Russian President Vladimir Putin was repeatedly warned that the West would pulverize his economy if he invaded Ukraine, but he decided to send the tanks in anyway.
Why? It’s possible he’s fatally miscalculated, but there’s also the grimmer scenario that he could have seen advantages to an economic meltdown that would offer him a high-risk route to return to Communist-era repression with the playbook of his old paymasters in the KGB.
There’s no overstating the economic precipice that he’s just chosen to drive off. Severed from access to his central bank’s foreign reserves and with key Russian banks uncoupled from the international payment systems, the ruble has plunged and the stock market remains closed through fear that companies will vaporize if trade opens. (Live on TV, one well-known trader drank a toast to the death of the Russian bourse on Thursday.) Moscow is rolling out capital controls like huge commissions on buying dollars and has sought to bar foreign companies from bailing out of Russia, but few economists think such measures can hold back the tide.
Energy heavyweights like BP and Shell have already announced that they are off. This sort of departure has both technology and financial dimensions, as Russia needs high-tech know-how for liquefied natural gas and Arctic drilling. Other companies, ranging from Volkswagen to IKEA, are cutting ties.
Much trade with the West has almost completely been brought to a halt, with the crucial exception — so far — of hydrocarbons. Planes will soon be grounded for lack of spare parts, and companies won’t be able to import foreign-made components, forcing production lines to a halt. All in all, it’s a spectacularly abrupt disconnection from the international economy.
The Kremlin admits the fallout from sanctions stings, but is putting a brave face on it.
“The Russian economy is now under serious pressure, it has taken a serious blow, I would say. But there is a margin of safety, there is potential, there are plans,” Kremlin spokesman Dmitry Peskov said on Wednesday.
Much now depends on what those safety “plans” are.
‘A USSR headed by a crazy dictator’
For its part, the West is doing little to disguise the fact that it’s out to smash Putin. Although he later softened his remarks, French Finance Minister Bruno Le Maire said this week that the West was waging “an all-out economic and financial war on Russia …We will cause the collapse of the Russian economy.” U.S. President Joe Biden has warned that Putin will pay a “high price over the long run” for his invasion and that the Russian leader has “no idea what’s coming.”
“We are now at the stage where the sanctions are implicitly aimed at regime change,” said Jacob Kirkegaard, a senior fellow at the Peterson Institute For International Economics and the German Marshall Fund.
The ruble crashed 30 percent on Monday, with analysts expecting it to depreciate further as the war grinds on. Credit rating agencies Fitch and Moody’s have slashed Russia’s debt rating to junk. Alarmed Moscovites queued at ATMs and packed shops to spend their cash before it became worthless. While the U.S. and EU countries have so far stopped short of hitting Moscow’s all-important gas and oil export revenue, they’ve stressed that the option of import bans remains on the table. And, in any case, the oil market is already boycotting Russian oil exports.
Putin “loved the concept of fortress Russia,” Anders Åslund, a Swedish economist and professor at Georgetown University, told an Atlantic Council webinar on Thursday. “Now it turns out there’s no fortress at all. Russia has become uninvestable.”
The question now is whether Moscow can insulate its broader economy, or whether Putin’s plan is, in fact, the opposite. Collapsing the economy and markets, while printing an unbacked currency, creates a historic opportunity to expropriate the oligarchs as a class when markets reopen and the companies trade as penny stocks. That would sap the power of Putin’s potential rivals, while he remained protected by the security apparatus.
In an ultra-pessimistic Twitter thread, Maxim Mironov, an associate professor at the IE Business School in Madrid, predicted that this could even mean heading back to the very darkest days of Soviet terror, when power was concentrated in the police state.
“The only plus from this story is that those who are nostalgic for the USSR will be able to feel all its delights in their own skin,” he wrote. “And it will not be a relatively herbivorous USSR like Khrushchev-Brezhnev-Gorbachev, but a USSR headed by a crazy dictator.”
Is China Putin’s Plan B?
A key piece of the puzzle is whether President Xi Jinping of China could throw his neighbor an economic lifeline. If Beijing doesn’t, it could prove an almighty strain on the two countries’ “limitless” friendship.
“Can Russia receive a bit of help from China? Absolutely,” said Julia Friedlander, director of economic statecraft at the Atlantic Council think tank. But doing so would likely draw the West’s ire, and China itself would be horrified to lose any access to rich Western markets.
Friedlander also noted the more immediate problem was that Beijing would be rightly worried that it could well not see again any cash that it pours into Russia’s cratering economy.
“If you’re Beijing, you’re wondering what financial sense this makes for you … Reading the tea leaves right now, they’re going to be hesitant to do this,” she said.
“China has a choice,” said Kirkegaard. “The big leadership can decide, ‘OK, we’re going to prop up Russia,’ well, then Russia will become a client state of Beijing. But Beijing will then also lose probably a lot of technological and other access to the rest of the world. Alternatively, China could cut off Russia, and then use that to try and reset its relationship with the United States in Europe. They’re really at a fork in the road.”
Economic trenches
Whatever China chooses to do, the economic pain is likely to get much more severe for ordinary Russians. “We definitely see Russian quality of life significantly affected because of inflation,” said Alexander Gabuev, a senior fellow at the Carnegie Moscow Center think tank.
Russian industrialist Oleg Deripaska also predicted a severe economic crisis.
“Multiply the 1998 crisis by three to understand the scale,” Deripaska, the president of Hong Kong-listed aluminum giant Rusal, was quoted as saying by the Russian state-owned news agency RIA Novosti, referring to Russia’s largest recession in recent decades, the so-called ruble crisis, when the economy contracted by 5.3 percent.
Åslund said that was probably on the optimistic end of the scale. “I would expect that 5 percent would be the minimum. I think it would be worse than 1998 because then there was cleaning up. Now there will be no cleaning up, it will be just a big mess,” he said.
The European Central Bank’s most recent stress test predicted that under an adverse economic and financial scenario, the Russian economy could contract by as much as 15 percent. That scenario is now likely to materialize, according to Jérôme Legras, Axiom Alternative Investments’ head of research.
At first glance, this would all seem potentially perilous to Putin’s rule. The war will fan public dissent across broad social classes from poor mothers with sons dying on the battlefields through to middle-class Gen Zers, who find that Apple iPhones and Disney films are no longer available in Russia. Most critically, Putin will also have incurred the wrath of powerful oligarchs whose wealth he is wiping out.
“People are still more in emotional shock,” said a 20-year-old law student from Moscow, while adding that he had already noticed the creeping effects of far-reaching sanctions: The price of chilis in his supermarket soared by 70 percent this week, while his cinema tickets to see the new Batman movie were canceled after the film was withdrawn from distribution in Russia. His family is now talking seriously about leaving the country. “It would be painful to leave Russia,” he said. “There are discussions since the situation is not stable.”
North Korea on steroids
But while the sanctions are already biting, there’s no sign that they will force Putin himself to back down.
The extent of isolation that Russia is facing is comparable to what Iran has faced for decades. Yet while U.S. sanctions on Tehran undermined parts of its economy, they didn’t bring economic life entirely to a halt. Russia too, at least in theory, can keep ticking over. The clear message that has been issued in Belarus, where Kremlin-ally Alexander Lukashenko has led a fierce crackdown on dissenters, is that Putin is not too worried about massive public opposition; it just has to be kept down.
“There are clearly limits to how much even this kind of economic warfare can do to change the policies of a determined government, especially obviously, as is the case for both Iran and Russia, an authoritarian one,” said Kirkegaard.
As Legras said: “I think [Russia] can pretty much survive and continue and still be quite miserable from an economic point of view. I mean, it’s Russia we’re talking about. They’ve done it for decades.”
Observers are skeptical about the prospect of mass social upheaval and predict the regime would double down on the repression of dissent.
“There’s much less money in the bank but you can compensate for that with more oppression: everyone becomes poorer and less technologically sophisticated,” said Gabuev. “It will become a giant, North Korea on steroids but can still operate as a regime.”
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