On 24 February 2022, Russian president Vladimir Putin ordered a full-scale military invasion of Ukraine. The decision was based on a series of fatally flawed situational assessments, including an overestimation of the fighting abilities of the Russian army, an underestimation of the determination of the Ukrainian army and people, and a faulty evaluation of the West’s willingness to impose serious economic sanctions.
The massive sanctions that have since been imposed on Russia’s economy have led to a freeze on half of the central bank’s reserves, a fall in the value of the rouble of more than 40 per cent, and an exodus of most Western companies from Russia. Increasing political repression and a fear of border closures caused several hundred thousand Russians – a significant part of the country’s intellectual elite – to flee abroad.
The economic consequences of these developments will be disastrous. At the moment, neither the Russian government nor most Russian people seem to realise the extent of the economic catastrophe that is already sure to happen. In the best scenario, Russia’s economy will shrink by 10 to 20 per cent this year, a somewhat worse decline than during the 2008 financial crisis. But if the war continues, and new war crimes lead to additional sanctions, the economic disaster might be comparable to that caused by the collapse of the Soviet Union in the early 1990s.
A self-inflicted catastrophe
There are few, if any, politicians in recent history who have inflicted such massive harm on their own country in such a short time as Putin has done in the last 20 days. Three weeks ago, Russia was a middle-income country well integrated into the global economy, with a large part of its population enjoying a standard of living comparable to that of some European states. Russians could choose from a similar range of consumer goods to people elsewhere in the world, occasionally travel abroad for a holiday, and expect to lead a relatively stable and peaceful life.
Today, Russia has become an almost completely isolated pariah state. Belarus, Eritrea, North Korea, and Syria were the only countries that voted against a UN resolution condemning the Russian war in Ukraine. According to a list compiled by researchers at Yale University, by 13 March, 350 foreign companies had ceased or curtailed their operations in Russia, with only 34 overseas firms continuing to operate normally. As both Airbus and Boeing are no longer servicing Russian planes, Russia’s airlines were forced to stop international flights and might soon be forced to stop domestic flights as well. Travel within the country will be pushed back to where it was in the early twentieth century.
It is unlikely that any of these companies will return to Russia if the current situation continues or deteriorates. As a consequence, the country will be deprived of many of the high-technology and consumer goods it has been importing until now. As Russia produces very few hi-tech goods, this will seriously affect the Russian economy, disrupting supply chains and making the country’s situation similar to that of Iran during the last 30 years.
A similarly heavy blow will be the brain drain caused by the recent wave of repression. Most of the hundreds of thousands of people who have fled Russia in recent weeks are highly qualified specialists and researchers who are difficult to replace. The remaining scientists in Russia will be cut off from international networks, as worldwide academic institutions have cut all ties with Russian universities. The consequences for science, research, and innovation in Russia will be devastating.
Dark prospects for the future
Even in the best possible scenario of immediate peace, it would take several years to repair the damage already caused. Such a scenario would probably require the fall of the Putin regime, and a new government that ends the war and takes responsibility for Russia’s actions, to open up the possibility of bringing the country back into the international community. Even in this highly unlikely scenario, however, Russia’s population will have suffered substantial economic harm, and the horrors already committed in Ukraine will leave deep scars for Ukrainians and Russians alike.
In what is unfortunately a more likely scenario, the war will drag on for a considerable time, potentially leading to a complete end of Western oil and gas imports from Russia. Although China might be willing to jump in, Russia will not be able to significantly increase its oil and gas exports in the near future, as the existing infrastructure in the Far East is already operating at full capacity. Moscow will thus have to rely on Chinese loans to import Chinese consumer goods. As a result, Russia might turn into some large-scale version of North Korea: economically dependent on China and with a government that through tight control of travel and information will try to prevent its population from finding out the true reasons for the disaster that has befallen it.
Michael Rochlitz is Professor for Economics with a focus on institutional change at Bremen University.