Vladimir Putin’s stronghold Russia is crumbling

FRussian approval The invasion of Ukraine has started an economic war. Westerners have imposed unprecedented sanctions. Investors are dumping Russian resources as quickly as possible. The ruble has lost one-third of its value so far this year. The government may soon be in default. Capital Economics, a consultant, expects Russian inflation to hit 15% sooner, GDP Decreased 5% this year.

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The chaos in the Russian market has taken many by surprise. Over the years, President Vladimir Putin, apparently successfully building Russia’s economic defenses, has been able to easily resist whatever Western governments throw at him – as Timothy Ash of BlueBall Asset Management calls a “Fortress Russia” strategy. It turns out that the strategy failed. “In a week the castle will be from Russia to the ruins of Russia,” Mr Ash said.

Fortress Russia was a product of Russia’s chaotic recent history. After the collapse of the Soviet Union in 1991, inflation exceeded 2,000%. Russia defaulted in 1998, causing the ruble to depreciate by more than two-thirds. Then the fall of oil prices in 2014, and international sanctions on Russia’s actions in Crimea and Donbass plunged the economy into a deep recession.

As Fiona Hill and Clifford Gaddy point out in a book published in 2015, “Mr. Putin: Operative in the Kremlin,” the Russian president has long wished that his country could be self-sufficient. Since 2014, however, that ideology has gone into overdrive, with Mr Putin desperate to ensure that the West can never again exercise economic control over his country.

The idea for Fortress Russia was something like this. On the economic front, Russia will diversify its economy away from oil and gas, two volatile products. This will reduce dependence on Western technology and trade. In financial terms, this will reduce foreign debt. It will pursue strict fiscal and monetary policy, allowing it to accumulate large amounts of foreign exchange that will enable it to protect the ruble, or move it to a profitable company in times of crisis.

Some success has also come. Talk about economics first. Russia is somewhat less dependent on hydrocarbons. Oil profits in 2019 were about 9% GDP, Less than 15% when Mr. Putin took office. The oligarchs remain exceptionally strong, controlling a huge portion of the overall Russian wealth, but their influence seems to have stopped growing. Between 2000 and 2019, Russia’s service industry grew by seven percentage points GDP, Even if the increase in productivity in most sectors is tragic.

In some areas, Russia has developed technology that works independently of the West. Mir, a Russian payment system, accounted for a quarter of domestic card transactions in 2020, up from nothing five years ago. The share of Russian imports, classified as “high-tech,” appears to be declining rapidly, according to World Bank data. European exports of Huiji products to Russia have stagnated over the past decade, while growing elsewhere.

But there are empty holes in the walls of the fort. Russia is involved in the supply chain of Western ideas and technologies. According to our analysis of bilateral data on stocks of long-term investment (control of companies, say, or construction of new factories), the Russian economy is somewhat more dependent on the West than it was a decade ago. About 30% of Russian imports come Yes7 countries, rarely different from 2014. In some industries, such as chipmaking and computers, Russia is completely dependent on the American part. Under approval, some Russian bank cards no longer work with Apple Pay or Google Pay, which caused chaos on the Moscow Metro on February 28 because people could not get through the turnstiles.

The chaos in Russia’s financial markets has been even more surprising. After all, by 2022, Russia had আন্তর্জাতিক 630 billion worth of international reserves (about 40%). GDP), The most, and has been versatile from the US dollar. It has also drastically reduced its foreign-default debt to foreigners since 2014.

But the country is dependent on foreign investors. Their short-term asset holding (including bank loans and stocks), is relative GDPRussia is more like any other emerging market — and they have been stable since 2014. Even without sanctions, Russian assets will be under tremendous pressure as investors rush to exit.

And Russia has always assumed that it would be able to access foreign currency to protect the ruble. It has not stopped completely: Russia’s energy exports have largely escaped Western sanctions, so some dollars are still flowing into it. However, due to sanctions, 65% of Russia’s reserves could be worth $ 0 The remaining 35%, held in gold and yuan, cannot be used to protect the currency in the dollar and euro markets.

Russia’s difficulties will increase over time. Closing from Swift The financial-transfer system will hurt trade; SPFS, A Russian-backed rival, remains much less popular. Russia still needs dollars to pay for one-third of its imports, a problem when it suddenly becomes difficult to hold them. Even in the case of imports from China, where “de-dollarisation” has progressed, about 60% of transactions are still using greenbacks.

A test from God

The question is whether Mr. Putin really cares. He can’t welcome the possibility of angry oligarchs, if any of them really dare to raise their voice. But, according to Mrs. Hill and Mr. Gaddy’s book, a key principle of Putinism is survival, where one sees economic warfare as a test of strength. Pain point. “In this narrative, Russia constantly fights for survival against a hostile outside world,” they say. “A critical lesson from history is that Russia, the state, always survives in one form or another.” Russia faces deep recession. But instead of anarchy, Mr Putin could redouble his efforts to isolate Russia from the outside world. 3

Read more from Free Exchange, our column on economics:
How to Avoid Deadly Responses to Globalization (February 26)
A new history of prohibition contains unsettling lessons for today (February 19)
Promises of former East-Block economy largely unfulfilled (February 12)

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This article is published in the print edition of the section on finance and economics under the heading “From the fort to the ruins”

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