Vladimir Putin has brought the Russian economy to the brink of disaster. Anadolu Agency / Getty Images
- Vladimir Putin has shut down Russia’s economy to fund the war in Ukraine, experts tell Insider.
- Experts say official data from Moscow suggests things are going far better than they actually are.
- The ruble is plummeting, labor has migrated and civil war remains a possibility.
The West has imposed sweeping sanctions on Moscow since the war in Ukraine began last February, but many of Russia’s economic woes stem from the suspicious and counterproductive leadership of Vladimir Putin.
Before the “special military operation” began, Russia was the 11th largest economy in the world and responsible for nearly 40% of the European Union’s natural gas imports and a quarter of its crude oil. A year and a half later, Putin transformed Moscow into a pariah state, isolated from the global financial system, locked out of its most lucrative trade routes and in the midst of a labor exodus. Experts assume that the damage is largely self-inflicted.
Speaking to Insider on Monday, Yale researchers Jeffrey Sonnenfeld and Steven Tian said Putin had largely lost the economic battle and was now struggling to maintain a status quo that was quickly crumbling under his feet.
“It’s devouring core industries,” Sonnenfeld said. “The lion’s share of the economy is controlled by the state, energy and financial sectors, and Putin is using the seed money from these companies as a cookie jar for his war chest.”
Trading will never be the same
Russia is barely breaking even in its energy trade, and most other key commodities such as wheat, lumber and metals are now selling at cheaper prices than before the invasion. The lack of trade revenue prompted Putin to impose draconian additional taxes on businesses and individuals, which Yale academics see as part of his “cannibalization” of the economy.
“Collecting onerous taxes doesn’t help the country’s economic health, but they do allow it to pay bills,” Sonnenfeld said.
Putin’s political missteps have become inevitable after he first called for an invasion of Ukraine, Tian said, adding that Russia’s trade status may never be the same. It is becoming increasingly clear that other countries can get along well without Russia as a trading partner.
“It is destroying the historical foundations of the Russian economy,” Tian said. “Its main exports have always been raw materials, but now nobody needs to buy Russian raw materials.”
Yale data shared with insiders showed that Russia’s liquefied natural gas market in particular has been permanently lost.
The initial supply shock in February 2022 was quickly overcome, and since then almost 100 billion cubic meters of natural gas have been connected to the grid thanks to regasification projects commissioned across Europe. Germany has prompted countries like France, the Netherlands and Italy to develop new floating storage units, which went online in record time.
According to Yale, Russia’s LNG markets are permanently doomed. Gas production by other major exporters skyrocketed after the invasion of Ukraine. Courtesy of the Yale Chief Executive Leadership Institute
While China and India have emerged as big buyers of cheap Russian crude since last year, deep discounts and long transportation routes are preventing these sales from providing a meaningful boost to Russia’s economy.
“If Putin were to call us today, he couldn’t name a single political or economic advantage for himself, the Russian people or the economy,” Sonnenfeld said.
Potential for a Soviet-style collapse
Volodymyr Lugovskyy, an economics professor at Indiana University, told me he expects dramatic economic change in the next three or four months.
“Many people are still unaware of how dire the situation in Russia could be,” he said.
Official government data points to an economy that has withstood the costs of the war, but under the hood figures such as retail sales, airline purchases and business activity suggest otherwise.
“Things are much worse than the reported 2% drop in GDP,” Lugovskyy said. “Sales of new cars, sales of new computers went down 40-60%. And when you remove military activity from the data, production looks far worse.” [than reported].”
The country’s currency in particular appears to be vulnerable. After the Wagner Group’s attempted mutiny in June, the ruble plummeted to a 15-month low. It was just above 90 per dollar on Monday but could weaken to 149 per dollar, according to Lugovskyy.
According to the professor, a change of power, a civil war or another attempt at mutiny could weigh on the exchange rate and ultimately lead to the collapse of the economy.
“Russia, like the Soviet Union, could fall into many parts, and that might not be bad for the world,” Lugovskyy said. “Right now it’s like an empire with a central power. Extreme events are entirely possible.”
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