Vladimir Putin is much more broke than we think

If you torture the statistics long enough, eventually they’ll confess. On that timeless maxim, Vladimir Putin managed to conjure a minor 2.1 per cent contraction in Russia’s economy last year against the double digits that we were expecting. The bizarre thing is that we believed him!

The IMF and World Bank dutifully recycled Moscow’s official 2022 growth numbers, prompting soul-searching about Russia’s resilience. If Russia could withstand the most sweeping western sanctions since the days of South African apartheid, perhaps we needed to rethink. I am no statistician. I do know, however, that there are deep grounds to mistrust Russia’s official data about anything.

As Jeffrey Sonnenfeld, doyen of the Yale School of Management, points out, Rosstat, Russia’s official statistics agency, has been through a leadership flux in the past year and was already a badly compromised agency. At any rate, Putin got the numbers he wanted. Rosstat predicts that Russia will grow by 0.3 per cent in 2023. I predict that this will be nonsense.

The most thoughtful economists do not sit around like chicks in the nest waiting for data to be dropped into their mouths. They look at other measures. In China, that used to be metrics such as rail freight and electricity usage. Reading Russia today should be much more simple.

Three million of Russia’s most educated people have left the country, taking with them their intellectual capital and energy. Back home, the Russian state is cannibalising refrigerators and other white goods for the chips it can no longer import. According to Sonnenfeld’s monitoring team at Yale, 1,000 of the 1,200 top foreign corporate investors in Russia have now fully pulled out of the country. Their revenues accounted for 35 per cent of Russia’s gross domestic product before the invasion of Ukraine. Among these are the oil and gas companies, such as BP (which took a writedown of $25.5bn) that kept Russia’s fossil fuel pipelines flowing and its equipment maintained.

Russia’s natural gas exports have all but dried up. Europe used to take the bulk of Russia’s supply and has now reduced it to close to zero. I have no idea who blew up Nord Stream II but it was quite unnecessary. Europe has shown Chinese-style efficiency in rapidly building LNG capacity to import the liquefied gas that Russia is technically incapable of producing. Russia’s vapour gas is thus stuck with no market. It would take years to build Russian pipelines to alternative buyers.

To be sure, China, India and others are taking the Russian oil that Europe no longer imports. But Russia is selling it at a loss. Deutsche Bank estimates that Russia is earning barely a third of its prewar fossil fuel revenues. It is also becoming increasingly expensive — roughly twice the global average — for Russia to extract it. It costs Russia $45 to extract a barrel of oil and another $12 to get it to its customers. This suits the west perfectly since we don’t want the global oil price to go up and don’t want Russia to make money. Since more than half of Russia’s budget comes from fossil fuel revenues, the government is now pillaging its rainy day funds. More extreme revenue extraction measures will surely follow.

What does this mean for the war in Ukraine? There are good and bad implications. I doubt China would be so rash as to start supplying the arms and ammunition that Russia so desperately needs. My colleague Gideon Rachman has written interestingly on this subject. I share his view that this indicates China’s growing concern about the costs of a prolonged Ukrainian war.

A vassal state the size of Russia is all well and good until you have to start paying the bills. The bad news is that Putin will be increasingly tempted to take desperate measures to bring this war to a favourable conclusion. This week’s salvo of Russian nuclear-capable hypersonic missiles targeted at key Ukrainian infrastructure was a worrying indicator of what a cornered Putin might do. We can certainly expect a cash-strapped Russia to hurl ever more human waves of badly trained conscripts to their deaths on the front lines.

Rana, when you do not trust official data, where would you look? If we are to believe Sonnenfeld over the IMF, what implications does that have for western policy on Ukraine?

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Rana Foroohar responds

Ed, I love the detail about Russians foraging for semiconductors in old refrigerators. Wow. The point about data is also key. At a time when old economic modelling techniques and data sets (which were never all that great) are totally ill-suited for tallying a changing world, I think gumshoe reporting is the way forward. This has long been done in China, where investment banks would hire reporters and risk analysts to go into wet markets and tally the amount of pork being sold, or use satellite imagery to see where the lights were on or off. Place-based economics will become more important (the idea that you can look at national stats as a measure of anything is increasingly questioned in progressive economic circles) as growth diverges not only by region but within countries, even developed ones. I very much welcome this kind of granular analysis via inductive methods.

On your question about what this might mean for US foreign policy around Ukraine, it seems to me this would be an excellent moment for Biden to pressure Russia (and behind the scenes China) around a ceasefire. I think that the uncertainty around commodity markets still drives inflation (and the trading that contributes to some of it) and taking that off the table would help the Fed with its current battle — and perhaps make it less likely that we will move towards a slowdown or a big market correction in the US driven by central bank rate hikes.

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And now a word from our Swampians . . .

In response to “How to think about Biden’s first two years”:
“On Rana’s question to Ed, I do hope Biden gets the credit. There certainly won’t be a replacement for Thatcher, because the current UK government is riddled with selfish individualism. Biden has a very wise group of economic advisers who realise economics needs to serve citizens before finance. Here is where I part company with Ed. Sure, governance is about execution. But first, to what objective? What thinking guides that governance? This debate is alive and well in connection with climate change risk and opportunity analysis.” — Mike Clark, Oxfordshire, England