How long can Putin afford to wage war in Ukraine? | DW News

how long can Vladimir Putin afford to continue his war in Ukraine without inflicting economic pain on his own people to talk about this I'm delighted to be joined today by Alexander Peno from the Carnegie Russia Eurasia Center Alexander thank you so much for being with us today thank you for having me it's pleasure and honor I want to take you back um to the weeks and months before Russia's invasion of Ukraine you were living in Moscow working for the central bank as an advisor correct descri to me how you would have conveyed the economic situation back then oh you know it's uh quite it's it's a good question and it's interesting uh and always useful to keep in mind that before the war Russia economy has was was in a quite good performance uh because of it was on its recovery Pace after covid uh and um uh well uh the most risks for Russian economy was p over effects uh from advanced economies and probably some outbreaks of new of new pandemic or whatever and then um so everything was stable and looked stable and one more very interesting thing because uh well when the war started everyone outside of Russia uh repeatedly and you may probably remember us and um UK authorities repeatedly told that that it's going to be a war and here in Russia we thought that no it's not going to be a war it would be super crazy to to have a war so it's like you know it's like a big game or whatever so it's a big Bluff it's not going to be a war and I remember that a week uh uh before the fullscale invasion of Ukraine I sat with my former colleague uh in one of the Moscow restaurants and he tried so he was a for um he is an expert in Russia from uh International organizations and he tries to convince me that it's going to be the war and I as an Insider try to convince him that now it's not going to be because it's crazy for the economy it's crazy for people well-being that uh it will undermine the whole um growth and development and all efforts of government to to to to bring economy back to recovery Pace after CID so and yeah and all Outsiders were right most insiders were wrong and now we are where we are talk to me a little bit about that early transformation into a war economy and what that meant for your colleagues that were working at the central bank still you left your job at that point we should say your conscience wouldn't allow you to to stay in Russia and you've been in Germany watching events from here uh pretty much since then but what did those early weeks and months look like after the invasion so uh shortly after the invasion everyone was shocked I mean there wasn't some sort of meeting before The Invasion where Putin will tell his his advisers and his uh ministers and the chief of central bank that he's going to invade no everyone was shocked everyone uh well all people I spoke with uh was absolutely terrified and find feel themselves devastated but uh then sanctions came and uh uh speaking on behalf of economic block of Russian government and Central Bank so this started to work as anti-isis managers the role they played uh a couple of times before so uh it's very interesting uh also I figured it out that recently Russia was uh Russia faced four major crisis during last 15 years it's extremely often compared to uh any kind of advanced and uh developing economies so and then two of these crisis were absolutely handmade it was first in 2014 first sanction after annexation of Crimea and then sanctions which came after uh the full scale invasion of Ukraine so uh so this people started to act as anti-crisis managers and I can remind you that first uh there was Russian reserves blocked and uh Russian uh government and Central Bank retaliate then they banned uh foreign uh then they banned non-residents to withdraw liquid assets from Russia uh then they Tred to develop some sort of uh defense measures for Russian economy and they actually put the economy to into artificial coma so they dealed less with war outcomes but they deal a lot with sanctions with pure economic impact so uh I think that they don't have much time for reasoning what they are do why they're not they they they they had a clue what they're doing but they didn't have much time reasoning why they're doing this yeah because when it comes to assessing how the Russian economy is doing there seem to be two radically opposed camps as you write as well there seem to be one side that are saying the country is on the brink of collapse and then the other that are saying we've never been stronger look at the growth rates and actually these Western sanctions are bowing the economy where do you stand amid these radically opposed viewpoints uh well the reality is uh a little bit complicated and in terms of sanctions I need to say that there is a some sort of disend disentanglement in uh perception of sanctions within Russian Elites and Russian bureaucrats so they're dealing with only sanctions with its economical outcomes without as I said uh keeping in mind why the sanctions were actually imposed so if you are isolated from the war and it's Po and it's actually possible if you're working in Moscow and dealing with only your um part of and then doing doing your part of your of the job which for instance related with financial markets So you you're dealing with transactions for instance uh what's going on in Ukraine it's going in Ukraine you're you you you can even not be familiar with uh with the news if you are not checking them uh constantly so you're are dealing with some struggling because of transactions and if you every day you are not reminding yourself why you're why you're dealing with transactional problems uh you very very easy and very fast you will started to forget uh what was the what was the reason behind all that so actually uh and I think this is a big problem with sanctions the communicational which is underestimated by uh both in Russia and here in the west and speaking about the debate here of course there are two different polar opinions uh the reality is somewhere in the middle since Russia's economy is a big animal is a big and rigid animal it's quite complicated to to be to kill with one shot so uh with a very short term economy is performing well it's partly because of it's it's on it it was on its recovery growth phase uh second this growth of course is based uh on uh export revenues and on high spending the fiscal impulse uh from Russian authorities in 2022 and 2023 exceeded 10% of GDP uh historical High uh in Russian's history and uh and so all this uh and and all uh this fulfilling uh this economic growth 3.6% in 2023 uh but uh we need to always keep in mind that uh since Russian government will stop spending or decrease spending growth figures would be different and uh there is a we already see the big problem between spending and inflation inflation is a problem for Russian authorities it's problem because it will uh it it will Mount problems uh in the midterm and then long term but now well it seems manageable but well it's it's always a trade-off for policy makers and and and the actually the major reason of the inflation the primary reason of the inflation is State spending so there is a problem of right and the leftand in Russian economy with one hand Russian Central Bank trying to mitigate inflation to t uh price growing and with another hand government uh continuous spending and mostly on War I mean uh Putin committed War EXP is in 2024 approximately 8% of GDP it's another history record uh since in in in the the history of modern Russia since the the state was established after the collapsing of Soviet Union and it's enormous I mean never before uh Russia spent so much and here are extremely uh High wages of those people who are in trenches uh State Demand on uh weapons and ammunition and inflation of Enterprises which is much higher than the average over economy and if Russia continue to so Putin will need to choose sooner or later uh between three uh major go between his three priorities financing the War uh maintaining people's well-being so uh paying pensions at the same amount keeping wages and keeping people happy with the payments and uh lower inflation so all three goals in one time it's impossible that's something you you refer to as Putin's Tri Lama isn't it trying to balance those three things at once I want to talk a little bit more about oil because of course Putin did manage to find new buyers in China India and turkey for example but that has also led to a kind of a shift in power dynamics and I'm particularly interested in how that relates to Russia's relationship to China you know Russia is very much the junior partner there how will that play out in the future do you think economically so economically the dependency of uh dependency of Russia on China is growing but China I would say benefits this uh kind of relationship a lot and enjoying uh and enjoying it it it's quite cheap for China I mean uh for uh Russia was a tiny market for Chinese producers but after uh the fullscale invasion of Ukraine it's it's uh transformed into medium Market we see that uh for Chinese uh po policy makers it's quite easy to massage Putin's ego saying that he's a great uh man and leader of a great country but uh and which brings to China cheap energy resources first and for theost then uh Chinese companies of I would say second and third row since Chinese companies of the thir of the first row and Chinese banks are quite um I'm trying not to get along with Russia so much so showing that they are resp ing red lines uh drawn by the West so uh but but but but but second uh but second row company then third row and companies and Banks they're all enjoying this growing dependency so uh and and this will grow I mean uh so Russia will be more dependent on China not only in terms of uh having a a buyer on Russian energy resources but also uh in terms of technological import uh car making so there were only two car U car makers on Russian Market before it was the whole world compete there and now there is only Russian after us and 14 Chinese Brands I mean it's it's huge and it's only and this transition happens only during two years in in in there is also a remarkable example uh from um from the region of heavy vehicles uh the uh the share of Chinese heavy vehicles and trucks on Russian Market uh incre SK rocketed it is increased on 600 uh% during one year just mindblowing it's BL it is it is and uh since when Russian producers like Ural and Kamas uh so they uh try they were focused on import substitution and uh fulfilling the demand from uh from the Army from the state Chinese uh Chinese industry just just set the market they occupied the market and it would be quite complicated to push them out if and when or when Russia will think to do this right so it's fair to say that Russia has found new buyers for its energy but there are other areas where Western sanctions have been hurting the economy a little bit more especially in the area of Technology maybe you have a couple of examples you can share about how that's affecting the economy uh so in terms of uh technology there is Russia you know uh not developing its offshore gas and oil uh because uh there is no access to technology Russia lost uh from from what I heard Russia lost uh its leadership it was it wasn't a leadership but it has a claim to be a leader in terms of AI in terms of biomedical Technologies and um Russia's industry struggling to get uh hardware and um uh so both hardware and software so they're switching from uh uh from Western companies to Chinese vendors and now they're feeling difficulties with payments and also payments and transactions all these settlements issue is also a bottleneck uh for Russia and this bottleneck was created because of sanctions uh there is a very interesting uh story because there is a room for uh interesting development between Russia and China in terms of creating uh parallel infrast parallel settlement infrastructure which uh maybe in the super long term not we're very we decades from uh when it started to undermine dollar dominance which Russian uh propaganda is trying to say but it's but Russia and China dealing a lot on this issue uh and it's also an indicator that uh this is a pro this is a problematic area created by by by sanctions so in terms of uh coming back to technology there are problems with computers with semiconductors uh which uh Russia cannot fulfill uh itself which Russia cannot substitute domestically or from China so uh Russian um businesses now forced to deal with uh not systemic Solutions but with different kind of schemes with different kind of third countries kind of proxies uh which can be uh you which which can be easily traced and banned by sanctions uh on so in general it uh limits Russian productivity and we see that wages are growing and inflation are growing but Russian productivity is not growing at all is there is there anger among the business community no no it's not an anger since uh they I I I don't I I don't know I would say correct correctly to say I I know nothing about the anger but uh business Community I know no one who is quite who is happy with the with the current situation so uh and uh the attitude of Russian business and Russian bureaucrats I would describe with the very you know infantile uh formula that can we go back to February 2022 when okay there is a geopolitical struggle with the west or how our leader understand that but there is no war which distracting resources and which is really devastating but uh because uh but because of the isolation uh because of the design of personal sanctions and because of lots of people are in the lists with the bad reasoning uh why they are here because someone called them that they are near Putin or whatever so the anti-western sentiment is growing in Russia and this is well on the long term I think it's bad since once uh this war end and uh well both countries need to think well Russia will not disappear and EU will not disappear so um uh so Union and Russia will need to think how they will live uh how they will be neighbors uh in the future well and uh and this anti-western sentiment of course will poison uh this future for years and does does that anti-western sentiment also apply to the economic policy makers and advisers that you know you used to work with I find fascinating that people uh that some people who were responsible for attracting foreign investors in Russian market now are actually quite skillful uh policy makers who are designing obstacles on the path of Western companies to withdraw their assets and to and to leave Russia so some of these people feel themselves really offended and uh they are acting in a retaliation mood some of them you know they they think that they they are they they like fatalists so they're dealing with the situation but I think that that here is it is a big problem since uh neither one side nor another knows how to live how to deal with each other in the future the very the very simple example is in terms of uh exchanges institutional cooperation between Russia Russian institutions in a very wide range in science and universities and corporate world and the West so all this stopped and this all and and and this looks like a double sarcophagi human capital so there is external pressure Russia uh the West who who doesn't want to or who are not dealing with Russians anymore because they're Russians and and from the inside uh since every contact uh should be traced or um people from FSB are in interested in every contacts in every actions and why so why you're reading why you're reading for Western article why you're doing this they are questioning people it all creates uh the very very bad environment so people are you know stopping to even be interested in what's going on here and um very easy and and and Russian science and Russian universities very easy you will become you know a cut off the uh uh the the um the frontier the science Frontier and the the most recent developments uh different science fields and uh as I said in the long run it's dramatically decrease and damages the quality of human capital in Russia and it's of course disturbing do you think on the other side that you'll also see a deeper academic cooperation with the likes of China and India as a result of this I so there are issues with the collaboration in China which are also disturbing since there are uh multiple cases uh when FSB accusing Russian scientists uh in a state treason because of their collaboration with China so I think Russian scientists are quite uh careful in this kind of collab ation too but um uh it's you know the the science the language of international science is English and in Russia everything which is in in English now sounds bad and then the level of knowledge uh of Chinese is increasing but we only two we it's only two years of Russian pivot to the towards uh East so it's not enough to have you know to have a bunch of Chinese Watchers of experts who are who can fulfill the growing Demand on China same with India there wasn't uh Russia Russia has a very few India Watchers uh even in a very peaceful times uh they couldn't appear accidentally because uh Russian president decided to to to go on a war against Ukraine and and all country were forced to do what what what it's doing so on the one hand you have this kind of a brain drain but if you look at the labor market General things look quite good unemployment is down wages in the defense sector are up this will end as soon as the war ends and I'm wondering if in a kind of a twisted way Putin actually has an economic incentive to prolong this as long as possible this is it's there is a very interesting backdrop on what you're calling the good side so unemployment when unemployment is on this historically low level so it's a 2.8% uh it basically means that there is no workers within the economy so if there would be any kind of external demand open or internal demand so for instance uh China will need uh Russian cars uh and after us will say okay we can fulfill this demand they simply cannot find people who will assemble the cars because there is no workers so in Russian Market is it is it's good probably good situation in terms of worker since uh employers are forced to pay them more so people keep their jobs and not uh not leaving their jobs and go to other employers but uh on the back side uh but but there is also other side so there are three major forces on Russian markets who are competing for the labor force it is an army itself who literally need men to put them on the trenches and this men on the front line they're getting uh enormous salaries and the problem here is once the war end uh there is no reason for the state to keep the salaries and uh this will so uh it is it is a big an open question to me how uh Russian authorities will manage this problem which is actually I think semi social so there are people who think that they are war heroes who want to be treated as war heroes and uh their salaries are unbearable burden for other taxpayers uh both on corporates and on the individual s so uh it would be a problem the second Force who is competing for Russian uh for the second force is uh military industry complex which is extended uh when I'm calling when I'm saying military industry complex I mean not only uh industry which produces uh stuff for the Army I mean weapons Armory tanks uh guns and soever and supplies but also civil part of Industry which are now working three shifts and they also uh they recruiting women on a typically men uh professions like drivers truck drivers heavy machinery operators and so uh they also using teenagers Labor uh in drones assembly lines because there is no workers in Russia and they are also competing for a labor force and third is the rest of economy the Civil part of economy I mean there is shortages uh there is no sector in Russia uh which doesn't feel shortages of workers right now so the situation isn't uh super bright and there is no migrant infl low uh especially after uh crocus terroristic attack so migrants are not feeling this they even before crocus they never feel themselves safe in Russia uh well Russia is quite nationalistic country we need I need to admit this uh but now uh the and so migrants inflow is almost stopped and the situ and and and this is a limitation on development of of the economy which also means that uh prices will go up because because because Enterprises cannot uh raise the productivity and also productivity is limited by sanctions by technological sanctions so uh the situation is okay in terms of uh current moment in this particular moment Russian feel themselves quite rich and wealthy but uh but but but its perception will change in three years or in um in the midterm I would say 3 years it's in the midterm when uh situation will change and situation will change so when I'm writing about uh some time frame uh I usually uh back on uh um on on a time frame provided by military experts who are saying that uh in terms of uh so from the pure military standpoint uh for the war for The Stance of War uh it's the next 12 18 months would be decisive and because the economy and The Stance of Russian economy is the function of what's going on at the front line if Putin uh will decide to accelerate and to to escalate and uh and if Russia want to have another offensive it would be some extra expenditures from from the budget and some extra pressure and tightness on the system so the equation would be different so uh for uh for if we are talking about from 12 to 18 months time frame uh with the current conditions so the situation would be relatively the same as it's today Putin has enough money to uh to continue all to to fulfill all three his goals after that uh he will face uh budget burden budget problems because of inflation you know you mentioned earlier that Putin is spending 8% of GDP on defense I think about a third of this year's budget is is going in that direction that is of course at the expense of other areas like social spending Health Care education are Russian people feeling the effects of that sort of prioritization already so social spending is not cut and uh it's actually accelerated so um there was a very interesting Trend we're witnessing right now so very interesting um the changes in people's attitude of wealth distribution since '90s and the first time ever we see this so because of the because people from a low uh income Stratus are pure to are pure beneficiaries of this war they feel themselves more rich and happy and and they think that the situation with distribution of wealth within the economy is more fair than it was before so we're in a very paradoxical situation that uh uh people are not feeling uh people live quite badly before now their living conditions improved uh they are not uh thinking uh they they don't have any time or any kind of longtime Horizon they are not planning for a long time uh so uh they're living to they're living with today and for today they're fine so people are noticing that their life is changing but for but for some people life changed in a good way so they are pretty happy with that you've mentioned before that the longer this war continues the worse The Hangover will be and I'm not going to ask you to try to predict when the war will end but I am interested in your take on how Vladimir Putin will deal with a bad hangover I think uh that people's uh living standards will decrease but they will decrease uh moderately so we will see uh so people will have um less money because of because of inflation so probably the figures they will see from their SMS from Banks would be relatively the same but uh the purchasing the consumer capacity of This Ss will be different then uh I think we will see we will witness a growing level of accidents uh with Machinery with the um with with with floods with fires with the with the utilities with all this stuff because of uh um because of the sanctions so it's complicated to find particles for uh for for the industry and uh because of underfinancing the whole industry people will see that uh so there would be less roads built and less less industry less infrastructure would be built because the cost of this construction is rais in because of the inflation so I think he will choose uh gradual uh woring of uh living standards and he will of course uh say that it's all because of the West it's all because of the cruel West all because of the sanctions and and this is very important what we need to um realize about Russia Russia is on its Survival Mod so when we're looking on its on this with our matrics of normal business cycle well it's okay and then then here we can say that there is no bright future in the midterm but if they are super happy and they're encouraging themselves when when they are when they can bypass sanctions when they can find something new very temporary and they're encouraging with all this teeny tiny success and all this means survival Modia so control of the Ming might be the most powerful force there Alexander Peno thank you so much for talking to us today thank you

Channel: DW News

Views: 467,113

Keywords: DW News, Russia, Vladimir Putin, Ukraine, war, military, economy, spending, bank, money, finances

Id: slzS7pxavi0

Length: 29min 32sec (1772 seconds)

Published: Thu Apr 18 2024