Things must be pretty bad in Russia because a few weeks ago I had an invitation to speak at the St Petersburg Economic Forum. As much as St Petersburg is one of my favourite cities, I will not be going. But, my disdain for Russian politics is almost matched by a curiosity for what is happening to the Russian economy and society.

In the past two months there have been many reports on the emerging weakness in the Russian economy, minor spats of dissent in Russian and the toll that the war is having on demographics – M16 recently released an estimate of over 500,000 deaths of Russian soldiers in the war on Ukraine so far (for context Russia suffered 450,000 deaths from combat/starvation/disease in the Crimean War and 15,000 in the 1980’s Afghan campaign), with a monthly casualty rate approaching 35,000.

As a result, the unemployment rate is close to 2%, labour shortages prevail and the growth of the economy is stalling out. Russia’s economy is now largely a war economy, defence spending is 8% of GDP but many private and state resources have effectively been co-opted to bolster the war effort. Cracks are starting to show. The budget deficit is widening despite high oil prices, shortages of goods are more noticeable I am told, and banking and taxi apps frequently don’t function.

While there are some reports of dissent amongst the Moscow elite, broad discontent is not visible, and nor should people expect to this this until things turn very bad. One memory I have is on morning runs through Moscow, passing the heaped flowers marking the spot where Boris Nemtsov, a Moscow insider but Putin rival, had been gunned down on the bridge that passes the Kremlin in a not too subtle message to anyone who thinks Vladimir Putin is not the only solution to Russia’s problems.

Putin’s predatory style is also evident across Europe in act of political manipulation (e.g. Nathan Gill the former leader of the Reform party in Wales was sentenced to 10 years in prison for taking bribes to make pro-Russia statements), sabotage and grey-zone hostile actions which we have written about in previous notes (‘Shadow Wars’ and ‘From Great War to Total War’). Europe is slowly adapting to this and there is less naivety and tolerance for Russia’s actions, amidst warnings from intelligence services of a potential conflict with Russia in the next three years.

The very striking development is how Russia’s attack on Ukraine has changed the strategic landscape around Russia. Previously neutral states, Finland and Sweden, have joined NATO and there is now a rush to increase defence spending and capabilities across the Nordic and  Baltic states, not to mention Poland. Hungarians voted to jettison Viktor Orban, a friend of the Kremlin, and Hungary’s new prime minister is restoring its place as a country that other EU members can have faith in, and notably repairing relations with Ukraine. Ukraine and Moldova are now on the (slow) path to join the EU, and within the Union, defence spending, manufacturing and innovation are picking up.

It is also worth noting that Russia’s relationship with China is changing, with Moscow now very much the weaker party, and increasingly beholden to Beijing. It might well be that China is the actor to bring forward a solution to the war in Ukraine, and thereby extricate Russia from its bloody, strategic mistake.

While there is no sign yet of an economic tipping point in Russia, nor more so of a political one, the sense is that the strain is mounting, and the odds of a ‘Russia’ crisis are slowly rising. This might manifest itself within Russia, or its security state, or could express itself in a tail-risk attack on a European country. Drone incursions into Lithuania and Romania have already heightened tensions.  

In terms of the Russian economy, I recall, as a young economist, attending a faculty seminar with Stanley Fischer in 1999, when (as one of the IMF chiefs) he described the urgency behind the IMF bailout of Russia, which was partly motivated by risks posed by Russia’s nuclear arsenal and the need for stability. Stability took some time to arrive and when it did, came in the form of Vladimir Putin (Catherine Belton’s book ‘Putin’s People’ is very good here).

Compared to 1998, the Russian economy is structurally much changed, but vastly behind the potential levels it might have reached. Remarkably, it is a competitive laggard in key hard technologies from semiconductors to AI, and less so in quantum computing. To that extent Putin has robbed his country of an economic future, and the consequences of his war are rising.

As I write the Ukrainian army has marked the beginning of the St Petersburg Forum with drone strikes on the city.

Have a great week ahead, Mike