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Russia: From crony capitalism to planned economy in three weeks

Summary:
For more than travel 20 years I have worked professionally and travelled extensively in Central and Eastern Europe – including in Russia and Ukraine. My Polish and Lithuanian friends again and again over the years have warned me about what have now happened and I must admit that while I 15 years ago was sceptical about this take on Putin I have come to share the view of my Polish and Lithuanian friends and particularly since 2014 I have feared what Putin would do next. So unfortunately I am not totally surprised by Putin’s invasion of Ukraine. But this blog post is not about my feeling about the invasion – I am horrified and angry – but rather an attempt of sharing my view on where the Russian economy is going from here. I a lot of course dependent on what happens on the

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For more than travel 20 years I have worked professionally and travelled extensively in Central and Eastern Europe – including in Russia and Ukraine.

My Polish and Lithuanian friends again and again over the years have warned me about what have now happened and I must admit that while I 15 years ago was sceptical about this take on Putin I have come to share the view of my Polish and Lithuanian friends and particularly since 2014 I have feared what Putin would do next.

So unfortunately I am not totally surprised by Putin’s invasion of Ukraine.

But this blog post is not about my feeling about the invasion – I am horrified and angry – but rather an attempt of sharing my view on where the Russian economy is going from here.

I a lot of course dependent on what happens on the battlefield in Ukraine and whether or not Putin stays in power and on that I can’t make an informed guess so my assumption here is that we effectively have entered a ‘New Cold War’ and the sanctions implemented against Russia will remain in place for some time to come.

A massive trade and liquidity shock

It is obvious to everybody that the sanctions and the global private sector reaction to Putin’s invasion of Ukraine is a massive direct shock to the Russian economy that completely have paralyzed the Russian financial system and the economy in general and cut the value of the Russian ruble in more than half.

The easiest way to understand that shock is essentially to think of it as a major liquidity shock what hit global economy in 2008. This one is just many times bigger. The implications for the Russian economy is obvious and that shock on its own should be expected to cause a drop in the Russian real GDP of at least 8-10 percent.

However, what I want to discuss in this post is not this from an economic theoretical perspective rather ‘normal’ shock. The purpose of this post is rather to discuss the possible transformation of the Russian economic political system that we likely will see in near future.

From crony capitalism to planned economy

Prior to the collapse of the Soviet Union in 1991 the Russian economy was a communist planned economy with little private ownership of business and essentially no use of the market mechanism.

Over the past three decade the Russian economy has gone through an enormous transformation from the planned economy to what we could call a commodity based crony capitalist economy.

Economic reforms in Russia has been rather imperfect, there is massive corruption and private property is certainly not automatically guaranteed. Furthermore, major business interests – popularly known as Oligarchs – are in bed with the ruling class and government.

Theft rather than trade has been a dominant factor of the Russian economy for decades – or rather centuries.

However, there is – or rather has been – a widespread use of the market mechanism and productive resources are to a large extent allocated based on market principles and therefore Russia can be described as a capitalist economy – but a rather imperfect one or what has come to be known has a crony capitalist economy. In that sense Russia, however, is not much different from many other Emerging Market economies.

Things are, however now set to change dramatically to the worse and while the Russian economy likely will remain a ‘crony economy’ it will likely be without the ‘capitalist’ part in the future.

The sanctions against Russia mean that Russia is now actually totally dependent on barter in foreign trade – oil and gas for cars, spare parts, medicine, technology, etc.

That combined with a ruble that has collapsed means that we may soon be heading towards 75-100% inflation in Russia.

That would be politically unacceptable for the Putin regime. Consequently, we will soon see the introduction of widespread price controls in Russia, where prices are frozen below the market price.

The result of price controls is always the same – soon you will see empty shelves in the supermarket. The regime will blame the sanctions and that will be partly true, but price controls will have an even more devastating effect. This is the kind of thing we have seen in Venezuela for more than a decade.

The political answer will most certainly be rationing.

And since the financial sector has essentially collapsed in Russia all allocation of credits will be state controlled and as companies will not be able to make any money with prices far below the market price, they will soon become completely dependent on government subsidies to survive. Nationalisations follow as a natural economic-political consequence.

In fact the Russian government has already announced that it does not rule out the nationalisation of foreign companies in Russia, and it has already dictated that companies in Russia must convert at least 80% of the companies reserve in foreign currency into rubles.

It is therefore to be expected that in the coming months we will see a wave of de facto nationalisations in Russia.

As foreign exchange reserves are now very limited and all imports essentially will be barter based and Russia will have to pay a price way above global market prices we should expect that all foreign trade soon will be strictly regulated. “Unnecessary” imports will be banned.

It is already happening. Yesterday, Russian Prime Minister Mishustin announced that all exports of sugar will now be banned as Russia is facing a “sugar shortage”.

Military needs will dictate the composition of Russian imports – and therefore also what may be exported.

Young men are also a production resource – a productive resource that is used to wage war, but Russia’s youth have had it with Putin’s regime and the collapse of the economy and the prospect for going to war and dying in Ukraine is causing young Russian to flee the country. It is said that more than 25,000 Russians have already left for Georgia since Putin’s invasion of Ukraine.

The exodus of young Russian in fact started more than a decade ago, but this process is now accelerating dramatically. Polls done even before the war on Ukraine have again and again shown that more than half of the Russian population would like to emigrate. That number is now skyrocketing – particularly among the young.

The Putin’s regime can hardly accept that much longer – and therefore it is only a matter of time before a “Russian wall” is erected – and in the same way as with the Berlin Wall, it is not about keeping enemies out, but about keeping the population confined.

Twitter users have in recent days shared films of Russians fighting over sugar in supermarkets and a lots of empty shelves. There is nothing to celebrate about this, but this is likely to be the reality that Russian will now be facing.

I personally have no joy in seeing regular and innocent Russians suffer because of the crime of Putin. I have travelled – primarily professionally – in Central and Eastern Europe for over 20 years, and know Russians, Poles, Lithuanians, Ukrainians, etc. and over the years they have shared stories with me about the horrors of living in communist dictatorial planned economies. I never met anybody longing for a return to a planned economy.

The free market economy and democracy have lifted millions of people out of poverty in Central and Eastern Europe over the past three decade. Now Putin has beaten 140 million Russians 30 years back economically and politically.

Putin wanted the borders of 1991 back, but he got the economy of 1991 instead. The question remains whether he will survive that.

 

Lars Christensen
International economist, Money Doctor, Founder of Markets & Money Advisory, Research Associate Stellenbosch University [email protected] +45 52 50 25 06

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