Sanctions and Russia: Effects, Lessons, and the Future | A History Lab Discussion w/ Stephen Kotkin

[Music] welcome everyone to the Hoover history lab discussion of sanctions and Russia effects lessons and the future I am Stephen cotkin director of the Hoover history lab with me today are Mikhail bernstam also of the Hoover institution at Stanford and Sergey guriev of The Institute politics otherwise known as Seance Paul this week the Russian Central Bank raised interest rates 3.5 percent a very significant jump Russia is experiencing inflation budget deficit Capital flight human capital flight and labor shortages today we're aiming for a data Rich unsentimental analysis of the sanctions on Russia their effects and where they might be heading and whether Russia is vulnerable or not in fact genuinely in its economy we want a sober understanding rooted in logic in the facts and how the situation actually is not how we want it to be cut through the noise to the fundamentals and we have two of the great experts alive fortunately to lead us in this discussion so let me pose the first question to Sergey guriev how can we describe the sanctions on Russia what does the term sanctions actually include and not include and and other categories of the sanctions or groupings of the sanctions and how do the sanctions compare to others in the past give us a sense of what these specific sanctions have been thank you very much Stephen for inviting me to the podcast indeed this is a very special uh episode in the history of sanctions uh in the last couple of years and said more sanctions than any other country in the history of geoeconomics in history of economic Warfare if you like to call it this way sanctions are defined as government-imposed economic restrictions and I think definitions are important here because some of the economic restrictions in the last year and in this year were actually imposed by companies rather than governments a lot of action is going on because of reputational concerns uh private actors actually decide not to maintain any links with Russia exit Russia to some extent and in that sense when we talk about sanctions we should not confuse the actions imposed by the governments undertaken by the governments and the actions taken by private sector but anyway when you ask question about kinds of sanctions I think it's not just the quantity of sanctions also different categories of sanctions which become very very extensive so Russia space macroeconomic sanctions imposed by the Western Government by Coalition which includes previously neutral countries such as Switzerland and non-western countries such as Singapore but also of course EU G7 all members of the western coalitions these sanctions were introduced on the third day of the war sanctions against Russian Central Bank and Central Bank Reserves that was a very very important step very quick step which eventually in the course of several days and weeks triggered the major macroeconomic planning this Panic was controlled later on but still it was something unprecedented another type of sanctions was the trade sanctions sanctions against exporting to Russia's sensitive Technologies sensitive components router by now has learned how to circumvent at least some of those sanctions and we see how using uh its uh intermediaries in third countries Russia succeeds circumventing some of those sanctions but still these sanctions were also unprecedented in their scale and magnitude uh the other the other uh kind of sanctions which I already mentioned were not sanctioned but actions by the private sectors who exited rata which undermine Ruckus capacity to produce various Goods most importantly in 2022 Russian Automotive sector uh suffered because rapid Automotive production was very much relying on Western uh Western Partners as well as Japanese and Korean Partners which also imposed those government or private sector sanctions on raqqa in addition um and that is probably the most consequential of all sanctions Russian uh governments so oil export assumptions so initially in the spring of 2022 a UK and U.S imposed oil and Bargain Market but most importantly uh because uh rapid oil was mostly sold to Europe rather than us and UK um Europe and Poland embarked on Russian oil and oil products in December 2022 and February 2023 Eden which is again something unprecedented oil price can so U.S and Europe said if Russia exports oil it has to sell it at the price no higher than 60 dollars per barrel now again recently we saw that even those types of sanctions can be circumvented at this partially but in the first half of 2023 these sanctions really had a catastrophic impact on Russian export revenues rotten oil and gas export revenues and oil and gas taxes and in addition of course there are also thousands of Russian individuals and companies who were sanctioned not just threaten economies at all but individual sanctions and again we talk about thousands of individuals and thousands of companies into this uh assumption by U.S Europe Canada Australia and other members of the Assumption coach so it sounds very impressive it sounds even more impressive given that private companies not compelled to act have also acted as you suggested um you described it as Epoch making that is to say this episode is more significant than previous ones in terms of geoeconomics let's start the Mikhail benchtam now to talk about the effects of the sanctions we see what how large the effort has been uh in many different categories from banking through trade uh through other aspects but what are the effects and have the if the actual effects of the sanctions which of the effects have been predictable which of the effects have been surprising how do we actually measure the effects uh are we looking at effects that we'd like to see and perceiving them or are those effects in reality do we have short-term effects versus medium term and long-term effects uh Mikhail help us a little bit understand the effects of these sanctions well a quick answer is all of the above uh for what you said uh first of all how do you measure it uh and the measurement the timing is very important the most widely quoted data is the Russian GDP I declined by 2.1 percent in 2022. but there were two good months January and February the war started effectively in the end of February so if you measure it for much for March 1 2022 to March 1 2023 it is 3.1 percent so you can play with the data the same way we do with the Great Recession in the United States because when you ask people about the Great Recession they say it is all right it is 2.6 percent contraction in 2029 but if you measure the entire period it is 4.3 percent from the end of 2027 uh excuse me into 2007 through 2009 so in Russia you can add that in the first half of 2000 20 diseases here we have the preliminary data that there is a recovery actually and the first quarter saw the decline of 1.8 percent of GDP the second quarter The increased preliminary 4.9 so if medically it is 1 plus 1.5 percent for the first half of 2023 it may be wise later the world two things which CG alluded to they were twice Russia was on the brick one was web visit 28 2022 when there was effectively bank failures and uh there was a panic gun and Banks and the Central Bank cleverly injected 7 trillion trillion with the chip Dallas into the banking system and the other one was similar that was what three days ago on the 15th of August 2023 in nursing seven a trillion and today there is a data which shows that only half the rest was in Dallas so there wasn't a fear that the banking system may become a liquid and there was a huge liquidity injection so of these episodes you can show you can see that the risks are very very high for the economy and especially I would emphasize on the banking sector and the next is the huge risk is in the debt sector you might remember that that crisis in Europe in 2010 after the Great Recession and this is because of the price cap and the sanctions and the oil export which again mentioned correctly and because of that the current account Surplus has declined uh in the seven months of 2023 to 25 billion dollars and for the comparison and the first seven months of 2022 it was 165 billion so it's an 85 percent Decline and the data on the debt which they have to pay in the next 12 months is about it's over 100 billion dollars they have to be paid and because of the EU sanctions of June 2022 there is no refinancing so how they will handle it now there is a mysterious data which I don't fully understand there is an additional volume of about uh 10 billion dollars probably from China so maybe maybe the Chinese are weighing them out but generally the arithmetic is very simple you need to replace the debt there is no Financial except maybe from some from China and their current account Surplus doesn't allow it so on the 9th of August 2023 there was a document issued which what I think is very important correct me if I'm wrong no one paid attention to it the president of Russia issued a residential decree in which it was effectively default in which he said that all state guarantees and the private debt of Russian corporations and Russian Banks are now can be paid in locals they can no longer be paid in dollars and Euros this is technically it's a default it didn't happen yet but there is already what in the Middle Ages was called Indulgence hmm okay Mikhail that's a very uh sobering picture of the macro economic effects that we see and Russia's attempt to manage its current accounts it's foreign reserves it's debt repayments and just in general the overall health of the banking system let's talk a little bit about the effects in the broader economy as well for example Sergey has already mentioned the private automobile sector and the the big effects that we've seen there of course we want to understand the effects on the military-industrial complex if any the ability to continue to produce weapons at scale for the war effort but also any changes that are significant in the makeup of Russia's domestic product for example are certain sectors growing while other sectors are shrinking and what are the implications of that and is that attributable to sanctions or are there other uh for example tendencies trajectories that predate the war predate the sanctions that have been accelerated or reversed and how might we understand Russia's place in the global economy in addition as effects of the sanctions so let's take Sergey let's go to you and talk about the uh both the domestic effects beyond the macroeconomic stability as well as maybe Russia's Global position economically and then we'll come back to Mikhail for the same questions yes Stephen this is a very good question because we started with the GDP numbers and fail is correct that this is the Top Line figure that everybody is interested in but as you mentioned the impact is highly unequal on different parts of Russian economy and one of the things which non-economics usually miss us in the economic historian know that very well is the GDP during the war is a different indicator than GDP during peace time when a defense industry produces tanks and Munitions and as you told me in this you are you're going to write in your book average tank survives for four days in the battlefield and every every communication probably a few days maybe a couple of days so basically it's just destruction of value but for an economic statistician that adds one for one to GDP so if there is one billion dollar worth of Munitions then one million dollars worth of GDP so the fact that attraction GDP has not collapsed as much as people thought in the beginning is also because defense spending has gone up so much and various estimates suggest that instead of spending three and a half or four percent of GDP on Military and defense purposes Rock and budget spend something like seven percent of GDP maybe eight percent of GDP we don't know for sure these data are classified classified beyond the normal Uh Russian government reporting practices last year we've seen a lot of data been removed from a public debate so it's very hard to conduct a quantitative analysis right now but the various estimates suggest that person defense sector is doing extremely well at least in the in the in the sense of those top line numbers I mentioned automotive automotive sector Automotive sector tells about 60 year on year in 2022 this is a huge huge difference now it will try to rebuild itself using Chinese partners uh that would that could help of course there are various impacts of course on retail trade on construction especially housing construction so in a sense you have a defense economy which is not powerful structuring economy it's much slower it's not a war like World War II in that sense not for uh Russia it's not comparable to Soviet Union's War economy or even United States of our economy in 1940s uh yet it's a big big difference between defense industry and uh household consumption industry and here for example if you look at numbers like household consumption uh retail trade turnover how much truck and households spend on Goods this number is much more catastrophic than GDP numbers so if you look at the decline in retail trade turnover found much broadened powerful spanning shops this number has declined in 2022 by 8 or 10 depends on which ones you're looking at so it's a much bigger impact so there is there is a different differential impact your question on the role of router and global economy of course the biggest track and trade partner was EU now Russia no longer sells oil and gas to the EU the Embark is not complete there is still some buyers of rotten gas there is still some Transit through your Ukrainian territory to Europe and Russia it keeps Spain Ukraine for Transit of fracking gas but the share of gas Imports in European energy balance the share of fraction gas Imports has collapsed from something like 40 to 50 or something like five percent so in that sense the trade has gone down and now the biggest structure trading partner is China and one of the biggest buyers of rapid oil in now is now India and biggest suppliers of military equipment and this is something that we don't know for sure but a new lot of evidence suggests that Russia now buys a lot of military equipment and even munition from North Korea and Iran this is a huge orientation of Russian of Russian economy but again as I mentioned many types of data are now classified and in particular poor in trade data are now no longer public luckily we have leaks Russian state is not totalitarian it's very corrupt it's very leaky and so we have researchers who look at League data Elite Customs data and show who buys and who sells to Russia thank you Mikhail same questions about the effects on Russia's overall domestic economy beyond the macroeconomic picture you presented and as well Russia's position in the world economy the big question is why the economic Contraption was much slower or much smaller than we expected and Mancuso thinks I would mention three things one is geology that Russia is a net major net exporter of energy and now of green so whatever sanctions you impose Russia cannot starve and Russia cannot darken no matter what you do so don't expect a knockout don't expect that the Blitzkrieg would work that's real the second thing is it's paradoxical to the covet because these sanctions coincided with global recovery from the covet if you look at oil prices there were 20 dollars per barrel in April 2020 and before the wars have already rated dollars per barrel lots of people attribute the rise of the oil price prices to the wall uh I strongly doubted because of the Peaks they were handed dollars per barrel in June 2022 so it might have been a small contribution and now they are down to 83 or 84 so the wall did not much contribute and the global markets we shuffled and we rooted their oil supplies and the design of the oil sanctions was not to reduce the global Supply to reduce the budgetary and the general revenues and the budgetary revenues but not the global oil supply and the third factor which we always talk about and never appreciate it to the extent of Jesus globalization that the world and the sanctions capture the world in the middle or in the expansion of globalization and these are the tectonic shifts if you look at the map of Russian trade and global trade before the war and now it's totally changed first of all we have the phenomenon which I call the external input substitution when all the four former Soviet countries suddenly found the niche they all speak Russian they all have personal relations with Russian Traders and suddenly there is a huge opportunity for them to repurchase or purchase the inputs that are banned from Western countries and sell them to Russia there is an Arbitrage commission there they own but if you look at the Imports you will see that in real jobs Imports declined by 15 and 2022 but the nominal terms Only by Nine percent which means the Russians are buying and now now they're up now actually there are up almost 20 percent in nominal terms which means that in real terms are globally recovered from from before the war which means that they are buying the same things maybe of lower quality from maybe the same Western Credit users via these short countries in those countries have almost republics turkey China India Middle Eastern countries anything and then there is this external the second part of the external endpoint substitution is that uh some countries like Iran and turkey and China they are producing this good service so if we expect it like I did and it was my mistake that the total Supply Chain's disruption on the scale of covet line skills what not didn't happen didn't happen thanks to globalization thanks to prime minister kusio who started the work reduction in Russia in the early 60s thanks to the recovery from recorded with the recovering a demand of oil of hundred million barrels per day so this is this is the picture in which globalization played a huge role and now it is total change of the supplies of oil from EU now it goes to China and India mostly some to Bangladesh some to Pakistan some to other countries and generally now everyone everyone is buying a Russian oil discount and surgical market prices and more than half of those are the Affiliates of Russian oil companies who are cheating their government the cooks are on our side they are cheating the Russian government from tax revenues and oil by low sell High you know I have to say that I am not it's not everyone Mikhail because I am not buying Russian oil at discount and reselling it I'm behind the curve here unfortunately but here we're already thank you for that I I didn't understand this concept external import substitution and in fact I'm hearing it for the first time and it's it's a revelation for me let's talk a dive more deeply into the responses question we're going to talk about the responses of the Russian government of the Central Bank of the finance ministry of other Ministries these are run by people you know people that you worked with over time before being forced out of Russia to Paris uh we talked a little bit earlier about the hemorrhaging of human capital that Russia is experiencing and labor shortages we have two prime examples here on this podcast of the hemorrhaging of human capital uh two top economists that they've lost talk about whether Russia's responses government official responses have been predictable or surprising whether it's in fact the government that's the main actor here or it's the responses of the population more broadly as well please address mikhail's point about how the responses are well beyond Russia and that those may even be the most important responses the responses for example of governments in the now independent formally Soviet republics that surround Russia as well as other countries that border Russia like turkey or or that are close by Iran the Emirates Etc so how do we understand the response question the quality of the response and and whose responses have been more important than others uh thank you Stephen I fully agree with Mikhail that Russia faced a major Challenge on the third day of the war when ratan Central Bank was sanctioned and at that point it was a very uh likely that Russia would face a maker banned crown and uh what Russian government or Russian Central Bank has done they played a very unusual strategy where they injected liquidity but on in addition to that they closed down markets and they also limited withdrawals from your deposit accounts and that is something which actually uh I didn't expect I thought if you tell Russian population sorry you cannot withdraw your currency deposits rotten public would take to the street but that didn't happen and this is where we should not forget that the response by macroeconomic team was actually accompanied by the response by internal retractment team right in the very first day days of the war not in public understood very clearly that before this 2022 War started you could demonstrate you could protest especially on non-political but economic issues after 24th of February 2022 you show up in the street you get beaten up tortured you go to jail for many years so when we talked about macroeconomic policy response we should not forget that it was also a major intensification of refraction that also have rotten Central Bank policy so it's not just Central Bank but also uh National Guard Ross guarde the right police which contributed to making it feasible to pretty much freeze Russian Russian households Financial assets but so that was a very a very effective response the public uh the public understood it cannot actually run on demands the financial Panic was uh limited and then in 2022 with something which we saw something which surprised a lot of people uh Ruble became much stronger why because uh experts continues um expert continued until December 2022 we mentioned that oil sanctions on the European side were introduced effectively only in December and so Russia had a record year with the record current account circles that Mikhail mentioned in 2022 so Russia continued to sell a lot of oil at high prices with a discount but still at high prices again the post covet Global recovery held but again Russian Imports collapsed because of sanctions imposed on trade and exodus of foreign companies Exodus of Western companies from Russia so Russia had this uh strange equilibrium where it received a lot of dollars but it couldn't spend it on Imports because of Western sanctions and exodus Western corporations and that of course contributed the stronger Rumble now these factors are mitigated and now the challenge is the opposite one Russian Ruble is now twice as weak as a year ago it used to be two American cents now it's one American Cent and so Russian Central Bank in public is worried about this and is trying to think about the issues that Mikhail just mentioned about the cost of debt servicing and so on but uh in 2022 Russian government would wear this as a base of Honor saying look Ruble is strong so your assumptions don't work well in in fact it was just an indication that oil sanctions are not there yet but there coming trade sanctions are functioning very well and then your Imports are constrained which is bad for you for example for your Automotive sector in 2023 the situation is actually very different as Mikhail mentioned we export much less oil or at least we get much less oil dot Petra dollars but we learned how to circumvent trade sanctions through turkey Central Asian countries some other intermediaries and this is where the factors are working in the opposite direction and so Russian government has done a great job in using those third countries as Mikhail mentioned as you mentioned two circumvent technological sanctions uh trade sanctions and this is now the main channel for the sanction installation which of course U.S and Europe understand pretty well but it's very hard to implement but the challenge is to enforce sanctions that are in place because uh the circumvention is is really really helping Russian war machine uh the U.S and Europe are trying to do that it's not easy I won't say that say kazakhstan's government or Armenian government want to help processor Convent the sanctions but it's very hard to play this whack-a-mole game because these are the private actors in those countries sometimes these are actors owned by the Russian companies themselves which help to circumvent those sanctions and I think the only way here is to impose secondary sanctions for those players who help Russia which is of course very hard because you need to prove that these sanctions uh are being circumvented in the US the approach is very simple you impose sanctions the day after As You Wish in Europe unfortunately or fortunately there is a great respect for rule of law so European union says unless we can defend our decision in court we won't go with him with sanction in this or that player so this is a very very difficult game and this is one of the major challenges today for the rest if it was wants to undermine rapid War Machine and the other challenge of course is to reduce oil price cap from 60 to say 55 or 50. further uh limiting resources that government has Mika help us out also on this question of whether the response has been effective or ineffective uh by Russian officials whether they just got lucky or they know what they're doing and also talk us through a little bit about whether there are paradoxes or perverse and unintended consequences here to the sanctions and the Russian and other responses for example are we driving legal economic activity Underground are sanctions reducing transparency are they rearranging global trade patterns in a way that's disadvantageous for the rule of law and for Western countries are the sanctions having perverse and unintended effects and actually costing more than they're delivering in terms of pressure on Russia so so so evaluate for us the the skill the expertise the quality of the Russian government response and then talk to us a little bit about the possibility of perverse and unintended consequences about the sanctions uh thank you Stephen the show tax answer again is all of the above and you already answered all the questions that you asked so but now now let me let me add a little bit uh the Russian government made lots of responses some of them were clever and some of them were dump some of them were foolish and Sergey mentioned the currency controls at the imposed and they still enforce uh correctly since the beginning of the war it was clever it was a 90 Market measure but nonetheless it worked Capital controls Capital controls always work and uh we know from the uh Asian financial crisis and others when there was a debt crisis and currency crisis and uh the crisis of the financial system Capital controls help uh to stem uh Capital flight and support the banking system and supports exchange rate so the Imposter the token tools but at the same time the most important I would think the most important policy which is not often mentioned but you alluded to it is bailouts that's what they did on a massive scale the same way we did during the Great Recession I wouldn't blame them remember Bernanke said whatever it takes and that's what they did whatever it takes if you look at the money supply it increased months by months any months you pick up doesn't matter 25 so you would expect an inflation explosion at some time but it hasn't happened yet but nonetheless there will be a time and inflection point when inflation will explode and then of course the real money supply will Decline and then it will have an uh a terrible effect on GDP it didn't happen yet but nonetheless those bailouts huge running huge government expenditures mostly one one per person clearly called it military cancer a very good expression that they just spend the money and run the budget deficit and immediately expenditures which increased by 30 percent if you look the first half of 2023 2022 and they run by two deficits they monetize they monetize it doesn't matter whether they sell a money from the Southern Wells Fargo they print money they still print money because they're selling the seven wealth fund and the inject rubles into the economy and so this bailouts which are massive uh they kept the economy going and they kept GDP going now they make huge blenders and those blandex they will pay for for a long time very few people mention them if anyone one blunder is out of spite out of political considerations maybe out of just not understanding economics they said we don't want dollars we don't want U.S we will pay it will trade in bilateral currencies so at everywhere and once they reloaded their oil trade and gas rate to China and India they said all right we will sell for rupees in the same currencies and we'll play in robots and will sell for rubles what not all right this works if you run a trade balance then you can create in seashells it doesn't matter but once you have a current account Surplus and you need to replace the debt and dollars and what you receive is again mean b and rupees you're in big trouble so now of the current account Surplus by the way it's a nominal Surplus because 38 billion dollars worth of rupees are sitting in Indian banks no one knows what to do with them they are not contributing to repaying the debt and now there is a wonderful Russian joke which deserves to be mentioned we can we cannot delete as much key because what do you do with the rupees you buy tea you cannot drink as much tea and the Surplus is just lost so they're selling oil for free effectively now for this is a big blunder and out of spice and when the Minister of Finance is talking about quote unquote toxin currencies if you think that dollars and Euro toxic currencies this man should be violent because he is doing a lot of damage to the Russian economy and use the psychology prevails they have nothing to present the second the second big blood the second big blender was they impose the mandated discounts that they were afraid that the Russian oil sells to Chip and because of their price caps and therefore they said all right it went as 85 we will we will make a mandated discount of 75 dollars per uh battle so 50 yourself we don't care how much you get for it we will charge fifty dollars and we will tax 50 dollars and then they reduced it from 35 to 71 and the next one 25 now they're talking reducing 280 to 20 the problem is that markets are smarter markets are smarter than them and the actual discounts on the world market virtual discounts will lower that once they Expo imposed and so forth they therefore they gave the Indulgence they gave the permission to their companies to pay lower taxes they under taxed by their own mandate and worst of all they made the law not just the regulation they made it the law of the land which is very hard to abolish so months ago or so they came to their senses they said all right if the actual discount on the market from Brand so the oil will be more expensive uh will be lower than our mandated discount we will charge the actual market price and if the Ohio then we will then we will just use this one day so there was too late they lost maybe 50 billion dollars worth of taxes to their budget so they made lots of lenders at the same time they were made some clever moves and one was again this uh then trying to save from the planning they first they made the blunt and the 14th of August just a few days ago they announced they didn't understand the symbolic importance of the rate of 100 they announced on the website of the Central Bank and every level that will be handed one and then there was a panic so immediately they injected uh seven trillion dollars excuse me 17 rubles of which 6.5 trillion uh 6.5 uh was in dollars uh to equivalent the bank uh the Grand and banks that was clever but they collected their own blunder so all I'm saying is the next effect might be that uh they did more harm with their policies to the economy that they did good so this is crazy they are relinquishing their ability to accumulate real currencies tradable currencies exchangeable currencies like dollars and euros and their accumulating rupees or renmin B or I noticed even dirham the currency of the UAE that Russia is accumulating in very significant numbers large quantities and so we have this on the balance right on the books that but what can they do with these currencies that they hold in the banks of the UAE or India right so that's that's one issue but the other issue we just clarify a little bit on the question of the self-imposed price caps the self-imposed discounts on the oil that you're talking about and how they lost budget Revenue why would anyone be so stupid as to forego budget Revenue when already the budget is under pressure explain to us a little bit more clarify if you would what was the thinking there Stephen you have to be fair uh just you use the word stupid I didn't want to use the stone I used to dump but nonetheless it's not just the Russian government if you look a few months ago at the Wall Street Journal you will have a full page huge article with a picture of one young gentleman I forgot his name it said the man the man who saved Russia it was the deputy minister of energy or Samsung the fellow from the president himself appointed and this fellow introduced these mandates that uh they would they would have a specific numbers regardless of the market that they would subtract from their aberrant price and charge and of course that was the man who ruined Russia he didn't save Russia but the mostly Journal was mistaken so generally policies unfortunately will make 40 series of governments make policy errors and the mostly Journal makes miscalculation so generally that was uh that was a big blunder but you I didn't answer another question you saved the effect on the shield countries so generally now yeah but by the way you mentioned is very useful they're buying real estate in Dubai Russian oil companies uh removed their big offices now several several thousand trading trading desks in Dubai Russian companies are selling crushing oil on the World Market evading both the sanctions and the mandates of the Russian budget and they are taking away from the Russian budget so uh Renminbi and Europeans India it's a huge Boon for the Indian Economic Development because the open refineries North African countries Libya Egypt mayorka Tunisia they open refineries they buy Russian code they Define they sell on the World Market so there is a huge huge what we call externality Global externality and it is great for economic development these sanctions were great for economic development of developing countries I think let me let me let me up to this I I think uh some people would say Russia is losing this discount Petra dollars India is gaining because of the fact that uh Mikhail mentioned that in this by an at a discount and then refines and sells at the market price to the same Europe that introduced embargo and Russian oil that was intended the oil price Gap was exactly to take money from Russia and give it to somebody else Europe for whatever reason decided we don't touch Russian oil anymore well almost nobody in Europe buys rational and gas anymore I guess this is because of reputational issues you cannot really stand up you can say we support Ukraine and we pay about a billion dollars a day for rational and gas send it right to Putin and so after you introduce the Embargo the question is who gets to benefit from this oil price camp that we introduced and somebody has to and basically it is not this externality is not something which India viciously uh ill Gotham this is really part of the policy that was introduced and this is an unprecedented policy oil price cap is something we've not seen before and also I would like to add to this discussion on the minister who Deputy Minister provider said or you know in Russia we should not forget that I think government doesn't have complete information on how oil companies function and uh indeed uh there is no single market for oil a lot of this oil is sold under the radar screen there is no one oil exchange for Russian oil and so whenever we say the price production of itself inside this is in a sense speculation and a lot of this stuff is going on in a very Shadow Market with Shadow tankers sometimes the the price reported is not the actual price because in addition to paying uh sixty dollars per barrel which conforms with the oil price cap you also have a side payment to uh to the oil company to compensate its uh Transportation costs and so on so there is a lot of non-transparency going on there so this is very complex uh issue for Russian government they brought it on themselves but uh we shouldn't we shouldn't forget how difficult is to run an economy where everybody's cheating and tell and everybody's telling you we are cheating and hiding because we want to circumvent sanctions but by simplementing sanctions they also run away from Rapid taxes right okay I want to remind our viewers and listeners that this is the Hoover history lab discussion of sanctions in Russia effects lessons and the future and now I'd like to turn to the Future well to to to understanding the vulnerabilities the real and actual vulnerabilities of the Russian economy and potentially the Putin regime as a result of the war the sanctions the responses to the sanctions the perverse and unintended consequences uh I'm I'm looking at the mikhail's backdrop with the um with with a a throwback to a different era filing cabinets and a paper ear and I'm reminded that in 1997 when I was in Russia in 1990 part of 1998 I only obtained six rubles uh for my dollar and now I'm able to obtain approximately 100 rubles uh to my dollar so let's understand if that's a good thing or a bad thing for the Russian economy now and going forward right Russia is well known for macroeconomic stability macroeconomic expertise even under the Stalin regime budgets were under control borrowing and debt payments were made on schedule by the Soviet Union until Mikhail Gorbachev's Sierra when he blew open undermined the microeconomic stability so Russia has a long history of a highly qualified Finance ministering a highly qualified Central Bank and leaders who recognize the importance the value to their own governments their authoritarian regimes of a certain macroeconomic stability uh are we now in a different place has Russia ruined its macroeconomic stability is the Russian economy vulnerable inflation at seven percent approximately the hemorrhaging of human capital of of financial capital and and the labor shortages the budget deficits the debt repayments scheduling how do we understand how critical all of this is for the Russian regime and in fact can we understand it is it available for us to figure this out Sergey just mentioned the difficulties of understanding what's happening and of controlling what's happening so let's walk through a little bit the picture of the extent to which the vulnerabilities are regime threatening or war effort threatening and the extent to which the vulnerabilities are bad but can be managed Mikhail let's start with you uh just look at the numbers in 2022 the current account show plus was 233 billion dollars out of that they were able without any refinancing to you pay a hundred one billion dollars of extra external debt they did very well the same thing happened during the sanctions of 2014-2015 as I had to replay over 200 billion dollars in that ah and they did but at that time they had to deep live there coin exchange is also the central bank to bail out their private debtors corporations and Banks and that the contraction of the money supply led to the contraction of the real GDP uh two percent and that was the result now they did it out of the current account Surplus because uh the foreign exchange results more than half of them are frozen 2023 is a totally different picture we have only 25 billion dollars in currently current account Surplus part of which is an office so we don't know actually what the real current account Surplus is and they have this proper music schedule they have forthcoming 120 billion dollars of repaying the debt includes shorty on that which means a few months and the maturing company on debt which has to be debated in the next 12 months how they're going to do it I don't see this arithmetically possible the next thing is their budget deficit that if you extrapolate from what we have for the first half and the first seven months it will be something like uh 4.8 to 5 trillion rubles in 2023 which is three percent of GDP and I'm being very conservative because lots of people would give you more scary numbers it will be three percent of GDP which they are going to finance all the southern wealth month you look at the seventh Wells fund 155 billion dollars nice so they can go ahead no they can't because the liquid part there was a big Georgie secret of the Russian economy the liquid part of the servant oil spawned is 79 billion dollars what is the rest I am sorry Steven the young bonds of the Russian companies Russian Railroad Company the southern World spawned what they call the southern World Squad in Russia is not what the Savages or the Norway or others would cause the Sovereign because it is not just United States treasuries which they already sold and not good with impound eliminated assets and not even the ending B assets which are very good and solid some of them are in the rubles delaminated in Europe wants denominated and dollars but nonetheless those are the shares of state-owned Russian companies half of the Southern World spawned is what Russia owns to itself and it can print money so generally uh I would say that if there are no uh loans from China and from the Emirates then they would have a situation in which they have maybe 1.5 years that they can Finance their budget deficit and after that the residential default and the number speaks will speak for themselves that's that's what it is you mentioned the technical default Mikhail and the decree that the president of Russia issued a few days ago here in August 2023 explain a little bit uh whether the technical default could become an actual default in a shorter period of time because you're giving them a long period of time here about a year and a half to manage this macroeconomic catastrophe that's potentially looming but you but in in mentioning the technical default earlier this very month I want to know how that relates to the longer time frame that you just mentioned now last June 2022 the World Press was full of the uh articles about that Russia had a technical default when jonathioneers Secretary of the Treasury did not extend the waiver for paying so the Russians had the money to pay they were willing to pay they wanted to pay and we didn't cleanse them and they were a few million dollars here and there and we talked about technical defaults and sadly everyone forgot about it this is serious now because we're talking not about Millions we're talking about billions some of them are seven dead some of them is Corporate debt and the most dangerous is the death of the banking system because if a corporation even the major state or Corporation goes into bankruptcy so on uh but if uh bank failures like the domino effect but people run on bugs that's serious it's a collapse of the banking system so this is what is going on and uh the decree of the Russian president of August the 9th uh effectively lifted the state guarantees for the debt of the private companies so it is a road to a technical defaulters were not announced all payments are still made there is a great deal of ambiguity there because the sixth package of the EU sanctions in June 2022 was very ambiguous it was an Annex one where there was some strange language they said yeah the Russians cannot use the European Financial system to be paid they're there but they can the Uber career finally had to yeah the Russians went to the courts and goes to the larsenburg court and still painting and in December 2022 the Euro clear announced that they made an informal announcement to the Russian a state depository fund that they can repay debt in dollars and U.S so it is legal it is illegal it is legal it is ambiguous so the Russians salary paying they can do it but they're running out of money so when the technical default will turn into the real default well first one there will be technical default and then when they will be available when they run out of money okay so same question back to you right we have uh our viewers and listeners have been expecting some form of Russian collapse possibly on the battlefield a disintegration of the Russian army in the field maybe in the capital in the political sense a kind of political Bank Run we had the uh the march on Moscow by the Wagner Group which was halted but nonetheless gave people the impression that there's a possibility of political change in the capital so we've been watching for Battlefield disintegration political disintegration and the capital neither one has happened yet maybe they're not going to happen at all but here we're talking about the possibility of the economy and the microeconomic situation being as great or even a greater vulnerability than possibly the battlefield or the political situation now of course an economic disintegration could have tremendous effects on the battlefield and on the political system in the capital right so in other words these are all connected not artificially separated but I think we've spent less time understanding the possibility of an economic unraveling compared to a battlefield or a political unraveling because in part Russia has seemed to manage the sanctions the sanctions are almost a year and a half old and Russia's economy is still there there's been a contraction there's been inflation there's been all the things we discussed and yet at the same time they're managing they have third party intermediaries and cutouts in uh helping them evade sanctions they're still getting massive supplies of semiconductors even though they're not showing up in the official bilateral trade statistics they're going through the Dubai port and other places reaching Russia and and so has Russia managed the crisis and will somehow muddle through economically uh with the sanctions even if the sanctions are improved here and there and your whack-a-mole metaphor or is this really the ultimate vulnerability and that it's only a matter of time and we just have to be patient and or apply a little bit more pressure here and there and we can unravel this economically and affect the battlefield and the war settlement that way thank you Stephen I think the fact that you mentioned that all these issues are connected is extremely important so for example economic pressures limit Rapids ability to produce more weapons and to buy more weapons in Iran and North Korea because of simple issue of budgetary constraints so this is one of the reasons why Mr pre Gordon and the Wagner group had this Mutiny had this March and Moscow Mr pigotten has complained that he's not getting enough Munitions he actually said I'm not getting enough Munitions to advance and this is one of the reasons why Russian army has not won this war so far because sanctions do work just imagine what would have happened if this sanctions have not been introduced think about rather still buying without any limits without any Financial constraints buying all kinds of military technology including semiconductors what would be the military outcome in the battlefield in that sense sanctions have already made sure that rocket has not won this war in this scarcity of Munitions we've seen that ready in the beginning of 2023 Mr pregold on the head of Wagner recorded many public messages complaining about the lack of Munitions and eventually this is what what resulted in his meeting now I fully agree raft is now managing this um this game uh well above expectations but there are cracks one of those of those cracks I would mention is during this Mutiny we saw Zero people who stood up for Mr Putin Mr Putin reports that 80 of rappers support him or 90 of practice afford him we saw no manifestations or protests against Mr precaution nobody went out to defend Putin no single Governor or general recorded a message of support for Mr Putin against Mr pigotto right so uh that also sends you a message that if Mr Putin wants to manage the budget deficit by decreasing spending say on pensioners or doctors that may result an additional political tensions and there Mr Putin will use Wagner or right by police to to um to suppress those potential products will that work how much the passion patience sorry of of rotten pensionalities we don't know and this is one of those challenges so we don't know to what extent Michael's estimate of 1.5 years is too optimistical to pessimistic there are too many unknowns as we mentioned and uh one of those unknowns and I fully agree with Michael we don't know uh we don't know um how much of the remaining liquid part of Russian Sovereign wealth fund is a Nuance or rupees we mentioned rupees probably we talk about 40 billion uh dollars worth of rupees uh that's a lot of money and rupees are much worse than urine and so we don't know those things we don't know how uh well Russia will be able to manage this uh budget deficit issue what I'm very confident of is that Russian Central Bank is uh able to manage the inflation issue and so the reason Ruble is now a weaker is because Russia has moved to this uh flexible exchange rate floating exchange rate inflation Target and macroeconomic Paradigm and this framework is a uh is a textbook mainstream economics uh textbook uh framework and so Russian Central Bank is pretty competent it will make Ruble weaker if there are challenges uh uh that Mikhail described if these challenges are continued at the same time it will try to raise interest rates to fight inflation so this is something that I'm not worried about if I were a Russian prime minister or president I would really worry about the budget deficit that Mikhail has described and uh that may result in defaults that's true but we shouldn't forget that the main cost of default is that you cannot borrow anymore but Russia cannot borrow anymore at all already because of the sanctions and so these are these are the challenges and I I genuinely agree with this idea of one and a half or two years worth of uh space fiscal space for Russian government but there are so many uncertainties on each side of that that it's very hard to say we should just be patient because this patient may be four years after five years which is probably too costly correct it may be half a year nobody expected precautions meeting a week before right so so all of this all of these things are very uncharted waters and it's very hard to say I would strongly recommend not to be too patient and really ramp up sanctions play The Welcome All game enforce the existing sanctions and all tighten up the uh the oil price scan and remember that for each loophole closed Russian government will try to find another loophole but each additional loophole is caused there thus aggravating the fiscal deficiency page okay Mikhail we're going to turn to you for the last word here right so so sergey's argument that you know in addition to the Ukrainian courage on the battlefield and the Ukrainian Ingenuity and the Western support and weapons and finance that the sanctions have had an effect on Russia's Battlefield performance right so obviously the sanctions alone uh are not the reason that Russia hasn't achieved its War aims the ukrainians are the main reason that that's the case but sergey's argument is that the sanctions definitely have had an effect on Russia's capabilities and so will that affect increase uh could we increase that effect that pressure that Sergey is asking us to increase are there things that Russia itself mistakes it might make you mentioned all the blunders right one of the beauties of an authoritarian regime is that it's often not competent in in many areas and often makes mistakes especially when uh no one is is incentivized to bring negative information to the bosses for example and they hear only positive information so close us out here on how you see Russia's ability to keep going and whether there could be a surprise or two and where that surprise might come from uh let me pick up the music metaphor military analogies that you used and I would say that if you if you look at it in perspective uh the sanctions started as a beat squeak the the few weeks maybe a few days it was Blitzkrieg and they got out of it and now we have a year and a half of the trench warfare and it's a draw no one lost no one won but uh so what's the look uh into a head I would say that we are we've started maybe in August this year with exchange rates with a budget deficit with the debt repayment uh we started with decisive battle it's a long battle this battle will be fought on the debt front on the fiscal front and the monetary front and the banking front it will last it's a long battle it will last four months we'll have to watch it but I think the important thing I want to say I think it's a decisive battle it's a final battle and I cannot foresee how Russia can win it final question we have is the long-term trajectory for Russia a great country a giant civilization uh worthy of better poorly LED criminal aggression against Ukraine diminishing its strategic capacity in every way how do we see the long term for Russia here is the trajectory there on sustainable can they succeed as a country going forward while still hemorrhaging human capital and everything else they're doing Sergey what do you think well I think uh the human capital loss is the most important challenge to the long-term uh trajectory of Russia Today in a modern economy this is what matters human capital is what creates the future is what drives economic growth and Russia has lost probably a million of citizens and also these are the citizens these are the professionals who also contribute to our educational system that reproduces new human capital and in that sense we can compare what's happened to Russia to what happened 100 years ago after 1917 October Revolution when again from one to three million best educated people have left so this is a challenge to be able to recover uh after Putin is gone but even then this will be a challenge because a lot of people people who've laughed will not come back also raka bro did break the links with its main trading partner European union and the Western General it is the best which is the source of advanced technology so even if Putin is gone today this work has already damaged the long-term economic trajectory substantial it's very hard to measure bike how much but uh this war of course has caused a lot of pain and tragedy in Ukraine but it's also undermined uh Russia's future as well Michal uh long-term course I'll go with greater than the short-term course uh this is in effect devastationization the globalization of Russia changing changing its markets directions uh the loss of foreign investments the loss of foreign capitals the laws of technological advancement which comes from the West will have very long-term consequences uh 25 years ago there was a default after which one lady British investor said we will rather eat nuclear waste and go back to Russia well took a few years back and it took a few years and all Western Technologies and Western investors were back to Russia I do not see this happening again and so Russia I would think sort of cut off itself with Exodus of human capital because not only people are living today but the Next Generation know course that if they look ahead they will do better they will be better off going to the West instead of staying this is a new attitude and it will change their trajectory of the Russian economic growth and development okay thank you so much to the two of you Serge Michael bernstam for our discussion today of Russia and sanctions um we hope that both of you are correct and and we hope that the Russian people uh can at some point understand what it is that you both understand really well as living outside of Russia having been born there okay thank you and be well [Music] foreign

Channel: Hoover Institution

Views: 111,830

Keywords: Sanctions and Russia, Russia, Putin, Stephen Kotkin, Sergei Guriev, Kremlin, sanctions, Eurasian, China, Turkey, United Arab Emirates, Central Asian countries, economy, economics, oligarchs, hoover institution, hoover stephen kotkin, hoover senior fellow

Id: 8x-qmMgVN8c

Length: 70min 23sec (4223 seconds)

Published: Fri Aug 25 2023