The Long-Term Costs of the Ukraine War Will Be Staggering. By Konstantin Sonin.
After Russia’s invasion of Ukraine in February, the Russian economy seemed destined for a nosedive. International sanctions threatened to strangle the economy, leading to a plunge in the value of the ruble and Russian financial markets. Everyday Russians appeared poised for privation.
More than eight months into the war, this scenario has not come to pass. Indeed, some data suggest that the opposite is true, and the Russian economy is doing fine. The ruble has strengthened against the dollar, and although Russian GDP has shrunk, the contraction may well be limited to less than three percent in 2022. …
The ruble is worth more than before the war
Sanctions are not missiles:
The misapprehension of what sanctions against Russia would accomplish can be explained in part by unrealistic expectations of what economic measures can do. Simply put, they are not the equivalent of a missile strike. Yes, in the long run, sanctions can weaken the economy and lower GDP. But in the short run, the most one can reasonably hope for is a massive fall in Russia’s imports.
It is only natural that the ruble strengthens rather than weakens as the demand for dollars and euros drops. And as the money that would have been spent on imports is redirected toward domestic production, GDP should in fact rise rather than fall. The effect of sanctions on consumption and quality of life take longer to work their way through the economy. …
Economic sanctions did, of course, have other immediate effects. Curbing Russia’s access to microelectronics, chips, and semiconductors made production of cars and aircraft almost impossible. From March to August, Russian car manufacturing fell by an astonishing 90 percent, and the drop in aircraft production was similar. The same holds true for the production of weapons, which is understandably a top priority for the government.
Expectations that new trade routes through China, Turkey, and other countries that are not part of the sanctions regime would compensate for the loss of Western imports have been proved wrong. The abnormally strong ruble is a signal that backdoor import channels are not working. If imports were flowing into Russia through hidden channels, importers would have been buying dollars, sending the ruble down. Without these critical imports, the long-term health of Russia’s high-tech industry is dire. …
Stagnation looms in Russia:
Russia could still eke out a victory in Ukraine. It’s unclear what winning would look like; perhaps permanent occupation of a few ruined Ukrainian cities would be packaged as a triumph. Alternatively, Russia could lose the war, an outcome that would make it more likely that Putin would lose power. A new reformist government could take over and withdraw troops, consider reparations, and negotiate a lifting of trade sanctions.
No matter the outcome, however, Russia will emerge from the war with its government exercising authority over the private sector to an extent that is unprecedented anywhere in the world aside from Cuba and North Korea. The Russian government will be omnipresent yet simultaneously not strong enough to protect businesses from mafia groups consisting of demobilized soldiers armed with weapons they acquired during the war. Particularly at first, they will target the most profitable enterprises, both at the national and local level.
For the Russian economy to grow, it will need not only major institutional reforms but also the kind of clean slate that Russia was left with in 1991. The collapse of the Soviet state made institutions of that era irrelevant. A long and painful process of building new institutions, increasing state capacity, and reducing corruption followed—until Putin came to power and eventually dismantled market institutions and built his own system of patronage.
The lesson is grim: even if Putin loses power and a successor ushers in significant reforms, it will take at least a decade for Russia to return to the levels of private-sector production and quality of life the country experienced just a year ago. Such are the consequences of a disastrous, misguided war.
David Archibald:
Putin had an image of being a benign dictator in the West but in reality he was reinstituting the Soviet system.
hat-tip Joe P.
