This is an audio transcript of The Economics Show podcast episode: ‘The real Russian economy. With Sergei Guriev’
Martin Sandbu
One of the biggest geopolitical questions of the moment is the war in Ukraine and how to stop it. A big part of the answer to that is what economic pressure or what economic concessions could change Russia’s calculations. Vladimir Putin claims that his economy is strong and sanctions have failed. But what is propaganda and what is reality? Today on the show, we’re going to try to find out what is really going on in Russia’s economy.
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This is The Economics Show. I’m Martin Sandbu, and joining me in the studio is Sergei Guriev, dean of London Business School and economic adviser to Russian opposition figures. Sergei, welcome to the show.
Sergei Guriev
Thank you very much, Martin, for inviting me.
Martin Sandbu
Sergei, you are a Russian native. You are also a French citizen. Now, it’s been a while since you’ve been able to go back to your native country, isn’t it?
Sergei Guriev
That’s right. I had to leave Russia in 2013, where people close to Vladimir Putin suggested that I should buy a one-way ticket as soon as possible. That’s what I did. The next day I left Russia. Since then, I actually visited Russia three times. Each time it was a couple of days when I was a chief economist of the European Bank for Reconstruction and Development. I had some kind of diplomatic immunity, so I thought that it would be safe and it was actually safe. The last time I was in Russia physically was 2018.
Martin Sandbu
And I should have mentioned that one of your credentials is that you were the chief economist at the European Bank of Reconstruction and Development before your recent academic positions.
Sergei, you are also a friend and you were an adviser to Russian opposition activist Alexei Navalny, and you’re friends with his family. Could you tell us a bit about your relationship with them?
Sergei Guriev
Yes, I know Alexei Navalny. I’ve known Alexei Navalny since 2008 when he was a corporate activist fighting corruption …
Martin Sandbu
Anti-corruption activist …
Sergei Guriev
. . . anti-corruption activist in state companies. I was a board member in Sberbank at that point and then together we tried to improve corporate governance in Sberbank. I should say the management was open to that. And since then we’ve been in touch. We talked a lot. I would indeed say that we were friends. I know his kids, Zakhar and Dasha. I know his wife, and we’ve been in touch and we continue to be in touch with the family. Alexei was a unique leader, somebody who worked really hard. He understood what he wants to achieve and he was very committed and fearless in this effort. And unfortunately, he paid for his idealism with his life.
Martin Sandbu
And he died Friday exactly a year ago, as we are recording this. You advise him on economics? So let us talk about your insights into the Russian economy. As I mentioned in the introduction, Putin has trumpeted some good numbers to basically prove that the west is powerless to affect mighty Russia. The economy is resilient and to generally try to instil both at home, I think, and abroad this message of strength. You have obviously studied the economy for a long time. You will have insights from contacts back in the country. Tell us what is really going on.
Sergei Guriev
So Putin is not wrong if you look at official numbers. I think this numbers reflect the national accounts. It’s an economics show, so let me walk you through how we measure GDP in a country at war, which is very different from a country at peace. So GDP measures value added. So if you have government procurement, we usually measure those goods that the government buys and the cost that the government is charged. So when the government buys, say, a billion-dollars worth of tanks, that’s addition to GDP of a billion dollars. Now, these tanks are burnt in Ukrainian fields. It doesn’t seem like a good value added for the Russian economic performance. It’s actually equivalent to government just printing this billion dollars and handing over to those people who work in the tank factory or their shareholders without producing anything. So on paper, it looks like Russia is actually producing a lot of GDP, but a lot of those GDP are soldiers who are killed in Ukraine or wounded in Ukraine with their families getting cash or weapons producers, munitions producers who seem like contributing to GDP. But actually this contribution is not very important. Now, a lot of economic growth is explained by this. So if you just look at one particular budget item, which is defence spending, it went up from about 3 per cent of GDP to almost 7 per cent of GDP. So that per se is a major increase in spending. But then of course, there are other industries like producing goods and services, transportation for the army. And a lot of that is outside of this narrowly defined defence spending. So if you identify industries related to the war, as some analysts are doing, eventually the story is all the growth is concentrated in the military sector. And now the question is who pays for that? And of course, Russia still has sovereign wealth fund. The liquid part of this fund is smaller and smaller. It’s now standing at about 2 per cent of GDP. So it’s literally, you can say, one year of budget deficit away. On the other hand, Russia is also using inflation. As I said, when you print money to give it to families of soldiers who were killed or to soldiers themselves, it’s equivalent to just what economists love to say, helicopter money, right, to just inject newly printed money into the economy that leads to inflation. Because when you spend this money to soldiers’ families, nothing is produced. And so there is more cash for the same output produced in the economy. So that raises inflation. And not surprisingly, interest rates are very high. Now, the Central Bank of Russia decided not to increase interest rates in February, but it still stands of 21 per cent. Right? This is a big, big number that shows that central bank is really worried about inflation. And when you actually talk to people on the ground, they don’t believe official inflation numbers. And again, I am not saying that Russian official statistics’ line, but a lot of things you can mismeasure in a country at war. The reason for that is what we call quality adjustment. So you come to the shop and you buy lower quality goods that used to be cheaper.
Martin Sandbu
For example?
Sergei Guriev
Think about cars, right? Car are probably the most visible example. Russia used to consume European cars or European cars or Japanese cars assembled in Russia. And Russia would also buy Chinese cars, but the price of Chinese cars would be 30 to 50 per cent lower. So now you buy Chinese cars and most of the cars are Chinese, right? You buy Chinese cars at the price of German cars. For Russian official statistics, there is no inflation. One car, same price. But actually there is a lot of inflation because if you look at models, makes, one for one. The prices have increased by tens of per cents and in some cases doubled. So a lot of inflation is actually not taken into account, not because the Russian official statistics’ line, but actually it’s very hard to track the price increase adjusted for quality when you have such a huge transformation. Because Russian consumption portfolio has changed dramatically in those three years.
Martin Sandbu
Let’s go back to the numbers of the cost of the war, because I see a lot of people here focus on the budgetary numbers. And that’s where you started as well. But I always find it useful as an economist to kind of go back and think about the real resources that are being put in, whether those are raised through some sort of inflation tax, actual public spending, printing money or some off balance sheet thing. In the end, there have to be real resources devoted to making tanks, making guns, feeding soldiers, transporting them and so on, and transporting their corpses back, all the things of war. Do we have a handle on how much of the Russian economy, in real terms, is now devoted to fighting and trying to oppress Ukraine?
Sergei Guriev
So nobody knows. Sometimes you see estimates which just add up this line item, which I mentioned defence spending, but also law enforcement spending. Once you add up those two things, you end up in the range of 10 per cent of GDP. But the number may actually be higher. Nobody’s saying that Russia is as militarised as Soviet Union. This debate is very important, by the way. Why? Because when cold war ended and Soviet Union drastically demilitarised, that hit the aggregate economy a lot because the defence sector was such a big part of the Soviet economy. Some estimates would say that it was up to 20 per cent of GDP. And so early 1990s, recession was a big shock for the whole economy and …
Martin Sandbu
Because nothing replace that spending.
Sergei Guriev
Exactly, exactly. You have to go through very painful restructuring, reskilling the defence workers to do something else. Services, it takes time and effort. And now there are worries that Putin doesn’t want to negotiate because he’s worried about postwar recession. But again, as I would say is first and foremost, Russians know how to live in the economy in peace. So this is recent memory and also this size of the military economy is probably half of what it used to be in Soviet times. And it’s also market economy. So adjustment will be easier. But this is a very important conversation. Now, one thing which people sometimes say is the whole Russia is working for this war, Russians like this war because they benefit from the war. This is, I think, an exaggeration. If you look at how many families have been involved in the war. We are still talking about single-digit millions of people in the country, which is 140 million.
Martin Sandbu
But Sergei, there must be a lot of redistribution going on here because we have heard about very high wage increases for people in weapons-related manufacturing. We know, of course, there are big wage premia for recruitment when they’re trying to mobilise or avoid compulsory mobilisation. But of course, if real resources are limited and we’ll talk a bit more about those limits in a second, that means other people are getting less either because they are not getting the wage increases and inflation is driving prices up or because they are outright losing somehow. What picture do you have of that?
Sergei Guriev
Right. Martin I really like your focus on the real cost and not monetary cost and not nominal variables. Indeed, if you think about this, we move resources to the military economy, which produces something which brings zero value to the Russian population. These tanks are being burnt in Ukraine. They don’t create value within Russia. And so basically the cost comes through different channels. First, indeed, you need to run your military factories 24/7, which means you need to pay a lot of wages there, which means civilian companies have to pay higher wages. They are actually short of labour. We are not even talking about people who have left, which is probably another 1 or 2 per cent of labour force. Right? But again, probably 1 per cent of labour force, maybe 2 per cent of labour force, are directly involved in the hostilities in Ukraine. Right? So these are big numbers. So not surprisingly, unemployment is at 2 per cent. Very low unemployment. Sometimes Mr Putin is proud of that. You were talking about propaganda. Putin sometimes says we are very happy that unemployment is low, but it’s actually a signal that civilian sector is very short on labour. This is one channel. The other channel is cost of capital. So central bank is increasing interest rate to fight inflation. Who is suffering from that? Military sector doesn’t suffer because military production is actually prepaid in the beginning of the year, they don’t need to borrow. Sometimes you hear that even military producers complain about high interest rates. But this is the export-import of Russian military complex. The Ukraine war-related part of military economy gets prepaid in January.
Martin Sandbu
Can I just ask you about that? Because this, I think, refers to something quite a lot of people were picking up on, which was that the boss of Rostec, the weapons manufacturer — Chemezov, I think, is his name — was complaining that this was making weapons manufacturing unprofitable. And you are saying he was referring to the export business. But that means, doesn’t it, that somehow the war is cannibalising what used to be a profitable export business. And if you go as far as having to reduce your profitable exports, it must be that you are coming up against constraints. Is that the right way to think about?
Sergei Guriev
Absolutely. And the whole civilian economy has to pay higher interest rates. And they are screaming. They’re saying that those interest rates are killing us. But they forget that the whole idea of higher interest rates is to cool down the economy. Which part of the economy has to be cooled down? The civilian one, because Putin wants to run the military economy at 24/7. So this is the redistribution from civilian normal economy towards military economy. There is another redistribution that you referred to in passing, which is redistribution towards poorer part of the Russian population. So the way Putin recruits soldiers, he pays higher salaries and he targets poorer regions where those salaries are multiples of average salary in the region, in some case 10 times the average salary in the region. And so in a sense, his cynical idea is Russians were very poor and these are the families I’m going to target, because for those families, these are the amounts they’ve never seen before, it will never see in the future. And this is so painful for me as somebody who was born in Russia, because if you think about this, this redistribution is actually progressive redistribution. Could Putin have done that without the war? And the answer is yes. You just give this cash to poor parts of Russia without sending this individuals to be killed in Ukraine and kill Ukrainians. This whole redistribution project would have proceeded without the war. Putin did have the money. And so this is this is an extremely painful thought.
Martin Sandbu
It’s a very morbid kind of levelling up, to be exactly glib about it. And it strikes me from what you were saying that the other thing Putin or his economic managers are doing is to show that crude war Keynesianism works. You can actually mobilise all the resources inside your country if you are determined as a state to do it. But at some point you come up at limits in terms of your domestic resources. And I suppose that’s where we are, right? That’s why you see these inflationary pressures and the need to increase interest rates.
Sergei Guriev
Let me just say one thing about Keynes, right? Your co-host on this show is Soumaya Keynes, who I think is a relative of John Maynard Keynes. So Keynesianism is about an economy which has slack. So indeed, the whole idea is to spend a lot to eliminate unemployment, bring the economy closer to full employment, but then stop. Otherwise you do have inflation. You do have labour shortages. And in this case, military Keynesianism is a misnomer in the sense that Keynes is insulted. His idea was to restore full employment and not to create inflation. And here we have in Russia, we have the opposite phenomenon where you push it too far. Exactly because you want to have full employment in the military sector. But that also creates this (inaudible) constraints and inflation and very, very low unemployment.
Martin Sandbu
There have been some reports out there suggesting that quite a bit of the war is also financed in sort of off-balance sheet credit. I wrote my last column about Russia on this. And you know, with the irresponsible license of a columnist, I said it shows that Russia’s economy is a house of cards, which you should be very free to disagree with. But on the substance, is there a lot of financing going on through the sort of private banking system? How significant is that and what are the vulnerabilities that that may create?
Sergei Guriev
I think this debate still continues, and I think you’re referring to Craig Kennedy who is a great and thoughtful analyst of Russian economy, especially of sanctions and energy sanctions in particular. I’m very proud to have worked with Craig on the design of Russian oil sanctions. But this debate on off-balance sheet financing is actually continuing because some numbers he’s given are very hard to verify. And the most important part of his argument is that the government will at some point, will bail out those loans, which is hard to predict whether government will or will not do that. So as I said and you said that in real terms, what matters is the aggregate real cost of the war, which is very significant. And this inflation is already bringing in of those costs. So, yes, Putin is very innovative and sophisticated in financing this war. And I would like to disagree with your statement that this is a house of cards in the following way. So if you are in a democratic country and you have economic pressures like this, people will take to the street. In Russia, they would not. Russia was not a paragon of democracy before 2022 and even before 2014. In the end of the day, as I mentioned, I had to leave in 2013 not because I wanted to, but today it’s a qualitatively different level of repression. And even though Russians are suffering from high inflation, from a decline in purchasing power of their salaries, these are real effects. But Russians don’t take to the street because they’re afraid. And in that sense, Putin’s financing model is not about saying, OK, I run out of cash, I stop the war. His idea is, OK, I run out of cash, so I will raise taxes. I will reduce pensions in real terms. I will reduce salaries of doctors and teachers in real terms. And I hope that they will not overthrow me. And I will, of course, never reduce salaries of my right police. And so when this thing breaks, we don’t know. The economy is facing constraints. So one important education is that this year he raised taxes by about one percentage point of GDP, which is not a trivial amount. He has never done that before. Sometimes he would raise taxes in 25 years in power, but by very small amounts. This time he had to raise taxes significantly because he is facing budget constraints. And the west, of course, has a lot of instruments to increase this pain. And of course, when you raise taxes, it slows down economic growth. It also makes a lot of people unhappy. But as long as you can rely on the right police and KGB, you can afford that.
Martin Sandbu
And I suppose inside of that, there are economic policy choices to make about how you balance the various ways of extracting resources where you don’t need to have them. That causes the least political risk. But I want to add one question to this, because we’ve talked about the domestic constraints. Of course, Russia is a surplus economy still, and it’s traditionally very much financed by natural resource exports. Those export earnings have gone down because of sanctions. Imports have been limited or become more costly also because of sanctions. It’s still a surplus economy. So I would like you to explain to me how if you’re in a . . . you’re trying to run a war, you are running up against domestic constraints, you shouldn’t really be running a surplus, right? You would want to spend all your earnings to import whatever it is you need, either directly for the war or to substitute for domestic resources. How should we understand the fact that Russia still has a smaller but still an external surplus?
Sergei Guriev
I love this question because right now there is a lot of debate about trade surpluses. And in the biggest economy in the world, the United States, there is a debate to what extent we should fight trade surpluses with trade instruments. And the consensus on macroeconomics is trade deficit is a capital account surplus. And this is what we teach. If you have a flexible exchange rate, if everybody wants to send their capital to you, your currency appreciates to the extent that you run a trade deficit. And this is exactly what’s happening in the US, which is important capital and running trade deficit because it is actually a wonderful destination for investment, in relative terms at least. And this is the opposite of what we see in Russia. The fact that Russia is running the current account surplus is a reflection of the fact that Russia is exporting capital. This is as simple as that. So if Russia improves its investment climate, the rouble will strengthen and Russia will run a smaller surplus. However, we are where we are, and Russia is exporting almost 200bn worth of oil every year. And this is a lot of money. And of course, Putin wants to import technology and this is what our sanctions limit his capacity to do that. First and foremost, as you rightly said, sanctions do reduce inflow of petrodollars. In some years, the impact would be in the range of $50bn per year, which is 3 per cent of GDP. Now it’s probably closer to 20, as Putin has learned how to circumvent sanctions and 20 is like 1 per cent of GDP. So it’s not that big, unfortunately. Now, new sanctions which were introduced in the end of the Biden administration, supported by sanctions from the UK side and European side, create additional tension. So hopefully Putin will get even less of influx of petrodollars, but it is what it is. Now the other question is can Putin use those to buy? And this is where sanctions, technological sanctions introduced in the very first months of the war and then tighten and strengthen later and later on limit his capacity to buy advanced technology in the west. China also is told by western allies it should not supply military technology to Russia. And my understanding is that indeed Putin cannot get everything he wants from China because of the threat of secondary sanctions. Now, Putin circumvents those sanctions. He finds loopholes. And this is where a lot of sanctions enforcement matters. Where those loopholes are identified, often they’re identified thanks to wonderful investigative journalists, including Financial Times, which writes about stories how Russian intermediaries buy through third countries, fourth countries, fifth countries, buy military technology in the west. This individuals then are sanctioned themselves. And this is a cat-and-mouse game where each new loophole being closed results in another loophole which is more and more expensive. So if Putin tries to import stuff, but there are huge transactional costs being created by sanctions.
Martin Sandbu
We’re going to have a very quick break. But when we return, I will ask Sergei what options western countries have to increase the economic pressure on Russia that we’ve just talked about. What may happen if they don’t or reduce it. And also, what his work on autocratic political systems teach us about what might happen next in both Moscow and Washington DC.
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And we’re back with Sergei Guriev talk about the Russian economy. Before the break, Sergei, we talked about how sanctions seem to be having an effect on limiting the options that Putin have that’s sometimes not fully appreciated in the west. If we look forward now, what are the sort of policy decisions that could be taken by the coalition, the sanctioning coalition, if we wanted to increase the pressure on Putin?
Sergei Guriev
I think the way you formulate the question is exactly right, because sometimes people are saying sanctions are not working, sanctions are not important because the war is continuing. But we should not compare the impact of sanctions on Putin’s economy with what we would like to see. But with the real counterfactual, what would have happened without sanctions? And I would remind the listeners that, well, Russia lost access to $300bn of sovereign reserves. With a $300bn in his pockets, Putin would have hired a lot more soldiers and bought a lot more North Korean munitions. Putin also is facing difficulties, as I mentioned before, in accessing western advanced technology, and with restricted access to global markets. Putin would have bought a lot more military stuff. So I think by now the outcome of the war would be very different if not for the sanctions. And finally, as I said, and you mentioned that in your question, Putin is getting a lot of petrodollars. This is what brings him foreign currency and this is what brings him cash in real terms as well. You quite rightly said we need to focus on the real variables. And so this is the main battleground right now. So the oil sanctions were only introduced in December 2022, February 2023 in Europe. US and UK embargoed Russia, the Russian oil right away in the spring 2022.
Martin Sandbu
But they were not big importers.
Sergei Guriev
Exactly. They were not big importers. These were the European sanctions that mattered. And initially, the sanctions had a big effect. As I said, we were talking in 2023, we were talking about 3 per cent of GDP that Putin lost. But then Putin built this shadow tanker fleet, and it’s only in 2024 the west started to work on that. Hundreds of ships were actually sanctioned. And this is a very innovative tool. I should say I’m really impressed by the sanctioning coalition. How many sanctions, but also how innovative solutions, how innovative the solutions were designed and introduced. And during the last couple of years, one of those were actually sanctioning individual vessels. By now, I think about 300 vessels are sanctioned by Europe, US, UK or both, or the whole three, and that limits Putin’s capacity to export oil. Of course, he buys new shadow fleet tankers. And the battleground here is exactly to track down those tankers, sanction the tankers, also check if the tankers are complying with the oil price cap, which is $60 per barrel. Now, the debate is whether Europe can check the vessels in the Danish straits. In theory, Europe cannot because these are international waters and everybody has a right of passage. But apparently the idea is to offer conducting a check. And if the vessel declines this offer, then the vessel will be just sanctioned. So you cannot force the inspection, but you can propose an inspection on the voluntary basis. So these are the debates which are taking place right now. The most important debate is actual enforcement of sanctions and tracking down sanctions evasion that I mentioned.
Martin Sandbu
So this is about stopping or blocking, plugging loopholes. It’s about enforcing better. It’s basically about putting more resources into implementation. Other rules or further steps, new sanctions or tightening of existing sanctions that we should be considering or which are the most promising places to look at.
Sergei Guriev
So pretty much everything is already on the table. And indeed, the question is about enforcement. So from the very beginning of oil price cap, I insisted that we should reduce the oil price cap from 60 to 55 to 50. You know, the whole idea of oil price cap is we want Russian oil to be present on the market. So there is no global energy crisis. But we want Russia to be deprived of oil revenues. So Russia can still export at 60, its above marginal cost. Russia can still export at the price of 55 or 50. Maybe at 40, Russia will start closing down oilfields. But in order to move from 60 to 55, we need to first enforce 60. And this is not done yet. I think this is very (inaudible). And if you do that slowly and steadily, first you don’t create a crisis. If you move from 60 to 55, it’s unlikely that Russia stops exporting everything it does. And second, if you do implement this policies slowly and steadily, you also send a signal that if your economy’s struggling now, wait for half a year when we move $5 lower.
Martin Sandbu
What about gas? Europe is still buying liquefied natural gas from Russia.
Sergei Guriev
These are small fish. Right? So gas is much less important to Russia than oil. And LNG, liquefied natural gas, is much less important to Russia than pipeline. And Europe’s imports of Russian gas have come down by a factor of four or five. So it’s really not a very important source of revenue. The main battleground is oil.
Martin Sandbu
And what about financial sanctions, Sergei? There are at least two questions here. One is that there are still banking channels that are on sanctions. Some of those have to do with facilitating the energy trade. And then, of course, there’s the big outstanding questions of the immobilised state reserves, the foreign exchange reserves, perhaps 300bn or thereabouts, mostly in Europe. What is your view on the debate about whether those should be transferred outright as a downpayment on compensation to Ukraine?
Sergei Guriev
I think on the last question I’m in favour and I was in favour of using those resources for compensating Ukraine. We wrote a report on the reconstruction of Ukraine already in March-April 2022, with a group of (inaudible) economists, including Yuri Shanker and several former IMF chief economists. So we are in favour. I’m in favour of transferring those resources, but it’s not clear whether you can legally do it right away.
Martin Sandbu
This is an economics podcast, so I’ll leave the legal issues to one side. But there’s an economic argument or financial argument that’s often made against, which is that this would lead to financial instability and in particular for euro instruments. The European Central Bank has been quite vocal in its opposition on the basis of that argument. What do you think?
Sergei Guriev
The European Central Bank’s job is to protect the stability of euro, minimise every possible risk. And indeed, if you weaponise euro like the US has weaponised dollar in the last decades, that of course creates an additional risk. But currently I don’t think we have credible competitors to dollar and euro as international reserve currency. And also not every country in the world wants to start such a big bloody war. So when we say, well, if you confiscate Russian assets, somebody else in this world will say, we’ll never store anything in Europe any more. Well, people who are going to start a big bloody war, like the war in Ukraine, probably will not. But hopefully we don’t have many players like this. But overall, I think, the cost of this war to Ukraine is estimated at about 400bn or 500bn. So if we can use 300bn of Russian assets, that will pay for a substantial part of this damage already, and that will be a big gift to European and American taxpayers who would otherwise contribute a large part of this reconstruction effort.
Martin Sandbu
Now for the very big question mark, we are recording this on February 14th during the Munich security conference. There have been various statements out of both Washington, DC and American representatives in Munich, some of which look like pretty big giveaways to Vladimir Putin. On the strategic side, there hasn’t really been a mention of sanctions. But on the economics, what happens if the US agrees to lift or soften sanctions on Russia? And in particular, can Europe sustain the pressure on its own?
Sergei Guriev
So Europe has powerful sanctions instruments, but of course the US is a much bigger player in this area simply because dollar sanctions are so important. The threat of American secondary sanctions for third countries is much more important than European secondary sanctions. I would remind the audience that until this war, this ongoing war, Europe was actually against the idea of secondary sanctions in principle. And it’s only this war that helped Europe realise that it has a powerful instrument of secondary sanctions. And so Europe doesn’t really know how to enforce those. So it uses the secondary sanctions as a threat. But America has much more knowledge and credibility in the use of those secondary sanctions. And when American financial officials talk to third countries saying, look, we’ve done that in the past, we can do it easily at zero cost, we have weaponised dollar. We know that. And we are not ashamed of that. People listen and …
Martin Sandbu
Speak softly and carry a big stick.
Sergei Guriev
Absolutely. Force in the peace through strength. Right? This is so what President Trump usually talks about, right? So in that sense, America is a much bigger player. And so I would be worried if America uses this carrot of removing sanctions.
Martin Sandbu
If it comes to this horror scenario for European leaders that the US basically abandons Ukraine, including on sanctions, you are saying that Europe does have some strengths it’s not fully employing. Now, there are things Europe can do, even if the total effect maybe isn’t as strong as with the US on board. But there’s more they can do than they’re doing now.
Sergei Guriev
Absolutely. And this is especially true if EU is joined by the UK because the whole idea of oil price cap is the oil which goes through the Baltic Sea should have UK insurance. Most of this insurance business is actually in the UK. Yeah, in the city of London in couple of firms actually. So Europe can do quite a bit of that. But of course it can do much more, especially on enforcing sanctions with the US. And so I think this is important. So the other issue that people talk about carrots to be given to Putin, I should say that the US has a lot of sticks. Strengthening sanctions that we talked about, but also providing more weapons to Ukraine. Now, in that sense, if US establishment wants to force this negotiation on Vladimir Putin from a position of strength, it has all the arguments and instruments.
Martin Sandbu
In the little time we have left, Sergei, I want to ask you about your last book, which I think you wrote before the full scale invasion of Ukraine. And it wasn’t specifically about Russia, but more generally about autocratic regimes. It was called Spin Dictators. And I think Putin at the time was an example of a spin dictator. So just tell us briefly what spin dictators are and why Putin was but maybe isn’t any more an example.
Sergei Guriev
That’s exactly right. And basically, the idea of this book is if you look around the world in the 21st century, most dictators are different from the classical model of the 20th century. The current dictators — for those who can see us — are dressed in grey suits like I’m wearing today, travel to Davos. They are not dressed in military or paramilitary uniforms, so they don’t project strength and fear. They pretend to be democrats. They use information manipulation. They subvert checks and balances rather than implement one-party system. They usually actually have elections, parliaments of opposition parties. They always win those elections. And in the book, we talk about instruments that help them to stay in power. And interestingly, in the recent decades, we have documented and we have a lot of data in the book, we’ve documented this qualitative shift from the old model based on open mass repression and fear to the new model, which is based on lies and manipulation of information and subversion of democratic institutions. And Vladimir Putin was a very sophisticated dictator but …
Martin Sandbu
Does he work better than the old style?
Sergei Guriev
Yes, it does work better because you travel to western capitals, you import western technology, you get investors, which Putin doesn’t do any more. Right? And that’s a big difference. So your country develops. You still have old-style models. Like North Korea, it’s still a typical 20th century dictatorship. But the newer model works better exactly because you get some economic development out of this. Actually, the first edition of the book, as you rightly said, we finish the draft in the spring of 2021. And already in that edition, we said, look, there are indications that Putin is moving towards the dictatorship of fear. And it’s not one example of that. We also talk in the book how Venezuela moved from spin dictatorship of Chavez to the fear dictatorship of Maduro. So things like this happen occasionally, go back in time, rebuild the old model, and then everybody knows that you are a dictator. You cannot pretend to be a democrat any more.
Martin Sandbu
Does this interact with what we’ve talked about earlier in the podcast that partly because sanctions reduce that the scope for manoeuvre for these dictators, that’s why they’re in part forced to return to a more brutal model?
Sergei Guriev
Absolutely. You run out of resources. It’s not just sanctions. You may just run out of economic growth because the corrupt system doesn’t allow you to produce real high-value industrial development or post-industrial development or develop knowledge-intensive industries. And when you run out of economic growth, sometimes you go back to the old model. In Venezuela, for example, the issue was oil prices collapsed in 2014. And also Chavez was more charismatic and Maduro less charismatic. So it was easier just to rely on brute force. And then interestingly, in the spring of 2021, when you look at the polls, all started to show that majority of Russians are aware of potential return of repressions. That was the time when Alexei Navalny came back from Germany after being poisoned and his recovery in Germany. He came back and there was a number of mass demonstrations in his support when he was arrested. And those demonstrations were brutally repressed. And then unlike before, when Alexei Navalny was prosecuted for tax fraud, for all kinds of non-political stuff, in the spring of 2021, Putin announced that Navalny and his organisations are extremists and terrorists and started prosecuting them as political prisoners, basically. So even before the war, there was this transition and of course, the war completed this transition to fear dictatorship within a week when Putin closed down all independent media, when he actually blocked Facebook and Instagram in Russia and when they introduced open military censorship. So for a conversation we are having right now, both of us would go to jail in Russia for 10 years or more.
Martin Sandbu
This form is obviously more brutal. I suppose the hope is that it’s maybe also slightly more brittle than spin dictatorships.
Sergei Guriev
We’ve seen that in Syria, right? In the book, we give the example of Assad’s Syria as a brutal dictatorship. But as you rightly said, this is less a flexible model and maybe it is brittle.
Martin Sandbu
Last question, you’ve pointed out that some of the tools that’s spin dictators are obviously available and used in democracies as well, including by populists, we’ve now had a bit more than a month of the second Trump presidency. And we, of course, have a history of the first. Is Trump a spin dictator?
Sergei Guriev
I think the US is still a democracy and indeed in some cases in the west and I’m not talking about the US right now, I think it’s too early to talk about the US. And I would be really, really careful not to call the US anything but democracy. It’s still a democracy. There is not indication that democracy is falling apart. And Trump did say that he wants to be a dictator for one day to destroy all the democratic institutions. But maybe by the time our podcast is out, things will change. But by now, it’s still a democracy.
Martin Sandbu
There is still hope. I think that’s at least somewhat optimistic note on which we can finish. Sergei Guriev, thank you very much for coming on the show.
Sergei Guriev
Thank you very much, Martin, for inviting me.
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Martin Sandbu
That is all for this week. You have been listening to The Economics Show from the FT. This episode was produced by Edith Rousselot, with original music from Breen Turner. It is edited by Bryant Urstadt. Our executive producer is Manuela Saragosa. Cheryl Brumley is the FT’s global head of audio. I’m Martin Sandbu. Thanks for listening.
