In his youth, Vladimir Putin is said to have read a lot of Marx, Engels and Lenin, the founding fathers of communism. Presumably that was a requirement for anyone intent on scaling the ladder of power in the Soviet Union.
For all the ills that communism unleashed on the world, its advocates posited one basic idea that still holds true (political theorists may disagree), namely that politics is a manifestation of economics and not the other way round.
Think of European history: the land tenure system that underpinned medieval feudalism; the mercantilism that drove the emergence of centralised nation states; or the monopoly capitalism and colonialism that led up to the first World War.
Even more recently with populism, the rise of Donald Trump and Brexit. Are these not, in their purest forms, backlashes against globalisation and the inequities that flowed from the massive quantitative easing (QE) projects enacted after the 2008 financial crisis?
In that vein, it seems certain that Putin must have calculated that western powers because of their reliance on Russian energy would be politically beholden to the Kremlin and that opposition to his brutal assault on Ukraine would be muted, at best halfhearted.
This calculation had proved correct when he annexed Crimea in 2014. Western governments criticised, imposed sanctions but ultimately acquiesced and then celebrated all things Russian by attending the World Cup in Russia.
For a few wobbly months last year, it seemed like this template would play out again.
As a long convoy of Russian tanks and armoured vehicles snaked its way toward Kyiv and western powers scrambled to impose what were ostensibly financial sanctions on banks and oligarchs, some of which involved impounding yachts, while studiously avoiding the one thing that would hurt, an oil and gas embargo, it looked like Putin’s gamble would pay off.
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One year on, as the Kremlin’s military aims atrophy, the economic harm that Russia has inflicted on itself is becoming more apparent.
Much has been made of the fact that Russia’s economy contracted by just 2.2 per cent last year, against predictions that the war would trigger a 15 per cent reversal.
But Russia’s gross domestic product, if it can be believed (critics say it is manipulated as part of the war effort), hides all manner of weeds. Last year’s performance was in part driven by the rapid growth in arms manufacturing, arms that have been spent on the battlefield with little or no economic benefit at home.
While increased military spending can provide a short-term boost, studies show it is negatively correlated with economic growth over time and causes a dislocation of potential jobs from the private sector to the public.
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Other metrics related to the housing market, the demand for credit, ecommerce and consumer sentiment are now all pointing in the wrong direction.
And then there is the surge in oil and gas revenues, which generated massive fiscal surpluses for the Kremlin last year, funding the war effort and strengthening the rouble.
Wholesale energy prices have fallen back significantly since then, and China and India, Russia’s replacement market, are only interested in buying at a steep discount. The vast majority of Russia’s gas pipelines also flow toward Europe, a market that is fast drying up.
Remember Russia is primarily a petrochemical state and the performance of its economy has a lot to do with which way oil and gas prices go.
The impact of the war is also manifest in other more subtle areas. The Russian oligarchs, many of whom Putin relies on financially and politically, are estimated to have lost almost $95 billion in 2022, shedding $330 million a day since Russia launched its invasion, according to the Bloomberg billionaires index. Roman Abramovich, the former Chelsea FC owner, was the biggest loser, with his fortune falling by 57 per cent to $7.8 billion.
Perhaps the most pernicious but difficult to measure impact has been the reported exodus of Russia’s brightest and most entrepreneurial young workers. At one point last year, RAEK, a Russian technology trade group, estimated that between 50,000 and 70,000 tech workers had fled.
Putin’s economic miscalculation is of course dwarfed by his military miscalculation. Ukraine has, against every expectation, not only held firm against a military superpower but destroyed a significant portion of its army. Equally, the argument that big bad Nato lit the fuse to all this has been trashed in the face of Putin’s aggression. Even exemplars of international neutrality Sweden and Finland are now lining up to join.
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However, for all Russia’s setbacks on the battlefield, a military endpoint to the conflict, involving either the Ukraine winning or Russia winning or one involving some kind of truce, is unlikely. Can the Ukrainians really be expected to sign up to a peace deal that leaves their country half-occupied, one that would allow the aggressor time to refuel before another assault?
All of which brings us back to the economics-as-driver-of-politics theory. Will Russia’s economic demise – which will only get worse – be the thing that ultimately topples Putin?
There is precedence for this in Russia. The Soviet Union’s 1979 invasion of Afghanistan resulted in a humiliating climbdown. Combined with a stagnating economy and a bankrupting arms race with the US, this eventually led to the collapse of the regime in 1989, an event that had been wholly unexpected.
Long-suppressed public discontent can break out all of sudden in dictatorships and Putin has exhausted a lot of political and economic capital on the battlefield.
