Russian engineers keep money flowing for Vladimir Putin’s war World news
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VADIM, a car-parts dealer from a Russian city, did not support the war. Indeed, he widely supports the sanctions of the West on Russia: how else can you stop the “monsters” from destroying your country, as well as Ukraine, if not by hitting their pockets? But when Western units hit the supply of the parts he needed from his distributors, he followed business logic and sourced them from wherever he could. The research took him to Turkey. The website of middlemen offers many plans to send your goods for a handling fee that is between $2 and $4 per kilogram. Today, they arrive, usually in bags marked “personal effects”, three to four weeks after ordering. Vadim does not ask questions, if the price is right. You understand that the same applies to customs officials.
Vadim’s performance reflects a larger story, as Russia reverts to primitive ways to lead by. The tough European and American sanctions, introduced in the wake of the invasion of Ukraine last February, are supposed to isolate the Russian economy. But with only half the world observing the measures, the truth will always be more complicated. Traders in friendly countries like Turkey, Kazakhstan, India and China now facilitate the import of restricted goods that Russia needs, for a price. In September 2022, Russian imports in dollar terms have exceeded their average monthly value for 2019. And these countries also receive a large share of Russia’s raw exports once sent to Europe – at a high discount.
This has allowed the Kremlin to avoid economic disaster. The gross domestic product (GDP) contracted by only 2.2% last year, breaking the expectations of many economies, made in the spring, of a reduction of 10% or more; nowhere near enough to weaken Vladimir Putin’s war effort. Unemployment remains low. Home prices have stopped rising, but there is no sign of a crash. Consumer spending is a drag on the economy, but not by much. In 2023 the IMF even expects Russia to grow by 0.3% – more than Britain and Germany.
Russia’s exclusivity also offers the most philanthropic a once-in-a-generation opportunity to get rich quick. Before the war European and American companies made direct investments in Russia worth about $350bn. A law issued in the wake of the attack made it mandatory for Western companies closing in Russia to obtain a license first; then they can sell their properties only at government-determined prices, set at a discount of 50% or more to their market value. A corrupt system has therefore emerged. A Western business owner who is helping many European companies to leave Russia says that privileged Russians and even Westerners are using their government connections to do business with each other. “We’re back to the 1990s,” he said, the wild era of gangster capitalism. “You can safely assume that the new owners will ignore the concessions as soon as they receive them.”
The restrictions are part of a package of extreme measures introduced by Russian engineers to stabilize the economy in the months following the attack. They have achieved far more than their authors could have imagined. Before the attack, many of them were not happy with the idea of an indiscriminate war that threatened to destroy the renewable economy they had spent their careers on. Various-including Elvira Nabiullina, head of the Russian central bank; German Gref, the boss of Sberbank, Russia’s largest; and Alexei Kudrin, a reformist former finance minister-is believed to have made representations to Mr. Putin when they saw that an invasion was on the cards.
But they quickly stepped into line once war was on the way, stopping a bank run from spiraling into a full-blown financial crisis and getting inflation under control. Only a few junior bureaucrats have resigned from the central bank and financial institution. A former central banker said he was impressed and surprised by his colleagues’ efforts to rein in the war machine. “They understand what they are doing, even while consoling themselves by pretending that the people who will replace them will be worse.” A high-level source close to the Kremlin said, “Eminents are prisoners. They are getting wet. When you are there for a long time, a seat is all you have. “
Courageous activists are agitating for more radical change. Some dream about removing important figures they find to be Pro-Western. But as long as those people are financing his war, Mr Putin is unlikely to oblige. It is difficult to know how well they are doing, because many key statistics are now secret. But back-of-the-pack calculations are possible. Russia’s 2022 budget is planned at 23.7trn rubles ($335bn). Government figures indicate that actual spending in 2022 will reach at least 31trn rubles.
According to Natalia Zubarevich, an economist at the University of Moscow, only about 2.5trn rubles of additional expenses are accounted for by benefits and other transfers: pensions, cheap loans, additional child support. That left about 5trn rubles unexpected for; Much of it, presumably, has gone on weapons. There are clear signs of an economy being mobilized for war. Security agencies work 24 hours a day, in three shifts. Uralvagonzavod, Russia’s main tank producer, has enlisted at least 300 prisoners to fulfill its new orders. And steel production falls by only 7% in 2022, less than 15% of some expectations given the decline of the car industry, which is greatly affected by the sanctions that have stopped the supply of semiconductors.
The Kremlin will obviously want to fight the economy further. In October the government established a new committee designed to bring together government and industry. But finding new sources of income is about to become very tricky. Mr Putin’s attack coincided with high prices for hydrocarbons. In the first five months of 2022, such revenues are two and a half times higher than in the previous year. But lower global oil prices, as well as a freeze on gas exports to the West and an oil-price cap, have hit that revenue stream, if much less than the West had hoped.
The European shift away from Russian hydrocarbons has left a gap that the Kremlin is trying to offset through discounted sales to other markets, such as Turkey, India and China (although there is evidence that the actual discounts are lower than reported). The further price range, on the oil markets, which came into force on February 5th, will be difficult to adjust, because those large markets have their own reforms established. Russia will be expected to sell more crude oil to compensate, and the impact will only become clear over time. In any case, Russia’s hopes that it may still be able to get $70 per barrel of its oil, the price the government needs to balance the budget, may reflect hope.
Although the economy has been manned into more wartime clothing, its ruling class understands that there is no turning back, at least while Mr Putin is around. He heard the president announced in December that there are “no limits” to the resources available to the military. That means cutting elsewhere. Health and education expenses will be reduced, suggests Ms Zubarevich. “The worse things get, the more war you need,” said an old mandarin.
The message that Russia is fighting for its survival against the West has become a powerful tool for repression. But it will mean ever-growing demands by the Kremlin on Russia’s long-suffering people. The former government official said: “They have been attacking people’s knowledge, but it is a long-term policy. “Hitler took five years. They’re just getting started.”
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