How long can Putin afford to wage war in Ukraine? | DW News

Summary

In this insightful discussion, Alexander Peno from the Carnegie Russia Eurasia Center analyzes Russia's economic situation during the ongoing conflict in Ukraine. He discusses the initial shock of the invasion, the transformation into a war economy, and the challenges of managing the Russian economy under sanctions. Peno highlights the dilemma of balancing war expenditures, social welfare, and inflation, and the growing dependency on China. He also touches on the impact of sanctions on technology and productivity, the paradoxical improvement in living standards for some, and the potential long-term economic consequences for Russia.

Takeaways

• 😐 The Russian economy was in a relatively stable state before the invasion of Ukraine, recovering from the effects of the COVID-19 pandemic.
• 🤔 There was a significant disconnect between the perceptions of Russian insiders and outsiders regarding the likelihood of war, with insiders initially dismissing the possibility.
• 😮 The Russian government and central bank were unprepared for the invasion and had to quickly shift to crisis management, implementing measures to protect the economy from sanctions.
• 💡 Russia has faced four major crises in the last 15 years, with two being sanctions-related, showing the country's frequent encounters with economic instability.
• 📉 The Russian economy is currently stable but is showing signs of strain, with high inflation and a reliance on state spending, which may not be sustainable in the long term.
• 💰 The Russian government's spending on the war effort is significant, with military expenditures projected to be around 8% of GDP in 2024, a historical high for modern Russia.
• 🔄 Russia has found new buyers for its energy resources in countries like China, India, and Turkey, but this has also led to increased dependency on these nations, particularly China.
• 🛠️ The technology sector in Russia is suffering due to a lack of access to Western technology, forcing businesses to rely on Chinese vendors or alternative, less efficient solutions.
• 📉 There is a growing anti-Western sentiment in Russia, which could complicate future relations and cooperation with the West, even after the war ends.
• 💼 The business community in Russia is not happy with the current situation, and there is a sense of being stuck in survival mode rather than planning for the future.
• 🕊️ Despite the ongoing war, there is a temporary improvement in living standards for some Russians, particularly those in lower income brackets, due to increased state spending.

Q & A

What was the economic situation in Russia before the invasion of Ukraine?

Before the invasion, Russia's economy was in a good state, recovering from the effects of COVID-19. It was growing and seemed stable, with the main risks being external factors such as pandemic resurgences or economic effects from advanced economies.

How did Alexander Peno perceive the possibility of war before the invasion?

Alexander Peno, working as an advisor for the central bank in Moscow, did not believe that a war would happen. He thought it would be economically irrational and detrimental to the well-being of the people, and that it was more of a bluff than a real possibility.

What was the immediate reaction within Russia after the invasion?

The initial reaction was shock. Many people, including those working in the central bank, were terrified and felt devastated. There was no prior meeting or announcement by Putin about the invasion, so the news was unexpected.

How did the Russian government and central bank respond to the sanctions?

They began working as anti-crisis managers, a role they had played before. Measures included blocking Russian reserves, banning non-residents from withdrawing liquid assets, and implementing defense measures for the economy, effectively putting the economy into an artificial coma.

What are the two opposing viewpoints on Russia's current economic state?

One viewpoint is that Russia is on the brink of collapse due to the war and sanctions. The other viewpoint is that Russia has never been stronger, with growth rates and Western sanctions bowing the economy.

What is Alexander Peno's stance on the debate about Russia's economic state?

Peno believes the reality is more complicated and lies somewhere in the middle. Russia's economy is large and rigid, making it difficult to collapse quickly. It is currently performing well due to recovery growth and high fiscal spending, but this growth is based on export revenues and could change if spending decreases.

What is the primary reason for inflation in Russia according to the transcript?

The primary reason for inflation in Russia is state spending, particularly on the war. This spending is causing a trade-off for policymakers between financing the war, maintaining people's well-being, and keeping inflation low.

How has Russia's dependency on China grown due to the war?

Russia's dependency on China has grown as it has found new buyers for its energy resources in China, India, and Turkey. However, this has also led to a shift in power dynamics, with Russia becoming the junior partner in the relationship.

What are some of the technological challenges Russia is facing due to sanctions?

Russia is facing challenges with accessing technology for offshore gas and oil development, AI, and biomedical technologies. It is struggling to get hardware and software, switching from Western companies to Chinese vendors, and facing difficulties with payments and transactions due to sanctions.

How is the current situation affecting the Russian business community and bureaucrats?

The business community and bureaucrats are not happy with the current situation. There is a sense of being offended and acting in a retaliation mood. Some feel like fatalists, dealing with the situation as it is without knowing how to deal with each other in the future.

What is the impact of the war on the Russian labor market?

The war has led to a historically low unemployment rate of 2.8%, indicating a lack of available workers. This has forced employers to pay more to retain their employees. However, there is competition for labor between the army, the military industry complex, and the rest of the economy.

How is the war affecting the perception of wealth distribution in Russia?

There is a change in people's attitude towards wealth distribution. For the first time since the 1990s, people from lower income strata feel more rich and happy, believing that the distribution of wealth is fairer than before.

What challenges will Russia face in the midterm due to the war?

In the midterm, Russia will face challenges such as decreasing living standards due to inflation, less infrastructure development due to rising construction costs, and a growing number of accidents due to underfinancing and difficulties in finding parts for the industry.