Dark Times

Vladimir Putin exuded a disturbing optimism at the Saint Petersburg Economic Forum several days ago. He spent ten minutes of his speech listing how terrifically the Russian economy had overcome the crisis and how it would continue to strengthen under the watchful eye of the government. The next twenty minutes were devoted to the problems plaguing the world economy, and specifically, the EU and US. To seasoned onlookers it was clear that Putin was playing his favourite card during his maniacal tirade against the West: blending fact and propaganda, and, whatsmore, earnestly believing his own version of events probably more than he should. Yet the picture he painted of the current state of affairs did have a surprising amount of truth to it.  

Let’s be honest: those who imagined three months ago that Russia’s economy would crumble under sanctions imposed in response to the invasion of Ukraine and Putin’s grip on power would dwindle should probably be crying themselves to sleep every night. A knockout blow has failed to materialise.   

The initial impact of sanctions on the Russian economy led to sharp changes in macroeconomic indicators such as the exchange rate, inflation, bank rates, and others. Initially, this seemed to point towards a full-fledged crisis, if we are to use terms that analysts and market agents understand. The problem is that these indicators have now mostly gone back to normal. The immediate effect on the economy in response to Western companies leaving the country and the consequent disruption of supply chains has been moderate and dispersed. 

For Putin’s bureaucrats, as well as for Russian businesses, this spells optimism, and not only of the official, government-sponsored kind. The main market index, the PMI, demonstrates that by the start of June the balance of negative and positive assessments by entrepreneurs was near 0, having neatly recovered from March’s slump. The manufacturing industries have shown even better results. Most surveys confirm this data, like the following analysis in Re: Russia. According to the NAFI Research Center, the number of entrepreneurs who now positively assess their financial situation after March’s contraction has returned to the same level as it was at the beginning of the year. The same can be said of the Russian population in general: the percent of those with a positive outlook on Russia’s economy has reached record highs, according to regular surveys conducted by FOM. Overall, if we take data from the Levada Center we can come to the following conclusion: if Russians were expecting a crisis in March, they’re certainly not expecting it now. 

In stark contrast to the situation in Russia, Western media is churning out one panic-stricken article after another about the economic state of the eurozone and US. The situation does indeed look dire. Germany, the UK and the US are recording inflation rates unheard of in the last 40 years, while the average rate of inflation in developed nations (the OECD countries) sits at an also unprecedented 8,5%. The average household will now spend more money on food (which has become 1,5 times more expensive than it was in the middle of the 2010s) and energy (heating, gas, electricity), limiting people’s ability to purchase other goods. Demand for products has also fallen, meaning businesses can’t turn a profit and repay their loans. Central banks are trying to fight inflation by hiking rates, which means credit loans are becoming more expensive, resulting in a snowball effect that puts even more strain on businesses. What we see is most definitely a downward spiral. As international agencies, such as the World Bank and OECD, lower their forecasts in regards to global growth by 1-2 p.p, independent experts are engaged in active debates on whether a recession in developed economies is inevitable or not.

Naturally, these processes can’t help but leave their mark on the population and its political mood. The Gallup Economic Confidence Index (which measures the optimism and pessimism of American citizens) has dropped to -45 points. This is worse than during the peak of COVID in 2020; in fact, the only time the index dropped lower was between February 2008 and the spring of 2009, a period marked by the global financial crisis being in full swing across the globe. In Europe, economic problems are also beginning to drown out solidarity with Ukraine, and expert centers predict a looming fracture in public support for the country. In other words, it looks like sanctions have hit their own architects. Western economies have entered a turbulent zone: the leaders of the anti-Russian coalition are under threat, their political capital about to take a serious blow. Which is, of course, exactly what the Kremlin’s strategists had predicted. 

In 1982, the CIA prepared a detailed report for the US Congress on the state of the Soviet economy and its future prospects. The main conclusion was that the Soviet economy would face a sharp downturn, stagnation, and the subsequent problems that usually go hand in hand with such events. Yet a structural crisis, and, more importantly, a collapse, was not very likely, at least in the immediate future. The report definitely went down in history as a spectacular example of professional analysis gone horribly wrong; a blunder, if you will. Yet how could the authors of the report have failed to see the approaching collapse? How could the leaders of the Soviet Union, who were familiar with the CIA’s conclusions, also have failed to see it? And why did they proceed with their reforms, which were wholly based on the idea that ​​the Soviet economy was stable to its core?

It’s actually not that hard to understand the reasons behind this blunder. Indicators that are usually used to evaluate imbalances in an economy, such as fluctuations in commodity prices, asset prices, the price of money, the price of labour and the price of resources, were either absent or so suppressed in the Soviet Union that they became useless in determining the real state of affairs and disproportions. Soviet leaders liberalised the government’s hold on the economy after mounting pressure finally forced them to realise that the system was working against them. Yet they, just as the American experts before them, had failed to realise the size of the disproportions. The discrepancies started to pile up so quickly, that the decision-makers and their experts simply weren’t prepared for what was about to happen. 

If we peel back the discursive strategies of Russian economic optimism, we will immediately find that Putin’s picture of the well-being of the Russian economy is mostly wishful thinking. What is the point of a stable dollar if people can’t buy physical dollars or even use the money they already have? If businesses can’t buy the goods and spare parts they need? The current stability is more reminiscent of the Soviet Union, when the dollar cost 67 kopecks. This price had nothing to do with reality; it was nothing more than a symbol of the isolation of the Soviet economy and its market inferiority. In Russia, the central bank keeps on lowering interest rates, but businesses don’t want to take out new credits. Now let’s take a look at inflation. In reality, we’re not talking about a slowdown of inflation, because what the Russian economy is facing can most definitely be categorised as deflation — a result of internal consumer demand contracting by more than 10%. What’s being paraded around as an indicator of stabilisation is actually an indicator of a full-blown crisis. Russia’s best analytical Telegram channel, MMI, writes that when analysing the sharp reduction in personal income tax paid by citizens, “Perhaps the situation is worse than we expected. This explains the collapse in consumer demand”. In general, the Russian economy has officially entered a recession, and even in the most optimistic of forecasts, is expected to contract by 7%.

The irony is that Russians are full of optimism even though a recession has already begun, whilst Europeans are full of pessimism waiting for it to begin. The Russian autocracy’s reaction to the crisis is becoming more and more reminiscent of Soviet times: market indicators are suppressed or have stopped working, statistical data is censored, unpleasant topics are not discussed (bureaucrats and famous entrepreneurs have been threatened into using the word “structural adaptation” instead of “crisis”). At the same time, the West’s reaction is very much the opposite. Economical, political and social mechanisms work to highlight and bring maximum attention to the ongoing crisis, in turn sending politicians, businesses, experts and the general population clear warning signs they can’t ignore.    

In his book on “open-access orders” Douglass Northand his co-authors note that all benefits of such orders as those observed in the West (or, in simple terms, in “democracies”) can be called into question on closer examination. Whilst they don’t always guarantee high growth rates or even demonstrate significant progress in the fight against inequality, they do have one undoubtable advantage that determines their long-term success. This is, of course, the ability to adapt to external shocks. 

The mechanisms of this adaptation can be said to be the exact opposite of those seen in autocratic regimes (called “limited-access orders”). This explains why autocracies, and the Russian autocracy in particular, are always talking about Europe and the collective West’s impending decline, disorganisation and even collapse. From their point of view, the West’s inability to forcibly stop or block the transmission of crisis indicators translates into weakness and lack of will. By blocking access to such indicators at home, the autocrats convince the population that there is in fact no crisis taking place, or if there is, it’s certainly nothing to worry about. This allows them to retain power but also dooms society to be unprepared and powerless in the face of an actual crisis developing. This means that while “weak” Western governments can be removed from power rather easily when their citizens feel the relatively mild effects of an upcoming crisis, once it actually begins, they will end up being much better equipped to deal with the real, tangible consequences.