer spending is weighing on the economy, but not by much. In 2023 the IMF expects Russia to grow by 0.3% – a performance better than Britain and Germany, and only marginally worse than the EU.
Russia’s economic isolation also offers the most ruthless a unique opportunity to get rich quick. Before the war, European and American companies held direct investments in Russia worth around $350 billion. A government decree issued following the invasion requires Western businesses closing in Russia to first obtain a government permit; they can then only sell their assets at prices determined by the government, at a discount of 50% or more to their market value. A corrupt system thus emerged. A Western industrialist who is helping several European companies leave Russia says opportunistic Russians and even Westerners are exploiting their government connections to land good deals. “We’re back to the 1990s,” he said, a wild era of gangster capitalism. “You can safely assume the new owners will ignore niceties like penalties once they take over.”
The restrictions were part of a package of extreme measures introduced by Russian technocrats to stabilize the economy in the months following the invasion. They succeeded much better than their authors could have hoped. Before the invasion, many of them were clearly unhappy with the idea of an unprovoked war that risked destroying the modernizing economy they had spent their careers creating. Several, including Elvira Nabiullina, the head of Russia’s central bank; German Gref, the boss of Sberbank, the largest in Russia; and Alexei Kudrin, a reformist former finance minister, reportedly approached Mr Putin when they saw an invasion was on the cards.
But they quickly aligned once the war began, preventing a bank run from turning into a full-scale financial crisis and keeping inflation under control. Only a handful of lower-level bureaucrats have resigned from the central bank and the finance ministry. A former bank mandarin said he was both impressed and dismayed by his colleagues’ efforts to keep the war machine afloat. “They understood what they were doing, even if they consoled themselves by pretending that the people who replaced them would be worse.” A high-level source close to the Kremlin says: “The elite are prisoners. They cling. When you’re there that long, the seat is all you have.
Emboldened extremists are campaigning for more radical change at the heart of government. Some dream of removing important figures they perceive as pro-Western. But as long as these people keep his war effort funded, Mr. Putin is unlikely to comply. It’s hard to know how successful they are, as many key stats are now secret. But calculations on the back of the envelope are possible. Russia’s 2022 budget was projected at 23.7 billion rubles ($335 billion). Government figures indicate that actual spending in 2022 reached at least 31 billion rubles.
According to Natalia Zubarevich, an economist at Moscow State University, only about 2.5 billion rubles of additional expenditure is attributable to benefits and other transfers: pensions, cheap loans, additional family allowances. This leaves about 5 tn rubles unaccounted for; much of it, presumably, goes to weaponry. There are clear signs of mobilization of the economy for war. Defense companies work around the clock, in three shifts. Uralvagonzavod, Russia’s main tank manufacturer, conscripted at least 300 prisoners to fulfill his new orders. And steel production fell just 7% in 2022, far less than the 15% some had expected given the decimation of the auto industry, heavily hit by sanctions that cut off semi supplies. -drivers.
The Kremlin would clearly like to further militarize the economy. In October, the government set up a new council to coordinate government and industry. But finding new sources of cash is about to get a whole lot trickier. Mr. Putin’s invasion coincided with high natural resource prices. In the first five months of 2022, these revenues were two and a half times higher than the previous year. But falling oil prices, along with a Western embargo and price cap, have hit that revenue stream, albeit less dramatically than the West had hoped.
The European diversion of Russian hydrocarbons has left a vacuum which the Kremlin is trying to fill with discounted sales in other markets, such as Turkey, India and China (although there is evidence that the actual discounts are lower than those officially announced). A new price cap on petroleum products, which took effect on February 5, will be more difficult to set, since these large markets already have their own established refineries. Russia hopes to sell more rough to compensate, and the impact will only become clear over time. Either way, the $70 a barrel price the government needs to balance its budget may prove unattainable.
Even if the Russian economy is forced to cannibalize itself in more primitive war gear, its ruling class understands that there is no turning back, at least as long as Mr. Putin is around. She heard the president say in December that there would be “no limit” to the resources available to the armed forces. This means cuts elsewhere. Spending on health and education will be reduced, suggests Zubarevich. The Russian sovereign wealth fund, which amounts to 10.4 billion rubles, or 7.8% of GDP, can be shot at. “The worse things get, the more war will become necessary,” says a former mandarin.
The message that Russia is fighting for its survival against an encroaching West has become a powerful tool of repression. But it will mean ever-increasing demands from the Kremlin on the long-suffering Russian people. “They are already militarizing people’s consciousness, but it’s a long process,” says the former official. “Hitler took five years. They are just getting started. » ■
