In a matter of weeks, the Russian autocrat has erased his country’s prosperity in a feckless attempt to rebuild a doomed empire.
May 2022
Thirty years ago this spring, Russia was at the beginning of what would be a dramatic, although uneven, economic recovery following the collapse of the Soviet Union in December 1991. At the moment of the Soviet collapse, Russia inherited a budget deficit that was conservatively estimated at 20 percent of GNP, it faced the threat of hyperinflation, economic growth was negative, there were shortages throughout the economy, foreign reserves were virtually nonexistent, and it was racking up a mountain of international loan commitments. The state faced the realistic threat of famine and bankruptcy. In the decades that followed, however, Russia traveled a long way down the road of economic and social modernization. This was partially due to high global prices for its exports. The country also benefited from good macroeconomic policy and the stewardship of Elvira Nabiullina, the smart and surprisingly independent chairwoman of the Central Bank of Russia (CBR) since 2013. Despite Vladimir Putin’s propensity to use public assets for his own personal benefit and that of his former KGB cronies, by 23 February 2022, the day before Putin’s invasion of Ukraine, the country had paid off its debts, built up sizeable foreign reserves, and for the most part maintained a budget surplus.
To be sure, Putin’s hardening autocracy, especially after his return to the Kremlin in 2012, worked against further socioeconomic gains rather than in their favor. After 2014 and the annexation of Crimea from Ukraine and just as the global pandemic began in 2020, real wages were dropping, wealth inequality was rising, and foreign investment had fallen to levels not seen since 2003.
Nonetheless, Russians had never lived longer or better since the collapse of communism, even if still below most other postcommunist countries. At purchasing power parity, Russian GDP per capita peaked in 2019 at US$29,967, just below Poland and Portugal, for example, a little less than twice that of China, and about four times higher than in 1999, the first year of clear postcommunist economic growth in Russia. A great deal, though not all of Russia’s economic progress could be attributed to its revenues from oil and natural-gas exports, but oil prices had long since dropped from their sky-high values of the early 2000s. In 2019, oil prices reached $64 per barrel, a little more than half of their all-time high in 2012, and despite the sanctions imposed by the United States and European allies following the Crimean annexation in 2014, Russia’s economy continued to squeeze out an annualized growth rate of 2.1 percent in the year before the covid-19 pandemic.
But if thirty years of uneven postcommunist recovery had seen Russia’s resurgence, we are now seeing its ruin. Vladimir Putin’s autocracy has not just wrought havoc on Ukraine, it has wrecked Russia, too. In a little more than eight weeks, Putin’s unjust and ill-conceived war has erased the gains of the last three decades.
The toll on Ukrainians is far greater than on Russians in material terms and, tragically, in lives lost. Ukrainian bravery in the face of Russian barbarism, however, has made Ukrainians a nation of heroes, while Russians have been rendered international pariahs, unable to travel abroad easily and suffering under the heaviest sanctions ever imposed anywhere in world history. The burden of Putin’s war on Ukraine will be borne by average Russian citizens for decades, if not longer. The damage done to Russian society, the economy, its military, its political development, and its international reputation will far out live Putin. Here are some of the ways in which Putin has managed to ruin Russia.
The “Pariah Economy”
The most obvious catastrophe that Putin has brought about by invading Ukraine is and will be economic. Scholars at Yale Business School reported that more than a thousand international companies had curtailed or shuttered their businesses in Russia by the eighth week of the war. More will surely follow. Most Russians won’t feel much pain from the shutdown of Aston Martin or Burberry, but the unavailability of repair and replacement items from companies such as Apple, Bombardier, Boeing, Dupont, Ericsson, Intel, and Analog Devices will hit labor productivity, consumers, and eventually the supply and production chain of Russian industry. These exits will also leave hundreds of thousands more Russians unemployed. Longer term, with Putin and the Duma threatening to confiscate any remaining assets of companies that have quickly fled Russia, few foreign investors will return anytime soon. It is sadly reminiscent of what happened to the Russian economy when the Bolsheviks seized power in 1917.
The heavy sanctions regime imposed on Russia since February will not soon be lifted given the Russian military’s brutality. Sanctions work slowly and are a somewhat clumsy tool to deter and punish a state for its behavior. We haven’t yet seen their full effect on the Russian economy. Yes, some of Russia’s super rich cannot access their yachts and mansions in London, Rome, or Zurich. They cannot send their children abroad for school, nor can they or their family members travel outside of Russia for the time being. While these are inconveniences, the freezing (and seizing) of their assets in foreign banks hurts more, although as long as they continue to support Putin, and reconcile themselves to remaining in Russia for the rest of their lives, they will survive.
But the effects of the sanctions on the broader Russian economy will end the project of Russian economic modernization that has proceeded in fits and starts over the last three decades. Foreign investment was low before, and it will only get lower. Europe will move off its dependence first on Russian oil (there are many alternative sources of oil, and it is a commodity that is easy to transport from elsewhere), and even its overwhelming dependence on Russian natural gas. It will, of course, take two or three years for liquefied-natural-gas terminals to be built in Germany in particular, but once those terminals are built, European customers will likely never need to buy natural gas from Russia again. Under Putin’s disastrous leadership, Russia has proven itself beyond doubt to be an unreliable supplier. Short term, the transition will hurt Europeans as gas prices continue to rise. But in the long term, it is the Russian economy, and Russians, who will suffer the most. The European market is gone not just for now, but forever, and with it much-needed revenue to the Russian budget.
Putin only allowed economic modernization up to a point and was slow to encourage diversification of the economy. While Russia sells military equipment and weaponry abroad, chemicals, coal, precious metals, and civilian nuclear power plants, revenue from these sectors almost certainly cannot ramp up fast enough to replace what has been and will be lost from oil and gas exports to Europe. Even if China increases its purchases of Russian oil and natural gas, it cannot replace the European market for Russia. And China will undoubtedly drive a hard bargain, using the enormous leverage it will have obtained over Russia in the absence of a European alternative market.
One of the major achievements of Russia’s post-Soviet economy had been its low debt-to-GDP ratio, accumulation of foreign reserves, robust national wealth fund to smooth over the inevitable booms and busts from the price volatility of its carbon-export revenues. Russia had also managed to maintain low inflation and unemployment rates. In less than sixty days, Putin has blown all of this up too. The Central Bank of Russia (CBR) and longtime chairwoman Nabiullina fought for years to maintain good macroeconomic and fiscal policy — and they had succeeded.
But at the start of the Russian invasion, Nabiullina was rumored to have quit her post because Putin’s war was destroying all she had accomplished for the Russian economy. He refused, however, to accept her resignation, and she was recently reappointed for a third five-year term to oversee the undoing of her past policies. The Russian economy is projected to shrink by 11.2 percent by the end of 2022 even if the war ends tomorrow. And it won’t. This will be due not only to the gradually increasing impact of Western sanctions, but also because of a brain drain from Russia, declining employment as foreign companies pack up and leave, the increasing cost of living, and a resulting decline in consumption. The removal of Russian banks from the SWIFT banking system will also make trade slower and more difficult. Supply shortages for computer chips will hamper Russian manufacturing processes, further exacerbating covid-related supply-chain issues. As a result, consumer prices are anticipated to rise from 9 percent in 2021 to as high as 22 percent in 2022.
At the end of January 2022, Russia had amassed $630 billion in foreign reserves, the fourth-largest in the world. But Russia has no access to about half of that sum now because the funds that are held in foreign banks are now under sanction. Putin is turning Russia into an autarky; it’s effectively heading back to the USSR.
A Closed Society
This long (and yet still incomplete) list of damage to the Russian economy will continue to unravel all the health and demographic gains that Russia had made before the February invasion (gains made despite Putin’s leadership, not because of it). Population growth had leveled off by 2018 or so, reversing the demographic catastrophe of the late Soviet period and 1990s. But Putin’s invasion of Ukraine has hastened what had already been called the “Putin Exodus” of educated young professionals that had begun after 2015. The BBC reported in mid-March that as many as 25,000 Russians had already arrived in Georgia, while others went to Turkey and Armenia because airspace to Europe and North America was closed to Russian flights. One estimate put the number of Russians who had fled the country in the first four weeks of the war at up to 200,000.
Cyberspace too has become far more restricted since the Russian attack. Russia’s 80 million Instagram users had to say goodbye to the platform in the first few weeks of the war. The Russian government’s ban on the platform followed blocked access to Facebook and Twitter because they refused to bend to the Kremlin’s demands that they stop attempting to censor official Russian state media.
Russia’s last source of independent information — the radio station Ekho Moskvy — was shut down at the start of the war, and the YouTube-based TV station Dozhd was blocked the same day. The lack of access to alternative sources of information to state-controlled media may well be helping to keep support for the war surprisingly high. One of the only polls taken on the “special military action” (it is illegal in Russia to call it a war), done by the respected Levada Center, pegged general support at roughly 81 percent of the population, but at about 10 percent lower than that for 18 to 24 year-olds, who grew up not knowing the hardships of the 1990s, owning the newest smart phones and accessing the internet and European and U.S. television shows, and having the ability to travel abroad without much trouble. All of that is gone now too, so time will tell whether public support for the invasion remains high — especially as Russian soldiers come home disabled, dead, or not at all.
Russian civil society has been under assault since 2012, when Putin reassumed the presidency. The cost of public protest increased following crackdowns after the massive anti-Putin protests of December 2011 and early 2012. In 2022, even holding up a blank piece of paper outside the Kremlin comes with certain arrest, jail time of up to fifteen years, and a fine of up to 50,000 rubles or almost a month’s wages for the average person. With any real opposition leader either in jail (Alexei Navalny was just sentenced to another nine years) or forced to live abroad due to the risk of certain arrest if they returned, it is difficult to see who would organize mass demonstrations against Putin and the war, but life under sanctions and the pariah economy Putin has created may well push some segments of society to the point of taking to the streets in protest should the war go on much longer. Time is not on Putin’s side.
Destroying Russia’s Standing in the World
Finally, Putin’s war has ruined Russia’s reputation abroad. In the months preceding the war, as Russian forces amassed on Ukraine’s border, both he and his diplomats consistently maintained that Russia had no intention of invading, and then of course, without provocation, they did just that. They acted in bad faith in violating repeated ceasefires to allow Ukrainian civilians to evacuate cities such as Mariupol before the Russian military turned them into rubble. The Russian military has violated the laws of war in clearly targeting civilians throughout Ukraine, and Russian soldiers and their commanders have used rape and torture against civilians in Bucha and elsewhere.
Putin’s strange speeches extolling his warped understanding of Russian-Ukrainian relations and his laughable characterization of Ukraine’s president Volodymir Zelensky (who is Jewish) and his elected government as “Nazis” has led foreign leaders to question his sanity. Having already been suspended indefinitely from the G-8 in 2014, Russia is now a pariah in the G-20 and was suspended from the UN Human Rights Council following evidence of war crimes in Ukraine in April 2022.
The pitiful performance of the Russian military (with an estimated 15,000 casualties in the first 7 weeks of fighting, about the same number of casualties in nine years of the Soviet conflict in Afghanistan) and especially the failed attempt to seize Kyiv in the first month of the war has also ruined the reputation of the Russian armed forces. Despite an expensive and extensive military reform in the last decade, Russia will lose this war to the much smaller, far less well-equipped Ukrainian defense forces. Soviet heroes of the Second World War must be rolling in their graves. The corruption that Putin has allowed to run rampant throughout the Russian political system has helped to erode its military prowess. Soldiers and commanders alike were purportedly selling off their equipment even as they were setting up to deploy in Belarus. They have plundered Ukrainians’ homes, stealing as much as possible and sending the loot back to Russia.
And so, the cycle is complete. Three decades after the collapse of the Soviet empire, Russians are being dragged back in time to when Soviet citizens lived isolated from the rest of the world, in a bubble of failed ideology and misinformation. That system fell apart under just the kind of autarky and autocracy that Putin hopes to reimpose. Just as the Soviet system collapsed, Putin is also failing Russia, erasing the gains of the postcommunist period in a feckless attempt to rebuild a doomed empire.
Kathryn Stoner is Mosbacher Director and senior fellow at the Center on Democracy, Development and the Rule of Law, professor of political science (by courtesy), and senior fellow at the Hoover Institution (by courtesy), all at Stanford University. Her most recent book is Russia Resurrected: Its Power and Purpose in a New Global Order (2021).
Copyright © 2022 National Endowment for Democracy
Image Credit: Shutterstock.com
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