REPUBLIC: In your view, how can we characterize the state of the Russian economy now? And where do you think it is going?
The Russian economy is going through a period of serious restructuring related to a fundamental shift in its relations with foreign markets. First of all, most of the Russian economy is changing suppliers. Since it has always been very strongly integrated into the world economy and almost all the goods that are produced in Russia are made with imported components or raw materials, we can say that the entire economy is being restructured. A fairly large number of developed countries have, to a greater or lesser extent, stopped purchasing goods from Russia and/or stopped supplying their goods to Russia. This is not a complete shakeup, as a large volume continues to flow. I would put the disruption at somewhere around 50%. But 50% is already a lot.
Sectors are reacting differently. The automobile industry, for example, is altering its final product, moving toward the production of Chinese cars, toward assembly really, and toward simplifying the cars it produces due to the lack of Western parts. Agriculture is being restructured in a different way: it has problems with Western technologies, with seeds, with livestock. But it is just being reorganized to purchase them in other places, while the same end product is being produced, and being produced quite well. In some industries, such as fishing, marine, petroleum, export petroleum, there is a reorientation toward other buyers. In terms of imports, these industries have seen minimal changes.
Meanwhile, if we talk about “core” GDP – excluding the short-term boost to GDP due to the war and due to the increase in prices for hydrocarbons – then the overall decline in Russian GDP in 2022 was somewhere around 8%.
According to official data, household income decreased approximately in line with the fall in GDP. But in terms of distribution across the wealth pyramid, the decline is very disproportionate. The incomes of the highest classes actually rose due to the fact that competitors left the market. Businessmen, high-up civil servants had their salaries keep up with inflation quite well, retail chains earned on markups, etc. For the other classes, for the third, fourth, fifth quintile, incomes fell. Moreover, the indicators of the third and fourth quintile usually correlate well with non-food retail, where there was a contraction of about 10%. And the very bottom quintile has a correlation with food retail, where there was a 6.5% drop.
Plus, you need to understand that Russian GDP and Russian household income are now slightly overstated, as about half of the more than million people who left the country continue to work for Russian companies. They do not spend their money in Russia – in fact, they receive it as if they were in Russia and immediately take it out.
In this context, it is necessary to say more about capital outflow. Despite restrictions from the West and from Russia, capital outflow was entirely unprecedented – $250 billion in one year. That had never happened in Russia, not even close.
In a sense, this shows both the attitude of business and people toward the current situation. The liberal intelligentsia opposing the war, of course, could not take $0.25 trillion out of the country, not even close.
This means that a huge number of players who remain silent or pay lip service to the war are nevertheless voting against it with their actions.
Capital outflow will continue. And the Central Bank itself has penciled in – and I am inclined to trust this estimate – an outflow of $125 billion for this year. Maybe more. It will depend on the structure of income in 2023. There is a fire sale of business-class real estate in Russia. Even those who stay in Russia are winding down their real estate portfolios, and that money will also go abroad. And the money that was invested in the Russian securities markets is also going abroad now.
I think that this year, export revenues will be at least $100–150 billion lower than in 2022 – oil and gas prices are lower. Russia is exporting 90% of its oil at prices well below the market. Gas is cheaper, and exports have declined fourfold. It will also take time before it can be figured out how to sell Russian oil products in Asia. The decline in oil production is already quite serious, at essentially 5% due to the inability to sell oil products.
Taking into account the costs of the war and sanctions, the budget deficit will create a "hole" in the budget of about $80 billion. That “hole” is approximately what is being spent on the army. This, of course, weakens the budget and necessitates a search for funds through raising internal debt (at a high interest rate), an additional burden on business in one form or another, debt emission and drawing down the National Wealth Fund (NWF).
In a nutshell, the Russian economy is currently weak, in recession, it is an economy of declining household income. Now, consumption is at the level of 2004-05 in real terms.
In fact, we are completing the circle: by the next elections in 2024, the Russian economy will be back to where it was in the year 2000. That is, 24 years with such oil earnings and everything else down the drain.
Still, of course, the economy will go on, but it will gradually "Iran-ize,” turning into the economy of a besieged fortress with only one remaining road to the world – through China. Russia is stronger, more powerful, bigger than Iran, a more important player in the markets, so this scenario will be softer in terms of the impact on the economy.
But given that this is an “Iran” scenario, it means that immovable ideologists and siloviki will play the leading role. All economic power will gradually be concentrated in their hands. The economy will be restructured in favor of a "Russian Patriotic Guard Corps" – an immovable supreme body of government that is not elected by anyone and regulates everything.
It is quite possible that in 5-7 years there will be real, competitive elections in Russia, even to the Duma, though the elected bodies will be completely dependent on, say, the "Security Council" and the president, with the members of the former appointed by the latter, who will be the life-time leader of the country, having the powers of a tsar of the pre-constitution period.
In fact, the competition will be between, hypothetically speaking, more moderate supporters of the Putin line and more radical supporters of the Putin line, with seats in Putin-controlled government bodies up for grabs. And it will be a stable system.
REPUBLIC: At the end of the day, the big economy is the sum of small actions on the part of the masses. How does behavior affect the economy, both at the lower and higher levels?
Few people have economic freedom, even among the wealthy and successful. I am a good example: my business is global, not connected to one place, I studied in the US, I am an EU citizen. One office had remained in Russia. After February 24, within two weeks, I just got all the people out, shut everything up and closed shop.
But what if a person, for example, in Pskov Region has a residential construction business, what will he shut and how? He has current projects for another three years to go. And if his business is local, the plant has been built – there is no one to sell it to. What is he to do, build a new one somewhere else? And what if it is just a professor, a specialist in Russian linguistics? And if his parents are almost 90 years old, and you can’t move them? What if you can't find a job abroad?
A large number of people in reality have no choice, or their choice involves risks and losses that they are not ready to take. They may not even live in Russia but they still go there and take part in economic life. And they will see their projects in Russia through to the end: you have to pay back the banks, people need to get their money.
People will continue to try to earn money, to live, to be comfortable. The more decent people will do that without [even] indirectly participating in the war, the less decent people will easily do it by profiting on the war.
I have already heard from some about how much money they are now making by getting around sanctions and supplying microcircuits to Russia. But let's recall that European tycoons bought Putin's oil and gas out of the ground, sat on boards of directors, despite everything. Money, unfortunately, does not stink, it's true.
REPUBLIC: There is a point of view that people who disagree with Putin's policy should still be offered some way out. In your view, how should the policy of sanctions be adjusted?
There is currently a dramatic confrontation with Ukraine, and in Ukraine, many people have directed their hatred – which is completely justified – and their fury – completely justified – toward an object that is closer and more accessible: there they are, those Russians, there are a lot of them, it is easy to hate them. And I really sympathize with the Ukrainians in this sense.
But, from the standpoint of common sense, we have no reason to say that 144 million Russian citizens are to blame for what is happening. I think that definitely 30% of people in Russia are actively against [the war]. And there are a huge number of people who are just living their small life – no need to demand that they live a bigger life.
If Ukraine with a population of 45 million, with the help of NATO, cannot overthrow Putin, then how will these Russian people – divided, without weapons, without opportunities, surrounded by police – be able to do anything?
Thus, I am not ready at all to take the position that Russians bear collective responsibility, and it seems to me that it would be reasonable for the West now to try not to make Russians their enemies.
REPUBLIC: What do you think about the sanctions that were actually introduced first – the exit of Visa and Mastercard, blocking of accounts, visa restrictions, restrictions on imports of consumer goods, etc.? In your view, do the current sanctions need to be adjusted somehow?
I hide my viewpoint neither before a Western audience, nor an Eastern one: I believe that sanctions against ordinary people are not fair and, most importantly, do not translate into positive results. The use of Visa and Mastercard, the opportunity to freely transfer money, the opportunity to purchase consumer goods in Europe, the opportunity to obtain visas, etc. – all this would have left a bridge between the West and Russian citizens while also allowing much more money to be withdrawn from Russia and thereby reducing the Kremlin's potential to arm itself. And no one calculated that, no one thought about it.
The same applies to opportunities to invest through Russian channels to the West: they were frozen, great, and perhaps another $50-70 billion of money that would have gone toward investment was left to Putin. What is the benefit, what is the point?
Now millions of Russians are sitting around offended, as they have been cut off from their [foreign] assets for no reason at all – without trial, without investigation, they have lost their funds. All that the West has achieved by its actions is that these people will now look very askance toward the West…
REPUBLIC: A more subtle question. In your view, does the West need to develop strategies, conditions for lifting sanctions on Russian oligarchs, who are trying to do this one way or another currently?
I personally support the idea of lifting sanctions against Russian oligarchs. Of course, not in the form of “please take your money, give it to the Kremlin,” but under guarantees that the money should not be sent to Russia, to the Kremlin, to the war machine. To have sanctions lifted, they must speak out unequivocally and clearly about what is going on, cut off their business ties with Russia, sell or liquidate all their assets in Russia.
Moreover, I am against the confiscation of part of their wealth to go toward anything, whether it be the treasury or a fund to help Ukraine. That would be extortion, not a legal action.