Economic meltdown gives Putin a route back to
Soviet repression
Facing economic isolation, the danger is that Russia’s
leader will just choose to turn back the clock to a darker era.
BY PAOLA
TAMMA, DOUGLAS BUSVINE AND VICTOR JACK
March 4,
2022 12:05 am
https://www.politico.eu/article/economic-meltdown-russia-putin-soviet-repression/
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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