November 27, 2025 • 27 mins
For months after Vladimir Putin’s fullscale invasion of Ukraine, Western leaders predicted Russia’s economy was on the brink of collapse under sanctions - and yet it didn’t.
It transformed into a wartime economy, fuelled by military production, redirected trade routes, and deeper ties with China and India.
But now there are signs this may be changing - with industrial output slowing, inflation rising, and severe labour shortages as hundreds of thousands of working-age men have either died, emigrated or been mobilised.
And Western leaders are once again questioning how long Putin can bankroll his war machine.
So is Russia’s economy finally starting to buckle - or is this still wishful thinking from Ukraine’s allies?
On this episode of The Fourcast, Krishnan Guru-Murthy is joined by Arkady Ostrovsky, Russia editor at The Economist, and Elina Ribakova, one of the world’s leading experts on sanctions and Russian macro-economics.
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Episode Transcript
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(00:00):
A lot of people got it wrong in the first years of the war that
Russian economy would collapse. And now I think the pendulum
swung the other way. You could ask, you know, is
Putin running out of money? Well, he's already run out of.
Money. It is now almost like a bubble
of the war economy. So the only sectors that they
have recovered to the pre crisislevels and actually have grown
(00:21):
some are the sectors related to the war economy.
Is there an argument that Putin needs the war to go on because
of the way that the Russian economy has now been oriented?
Hello and welcome to the forecast.
For months after Putin's invasion of Ukraine, Western
leaders said Russia was on the brink of collapse under
sanctions. And yet it didn't.
(00:43):
It transformed into a wartime economy fuelled by military
production, redirected trade routes and deeper ties with
China and India. But now there are signs this may
be changing, with industrial output slowing, inflation rising
and severe labour shortages as hundreds of thousands of working
age men have either died, emigrated or been mobilized.
(01:04):
And Western leaders are once again questioning how long Putin
can bankroll his war machine. So is Russia's economy finally
starting to buckle or is this still wishful thinking from
Ukraine's allies? With me today, Arkady Ostrovsky,
Russia editor at The Economist, and Elina Ribakova, one of the
world's leading experts on sanctions and Russian macro
(01:26):
economics. Let's begin with the sort of the
simple question, if you like, ofwhether Putin really wants a
deal right now, Arkady, I mean, is he under economic pressure
that is pushing him towards wanting an end?
I don't think he wants to suddenly leave Ukraine alone.
I don't think he suddenly wants to stop, stop his bigger
(01:49):
offensive against Europe and against transatlantic security
system which he he is set to, you know, he wants to undermine.
So I don't think we should look at the deal sort of separately.
Now, is he under pressure? Yes, he is under some pressure.
Does that mean that the war is going to end?
That doesn't necessarily follow.Alina what would?
(02:10):
You say, I would say indeed, I fully agree with our career that
we need to separate the two and I think that's where the biggest
mistake we in Europe and in the West make.
Visiting Russia, they have separated the two at the very
beginning of the 2022 invasion. They went into this head on
understanding what kind of sanctions can be implemented.
There were some surprises, but not not many.
(02:31):
They prepared for the sanctions since 2014 and they were willing
to take the cost. However, what they didn't plan
for, for the fact that it would take so long.
And it is indeed incredible thatsize matters, you know, economy,
number of people, but yet Ukraine still holds four years
on, right? Russia wasn't entirely prepared
for that. They were hoping for either
blitzkrieg of maybe 2 days or maybe a couple of years.
(02:55):
And now we're in the situation where instead of producing more
tanks, tanks got more expensive.And therefore we've seen the
central Bank of Russia trying toslow down the economy.
And that is also affecting the production of the military
industrial complex. Right.
So, so, So what extent is Russia's economy dependent on
the war, and to what extent is the war dependent on the
(03:16):
economy? I think it goes both ways
indeed, right. It is now almost like a bubble
of the war economy. So the only sectors that they
have recovered to the pre crisislevels and actually have grown,
some other sectors related to the war economy, they have
slowed down recently, but not really fully to negative
(03:37):
territory. Most of other sectors have not
recovered their losses. So it is almost like pricking
the bubble, right? We talked a lot about it before
the global financial crisis thatit is very hard to do
politically and economically. At the same time, it is also
giving opportunities for people that have not had a social lift
in decades. You know, weaker regions, you
(03:58):
know, they're getting contractual payments for
participation in the war or regions where there is military
production. So this is on the one hand.
On the other hand, of course, for Russia to be able to
continue at this pace is challenging.
And that's where they're lookingfor new sources of investment.
And that's what they're trying to negotiate, whether with the
US or with countries in Asia, for some sort of sort of blink
(04:20):
for less forceful enforcement ofsanctions.
Katie, do you think the West misunderstood this at the
beginning? I think the West did
misunderstand it. I think the West misunderstood a
lot of things and I think the West continues to make a lot of
mistakes towards Russia. We can talk about it in terms of
public opinion and the links between public opinion, economy
and politics of it. But in terms of economy, yes, as
(04:43):
you said rightly, everybody was expecting Russia to collapse.
It did not. But the pressures are catching
on. The divide between the civil
economy and the military economy, part of the economy is
growing. Now this the source of, you
know, income for Russia is shrinking, which is why Russia
(05:05):
has the biggest budget deficit Ithink it's had in modern
history. And you know, and very high
inflation and 40% of Russian budget goes towards the
military, towards the war, both in terms of production of
weapons and in payments of of contracts and the payout death
(05:29):
payouts. So I think the pressures are
building up. I think the West misunderstood
at the time when they expected it to to collapse.
I think it's misunderstanding what game Putin is playing now
and actually how complicated that relationship between the
economy and the society and the politics really is.
Yes. I mean, I again, I think at the
(05:49):
beginning there was this assumption or a lot of
commentary that this would not be sustainable for long, that
the impact of the war would be felt by ordinary Russians and
that this would dramatically affect the popularity of Putin.
Why hasn't that happened? He made it a commercial war.
It's most extraordinary things. You know, people don't talk
(06:11):
about war, but partly because ofthat and partly to great degree
is because of repression. I mean, Russia is highly
repressive, almost a totalitarian regime where
speaking out will will land you in jail.
So you have a certain living standard which is maintained
across the population. You have the army, which is most
(06:34):
people think, OK, well that, youknow, they're getting paid so we
don't need to feel sorry for them.
And you have a repressive systemwhich basically punishes
speaking, speaking out against the war.
And that creates a false idea ofhomogeneous support.
And that is, I think the biggestmistake the West has made in in
(06:55):
recent months is basically completely accepting and
embracing Putin's propaganda that all Russians support the
war or the majority of Russians support the war.
And the picture is much more nuanced.
But the the the Western policy towards Russia and the Western
rhetoric towards Russia has reinforced Putin's propaganda
rather than confronted it. Right.
(07:18):
But I mean, accepting the fact that he's commercialized the war
and the people are not being dragged off against their will,
the numbers surely at this pointare so enormous that everybody
must be touched by it. You're right.
I mean, the numbers are huge. I mean Russia's losses are in
(07:41):
dead and wounded. You know, some say, you know,
it's it's a million around 1,000,000, which is, which is
enormous. And yes, it is contractual.
And I wouldn't say it's all, youknow, there is a lot of
deception. There is a lot of pressure.
You know, to what extent it's voluntary, it's another matter.
(08:03):
I don't think it is. You know, a lot of it is not
voluntary. A lot of it is actually people
who are drafted into the Army bylaw and then pressured to sign
contracts. So there is lots of lots of
deception. But yes, you're right,
ultimately everybody now knows that the, the losses are, are
(08:24):
huge and people see it and they're the cities and towns and
the villages because the, the size of cemeteries is growing
and everybody particularly in a small place where you know,
people have been taken from mostly it's not large cities
like Moscow and Saint Petersburg.
It's disadvantaged economically.Poorer regions of, of Russia.
(08:46):
Of course people see it. It is having an impact.
If you ask people what they would like, they say they want
the stop of the war, they don't want mobilization, they do not
want to participate in it, and they want 60% want improvement
in the relationship with the West.
Interestingly, the argument you hear a lot is that, well, none
of it matters because public opinion in Russia doesn't matter
(09:08):
because people don't have any agency.
But actually it does not in the direct way that everybody
expects that people will just come out in the streets and
overthrow Putin. People can't do that if there
are tanks and people with guns. But in terms of the why the
Kremlin cares about public opinion and it does, it measures
(09:29):
it all the time, is that it creates a merely in which it can
operate. It needs to have this picture.
Putin from the very beginning, from the moment he came to
power, he came out with this idea of super majority of people
supporting him. That is the source of
legitimacy. Let's let's turn to the economy.
To what extent did sanctions backfire and and how much was
(09:51):
Russia able to turn itself towards China, towards India and
adapt? Well, you know, I think first we
need to think about objectives of sanctions.
Sanctions do not create World Peace.
You know, they don't change regimes.
They don't resolve your educational reform at home,
right? I think we're just loaded too
many things on this magic tool that is supposed to be like a
(10:11):
magic wand and then Putin disappears and will live happily
ever after. So I think first we needed to
have realistic expectations. In terms of realistic
expectations, should we give foreign exchange to Russia in
exchange for their oil? Probably not Should we sell the
missile and components of missiles?
Probably not, right. This is the extent of sanctions
that I would like to see with clear targets and clear
(10:32):
measurable objectives to to check against them, right.
So this is first whether Russians get luxury goods or
not, frankly, I don't really care, right?
And most people in Ukraine that getting their Shahid's to their
house also don't really care. So this is the first part.
In terms of what backfired, I think what backfired is our poor
enforcement and implementation of sanctions.
(10:53):
We gave the huge window for China to drive through with the
truck and more than 90% of various sanctions evasion
schemes happen via China. It may be Western produced the
Western owned goods that ship through China or maybe are
produced in joint venture ventures in China or licensing
and then go to Russia. Of course, other border states
(11:15):
are also at fault and I think that's has created a special
relationship and it's also allowing China to test drive
sanctions evasion techniques foragainst possible sanctions that
they might experience in the future.
So. So are you saying that pretty
much everything gets through anyway?
Not everything gets through. Things spend longer time
(11:37):
travelling to Russia, they're more expensive, but a lot of
things still get through. And we can see that from the
disassembled components, parts that the Ukrainian authorities
are disassembling and putting online.
You can see that Russia still acts has access to Western
components, albeit more expensively and with the longest
production times. What about the the US
(11:57):
administration's approach to trying to to tackle this?
I mean, they've been terribly fierce on India, but not
terribly fierce towards China. Well, there is this panda in the
room that they're very afraid ofaddressing, right.
And I think it is also characteristic to this
administration as well as the previous one.
If you look at the statistics, China started supplying this
(12:20):
components already in autumn 2022 and it's almost sort of
went to the pre war levels, the volumes thanks to China.
And we sort of closed the blind into that and we try to have
behind the closed door conversations with China and
didn't quite really work out right.
So I think here the current administration seems to be
following the same strategy. Maybe they would like to have a
(12:41):
grand deal on trade and they do not want to have the the pesky
Russia, Ukraine war issue getting in the way of that.
In specifically in terms of India, I would like to see more
the decisive action. Yes, they've been some good
announcements, but let's see if there will be enforcement.
Right. But how does how is all this fed
(13:02):
through to Russia's domestic economy and to what extent is it
under pressure? I mean, you know, the question
kind of feels, is there an argument that Putin needs the
war to go on because of the way that the Russian economy has now
been orientated? Once you have driven into the
bubble, you know, and we all remember, Greenspan, that nobody
(13:24):
likes to prick the bubble, right?
It's very hard for you to stop to stop that.
And we've seen all this musical chairs let them continue from
the bankers, you know, before the global financial crisis.
And there is something very similar here because Russia has
been writing five year plans of diversification from commodities
of productivity growth improvements.
And at some point they just started rewriting the same plan
(13:46):
because they struggled to find the new sort of results that
hope or productivity growth apart from just being a
commodity economy. And this war economy has given
this temporarily boost. And I think that is very hard to
stop. You know, even as Arkady was
describing even an autocratic regime, people still worry about
the opinion of the people. And specifically in autocratic
(14:09):
regimes, the regime change is more painful than in a
democratic economy, I think. That's absolutely right what
Lena is saying. And I I think we should be
slightly humble in that we got it.
I mean, a lot of people got it wrong in the first months and,
you know, years of the war that Russian economy would collapse.
(14:30):
And now I think the pendulum swung the other way is, oh, no,
it's fine. You know, it's so resilient.
It will, you know, nothing will actually happen and, and Putin
can carry on for three, 5-7 years.
The truth is we don't know. We haven't been to this
position. I mean, Lenny is absolutely
right that it's very hard. Even if the world were, even if
(14:53):
the war was to freeze, let's say, even if you imagine, which
is very hard to imagine, some ofthe sanctions would get lifted.
Basically, I can't see any sources of growth or investment
in Russia. I can't see Russian economy
getting back, getting back on track.
So in a way, the deterioration, the degradation of Russian
(15:17):
economy will continue. How people will respond, how the
politics will respond, we simplydon't know.
But we do know that in a way youcould ask, you know, is Putin
running out of money? Well, he's already run out of
money. If he didn't run out of money,
there wouldn't be a budget deficit, which is five times I
think, or Lenny will correct me larger than that what what they
(15:38):
forecast. So in that sense, he's already
run out of money. And so the fact that the economy
will, you know, suffer is already suffering, is under
pressure that doesn't necessarily again mean that that
Putin will stop. So we are we're in uncharted
territory. We simply don't know how things
are going to to form. And it will be a function of
(16:01):
many things of where the war is going or where the economy is
going, whether there are any black Swans, what the, you know,
what would if the war was to freeze, what would happen to the
soldiers who return home? What would happen to the levels
of violence and aggression. There are just too many factors
which we have to be, as I said, humble and so, so.
(16:21):
Alina, to what extent is sanctions relief, you know,
needed by Russia and attractive in the peace process?
You know, how much of A prioritywill it be?
I think we've seen already from the person whom I call the
sanctions lifting envoy Dmitriev, that sanctions are a
priority in this negotiations. Why are they priority, As I kind
(16:42):
of exactly explained, not because it's going to boost the
economy dramatically, but it's going to think change things on
the margin. And let's think about investors
domestically, third country investors and then Western
investors. Russia doesn't necessarily hold
or need the Western investors tocome back.
They need to have this sort of multiple equilibrium domestic to
be resolved where domestic investors was extra cash or
(17:05):
maybe third country investors feel, oh, wait a second, this is
maybe a normalising situation. I'm more ready to invest at this
levels into Russia. And I think this is a critical
moment for Russia. The signalling of normalisation
would give them space to invest more.
And the question is whether theyinvest more in something
productive for civilian use or something more military related.
(17:25):
And the big risk, it will be something that is definitely
military related. Yes, and and why would anybody
trust that Russia won't get intofurther entanglements in the
future when it's it, it's whole foreign policy approach seems to
be based on that? Well, I can comment on the
macroeconomic side of it is we have done a lot of studies at
(17:46):
the Kiev School of Economics where we're trying to use data
to track supply chains and the shipments among different parts
of the Russian industrial base, military industrial base.
And we're seeing production of some of the types of weaponry
that is not currently needed in Ukraine.
So we've seen that activity, whether it's naval warfare
related or maybe the airplanes. And that raises questions, what
(18:08):
are they using that output for? What are they planning to use it
for? Akadi.
Yeah, I think there is also one very big factor in all of this,
which Elena mentioned the a few minutes ago, which is China.
(18:29):
Russia would not have been able to conduct this war economically
without China's lifeline. Now China's got deep pockets.
It's not going anything away forfree.
We know that Chinese actually investment in Russian economy
and the private economy is very low.
(18:49):
But China needs Russia to be stable with the biggest mistake
I think the West has made at thebeginning of the war.
And it was sort of almost contemptuous to think that you
could isolate Russia simply by imposing Western sanctions.
The world is bigger than the worst.
(19:10):
You know, if you have India, if you have China, if you have
global S which do not isolate Russia, you cannot isolate its
com. You cannot cut the sources of
revenue. The Indian companies, Chinese
companies will buy Russian oil. Physically restricting Russian
volumes of oil export is probably the best thing.
(19:33):
And and the best thing of all would be take bringing down the
oil price. And I think that is actually the
probably the biggest unknown factor is you know, there are
predictions in the market out there.
Ilina probably knows more that you know, the oil is already $50
a barrel that it will get to $30, it will get to $30 a
(19:55):
dollars a barrel by by the end of 2027.
Now Russia is going next year isgoing to be the hardest year
economically Russia has had. If the oil price continues to go
down, that's a very different dynamic.
You know, Russian cost of extraction I from the top of my
mind, I think is about $2025 a barrel.
(20:17):
So you only get $5. I mean that you can't conduct a
big war, you can't continue to pay those contracts given that
your army is contractual at $30 a barrel of the same.
And keep the the army of the same size.
So it just becomes impractical. It just he, Putin will stop when
either he has stopped or when he's unable to go any further in
(20:41):
terms of his intentions. The intentions are not going to
change. The capacity and capability
could change. And Alina, are Russian consumers
happy to be this reliance on China in the future?
And I suppose in terms of labourforce, you know the increasing
number of imported workers from Africa and you know where, where
(21:03):
else, wherever else they may be coming.
Well, on China, I think the consumer is definitely sort of
getting concerned, but it's a bit too early days.
Let's look at the car imports. Russia actually imposed tariffs
on its big friend China for car imports because they realized
that the Western producers used to put some of the production
domestically and it led to some positive spillovers and
(21:26):
agglomeration effects in the economy, while China just
aggressively dumping the oversupply into Russia.
And that has allowed China to continue one of the biggest
producers in the world in cars because they were dumping into
Russia. So Russia actually put in a
tariff on that, right. So you see already some of the
concerns, but I think also the big concern or maybe
(21:46):
embarrassment is the big flip interms of Russia's export to
China. Russia used to export to China
mostly manufacturing products, more complex machinery sometime
in 2000. Now 80% is energy and metals,
you know, so it's truly like a pump, you know, that is that is
sending goods to China. And it's definitely not a good
(22:07):
look for Russian authorities or the consumer.
OK. And what about Labour just going
on into the future? I mean, you know, if Russia has
lost quarter of a million dead or somewhere between that and a
million, that's enough to have quite an effect, isn't it?
Yes, I mean we see it already inunemployment numbers.
The unemployment numbers are around 2%.
You know, this is an emerging market, right?
(22:27):
In any emerging market there aremore frictions that would keep
your natural rate of unemployment, meaning non
inflation generating rate of unemployment somewhat elevated.
This is not even a normal rate for UK or the US, right.
So that's one of the reasons whythe central bank was forced to
hike rates. So this employment issue will be
very sort of unemployed or employment or labour force issue
(22:49):
will be pervasive. For now, it seems that the, the,
the, the block of secure security block has won out,
especially after the terrorist attack on, on I think in Crocus
City Mall where they are not letting a lot of migrant workers
to come back. On top of that, you had some of
(23:10):
the racism nation issues and also not adding to the
willingness of this work is to come back.
And then finally, you mentioned some of them African countries
sort of coming, including from South Africa and others being
lured to Russia. And the issue is there that
integration is very hard. And also many of them have to
come under pretense of working. And then the end of the day,
(23:32):
they end up either on the highlytoxic, poisonous production or
the some of them end up on the frontline.
And then of course, they let their people home know that,
well, this is not a great way toto, to earn your money.
So finally, Arkady, I mean, it doesn't sound like you think the
economy is is going to force Putin into anything imminently.
(23:53):
I think so. I don't think there is anything
to force, unfortunately, there is anything to force Putin into
into any sort of a deal. Now that is not to say that he
doesn't have pressures. There are pressures in terms of
the expenditure. There is pressures on the
economy. There is a pressure, you know,
he can't obviously, you know, they've been fighting for four
(24:17):
years in January. This war will be longer than
than the Soviet participation inthe Second World War, the in the
Great Patriotic War. So the the pressures are
building up. Russia is not in a, you know, in
a healthy position at all. But remember, it's, you know, in
(24:38):
a war, it's always about the other side as well.
It's who's got more resources. That's why the war of attrition
is so dangerous. You know, he's he can't deal
with sort of a military final military blow to Ukraine.
But if he ties Ukraine to degreethat the number of desertions
(24:59):
is, you know, is very, very highnow, you know, Russia spends 8%
on, on, on, on the war on the military.
Ukraine spends 30% of the military, you know, corruption
scandals, everything else. You know, it only needs to be it
doesn't need to be strong. It only needs to be slightly
stronger than Ukraine talked about mistakes in the West.
(25:19):
But the fact that, you know, four years into this war,
European military production is nowhere near the fact that that
Europe still has not passed the frozen assets to Ukraine.
And it's still, you know, there is more talk than action.
I think that's the biggest LED down for Ukrainians.
And they know this. I mean, you know, the, the
(25:40):
opinion in Ukraine is already becoming very resentful of
certainly of America and now will be towards Europe because
they feel LED down because all this talk about, you know, for
as long as it takes, whatever ittakes is the talk.
And, and, and finally to you, Alina, I mean, if you were an
economic adviser to Putin, mightyou be tempted to say the lesson
(26:01):
of the Ukraine war is that this works for Russian growth and
that Russia has shown that it can, it can pivot to this kind
of existence and that in the medium term, it suits us to keep
agitating at Europe because it works for us too.
If I were a great cardinal in Kremlin administration, I would
(26:22):
definitely say that it's gives us the social lift for many
people in the regions that wouldwouldn't have it otherwise.
It keeps people calm. We also don't want to have this
people back at home trying to reintegrate into the society
after being at war. And some of them are also
criminals, right? That also creates a lot of
(26:43):
challenges. I would probably advise to find
ways to freeze the contract conflict, the war temporarily to
be able to invest and rearm moreskilfully and then think what
kind of levers will have vis A vis Europe if we can put more
pressure on Europe. So that would be unfortunately
my advice for if I were great Cardinal in Putin's
(27:05):
administration. Elina Arcadi, thank you so much
indeed for your time. It's been fascinating talking to
you both. That's the forecast.
Until next time, bye bye.
A lot of people got it wrong in the first years of the war that
Russian economy would collapse. And now I think the pendulum
swung the other way. You could ask, you know, is
Putin running out of money? Well, he's already run out of.
Money. It is now almost like a bubble
of the war economy. So the only sectors that they
have recovered to the pre crisislevels and actually have grown
(00:21):
some are the sectors related to the war economy.
Is there an argument that Putin needs the war to go on because
of the way that the Russian economy has now been oriented?
Hello and welcome to the forecast.
For months after Putin's invasion of Ukraine, Western
leaders said Russia was on the brink of collapse under
sanctions. And yet it didn't.
(00:43):
It transformed into a wartime economy fuelled by military
production, redirected trade routes and deeper ties with
China and India. But now there are signs this may
be changing, with industrial output slowing, inflation rising
and severe labour shortages as hundreds of thousands of working
age men have either died, emigrated or been mobilized.
(01:04):
And Western leaders are once again questioning how long Putin
can bankroll his war machine. So is Russia's economy finally
starting to buckle or is this still wishful thinking from
Ukraine's allies? With me today, Arkady Ostrovsky,
Russia editor at The Economist, and Elina Ribakova, one of the
world's leading experts on sanctions and Russian macro
(01:26):
economics. Let's begin with the sort of the
simple question, if you like, ofwhether Putin really wants a
deal right now, Arkady, I mean, is he under economic pressure
that is pushing him towards wanting an end?
I don't think he wants to suddenly leave Ukraine alone.
I don't think he suddenly wants to stop, stop his bigger
(01:49):
offensive against Europe and against transatlantic security
system which he he is set to, you know, he wants to undermine.
So I don't think we should look at the deal sort of separately.
Now, is he under pressure? Yes, he is under some pressure.
Does that mean that the war is going to end?
That doesn't necessarily follow.Alina what would?
(02:10):
You say, I would say indeed, I fully agree with our career that
we need to separate the two and I think that's where the biggest
mistake we in Europe and in the West make.
Visiting Russia, they have separated the two at the very
beginning of the 2022 invasion. They went into this head on
understanding what kind of sanctions can be implemented.
There were some surprises, but not not many.
(02:31):
They prepared for the sanctions since 2014 and they were willing
to take the cost. However, what they didn't plan
for, for the fact that it would take so long.
And it is indeed incredible thatsize matters, you know, economy,
number of people, but yet Ukraine still holds four years
on, right? Russia wasn't entirely prepared
for that. They were hoping for either
blitzkrieg of maybe 2 days or maybe a couple of years.
(02:55):
And now we're in the situation where instead of producing more
tanks, tanks got more expensive.And therefore we've seen the
central Bank of Russia trying toslow down the economy.
And that is also affecting the production of the military
industrial complex. Right.
So, so, So what extent is Russia's economy dependent on
the war, and to what extent is the war dependent on the
(03:16):
economy? I think it goes both ways
indeed, right. It is now almost like a bubble
of the war economy. So the only sectors that they
have recovered to the pre crisislevels and actually have grown,
some other sectors related to the war economy, they have
slowed down recently, but not really fully to negative
(03:37):
territory. Most of other sectors have not
recovered their losses. So it is almost like pricking
the bubble, right? We talked a lot about it before
the global financial crisis thatit is very hard to do
politically and economically. At the same time, it is also
giving opportunities for people that have not had a social lift
in decades. You know, weaker regions, you
(03:58):
know, they're getting contractual payments for
participation in the war or regions where there is military
production. So this is on the one hand.
On the other hand, of course, for Russia to be able to
continue at this pace is challenging.
And that's where they're lookingfor new sources of investment.
And that's what they're trying to negotiate, whether with the
US or with countries in Asia, for some sort of sort of blink
(04:20):
for less forceful enforcement ofsanctions.
Katie, do you think the West misunderstood this at the
beginning? I think the West did
misunderstand it. I think the West misunderstood a
lot of things and I think the West continues to make a lot of
mistakes towards Russia. We can talk about it in terms of
public opinion and the links between public opinion, economy
and politics of it. But in terms of economy, yes, as
(04:43):
you said rightly, everybody was expecting Russia to collapse.
It did not. But the pressures are catching
on. The divide between the civil
economy and the military economy, part of the economy is
growing. Now this the source of, you
know, income for Russia is shrinking, which is why Russia
(05:05):
has the biggest budget deficit Ithink it's had in modern
history. And you know, and very high
inflation and 40% of Russian budget goes towards the
military, towards the war, both in terms of production of
weapons and in payments of of contracts and the payout death
(05:29):
payouts. So I think the pressures are
building up. I think the West misunderstood
at the time when they expected it to to collapse.
I think it's misunderstanding what game Putin is playing now
and actually how complicated that relationship between the
economy and the society and the politics really is.
Yes. I mean, I again, I think at the
(05:49):
beginning there was this assumption or a lot of
commentary that this would not be sustainable for long, that
the impact of the war would be felt by ordinary Russians and
that this would dramatically affect the popularity of Putin.
Why hasn't that happened? He made it a commercial war.
It's most extraordinary things. You know, people don't talk
(06:11):
about war, but partly because ofthat and partly to great degree
is because of repression. I mean, Russia is highly
repressive, almost a totalitarian regime where
speaking out will will land you in jail.
So you have a certain living standard which is maintained
across the population. You have the army, which is most
(06:34):
people think, OK, well that, youknow, they're getting paid so we
don't need to feel sorry for them.
And you have a repressive systemwhich basically punishes
speaking, speaking out against the war.
And that creates a false idea ofhomogeneous support.
And that is, I think the biggestmistake the West has made in in
(06:55):
recent months is basically completely accepting and
embracing Putin's propaganda that all Russians support the
war or the majority of Russians support the war.
And the picture is much more nuanced.
But the the the Western policy towards Russia and the Western
rhetoric towards Russia has reinforced Putin's propaganda
rather than confronted it. Right.
(07:18):
But I mean, accepting the fact that he's commercialized the war
and the people are not being dragged off against their will,
the numbers surely at this pointare so enormous that everybody
must be touched by it. You're right.
I mean, the numbers are huge. I mean Russia's losses are in
(07:41):
dead and wounded. You know, some say, you know,
it's it's a million around 1,000,000, which is, which is
enormous. And yes, it is contractual.
And I wouldn't say it's all, youknow, there is a lot of
deception. There is a lot of pressure.
You know, to what extent it's voluntary, it's another matter.
(08:03):
I don't think it is. You know, a lot of it is not
voluntary. A lot of it is actually people
who are drafted into the Army bylaw and then pressured to sign
contracts. So there is lots of lots of
deception. But yes, you're right,
ultimately everybody now knows that the, the losses are, are
(08:24):
huge and people see it and they're the cities and towns and
the villages because the, the size of cemeteries is growing
and everybody particularly in a small place where you know,
people have been taken from mostly it's not large cities
like Moscow and Saint Petersburg.
It's disadvantaged economically.Poorer regions of, of Russia.
(08:46):
Of course people see it. It is having an impact.
If you ask people what they would like, they say they want
the stop of the war, they don't want mobilization, they do not
want to participate in it, and they want 60% want improvement
in the relationship with the West.
Interestingly, the argument you hear a lot is that, well, none
of it matters because public opinion in Russia doesn't matter
(09:08):
because people don't have any agency.
But actually it does not in the direct way that everybody
expects that people will just come out in the streets and
overthrow Putin. People can't do that if there
are tanks and people with guns. But in terms of the why the
Kremlin cares about public opinion and it does, it measures
(09:29):
it all the time, is that it creates a merely in which it can
operate. It needs to have this picture.
Putin from the very beginning, from the moment he came to
power, he came out with this idea of super majority of people
supporting him. That is the source of
legitimacy. Let's let's turn to the economy.
To what extent did sanctions backfire and and how much was
(09:51):
Russia able to turn itself towards China, towards India and
adapt? Well, you know, I think first we
need to think about objectives of sanctions.
Sanctions do not create World Peace.
You know, they don't change regimes.
They don't resolve your educational reform at home,
right? I think we're just loaded too
many things on this magic tool that is supposed to be like a
(10:11):
magic wand and then Putin disappears and will live happily
ever after. So I think first we needed to
have realistic expectations. In terms of realistic
expectations, should we give foreign exchange to Russia in
exchange for their oil? Probably not Should we sell the
missile and components of missiles?
Probably not, right. This is the extent of sanctions
that I would like to see with clear targets and clear
(10:32):
measurable objectives to to check against them, right.
So this is first whether Russians get luxury goods or
not, frankly, I don't really care, right?
And most people in Ukraine that getting their Shahid's to their
house also don't really care. So this is the first part.
In terms of what backfired, I think what backfired is our poor
enforcement and implementation of sanctions.
(10:53):
We gave the huge window for China to drive through with the
truck and more than 90% of various sanctions evasion
schemes happen via China. It may be Western produced the
Western owned goods that ship through China or maybe are
produced in joint venture ventures in China or licensing
and then go to Russia. Of course, other border states
(11:15):
are also at fault and I think that's has created a special
relationship and it's also allowing China to test drive
sanctions evasion techniques foragainst possible sanctions that
they might experience in the future.
So. So are you saying that pretty
much everything gets through anyway?
Not everything gets through. Things spend longer time
(11:37):
travelling to Russia, they're more expensive, but a lot of
things still get through. And we can see that from the
disassembled components, parts that the Ukrainian authorities
are disassembling and putting online.
You can see that Russia still acts has access to Western
components, albeit more expensively and with the longest
production times. What about the the US
(11:57):
administration's approach to trying to to tackle this?
I mean, they've been terribly fierce on India, but not
terribly fierce towards China. Well, there is this panda in the
room that they're very afraid ofaddressing, right.
And I think it is also characteristic to this
administration as well as the previous one.
If you look at the statistics, China started supplying this
(12:20):
components already in autumn 2022 and it's almost sort of
went to the pre war levels, the volumes thanks to China.
And we sort of closed the blind into that and we try to have
behind the closed door conversations with China and
didn't quite really work out right.
So I think here the current administration seems to be
following the same strategy. Maybe they would like to have a
(12:41):
grand deal on trade and they do not want to have the the pesky
Russia, Ukraine war issue getting in the way of that.
In specifically in terms of India, I would like to see more
the decisive action. Yes, they've been some good
announcements, but let's see if there will be enforcement.
Right. But how does how is all this fed
(13:02):
through to Russia's domestic economy and to what extent is it
under pressure? I mean, you know, the question
kind of feels, is there an argument that Putin needs the
war to go on because of the way that the Russian economy has now
been orientated? Once you have driven into the
bubble, you know, and we all remember, Greenspan, that nobody
(13:24):
likes to prick the bubble, right?
It's very hard for you to stop to stop that.
And we've seen all this musical chairs let them continue from
the bankers, you know, before the global financial crisis.
And there is something very similar here because Russia has
been writing five year plans of diversification from commodities
of productivity growth improvements.
And at some point they just started rewriting the same plan
(13:46):
because they struggled to find the new sort of results that
hope or productivity growth apart from just being a
commodity economy. And this war economy has given
this temporarily boost. And I think that is very hard to
stop. You know, even as Arkady was
describing even an autocratic regime, people still worry about
the opinion of the people. And specifically in autocratic
(14:09):
regimes, the regime change is more painful than in a
democratic economy, I think. That's absolutely right what
Lena is saying. And I I think we should be
slightly humble in that we got it.
I mean, a lot of people got it wrong in the first months and,
you know, years of the war that Russian economy would collapse.
(14:30):
And now I think the pendulum swung the other way is, oh, no,
it's fine. You know, it's so resilient.
It will, you know, nothing will actually happen and, and Putin
can carry on for three, 5-7 years.
The truth is we don't know. We haven't been to this
position. I mean, Lenny is absolutely
right that it's very hard. Even if the world were, even if
(14:53):
the war was to freeze, let's say, even if you imagine, which
is very hard to imagine, some ofthe sanctions would get lifted.
Basically, I can't see any sources of growth or investment
in Russia. I can't see Russian economy
getting back, getting back on track.
So in a way, the deterioration, the degradation of Russian
(15:17):
economy will continue. How people will respond, how the
politics will respond, we simplydon't know.
But we do know that in a way youcould ask, you know, is Putin
running out of money? Well, he's already run out of
money. If he didn't run out of money,
there wouldn't be a budget deficit, which is five times I
think, or Lenny will correct me larger than that what what they
(15:38):
forecast. So in that sense, he's already
run out of money. And so the fact that the economy
will, you know, suffer is already suffering, is under
pressure that doesn't necessarily again mean that that
Putin will stop. So we are we're in uncharted
territory. We simply don't know how things
are going to to form. And it will be a function of
(16:01):
many things of where the war is going or where the economy is
going, whether there are any black Swans, what the, you know,
what would if the war was to freeze, what would happen to the
soldiers who return home? What would happen to the levels
of violence and aggression. There are just too many factors
which we have to be, as I said, humble and so, so.
(16:21):
Alina, to what extent is sanctions relief, you know,
needed by Russia and attractive in the peace process?
You know, how much of A prioritywill it be?
I think we've seen already from the person whom I call the
sanctions lifting envoy Dmitriev, that sanctions are a
priority in this negotiations. Why are they priority, As I kind
(16:42):
of exactly explained, not because it's going to boost the
economy dramatically, but it's going to think change things on
the margin. And let's think about investors
domestically, third country investors and then Western
investors. Russia doesn't necessarily hold
or need the Western investors tocome back.
They need to have this sort of multiple equilibrium domestic to
be resolved where domestic investors was extra cash or
(17:05):
maybe third country investors feel, oh, wait a second, this is
maybe a normalising situation. I'm more ready to invest at this
levels into Russia. And I think this is a critical
moment for Russia. The signalling of normalisation
would give them space to invest more.
And the question is whether theyinvest more in something
productive for civilian use or something more military related.
(17:25):
And the big risk, it will be something that is definitely
military related. Yes, and and why would anybody
trust that Russia won't get intofurther entanglements in the
future when it's it, it's whole foreign policy approach seems to
be based on that? Well, I can comment on the
macroeconomic side of it is we have done a lot of studies at
(17:46):
the Kiev School of Economics where we're trying to use data
to track supply chains and the shipments among different parts
of the Russian industrial base, military industrial base.
And we're seeing production of some of the types of weaponry
that is not currently needed in Ukraine.
So we've seen that activity, whether it's naval warfare
related or maybe the airplanes. And that raises questions, what
(18:08):
are they using that output for? What are they planning to use it
for? Akadi.
Yeah, I think there is also one very big factor in all of this,
which Elena mentioned the a few minutes ago, which is China.
(18:29):
Russia would not have been able to conduct this war economically
without China's lifeline. Now China's got deep pockets.
It's not going anything away forfree.
We know that Chinese actually investment in Russian economy
and the private economy is very low.
(18:49):
But China needs Russia to be stable with the biggest mistake
I think the West has made at thebeginning of the war.
And it was sort of almost contemptuous to think that you
could isolate Russia simply by imposing Western sanctions.
The world is bigger than the worst.
(19:10):
You know, if you have India, if you have China, if you have
global S which do not isolate Russia, you cannot isolate its
com. You cannot cut the sources of
revenue. The Indian companies, Chinese
companies will buy Russian oil. Physically restricting Russian
volumes of oil export is probably the best thing.
(19:33):
And and the best thing of all would be take bringing down the
oil price. And I think that is actually the
probably the biggest unknown factor is you know, there are
predictions in the market out there.
Ilina probably knows more that you know, the oil is already $50
a barrel that it will get to $30, it will get to $30 a
(19:55):
dollars a barrel by by the end of 2027.
Now Russia is going next year isgoing to be the hardest year
economically Russia has had. If the oil price continues to go
down, that's a very different dynamic.
You know, Russian cost of extraction I from the top of my
mind, I think is about $2025 a barrel.
(20:17):
So you only get $5. I mean that you can't conduct a
big war, you can't continue to pay those contracts given that
your army is contractual at $30 a barrel of the same.
And keep the the army of the same size.
So it just becomes impractical. It just he, Putin will stop when
either he has stopped or when he's unable to go any further in
(20:41):
terms of his intentions. The intentions are not going to
change. The capacity and capability
could change. And Alina, are Russian consumers
happy to be this reliance on China in the future?
And I suppose in terms of labourforce, you know the increasing
number of imported workers from Africa and you know where, where
(21:03):
else, wherever else they may be coming.
Well, on China, I think the consumer is definitely sort of
getting concerned, but it's a bit too early days.
Let's look at the car imports. Russia actually imposed tariffs
on its big friend China for car imports because they realized
that the Western producers used to put some of the production
domestically and it led to some positive spillovers and
(21:26):
agglomeration effects in the economy, while China just
aggressively dumping the oversupply into Russia.
And that has allowed China to continue one of the biggest
producers in the world in cars because they were dumping into
Russia. So Russia actually put in a
tariff on that, right. So you see already some of the
concerns, but I think also the big concern or maybe
(21:46):
embarrassment is the big flip interms of Russia's export to
China. Russia used to export to China
mostly manufacturing products, more complex machinery sometime
in 2000. Now 80% is energy and metals,
you know, so it's truly like a pump, you know, that is that is
sending goods to China. And it's definitely not a good
(22:07):
look for Russian authorities or the consumer.
OK. And what about Labour just going
on into the future? I mean, you know, if Russia has
lost quarter of a million dead or somewhere between that and a
million, that's enough to have quite an effect, isn't it?
Yes, I mean we see it already inunemployment numbers.
The unemployment numbers are around 2%.
You know, this is an emerging market, right?
(22:27):
In any emerging market there aremore frictions that would keep
your natural rate of unemployment, meaning non
inflation generating rate of unemployment somewhat elevated.
This is not even a normal rate for UK or the US, right.
So that's one of the reasons whythe central bank was forced to
hike rates. So this employment issue will be
very sort of unemployed or employment or labour force issue
(22:49):
will be pervasive. For now, it seems that the, the,
the, the block of secure security block has won out,
especially after the terrorist attack on, on I think in Crocus
City Mall where they are not letting a lot of migrant workers
to come back. On top of that, you had some of
(23:10):
the racism nation issues and also not adding to the
willingness of this work is to come back.
And then finally, you mentioned some of them African countries
sort of coming, including from South Africa and others being
lured to Russia. And the issue is there that
integration is very hard. And also many of them have to
come under pretense of working. And then the end of the day,
(23:32):
they end up either on the highlytoxic, poisonous production or
the some of them end up on the frontline.
And then of course, they let their people home know that,
well, this is not a great way toto, to earn your money.
So finally, Arkady, I mean, it doesn't sound like you think the
economy is is going to force Putin into anything imminently.
(23:53):
I think so. I don't think there is anything
to force, unfortunately, there is anything to force Putin into
into any sort of a deal. Now that is not to say that he
doesn't have pressures. There are pressures in terms of
the expenditure. There is pressures on the
economy. There is a pressure, you know,
he can't obviously, you know, they've been fighting for four
(24:17):
years in January. This war will be longer than
than the Soviet participation inthe Second World War, the in the
Great Patriotic War. So the the pressures are
building up. Russia is not in a, you know, in
a healthy position at all. But remember, it's, you know, in
(24:38):
a war, it's always about the other side as well.
It's who's got more resources. That's why the war of attrition
is so dangerous. You know, he's he can't deal
with sort of a military final military blow to Ukraine.
But if he ties Ukraine to degreethat the number of desertions
(24:59):
is, you know, is very, very highnow, you know, Russia spends 8%
on, on, on, on the war on the military.
Ukraine spends 30% of the military, you know, corruption
scandals, everything else. You know, it only needs to be it
doesn't need to be strong. It only needs to be slightly
stronger than Ukraine talked about mistakes in the West.
(25:19):
But the fact that, you know, four years into this war,
European military production is nowhere near the fact that that
Europe still has not passed the frozen assets to Ukraine.
And it's still, you know, there is more talk than action.
I think that's the biggest LED down for Ukrainians.
And they know this. I mean, you know, the, the
(25:40):
opinion in Ukraine is already becoming very resentful of
certainly of America and now will be towards Europe because
they feel LED down because all this talk about, you know, for
as long as it takes, whatever ittakes is the talk.
And, and, and finally to you, Alina, I mean, if you were an
economic adviser to Putin, mightyou be tempted to say the lesson
(26:01):
of the Ukraine war is that this works for Russian growth and
that Russia has shown that it can, it can pivot to this kind
of existence and that in the medium term, it suits us to keep
agitating at Europe because it works for us too.
If I were a great cardinal in Kremlin administration, I would
(26:22):
definitely say that it's gives us the social lift for many
people in the regions that wouldwouldn't have it otherwise.
It keeps people calm. We also don't want to have this
people back at home trying to reintegrate into the society
after being at war. And some of them are also
criminals, right? That also creates a lot of
(26:43):
challenges. I would probably advise to find
ways to freeze the contract conflict, the war temporarily to
be able to invest and rearm moreskilfully and then think what
kind of levers will have vis A vis Europe if we can put more
pressure on Europe. So that would be unfortunately
my advice for if I were great Cardinal in Putin's
(27:05):
administration. Elina Arcadi, thank you so much
indeed for your time. It's been fascinating talking to
you both. That's the forecast.
Until next time, bye bye.
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