The Militarization Of Russia's Economy, And The Demise Of The Oligarchs
By putting the economy on a war footing, Putin risks returning Russia to the days of Stalinist totalitarianism, where there will be no oligarchs or businesses left, only loyal administrators.
MOSCOW — The war with Ukraine has not gone according to Vladimir Putin's plan. Eleven months have passed, but less than 17% of Ukrainian territory, including Crimea, is under Russian control.
Moreover, the war has been much longer and more expensive than Putin expected: Russia is under international sanctions, oil prices are frozen and oligarchs are trying to withdraw whatever shreds of their money they can from the country.
Under these conditions, the Russian president has been forced to roll back social support and squeeze everything out of the economy for the war budget. Russian economic observer Boris Grozovsky tellsVazhnyye Istorii what Putin's policies will mean for Russia.
Putin has enough money for the long war, but it's becoming harder and harder to get. Sanctions against Russian exports are beginning to have an effect, and oil and gas revenues have fallen. The federal budget will receive less money, and the economy will shrink: the government predicts a 0.8% drop in GDP this year, but experts predict a threefold decline.
Accounting for inflation, oil and gas exports will likely be 20-34% less than they were in the second half of the 2010s, predicts CMACP, a think tank connected to the Russian government. With this decline in revenue, the budget and the entire economy will have to adjust to a much poorer and simpler life.
Military expenditures are untouchable, and growing.
It is impossible to calculate the exact cost of the war: the statistics are now classified, and some military expenditures are disguised as civilians — described as pensions, industry, etc. — and the share of classified budget expenditures has grown from 16% in 2021 to 22.4% in 2023.
But from what is disclosed, it is clear that spending on military and security increased from 24% to 32% of the budget, an unprecedented amount.
This soaring spending means cuts to civilian expenditures, and squeezing more money out of the economy. For example, increases in social spending will barely cover inflation, even though a third of the population depends on government aid.
Russian President Vladimir Putin visiting the Instrument Design Bureau in Tula
But cutting spending alone won't be enough. Russian oligarchs worry that the logic of war will lead the government to nationalize or transfer businesses from less loyal owners to more loyal ones, as happened with Yandex and Tinkoff. Some big companies are reported to have commissioned studies by historians on how the Nazi and fascist Italian regimes dealt with large private property.
The most radical, like Duma Speaker Vyacheslav Volodin, have already proposed confiscating the property of Russians who moved abroad and "publicly slung mud at Russia."
Russian officials are bound to come to the same conclusion that the government should take control of businesses whose owners don't vigorously support the war.
Revenue mobilization has already begun. Last year, the government added Gazprom's profits to the budget, and in December, it looked at increasing dividend payments to state companies and making a one-time payment to the budget for coal and fertilizer producers.
Members of the Russian elite know that this will end badly. The war has already cut off Russian business from world markets, and the billionaires from their foreign wealth and property. The next step is the regulation of profits.
A wartime economy is characterized by central planning and mobilization — otherwise, it is impossible to make businesses and people work for the war. During World War II, Britain and the United States had to switch to centralized planning and distribution of goods needed for the front and investments. Russia's mobilization approach is even more peculiar.
In the late 1920s, Stalin accelerated mobilization planning, making it the center of preparations for a future war, believing that the entirety of the country's human and material resources were needed to ensure military success. Stalinist militarism required a forced transformation of economic and social structures toward militarization — similar to what Russia is experiencing now.
The Soviet Union was preparing to fight the whole world.
Since Stalin, wars have become much more technologically advanced. The Americans did not need to mobilize for the war in Iraq. Putin thought the war in Ukraine would be similar and did not plan to radically change the socioeconomic system. But now, that is becoming a necessity, as long as the Russian government cannot admit defeat by withdrawing from Ukrainian territory.
Despite the clearly failed preparations for February 2022, all that Russia needs is a redoubled effort to finally "press the enemy" — this is more or less how Russian military commentators reason.
In the mid-1930s, the Soviet army was considered the strongest in the world. Then, it suffered humiliating defeats, losses in the millions, and, finally, victory — but at the cost of unimaginable casualties and with the help of allies. Putin, who likes to compare himself to Peter the Great, does not mind repeating Stalin's successes on occasion.
Both Russian military leaders and business people remember this history. So they are soberly aware that a continuing war, which will require a significant increase in arms production, would not leave their business empires untouched.
Direct nationalization won't be necessary — price regulation, scheduled deliveries of goods needed for the army, as well as high taxes or profit-taking, which have already begun, will suffice. Businesses will collapse or move to the hands of managers loyal to the state as a result.
The economy will not come to this immediately. So far, the state buys products from businesses at market prices — but the logic of wartime and government action will almost inevitably lead to an economy geared toward war. First, the limitation of profits (it is unpatriotic to make much money from military orders), then of prices (everything for the front, everything for victory). Welcome to the mobilization economy.
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