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Limits of the Mobilization Economy

Do not underestimate the will and overestimate the ability of the Kremlin. The Russian economy will not be able to be transferred to any mobilization rails.

Konstantin Sonin. Photo credits: Vasya Krestyaninov

Speech at the Congress of Free Russia, Vilnius, August 31, 2022

Having observed the Russian economy for more than a decade, I see a systematic error of both my own and other observers, and it seems to me that we constantly underestimate the will and constantly overestimate the ability [of the Kremlin].  All the time one hears such reasoning: no, such a decision will not be made, because it is complete idiocy. Further, it is proved that this is idiocy and from this, it is concluded that such a decision will not be made. No, it will be accepted despite all the idiocy and perniciousness. And vice versa, we see that when some decision has been made, and now that’s it, now it will certainly be carried through to the end: if they decide to increase armaments there, then they will increase it. No, they will fail. That is, when we look to the future, we underestimate the will and overestimate the ability.

Looking at what happened in the Putin economy in the last 10-15 years, when it became truly Putin’s, I notice what they have learned to do. Putin has learned to appoint such people to different places who do not steal 100%. Now people who do some kind of government work earn incredibly more than people in the 1990s government. I suspect they are making more in a day than the most corrupt member of government could make in a year in the 1990s, but something is being built.

There is no doubt that according to the current macroeconomic dynamics, budget revenues will decline, everything will become more expensive, any costs will increase, transport costs will increase, and any conceivable costs will increase. That is, the same goods are supplied at a higher price, which means that after some time, in the long run of a year or two, when there is not enough money, everything will come back — Putin’s officials cannot and will not do anything without earning incredible money and he won’t force them. It will just go into a state where nothing really gets done.

Unfortunately, it is difficult to predict all this, because any logical analysis relies on some conceivable calculation. When you imagine what a mobilization plan for the development of the Russian economy could be, you think: no, this is impossible, of course, they will now begin negotiations on sanctions because this is complete idiocy. But no, the fact that it’s idiotic doesn’t get in the way of decisions. My prediction: in a few years, when under the influence of economic difficulties, the current leadership will hand over a business with or without Putin, and it will be the same economy as it is now, only worse. It cannot be transferred to any mobilization rails.

There are no such economic measures that could stop the war, it causes more long-term damage to the country. Even speaking of sanctions, we must not forget that half of the world’s countries have not joined the sanctions, and although some Chinese, Indian, and Turkish companies are afraid to violate the sanctions regime due to secondary sanctions, this is a dark area, and it is hardly possible to limit the use of dollars and euro because you can use the yuan and the yuan has an exchange rate against the dollar, so even if the Russians cannot use dollars directly, they will be able to use them through countries that have not joined the sanctions.

If the war continues in the same way, then after some time the Russian economy will be more dependent on the oil and gas needle, because now the decline in all other industries is much greater, and state budget revenues not from oil and gas fell very sharply in July. As a result of this activity, Russia will be impaled on the Chinese oil and gas needle, because if the current dynamics continue, we will sell oil and gas only to China and India, and Europe will fulfill its program of getting rid of Russian gas. The dependence will only get stronger.