Economic collapse gives Putin a path back to Soviet repression – POLITICO

Russian President Vladimir Putin was repeatedly warned that the West would pulverize its economy if it invaded Ukraine, but he decided to send in the tanks anyway.

Why? It’s possible he made a fatal miscalculation, but there’s also the darker scenario that he could have seen benefits from an economic collapse that would offer him a high-risk path back to cracking down on the virus. communist era with the playbook of its former KGB paymasters.

There is no exaggeration of the economic precipice he has just chosen to drive away. Cut off from access to its central bank’s foreign exchange reserves and with Russia’s main banks decoupled from international payment systems, the ruble has plunged and the stock market remains closed on fears that businesses could vaporize if trade opens. . (Live on TV, a well-known trader drank a toast to the death of the Russian stock market on Thursday.) Moscow is rolling out capital controls like huge commissions on the purchase of dollars and has sought to prevent foreign companies from bailing out Russia, but few economists think such measures can stem the tide.

Energy heavyweights like BP and Shell have already announced their departure. This kind of departure has both technological 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 of the trade with the West has been almost completely cut off, with the crucial exception – until now – of hydrocarbons. Planes will soon be grounded for lack of spare parts and companies will no longer be able to import foreign-made components, forcing production lines to halt. All in all, it’s a spectacularly sharp disconnect from the international economy.

The Kremlin admits the fallout from the sanctions, but puts on a brave face.

“The Russian economy is now under serious pressure, it has taken a serious hit, I would say. But there is a margin of safety, there is potential, there are plans,” the carrier said on Wednesday. word of the Kremlin, Dmitry Peskov.

Much now depends on what these security “plans” are.

“A USSR led by a mad dictator”

For its part, the West does little to conceal the fact that it seeks to crush 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 against Russia… We are going to bring about the collapse of the ‘Russian economy’. US President Joe Biden has warned that Putin will pay “a high long-term price” for his invasion and that the Russian leader has “no idea what is coming”.

“We are now at the stage where sanctions are implicitly aimed at regime change,” said Jacob Kirkegaard, senior fellow at the Peterson Institute for International Economics and the German Marshall Fund.

The ruble tumbled 30% on Monday, with analysts expecting it to depreciate further as the war continues. Rating agencies Fitch and Moody’s lowered the Russian debt rating to “junk”. Alarmed Muscovites lined up at ATMs and filled stores to spend their money before it became worthless. While the United States and EU countries have so far not touched Moscow’s gas and oil export revenues, they stressed that the option of import bans remains on the table. And, anyway, the oil market is already boycotting Russian oil exports.

Putin “liked the concept of fortress Russia,” Anders Åslund, a Swedish economist and professor at Georgetown University, said Thursday during an Atlantic Council webinar. “Now it turns out that there is no fortress at all. Russia has become uninvestable.

The question now is whether Moscow can insulate its wider economy, or whether Putin’s plan is, in fact, the opposite. The collapse of the economy and markets, while printing unsecured currency, creates a historic opportunity to expropriate the oligarchs as a class when markets reopen and corporations trade like penny stocks. This would undermine the power of Putin’s potential rivals, while he remained protected by the security apparatus.

In one ultra-pessimistic Twitter feedMaxim Mironov, an associate professor at IE Business School in Madrid, predicted it could even mean returning to the darkest days of Soviet terror, when power was concentrated in the police state.

“The only plus of this story is that those nostalgic for the USSR will be able to feel all its delights in their own skin,” he writes. “And it will not be a relatively herbivorous USSR like Khrushchev-Brezhnev-Gorbachev, but a USSR led by a mad dictator.”

Is China Putin’s Plan B?

A key piece of the puzzle is whether Chinese President Xi Jinping could throw his neighbor an economic lifeline. If Beijing does not, it could put a strain on both countries. “Unlimited” friendship.

“Can Russia get a little help from China? Absolutely,” said Julia Friedlander, director of economic policy at the Atlantic Council think tank. But that would likely draw the ire of the West, and China itself would be horrified to lose all access to wealthy Western markets.

Friedlander also noted that the more immediate issue was that Beijing would rightly be concerned that no more money would be pouring into Russia’s collapsing economy.

“If you’re in 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 that,” she said.

“China has a choice,” Kirkegaard said. “Big leaders can decide, ‘OK, we’re going to support Russia,’ well then Russia will become a client state of Beijing. But then Beijing will also likely lose a lot of technological and other access to the rest of the world. Alternatively, China could cut off Russia and then use it to try to reset its relationship with the United States in Europe. They really are at a crossroads.”

Economic trenches

Whatever China chooses to do, the economic pain is likely to become much more severe for ordinary Russians. “We definitely see Russian quality of life significantly affected because of inflation,” said Alexander Gabuev, senior fellow at the Carnegie Moscow Center think tank.

Russian industrialist Oleg Deripaska also predicted a serious economic crisis.

“Multiply the 1998 crisis by three to understand its magnitude”, Deripaska, the chairman of Hong Kong-listed aluminum giant Rusal, was quoted by Russia’s state-run news agency RIA Novosti as referring to Russia’s biggest recession in decades, the so- so-called ruble crisis, when the economy contracted by 5.3. percent.

Åslund said it was probably on the optimistic side of the scale. “I would expect 5% to be the minimum. I think it would be worse than 1998 because there was a cleanup then. Now there will be no more cleaning, it will just be a big mess,” he said.

The European Central Bank most recent stress test predicts that in an unfavorable economic and financial scenario, the Russian economy could contract by up to 15%. This scenario is now likely to materialize, according to Jérôme Legras, head of research at Axiom Alternative Investments.

At first glance, all of this would seem potentially dangerous for Putin’s rule. The war will stoke public dissent across broad social classes, from impoverished mothers whose sons die on the battlefields to middle-class Gen Zers, who discover that Apple iPhones and Disney movies are no longer available in Russia. More importantly, Putin will also have incurred the wrath of powerful oligarchs whose wealth he wipes out.

“People are even more in emotional shock,” said a 20-year-old law student from Moscow, adding that he had already noticed the creeping effects of wide-ranging sanctions: the price of chillies in his supermarket soared 70% this week as his cinema tickets to see the new Batman film were canceled after the film was withdrawn from distribution in Russia. His family are now seriously talking about leaving the country. “It would be painful to leave Russia,” he said. “There are discussions because the situation is not stable.”

North Korea on steroids

But while the sanctions are already hitting, there is no indication that they will force Putin himself to back down.

The degree of isolation Russia faces is comparable to that which Iran has faced for decades. Yet while US sanctions against Tehran have undermined parts of its economy, they have not brought economic life to a complete halt. Russia too, at least in theory, can keep spinning. The clear message that has been sent out in Belarus, where Kremlin ally Alexander Lukashenko has led a fierce crackdown on dissidents, is that Putin is not overly concerned about massive public opposition; just keep it low.

“There are clearly limits to what even this kind of economic warfare can do to change the policies of a determined government, especially obviously, as is the case with Iran and Russia, an authoritarian government,” said Kirkegaard.

As Legras said: “I think [Russia] can pretty much survive and go on and still be pretty miserable economically. I mean, this is Russia we’re talking about. They’ve been doing it for decades.”

Observers are skeptical of the prospect of mass social upheaval and predict that the regime would double down on repression of dissent.

“There’s a lot less money in the bank but you can compensate for that with more oppression: everyone is getting poorer and less technologically sophisticated,” Gabuev said. “It will become a giant, North Korea on steroids but can still work like a diet.”

You want more analysis of POLITICS? POLITICS Pro is our premium intelligence service for professionals. From financial services to trade, technology, cybersecurity and more, Pro delivers the real-time intelligence, in-depth insights and scoops you need to stay ahead. E-mail [email protected] to request a free trial.

About Mike Stevenson

Check Also

The time to recheck your risk profile matches your tolerance for market downside

Investors may not have fully appreciated the level of risk they were carrying in their …