Commentary on Political Economy

Sunday 11 February 2024


Two years ago, the west stunned the rest of the world by imposing unprecedented economic sanctions on Russia after Vladimir Putin’s assault on Ukraine. Yet the euphoria in western capitals about this response turned to disenchantment when the Russian economy did not collapse as some had anticipated.

Russia’s economic outperformance relative to expectations has been a gift to Kremlin propaganda. “They are supposed to be smothering and pressuring us from all sides”, boasted Putin recently. In his telling, a stabilising currency and the return of growth after the initial impact of sanctions demonstrates the invincibility of a Russia supposedly under economic attack from the west.

Many have allowed themselves to be impressed. The IMF has in the past three months more than doubled its estimate for Russia’s 2024 growth in gross domestic product, which it now puts at 2.6 per cent. So does Putin have a point? Have sanctions failed? And are there lessons for us in Russia’s economic management? The answers are no, no, and quite possibly.

First, note that strong GDP growth does not tell the story it might in other countries. GDP, the sum total of all paid activity in an economy, is influenced by how much people want to buy: since its full-scale attack on its neighbour, Moscow has gone on a shopping spree for soldiers, imported weapons, and ramped up its own arms production. The Bank of Finland’s Institute for Emerging Economies (Bofit) finds that most of the growth in Russian manufacturing is in war-related subsectors. The rest of industry has largely stagnated. Car production, for example, remains a third below where it once was.

This does not mean the growth in GDP is not “real”. Activity has clearly increased, as is visible from other indicators such as the falling unemployment rate. But the aggregate figure reflects a changed composition of economic activity — and even then, on Russia’s own numbers, GDP has barely caught up with its pre-invasion level. Big economic problems — from exploding district heating pipes to egg shortages — proliferate alongside revived GDP growth. Public utilities and residential infrastructure are deteriorating badly, worsened by sanctions-related deficits in spare parts and machinery. War economy, yes. Broad resilience, not so much.

It is an error, then, to conclude from Russia’s GDP growth that sanctions have failed. Redeploying resources towards war camouflages the underperformance of the ordinary economy. The correct counterfactual is how badly the Russian economy would have performed in its previous configuration. The GDP fallout from sanctions would have been much greater. Besides, the sanctions were not comprehensive: for nearly a year after the invasion, Russia was selling oil and gas without sanctions at prices it had itself driven up.

Nevertheless, Moscow is exploiting a possibility that liberal market democracies ignore: if you disregard economic policy orthodoxies, you can mobilise resources for political goals, and squeeze more real activity out of an economy in the process. In the 1930s, the Nazis’ central banker Hjalmar Schacht found ingenious ways to inject liquidity into a broken German banking system, then military mobilisation restored depressed demand, employment and growth.

Russia, too, has jettisoned much conventional economic wisdom. (The FT has reported “a lot of interest in Schacht” at the Russian central bank.) Capital controls and heavy-handed intervention in corporate decisions staved off currency collapse and financial disorder. Massive worker and resource mobilisation has been achieved through a mix of planning, deficit spending and repression of consumption.

This ought to give liberal market democracies pause. Not that they should emulate warmongering dictators. But they should realise that mobilising and allocating very large resources — not to war, but to worthwhile investments — is perfectly doable. As Keynes said: “Anything we can actually do, we can afford.”

Admittedly, Moscow’s experience reminds us why the orthodoxies arose in the first place: the war economy cannibalises its own economic future. Non-military infrastructure suffers because investments are diverted. Bofit points out that Russia spends less on scientific research than a decade ago. But western countries could mobilise their resources to do precisely the opposite.

In truth, Russia’s cheerleaders have little to cheer. The rest of us should (while tightening the screws on sanctions) note its ability, for now, to deliver on politically-directed economic goals. Our goals being infinitely better, we should not let that put us to shame.

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