For the sake of the war, Putin is ready to sacrifice the economy and the well-being of Russians, but not his own money, says economist Anders Aslund

The war unleashed by the Kremlin and the corresponding sanctions have limited Russia’s economic growth, closed access to European markets for Russian exports, as well as access to high-tech goods.

Although the war has weakened Russia militarily, politically and economically, it should not be underestimated, because the Kremlin’s plans for Ukraine have not changed, says NATO Secretary General Jens Stoltenberg, addressing the foreign ministers of NATO member states in Brussels on November 29.

Stoltenberg noted: Russia is becoming increasingly dependent on China, and oil and gas revenues are falling. “The Russian banking sector is under sanctions. More than a thousand foreign companies have stopped or reduced their activities in the country. Also, 1.3 million people left Russia last year.”

Despite this, Putin has not changed his plans for Ukraine and is putting the economy on a war footing, says the NATO Secretary General. This week, Putin approved a new state budget for three years, in which he increased military spending to a record. Almost a third of Russia’s state funds will go to defense needs. A total of 40% of Russia’s state budget will go to finance the military and security sectors, analysts have estimated.

However, even this is not the limit. Putin also has a shadow budget, hiding from the public funds for the war in state-owned enterprises and separate funds, observers say.

The presence of such a shadow budget in Russia is also claimed by the US government – US Assistant Secretary of State James O’Brien pointed out during hearings in the US Senate in November that Russia spends more on war than budgeted for. “I think Russia spends more – it’s 30% of the public budget and they have a “secret budget” that’s even more,” he noted.

Oksana Bedratenko, a journalist of the Ukrainian Service of the Voice of America, talked about the state of the Russian economy with Anders Aslund, an American researcher and author of books on the Russian economy.

Putin transfers funds from social spending to the war. Will the Russians revolt?

In order to finance military spending, Putin is forced to “tighten the belt” for the government and shift funds from social spending to the security sector, Aslund says.

With Putin cut off from global borrowing markets, Russia’s international debt has halved since 2013, Aslund says, while other countries have expanded their available credit resources.

Although the well-being of Russians is deteriorating, Aslund does not expect a revolt from the Russians, because, as in Soviet times, the well-being of citizens deteriorated gradually so as not to cause obvious discontent.

Putin benefits from the fact that the Russian economy increasingly resembles the USSR, Aslund believes

More than 1,100 companies have pulled out of Russia since the full-scale invasion began, according to a Yale database. According to the calculations of the Russian Center for Macroeconomic Analysis, capital outflow from Russia last year amounted to an unprecedented 239 billion dollars.

Even Putin’s allies talk about the poor state of the Russian economy. In a social media post, Russian oligarch Oleg Deripaska called the Russian economy a “trap” and warned against the “tyranny of state capitalism.”

Technology sanctions have made Russia more technologically backward, “like the Soviet Union,” Aslund says. “Putin’s course is economic stagnation, the lack of modernization, which scares away talented youth, leads to a demographic crisis and complete isolation from the world,” he adds.

Aslund says, only Putin himself and his henchmen who transfer funds abroad will benefit from such a policy.

“The irony is that private Russian funds abroad are estimated to be at least $1.3 trillion – almost as much as Russia’s GDP – and most of these funds belong to Putin and his cronies,” Aslund says.

He is convinced: Putin will not use these funds for the war under any conditions, because “he needs them to maintain his power.”

Russia has virtually no liquid currency reserves, the expert says

At the beginning of the war, Russia had an impressive 600 billion dollars in foreign currency. Now, Aslund says, there are no liquid currency reserves. This happened because of the sanctions, and also because Russia increasingly receives not dollars or euros for its oil, but Indian rupees and Chinese yuan, which it cannot use, because these currencies are not fully convertible.

Approximately 300 billion dollars of Russian reserves were frozen by the West. Another 70 billion dollars was used by Russia, says Aslund and adds: “They have 103 billion dollars in yuan – it is unconverted and illiquid. They also have a big plus in their accounts with India – 20 billion dollars in rupees. Also 130 billion dollars in gold is illiquid and difficult to use. If you subtract that from the official reserves of $577 billion, they have no liquid reserves left at all.”

The lack of liquid reserves limits Russia’s ability to support the ruble or ensure the purchase of high-tech goods.

“This means that Russia has less money for war,” says the analyst.

He adds: because of the war, the ruble has fallen by two-thirds from 32 rubles to the dollar before the war in 2014 to almost 100 rubles to the dollar now.

The Kremlin will not limit its kleptocracy, even if the ruble threatens to collapse

In order to save the ruble and stop the outflow of capital, the Russian central bank keeps high interest rates, but it will limit itself to this, Aslund says, because further steps may prevent Putin from continuing to withdraw his money from Russia.

“I don’t think they will do anything except very high interest rates, because who benefits from the capital outflow? Putin and his cronies, and they want to continue withdrawing money,” the analyst adds. , but these are real manufacturing companies, not Putin’s companies that just steal. Putin wants to keep stealing – and that’s his weakness. He thinks he has to be richer than everyone else to stay in power,” says Aslund .

It is amazing how much less corruption there is in Ukraine now than in Russia

Ukraine managed to achieve economic growth this year, and European integration is able to stimulate the further development of such industries as mechanical engineering, Aslund says.

He also notes: Ukraine has made significant progress in overcoming corruption.

“It is striking how much less corruption is now in Ukraine than in Russia,” says Aslund. “There was a similar level of corruption there ten years ago, when Yanukovych was the president. However, since the Revolution of Dignity, Ukraine has been powerfully cleansed. Of course, there is still a lot to be done, and that’s why it’s good that there is a constant stream of corruption scandals coming from Ukraine, which indicates that corruption is not tolerated, it is detected.”

Aslund also expressed hope that the EU will decide on the start of accession negotiations with Ukraine in December, and the European Council should approve an aid package of 50 billion euros for four years for Ukraine at that time.

The opening of the EU markets, Aslund says, for the countries of Central Europe “has led to the emergence of a huge mechanical engineering industry, and we see such development in the west of Ukraine.” “We will see the return to Ukraine of various types of mechanical engineering, the development of the high-tech industry, and agricultural goods, for which the price of transportation is important, will probably be exported to developing countries by sea, and not through the western border.”