A recent article in Britain’s Financial Times revealed unknown details about perhaps the most thrilling episodes in contemporary decision-making between a president and his team of economists: how Russia avoided a collapse of catastrophic proportions how many predicted the war-torn truth and from the West sanctions after the invasion of Ukraine.
Max Seddon, the FT’s chief correspondent in Moscow, and Polina Ivanova, a Berlin-based FT journalist, published weeks ago “How Putin’s technocrats bailed out the economy to fight a war they opposed.” For the article, reporters spoke to more than 20 people, including current and recent Russian officials, businessmen, oligarchs, bankers and economists who closely follow the challenges facing technocrats, to recreate various scenes. The result reveals a lesson no less for any economist interested in making public policy: there is a difference between what you aspire to and what you get.
A month before Russia launched its full-scale invasion of Ukraine, Vladimir Putin’s economic team visited the Russian president at his residence in Novo-Ogaryovo outside Moscow. Economists there warned him of the panic the sanctions would create in financial markets and shrink the economy for decades. His GDP could contract by 30% in 2 years and rising inflation would force the central bank to raise rates by 35 points. People’s income would be worth a fifth of that time. The outlook was bleak.
One of those unmasked – again according to the article – was Herman Gref, president of the state bank Sberbank, a close confidant of Putin.
The Russian president interrupted Gref and asked what alternative there was. There were no answers.
Within days Putin invaded Ukraine. He cared little what his economists said about him.
The president of the Central Bank of Russia, Elvira Nabiullina, and Gref himself are recognized reformist technocrats in favor of adopting Western criteria in the management of things and in public practice, such as the exercise of information transparency and the role of markets in the allocation of resources. But when presented with the historic opportunity to speak out against the war and in favor of the free market, the FT reports that both fell silent and closed ranks behind Putin.
Loyalty to Putin made many of these economists change their script. Exchange controls tightened and loans to state-owned companies skyrocketed due to the parameters set by the president. For politics, a collapse of economic activity had to be avoided at all costs.
One of the role models for the Russians was that of the economist and Adolph Hitler’s Minister of Economy, Hjalmar Schacht. “There was a lot of interest in Schacht at the Central Bank of Russia,” according to Seddon and Ivanova.
Hitler’s Minister of Economy and President of the Central Bank was an internationally respected figure, as were Nabiullina and Gref. Like his contemporary Russian peers, he too believed that the German economy should function integrated with the West and according to market criteria. But the depression, the war and the sanctions will make him throw the orthodox instruments he was carrying under his arm out the window and he will end up embarking on an impressive program of public works financed with the issuance of public and monetary debt. In Nazi Germany private property had not been nationalized, although its production parameters were (what was produced, at what prices it was sold, how much, to whom and what was the cost of wages), everything was established by the state and by entrepreneurs they were state delegates.
Putin has not overcome certain barriers. He supported Nabiullina publicly warning that Russia “could end up like Turkey” if she decides to intervene in the Central Bank. Although the bank president would later publicly acknowledge that “we destroy everything that we have built in ten years.” Like Schacht, Nabiullina also went against what he had stood for in his earlier career.
According to the FT article, “Russia avoided the more dramatic projections that Western economists had calculated on the impact of the sanctions.” Russian GDP fell by 3.4% according to what was published by the IMF, which forecasts 2.3% for this year in the World Economic Perspectives 2023 report. There are doubts about Russian data but it is clear that the contraction, due to , it was not the advertised size.
“Extraordinary given all the effort to sanction Russia, the decline in GDP in 2022 was in the range of the contraction experienced by the United States in the 2009 financial crisis and significantly lower than in other countries affected by the price decline. Lehman Brothers, Former Treasury Secretary Larry Summers recently tweeted about Seddone and Ivanova’s article, which received no response from either the Russian Economy Ministry or the Central Bank.
Source: Clarin
