Russia’s resilient economy means war is the ‘new normal’

Reuters

President Vladimir Putin was in show-off form at the Saint Petersburg International Economic Forum, the “Russian Davos”, last week.

Trumpeting official Russian estimates of 5.4 percent GDP growth this year, “exceeding the global average”, he concluded: “This is the achievement of a new quality and content of economic growth in Russia, a change in the sectoral structure due to an active economic policy.”

While the global experts do not all agree with the detail – the IMF, for example, is predicting 3.2 percent growth in 2024 – Putin is essentially correct: the Russian economy is doing much better than almost anybody could have forecast when a barrage of economic and financial sanctions was fired in response to the invasion of Ukraine in 2022.

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Over the past two years, with an acceleration in the last six months, Russia has been put on a “war economy” footing as a direct result of policies originated in the Kremlin in support of the conflict with Ukraine.

Alexander Kolyandr, one of the authors of The Bell, a well-informed newsletter about the Russian economy, said recently that for Russia, “it’s clear the war in Ukraine is no longer seen as a crisis, but as the new normal.”

The appointment of Andrei Belousov, an economist, as Russia’s new defence minister with a brief to make the entire military-industrial complex an instrument for the long term waging of war, prompted comparisons with Albert Speer, Adolf Hitler’s minister of armaments and war production.

Kolyandr also noted recently that Putin had just proposed Russia’s most radical overhaul of its tax system in two decades – scrapping the 13 percent flat income tax rate in favour of a progressive system that could go as high as 22 percent, putting corporate tax up from 20 to 25 percent, and introducing VAT on previously exempt SMEs.

With a nod to the oligarchs and wealthy bureaucrats, income from dividends, deposits, securities and real estate trading will, however, remain unchanged at 15 percent.

The aim of the tax changes is to raise more money for the Kremlin and to redirect economic strategy towards domestic manufacturing, especially military production, at the expense of trade, services and other “bourgeois pleasures”, Kolyandr said.

Will the Russian people resent this? The fact is that most Russians do not seem to care that their country is sliding towards permanent war with the West. As long as salaries keep being paid, and life-saving government pensions keep flowing to an ageing population, they will follow the Kremlin line.

As long as the petro-roubles keep flowing, Putin will be able to wage war

Putin’s recent hubris has caused some in the West to think again about the efficacy of the sanctions package ratcheted up since 2022.

These have obviously not had the desired effect of destroying Russia’s ability to wage war, nor of alienating the oligarch and business leaders within the country, who have by and large remained loyal to Putin, and even been “persuaded” to come back within the fold in some cases.

There is one overarching reason why Western sanctions have failed in their short-term aim: Russia is still managing to export vast quantities of oil and gas, even if the markets have shifted from Europe to Asia and are being served by uninsured and probably illegal “shadow fleets” of ageing tankers.

The Biden administration “price cap” – designed to keep Russian oil flowing while limiting revenue to the Kremlin – is generally regarded as a failure. Russia still exports something like half its 10 million barrels per day capacity, and Moscow is predicting a 30 percent increase in oil and gas revenue this year.

As long as the petro-roubles keep flowing, Putin will be able to wage war. The problem for the West is that all the alternatives have unpalatable effects for their domestic constituencies.

A total ban on Russian hydrocarbon exports would be difficult to enforce without military intervention, especially with Indian and Chinese appetite for cheap Russian crude so resilient.

It would also send the global price of crude soaring, to above $150 a barrel by some estimates. President Biden does not want that in an election year.

Reuters

Other forms of sanctions escalation – like confiscating the assets of Russian sovereign funds in Western banks, or applying more rigorous strictures against the many Western companies still doing business in Russia – all face varying degrees of challenge in the West.

As Russia gears up for long-term war, the Western reaction seems almost quaint – worrying about upholding the “rules based system” Putin is intent on destroying.

The boss of one German chocolate manufacturer recently defended his company’s decision to keep on doing business in Russia with the words: “Russian children also like to eat chocolate.”

While the West bickers about spending 2 percent of GDP on defence, Russia is spending 6 percent, amounting to 40 percent of all government spending.

The point of a war economy is that, in the end, it must wage a victorious war, or come crashing down – either outcome would be a disaster for the world, or for Russia, or both.

Frank Kane is Editor-at-Large of AGBI and an award-winning business journalist. He acts as a consultant to the Ministry of Energy of Saudi Arabia and is a media adviser to First Abu Dhabi Bank of the UAE