The State-Based Structure of the Russian Economy Allows It To Resist, for the Moment ...
The State-Based Structure of the Russian Economy Allows It To Resist, for the Moment ...
Vladimir Putin may be boasting, but the hardest part is yet to come for Russia.
It has been more than 120 days since the war in Ukraine started. The Western sanctions are getting stronger and stronger, and the European Union has already taken six different packages of measures since the beginning of the conflict. For all that, if you had asked some Russian businessmen for their views on the most effective sanction to weaken the Kremlin, you would have had a more than a surprising answer:
“Not to target and punish us but, on the contrary, to give us visas so that we leave the ship!"
Iconoclastic, the point of view of this businessman embodies the unease that, in mid-June 2022, weighed on the corridors of the "Russian Davos" in St. Petersburg. At the “international” economic forum, orchestrated by the head of the Kremlin to attract foreign investors, the elite of the business community at the national level was this year in a vacuum. “And obliged to line up behind the regime and its economic strategies that lead us to a dead-end,” says the same source, a Russian manager in one of the main state-owned companies.
Like so many others, this 40-year-old, a typical portrait of the new upper middle class, with a foreign passport in his pocket, educated in the West, liberal and multilingual, discovered his name on the lists of Western sanctions. Directly or indirectly, a large part of the Russian business community was caught up in the European and American sanctions against Moscow.
At the beginning of the Kremlin's “special military operation” in Ukraine, according to the official understatement, many people were shocked and did not hide their disapproval of the military offensive. Four months later, the successive trains of sanctions prevent them from leaving Russia. Departures which, on the contrary, would have weakened the Kremlin and its economic strategy.
At the St. Petersburg forum, these silenced rebels were forced to remain discreet. They confided their unease and reminded us of one reality: the sanctions have had a counter-productive effect. The working class, loyal supporters of the Kremlin, were delighted with the measures on the richest, indirectly thanking Europe for having done what the Kremlin could not do: go after the despised oligarchs. On the other hand, the upper class found itself stuck: blocked in Russia, it had to implement the president's objectives, particularly the hypothetical replacement of imports by domestic production. A policy that has been struggling for a long time. Putin even sees a unique opportunity to finally diversify the Russian economy.
The ruble maintains the illusion of resilience of the Russian economy
In twenty-two years of power, Vladimir Putin has managed to put the country in order and, despite a drop in income in recent years, to improve the daily lives of Russians. But he has failed to modernize the country's economy and, far from the manna of oil and other raw materials, diversify its industry.
By not creating the conditions for a stable, open, competitive, and business-friendly market, including a transparent and fair judicial system for entrepreneurs, he has sacrificed the well-being of Russians in the long run. Not the poor, who will continue to grow in number. Not the richest either, who, despite the crises, know how to maintain their fortunes. But all these middle classes who, between economic frustrations and political contortions, are now forced to side with the Kremlin.
This has led to an unprecedented rise in Putin's popularity for several years now.
The suddenly recovered strength of the ruble, which has been artificially maintained, allows Vladimir Putin to stage a resilient economy. All the more so since, with fewer imports and raw material exports boosted by rising prices, the trade balance is reaching record surpluses. Gazprom has never made so much profit from the sale of its gas, providing the state with much-needed tax revenue to finance the war effort.
The reopening of McDonald's, which was taken over and relaunched with a new name and logo by one of the franchisees, is another symbol put forward by Kremlin propaganda. It serves as a symbol of Russia's ability to rebound despite the departure of Western companies. It is a way to feed the middle classes in the cities and maintain hopes of emancipation in the face of threats of isolation.
The first damage to the economy, and thus to Russian incomes, is expected in the fall of 2022. A recession seems inevitable. But contrary to initial forecasts, the cumulative drop in GDP should be closer to 15% than 25%. This is because the state-based structure of the Russian economy, 70% of which is controlled by the state and its public companies, helps it to adapt.
Employment is resisting the slowdown in activity thanks to agreements (and constraints...) on part-time work and other imposed vacations. But waves of layoffs are all the more inevitable as companies are caught in the bottleneck of depleting stocks of intermediate products. In Russia, state aid and intervention are keeping the industry resilient. And, despite the fears of a disoriented middle class, to stage an invincible economy against the West.
However, the longer the war goes on, the more difficult it will be for the Russian economy to maintain itself. This is why many believe that Russia's window to win this war is 12 to 18 months. Beyond that, even Vladimir Putin's much-vaunted resilience will not allow Russia to avoid a total collapse of its economy and great difficulty in continuing to finance its heinous war in Ukraine.