For almost two decades Russia had been steadily climbing out of the economic hole it found itself
in after the end of the Cold War. Overnight it found itself right back in the bottom of
that hole- but just how bad Russia’s future will get just may be shocking to some viewers.
Russia's invasion of Ukraine may have begun in February of 2022, but Russia was preparing for
this since the first international sanctions against it in 2014 over its annexation of
Crimea. For years Russia carefully built up a massive war chest of over $600 billion,
all with the goal of softening the blow to its economy from any potential sanctions
over further military aggression. Quite literally overnight, Russia lost access
to half of that money thanks to some of the toughest sanctions ever imposed on a country.
Putin's plan was a good one- he expected there would be sanctions placed on Russia
due to the invasion, so the $600 billion, held in foreign reserves, could be used to prop up
the Russian economy until hostilities ended. However, the West's plan was even better:
simply freeze all of that money and deny Russia access to it. To be fair, Putin never imagined
that the West would unify so rapidly, and he certainly never dreamed Western nations would
be willing to hurt themselves to sanction Russia. When Putin annexed Crimea in 2014,
international sanctions were light- with the US putting most of the pressure on Russia. There was
little reason to believe a wider invasion would result in such a drastic response.
Without access to its war chest, Russia was forced to take extreme actions to try and
protect its economy. First, it shut down its stock market- at first it was for a few days,
but soon it was announced the market would remain closed
for weeks. It was only in late March that the Russian stock market opened up again,
once fears of investors pulling all of their assets were largely minimized.
Second, Russia's central bank raised interest rates as high as a whopping
20% in order to combat the depression of the Ruble which, immediately after the invasion,
fell in value by as much as 40%. The interest rate hike was meant to slow
down lending and big-ticket purchases, but in March Russia's inflation still hit 16.7%-
compared with the US's 8.54%, which is itself an extremely abnormal high.
Even before the invasion of Ukraine though, Russia's economic future looked extremely shaky.
In 2015 and 2016 Russia experienced an economic crisis fueled by both a drop in the price of oil
and international sanctions against Russia. If you're wondering why your own country's
economy doesn't collapse when oil prices drop it's because Russia lacks a well-diversified economy.
Oil and gas make up as much as 40% of state revenue, and the Natural Resources and Environment
Ministry estimates that natural resources make up as much as 60% of the country's GDP.
This is perhaps not surprising given the vast size of Russia, which gives it some
of the largest reserves of oil, natural gas, minerals, and other resources in the world,
all of which are vital for modern industry. Oil and gas alone make up 40% of Russia's exports.
Access to some of the largest natural resources deposits in the world however
has been perhaps a greater curse than a blessing. While it has made individuals
very rich inside Russia, which boasts the 5th largest number of billionaires,
the lack of a diversified economy has also led to it coming at the top of wealth inequality
charts amongst developed nations. It is also a massive strategic vulnerability for the nation,
as it makes its economy incredibly easy to target and cripple by foreign powers.
To that end, Russia has done everything it can to influence western nations to shy away from
renewable energy, including directly backing the campaigns of public officials in the west
who work to dismantle green energy initiatives. It has also worked hard to create energy dependence
from western nations, and today Germany is but one of many victims of its own dependence on
Russia for its energy needs. The fact that Russia provides most of Germany's energy
makes the nation extremely reluctant to publicly oppose it- as evidenced by Germany's
lack of military support for Ukraine until only recently, and its outright refusal to
support a complete ban on Russian energy in order to punish it where it hurts the most.
Russia would take two years to emerge from the financial crisis of 2014-2016,
during which vast sums of money left the Russian economy as investors lost confidence in the ruble.
What was an economic crisis though is today an economic catastrophe,
with consequences that will haunt Russia for years to come.
To try to more directly influence the economy,
Putin has spent two decades turning Russia's fledgling market economy
into a Soviet-style command economy. You can't teach an old dog new tricks they say,
even when those tricks very obviously don't work. In 2003 Putin began to take control of Yukos,
the country's largest oil company. At its height Yukos produced 20% of Russia's oil and this caught
the eye of Putin who began to engineer a scheme to take direct control of the company. First,
he orchestrated the creation of fake tax bills which the Russian government claimed Yukos had not
been paying. Yukos was presented with $27 billion in unpaid taxes, a sum so preposterously large
that the company couldn't hope to pay it off. This is exactly what Putin wanted, as he then ordered a
freeze on all of Yukos' assets and began ordering that company assets be seized by the government
in order to pay off the massive tax bill. Those assets were then sold at pennies on the dollar
to state-owned companies, who quickly put them to use under Putin's careful watch.
Mikhail Khodorkovsky was arrested by the police and charged with fraud. He
would be sentenced to prison for ten years before being pardoned by Putin,
after which he immediately fled the country and became one of Putin's biggest critics. However,
at home the lesson was clear- you do as Putin says or he steals all of your wealth and throws you in
prison. Few Russian oligarchs needed to be taught this lesson directly after Khodorkovsky's example.
Rosneft and Gazprom became Russia's largest players in the energy market, and as stated-owned
enterprises, Putin was largely free to do as he wished with the money that the companies made.
He enriched himself with the profits to an unknown degree- to this day Putin's true wealth,
all of it stolen, is unknown but many suspect his robbery of the Russian people has made him
the richest man in the world. Putin however also put the state-owned companies to use by funding
kickbacks for his allies amongst the Russian security services. With close friends paid
off to the tune of millions. Russia's infamous security services now serviced Putin directly.
He put their loyalty to great effect by using Russia's security apparatus
to spy on and intimidate political opponents or critics, or even outright kill them. Anyone who
might speak up against Putin's bold use of Soviet-style intimidation and assassination
was probably already on his payroll, or about to be intimidated or assassinated themselves.
Putin was now in direct control of the most important sector of the Russian economy,
and those entrepreneurs who played nice with him were allowed to launch their own successful
enterprises, such as Novatek and Sibur. However, anyone who did not play by Putin's playbook
found business extremely difficult to conduct inside bureaucratic Russia.
In fact, such heavy bureaucracy and rampant corruption made Russia an extremely unappealing
market for foreign investors, only further hurting the Russian economy.
But after the financial crisis of 2014 to 2016, Putin worked to secure his hold over
the Russian economy even further. Now truly independent businesses with a certain level
of success were being put under pressure to sell to the state. Magnit for example,
one of Russia's largest grocery retail chains, found itself under intense pressure to sell to
the government, and its founder Sergei Galitsky proved no fool when he sold most of his shares in
his own business to a state lender. While he got a $2.5 billion payday, he also lost ownership of
the business he had started himself and grew to be one of the world's largest grocery retailers.
Galitsky was smart and played ball, but others were not so smart.
Enriched by their collusion with the Kremlin,
many of these wealthy individuals now resisted selling their businesses to the government.
Most of these oligarchs would end up in exile, or simply imprisoned under false charges.
Despite the Kremlin controlling the bulk of the Russian economy with a very heavy hand,
there was still room for small and medium sized businesses to find success
while avoiding enough of it to draw Putin's eye-of-Sauron like gaze.
With relations between Russia and the west relatively cordial,
many western businesses moved into Russia in order to service its growing middle class. Nestle, Ikea,
H&M, and Adidas all moved in, amongst hundreds of others, helping to bolster the Russian economy.
However, Russia's invasion of Ukraine has led to an unprecedented exodus out of Russia by foreign
business- with a pullout of revenue worth an estimated $200 billion to the Russian economy.
Major brands to pull out include Nestle which suspended sales of the vast majority of goods it
imported regularly into Russia. British American Tobacco left its Russian business altogether,
and Philip Morris reduced Russian manufacturing and suspended future investments in the country.
TJX, owner of T.J. Maxx and Marshalls, is divesting its equity ownership in Familia,
an off-price retailer popular across the country, while H&M
and Nike both have completely suspended sales in Russia. Perhaps most devastating of all for the
Russian people however is the suspension of all sales of Adidas products- to include tracksuits.
Just as devastating though was the pullout of major foreign players in the Russian financial
sector. Société Générale, France's third largest bank, sold its controlling stake in Rosbank,
which resulted in a loss of $3.3 billion in capital for Russian lenders. Deutsche Bank is
in the process of winding down business in Russia and helping its clients cease their own operations
inside the country. Goldman Sachs bid Russia do svidaniya, followed hours later by JPMorgan Chase.
American Express, Mastercard, and Visa all delivered a crippling blow to Russian
travelers by announcing that their cards would no longer work outside of Russia if
issued inside Russia. Those cards issued outside Russia would likewise not work inside the country.
The mass exodus of foreign businesses in Russia has led to the loss of hundreds of thousands of
jobs, and skyrocketed unemployment to over 9% after having reached a record low in March. The
unemployment rate is not expected to drop below 5% for years as the true cost of sanctions hit the
Russian labor market, and the exodus of foreign businesses has seen retail sales drop by 10%.
In response, the Russian government has allocated 39 billion rubles,
or $466 million, towards emergency benefits, temporary employment,
and public works projects in the hopes of stemming the economic harm of massive unemployment.
In the short term this is an effective strategy employed by the likes of the United States,
which invested billions into job programs and benefits during the financial crisis of 2008.
But even $466 million is a paltry figure for a nation of 144 million, and with foreign investment
and business not returning to the country anytime soon, that money will run out in mere months.
To try to limit the impact of foreign businesses pulling out of Russia,
the Kremlin has nationalized many of the businesses once operated by foreign companies.
McDonalds stores are set to be taken over by a new state-owned,
family friendly restaurant- Uncle Vanya's, complete with a very familiar looking logo.
The goal is to stop the bleeding caused by the sudden pullout of western businesses by preserving
the jobs and income through simply replacing the foreign operators and creditors. Any concerns
over intellectual property rights are completely disregarded, as Russia has decided not to honor
the copyrights or IP rights of any business which is deemed “hostile to Russia or its people''.
This might seem like a good idea- simply replace foreign businesses with a Russian
equivalent- but thanks to the freezing of Russia's foreign currency reserves,
the Kremlin's ability to support vast amounts of businesses once financed by foreign corporations
is limited at best. Then there's the simple matter of expertise and brand identity- people go to a
McDonalds or KFC all over the world because of their preference for their specific food.
Simply replacing who runs an abandoned restaurant isn't going to lead to the same popular demand for
what is now essentially a completely different product. But the greatest concern might be a
foreign business or investor's reluctance to one day re-enter Russia, given how quickly the Kremlin
was to completely trample all over copyright and intellectual property protection laws. If there is
fear of the government simply stealing your idea or product and giving it to a domestic lacky,
foreign corporations and investors have little incentive to bring large sums of money into the
country. This means that in the future Russia will find it incredibly difficult to lure in
big investors and companies and build a truly modern, forward-looking economy.
Instead, it's dooming itself to a future where the west continues to lead the world
in innovation, and Russia remains merely a consumer of western products and ideas.
Russia is essentially in crisis mode and attempting to build a self-sustaining
economy. While projected to experience a GDP loss of 11% over the next year,
this will likely gradually stabilize. However, stabilization does not mean growth,
and the Russian economy is expected to grow only by tiny increments over the next few years.
This is a catastrophic turn of events for the Russian people, who can expect to see
a rapid decline in Russia's middle class and a return to Soviet-era economic woes,
just as Putin does his best to steer the Russian economy back to a Soviet-style self-sufficiency
model. While this may keep the Russian economy from completely imploding, it means an end to the
prosperity the average Russian was beginning to enjoy as the nation pulled itself out of
the rubble of the collapse of the Soviet Union. Perhaps the greatest blow to the Russian economy
however is the brain drain experienced by the mass exodus of Russia’s artists,
intellectuals, and skilled workers. Chafing under an increasingly authoritarian regime,
Russia’s elite are leaving the country in droves, crippling its ability to build a
competitive economy. There is already a major fear of a shortage of qualified STEM specialists.
The future of the Russian economy is a thoroughly grim one, unless Putin immediately reverses course
and the world decides to forgive Russia overnight for their invasion of Ukraine.
As this is extremely unlikely, Russia is set to become a second world nation within Europe as it
remains economically isolated from the world. Things will only get worse as the west targets
Russia's energy sector- it's most important sector and the entire linchpin of the Russian economy.
A complete ban on Russian energy by the west would see the economy contract by over 20%,
and plans are already in place to gradually phase out Russian coal, oil, and natural gas across the
European Union over the next few years. This will cripple Russia's most important economic sector,
completely nullifying any possible political gains made by successfully invading Ukraine- something
Russia also seems not capable of achieving. While Asian nations will inevitably pick up the slack of
Western energy imports from Russia- such as India which is hungrily buying up cheap Russian oil-
it will not be enough in the long run to save Russia's economy from shrinking dramatically.
Now go check out What Is Wrong With Russia's Military to see why
its invasion of Ukraine is failing, or click this other video instead!