— Can Western sanctions stop the war?
— Sanctions work. There is a deep crisis in many sectors of the Russian economy, and in some of them, the situation is close to critical. For example, in May, car sales dropped by 83.5%. In addition to imminent mass layoffs and non-payment of wages in the automobile industry, a crisis in many others will follow. After all, the automotive industry is a big buyer of steel, lead, rubber, components, and so on. "People will lose their jobs, and there will be no new jobs" Most Russians do not have any savings, so the delay in the impact from job loss to a sharp decline in living standards will be very short.
— But how can the fact that hundreds of thousands of Russians will lose their jobs and lose their money stop the war?
— I don't know exactly how this is going to work because, of course, sanctions are not military power. That is, they do not directly kill people, but they worsen the capabilities of the Russian economy not just in the short term, but fundamentally — to produce weapons, pay salaries, and run a budget. There was already a budget deficit in April. If you have a deficit budget and can't borrow money on the market — and Russia is cut off from all markets right now — then that means someone's wages need to be cut. Very soon people would need unemployment benefits, there would be social tension.
In four months, Russia squandered virtually a full supply of modern missiles, a bunch of tanks went out of action, and so on. It will be very difficult to replace all of these weapons because there is no capacity. If Uralvagonzavod works around the clock, it could produce several dozen tanks a year. You can't fight with money, you have to fight with weapons. No one will give them to Russia now, and Russia can't produce them on its own. They are already unpacking old T-62 tanks made in the 1960s. If your access to imported components has been cut off, you can't produce normal weaponry.
All of these factors will make it harder and harder to continue fighting the war. But exactly what will work — whether people go out on the streets, wages won't be paid, or there will be no tanks. Something would work, I guess.
— According to the latest available data, Russia spends almost a billion rubles per hour on the war, to be exact — 21 billion per day. And the money just won't run out.
— 21 billion a day is even less than what the European Union sends Russia daily for oil and gas. That is, Russia spends EUR 400 million a day on the war, and the European Union pays Russia 700-800 million a day. And half of the money the EU sends, Putin spends on the war."
— How long can this situation last?
— If nothing changes, a long time. Because oil and gas prices are at record highs. Because of the sanctions, import purchases have been drastically reduced so you can live like this for a long time. But, in principle, Western countries have a consensus to give up Russian gas and oil. Now there is a discussion about the price cap. If we manage to achieve, for example, a cap for the price of Russian oil at USD 40-50 per barrel, it will be significant, because now the price is 100-110. Russia sells at a discount of 70, but if it is not 70, but 40-50, it will be one and a half times less revenue, and it will already be a serious problem for the budget.
But there are so many variables, it all depends on who does what. On the other hand, Europe, too, is tired of the war, it wants to end it. If immediately, in March, as suggested by academic economists Sergei Guriev and Oleg Itskhoki, European countries had imposed a price cap on gas and oil exports or an embargo, it would have had a different result. The war could have been over within the first month if the West had been willing to cut off Putin's funding. But they didn't cut it, and now the Russian budget lives entirely off oil and gas revenues, and the main donor is the European Union.
— When will Russians feel the effects of war and sanctions? Disruptions in pensions, unemployment, missing goods in stores?
— Russians have already felt it, but, of course, not intensively, there are no catastrophic consequences yet. Some of the goods are already gone. You can look at the choice of cars: car sales have dropped five or six times, they have become very simple, basic. IKEA, a bunch of clothing brands have left Russia. Therefore, the loss of non-food items has already been noticed.
Unemployment will manifest itself closer to the fall because when companies left they continued to pay salaries for a while so that their management would not be arrested. But you can't pay forever. So I think they will try to fire people in July and August, while it's still summer, everyone is at the dachas. I think that's when some restrictions on oil prices will begin, and budget problems will begin.
But the main thing depends on whether Western countries will pay Putin for oil and gas. Because as long as the prices of oil and gas are record-breaking, even taking into account the discount, Putin can run a budget with a small deficit.
— How is Putin's promised reorientation of the economy toward China and India going? Is a full-fledged replacement for Western countries possible?
— That's impossible. And China itself is not very willing to do this. Even though China is the second largest economy in the world after the U.S., most of the companies that do business in China are international. And even if they are Chinese, they sell their goods to the international market.
Russia is a fairly small market, about 2% of world's GDP. And they are not interested in quarreling with customers from America and Europe, whose combined market is 20 times larger. And what's more, these markets, especially European markets, are very much affected by the war. Therefore, China is not very eager to replace Western countries for fear of secondary sanctions. And China wants the war to end faster.
Of course, India and China are buying Russian oil and gas cheaply, taking advantage of the opportunity. But if you look at the statistics, Russian imports have fallen not only coming from Europe and the United States, but also China. That is, Chinese companies have also reduced sales of everything in Russia. So there will be no replacement.
— Can sanctions lead to political regime change in Russia? Are there such examples in history?
— In practice, this is often the case. The entire "Arab Spring" began because of economic hardship. There was a drought in Russia in 2010, and Putin shut down grain exports. Grain and food prices skyrocketed in Arab countries, and social tensions began to rise. A citizen of Tunisia set himself on fire in protest and so it began. Those countries lived in such regimes for many, many years, but then there was a deterioration in the economic situation and everything exploded.
But there are other examples where sanctions and a difficult situation do not lead to regime change — North Korea and Iran. Iranians revolt from time to time, but the regime does not change. But I still want to believe that Russia will be closer to European culture, and even to Arab culture than to North Korean culture. When things get tough, people will start to speak up somehow. A harbinger of the collapse of the USSR were the miners in Kuzbass, who went on strike against non-payment of wages.
— Isn't there, on the contrary, a correlation such that the poorer the Russians, the more stable the political regime?
— There are different kinds of poverty. It's one thing when you've been poor all your life, then you're stable, yes. It's different when you were poor yesterday and suddenly a pauper today. The main thing here is not the level of consumption, but the dynamics.
The Arab Spring countries — Egypt, Tunisia, Libya — are poor, objectively speaking. There was just a change compared to the previous year. And, by the way, in Saudi Arabia at the same time, the king realized what it was all about. And he handed out billions of dollars in aid to the people — almost his own money — and the "Arab Spring" passed Saudi Arabia by.
— And is there hope that people's discontent will lead, for example, to the release of Alexei Navalny and other political prisoners, to some kind of democratic reforms?
— I would very much like to see Alexei Navalny released. I've known him for a long time, I co-authored his presidential economic program. But if I were to bet my money on which outcome is more likely, I'd bet on some kind of internal upheaval within the elite. Then, perhaps, Navalny's release will be in the package of measures that the new person in charge will have to demonstrate to the world — to show that he is not like Putin. Navalny gets out, starts conducting his political initiatives again, then after a while, there can be elections, which he might win. This option, I think, is more realistic than Navalny getting out and becoming president right away.
— If the war does end in the next few months, how long will it take Russia to restore its economy to at least 2021 levels?
— It depends on the way it ends. If it ends with Putin crawling back and licking his wounds, and this being some kind of murky truce, it may never recover in the foreseeable future. Because no one will lift the sanctions, and without access to world markets it is simply unrealistic.
Russia became rich like any other country — through trade. For the past 40 years, the whole world has been thriving and poverty has been falling rapidly, all thanks to trade. China, Vietnam, Japan, Taiwan, Europe, and the United States have all risen through trade, by selling to each other. Without trade, without normal business chains — absolutely unrealistic. It is unrealistic to replace these imports. That is, they will now make Ladas [Russian brand of cars] without airbags, without everything. Well, yes, they will make some junkers twice as expensive and three times worse, but it is unrealistic to return to the level of 2021 without trade.
And if the war ends with a regime change, even if one of Putin's people comes in — like Sobyanin or Mishustin — and sprinkles ashes on his head and says, "Yes, we are to blame, we are ready to pay reparations to Ukraine" and cooperates, then in five years everything can be restored. Because all Western companies don't really want to leave the Russian market. Almost everyone who leaves keeps the option to come back. IKEA left for good but McDonald's, Renault, and others will be back as soon as things settle down. As far as I know, they negotiated a buy-back option when they sold the business.
But of course, there should be signals from Russia that Russia will no longer behave aggressively. I think as long as Putin is in power, Russia cannot send such signals.
— If the war continues, what could the Russian economy look like — like North Korea?
— It will not be like North Korea, because North Korea has a command economy, a controlled economy, while Russia has a market-driven economy. Well, Russia will just regress by 20-30 years. There will be gray channels of imports, everything imported will be 20-30% more expensive. There will be no normal stores, no clothes. They will unofficially import some brands like shuttle traders used to do. For the mass segment, everything will be much more miserable. The country will simply regress. But so far we don't see any measures to transition to a controlled economy, so it won't be like in North Korea — in terms of economics.
— Is it possible to imagine that Russia will become a country with an innovative economy and take a proper place in the world in the next ten years, for example?
— Yes, of course. It is not a question of time, but rather of the way the economy is structured.
The resource-based economy is very simple: you stick a pipe in and pump oil and gas. It's all very simple, you don't need human capital to do it. You can bring all the managers from abroad, you can buy the equipment — and pump. That is why oil and gas are pumped in democracies like Norway and dictatorships like Russia, Venezuela, Saudi Arabia, and Nigeria.
And the innovation-driven economy requires a lot of things, first of all, human capital so that people can live comfortably. If Russia creates the conditions for people to want to stay in the country and come from other countries, an innovation-driven economy can be built very quickly. And if not, nothing will ever happen.