00:00:00:03 – 00:00:20:04
Kassandra
Today we are looking at the future of the Russian economy. How is it that in a country so rich in oil? Locals are waiting in line for hours just to get a little bit of gasoline in their car? Hey, and welcome to the dip. I’m Kassandra, and our podcast today is really going to be adding some space to the world’s most important economic stories.
00:00:20:04 – 00:00:42:07
Kassandra
But first, like I said, I want to know what the heck happened. But I want to start with a little bit of context. So this is all a consequence of Ukrainian attacks on Russian fossil fuel infrastructure. We’re talking wave after wave of drone strikes on equipment. That’s really important for turning crude oil into the gasoline that people pump into their cars.
00:00:42:07 – 00:01:01:01
Kassandra
Right. And it’s even gotten so bad that the usually, let’s say, optimistic President Vladimir Putin is admitting that there is a problem. And that’s because people are feeling that problem, because even if by the time they get to the front of these lines, to put some gasoline in their cars, they’re paying what are 20 year highs for the privilege.
00:01:01:03 – 00:01:26:17
Kassandra
So has Russia’s war on Ukraine finally come home to get into this, I’m joined by two fabulous guests. Up first we have Janis Kluge. He’s one of Europe’s leading researchers analyzing Russia’s economy, the effects of sanctions and finances. Thanks for being here, Janis. And also on the line, we have Sergey Aleksashenko, who has previously worked not only for the Russian finance ministry but for the Russian central bank.
00:01:26:17 – 00:01:40:02
Kassandra
But now that must seem like a previous life. Now he is on Putin’s most wanted list. So, Sergei, thanks for joining us. I want to start with you. What have you done to land on Putin’s most wanted list?
00:01:40:04 – 00:02:02:07
Sergey Aleksashenko
Kassandra, nice to be with you, Yannis. Very nice to see you once again. I guess I’m gonna answer the answer to your questions. Very simple. After the Russian invasion of Ukraine, a group of Russians, political and, public figures in exile established a group that is called the Russian Anti-war Committee. And we protested against the war.
00:02:02:07 – 00:02:28:04
Sergey Aleksashenko
We tried to enforce a European and American policy of politicians, to make proper decisions. We support Russians who left the country. We still support Ukraine. And the last year, the Federal Security Service, former KGB announced, in attempting to seizure of power in Russia. And this is the most heavy criminal case. So we have 25 plus years in prison.
00:02:28:04 – 00:02:34:02
Sergey Aleksashenko
So you can imagine that there is no more bigger danger to Mr. Putin than to lose the power.
00:02:34:04 – 00:02:45:14
Kassandra
And I want to just stay with you for an extra moment here. Sergei, what are you hearing or observing in Russia about these long gasoline waits right now? How big of a deal is this?
00:02:45:16 – 00:03:13:00
Sergey Aleksashenko
The deal. The deal is very big in public opinion. And, you were right completely in the introduction saying that all of this is the result of the, war in neo against Ukraine, Russian invasion and the strikes of Ukrainian drones and missiles. But above that, we have to add that Russian economy is mostly an oil sector, is strongly monopolized, controlled by a few of the five big companies.
00:03:13:00 – 00:03:40:14
Sergey Aleksashenko
Three of them belong to the state, in control by this state and Russian, retail gasoline market. He is regulated by the government, which, according to Putin’s desire, wants the prices to be stable. So to grow slowly, slowly, slowly, independent of what’s going on in the market. And yes, the production of gasoline in Russia declined by different estimates from 15 to 20%.
00:03:40:14 – 00:04:05:07
Sergey Aleksashenko
But the biggest concern, the biggest problem of the market is that distribution doesn’t work. The market doesn’t exist because it’s controlled by big companies, independent companies. They have no own refineries. And the problem is in distribution. So regions that have a shortage of gasoline, companies that operate in there, they cannot purchase gasoline from other regions because prices are regulated.
00:04:05:09 – 00:04:37:14
Sergey Aleksashenko
Markets are monopolized. So combined together, this created shortages in different regions. In Russia we have 85 regions. And as of today, 21 of them announced on the regional level by regional governors of governments. They introduce limitations, regulations, control and so on. And, Crimea is fully banned for private citizens to purchase gasoline. So we may say that every fourth region of Russia is suffering from this crisis.
00:04:37:16 – 00:04:54:04
Sergey Aleksashenko
And many other cases were even in Moscow, where markets is not closed. And the statistical agency reports that the price growth and growth in price is very, very slow. Still, you people can sometimes stay in lines for an hour or two hours or more.
00:04:54:06 – 00:05:15:06
Kassandra
That’s like just a whole nother level. When you say that private citizens are actually banned from purchasing gasoline. But, Janis, I want to bring you in on this because you told me offline in our chats earlier this week that this gas crisis is the most urgent topic for Russian authorities. Break this down. Why is this so important?
00:05:15:08 – 00:05:36:22
Janis Kluge
First of all, great to be with you. And also today. Great to see you again. I think it’s the most important issue at the moment because the Russian government or the Kremlin has to go to, at least partially insulate, average Russians from the impact of this war. This has worked at periods, you know, times quite well.
00:05:36:23 – 00:06:03:02
Janis Kluge
Other times it hasn’t worked. Previously we had, mobilization, which, of course affected, you know, lots of people who didn’t want to be affected by it. And Russia. But we over ahead of stable or in good economic situation foremost. And now we have impacts of the war, not just that the drone strikes are visible, but also that average Russians are struggling to fight gasoline.
00:06:03:02 – 00:06:27:06
Janis Kluge
Gasoline, that it’s I mean, this is something that you feel directly in your lives. In a way, it is even more severe than just general inflation, because it’s a specific good that you cannot, you know, keep on carrying on your daily routine. Without. And, you know, that actually creates real problems. So I think it’s a bit embarrassing.
00:06:27:08 – 00:06:41:24
Janis Kluge
It’s not clear yet how severe this is going to be in the next day. So and weeks we will find out more about that. But, as it stands, I would say it is, you know, it’s it looks pretty bad for the Kremlin.
00:06:42:01 – 00:07:04:23
Kassandra
One thing that I keep hearing from, from colleagues and analysts is that this is giving, kind of the end of the USSR vibes, right? We’re hearing lots of comparisons to these kinds of shortages. Empty fridges versus empty gas tanks. And I’m wondering, Sergei, I believe you were in the USSR at that time. What’s your view?
00:07:04:23 – 00:07:07:14
Kassandra
Is this comparison fair?
00:07:07:16 – 00:07:30:21
Sergey Aleksashenko
No. Kassandra, I may disclose the secret. I had the chance to work in the government of the USSR. Being the very junior, especially in 1991. And my mailing address was Moscow Kremlin. An exception. So it’s funny, but, but being serious, of course, there is nothing similar to the Soviet Union, in economic system.
00:07:30:23 – 00:07:58:14
Sergey Aleksashenko
And the biggest difference is how the economy is, finding the reestablish an equilibrium in economic development and development. And then economic equilibrium is the most important. And, if economic, you think, the economy is, liberated. That’s if that’s a crisis in market economies, it’s very simple. It’s prices. So as soon as you have some disturbances, markets in one sectors grow faster, you know, others grow slower.
00:07:58:17 – 00:08:30:08
Sergey Aleksashenko
You have, bankruptcies or booming, booming growth in other sectors. And finally the economy reestablish its balance. In the Soviet Union, everything was decided by bureaucrats. One bureaucrat decided in, the state planning committee was planned. They decided which company will produce what and where. Second, agency got snob and distribution agency. They decided who will supply raw materials for this company and where this company will sell its goods next.
00:08:30:08 – 00:08:57:03
Sergey Aleksashenko
The agency decided what is the price? So, the next agency decides how much labor you need. Another agent decided what should be the salary and other. They decided what should be price, and so on and so forth. And you see, and, well, when the economic it was, it was developing smoothly. Okay. Bureaucrats have enough of time, had enough time to agree with themselves, to change something, to adjust and to keep the economy calibrated.
00:08:57:06 – 00:09:25:08
Sergey Aleksashenko
But as situation started to develop much faster in the second half of 80s, they had no time. Moreover, the biggest problem in the second half of eight years was the lack of political understanding what to do and political will to do something to change the system. Of course, today Russia, despite all problems, despite monopolization, Putin’s control and national control of the economy, state participation, still, it is a market economy where the bulk of prices are free.
00:09:25:08 – 00:09:46:17
Sergey Aleksashenko
And this way the market can be liberated. And that is that is, as I said, one of the reasons of this gasoline prices, this market is regulated, prices are regulated and market is monopolized. That’s why we see all those effects that are similar, to the Soviet economy. But all the rest is very different.
00:09:46:19 – 00:10:09:03
Kassandra
Yeah. No, a totally fair observation. I think when we’re when I’m hearing these videos or seeing these videos, it’s more vibes based. But I want to go back to these long queues at gas stations. Janis Russia is still a major oil exporter despite having such long lines and outages and straight up bands like Sergei was mentioning. How does this all make sense?
00:10:09:05 – 00:10:35:22
Janis Kluge
Well, it’s just different goods, a different products. Russia exports crude oil. It also exports oil products, especially diesel. But, you know, you could even make the connection if Russia cannot refine its oil as on crude oil anymore than it has to export it. So we saw even in recent weeks that Russian crude exports were increasing and not decreasing, but just a sign of Russian refineries not being able to take in the same amount of crude oil.
00:10:35:22 – 00:10:58:12
Janis Kluge
So it’s a different market, a different product. Russia, exports a lot of diesel with gasoline. Usually it consumes about as much as it produces. That’s why I think that, you know, as I’m, Sergei already pointed out with regards to diesel, it’s probably I mean, it’s definitely a logistics problem. There should be enough diesel available in the country, just not where it is needed.
00:10:58:14 – 00:11:20:05
Janis Kluge
With regards to gasoline, you know, Russia probably actually has to import it because, it doesn’t have the same amount of spare capacity. Why? Quick remark. I found the discussion really interesting about, you know, what about this current situation is maybe so a Soviet experience and, you know, as, as you mentioned, the the prices are controlled.
00:11:20:05 – 00:11:39:03
Janis Kluge
So now we have scarcity of gasoline and it’s not regulated by the market, but it is regulated, also by regional governments who tell people how, how much gasoline they allow to get gas for. And it’s regulated at the price is also the time that you spent in the queue. Of course, you know, if you’re willing to queue for a few hours, then you will get it.
00:11:39:03 – 00:12:03:01
Janis Kluge
It’s not that. Not so. It’s a bit it’s maybe those kind of distribution systems are also more common in the Soviet Union. And yeah. So it’s basically, if, if Russian gasoline prices were free, then we would probably see higher prices, but maybe not this, scarcity and limitations in volume. So that but but they’re not. So they’re not rising as quickly as gas prices in the West would rise.
00:12:03:01 – 00:12:20:22
Kassandra
Okay, I can’t help but wonder, taking all this into consideration, if the Russian war on Ukraine that maybe it’s no longer just on a screen for your average Russian, but that the war is actually coming home? Sergei, what’s your view?
00:12:20:24 – 00:12:48:16
Sergey Aleksashenko
I would say that the biggest, task, biggest idea of Kremlin, as you rightly mentioned, is the key point of Russian public opinion. Russian minds, Russians, outside of the war. So they should not think about the war. They should not use the word war, and they should leave ordinary life. And, as the war continues, that if you scale of wars, the effects of the war are more and more visible.
00:12:48:18 – 00:13:31:17
Sergey Aleksashenko
More and more people are drafted by the army. More and more people receive, their, members of the family killed or wounded in actions. And that’s widespread in and we see the internal tension within the society. So the polls show that the bigger and bigger share of Russians believe that it’s time to end the war and even, talk for, top officials and managers, the state controlled companies, like, for example, German Graf, who is the CEO, always their bank, the biggest Russian, bank, or Alexander Novak, who is a deputy prime minister in charge of the industry.
00:13:31:20 – 00:13:59:04
Sergey Aleksashenko
They said, okay, it’s time to end the war. It’s the biggest problem. It’s the biggest break. And it doesn’t help our economy. So that that discontent inside the society is growing. But being in the authoritarian regime, we should not wait that it will be a political discontent, political revolt or something like that, because Putin and his clique, they control, the power structures and of course, they can repress all revolts.
00:13:59:06 – 00:14:17:03
Kassandra
I want to just zoom in on that for just a quick second, because I, I can’t help but wonder, is your average Russian connecting the dots between gasoline shortages and the war, or are these viewed by most people as a separate issue? Sergei?
00:14:17:05 – 00:14:41:11
Sergey Aleksashenko
5050. I and even even those who connect these, shortage of gasoline with the war, they do not connect it with Russian aggression, against Ukraine. They connected the with Ukrainian strikes. Why do they strike us? We should defeat them. We should destroy them. Yeah. The the, consequences of steps or dots is different.
00:14:41:14 – 00:14:51:20
Sergey Aleksashenko
It’s not Russia which invaded Ukraine, and Ukraine is defending itself. It’s Ukraine who is attacking Russia. And Russia is peaceful country. We do nothing.
00:14:51:22 – 00:15:05:11
Kassandra
Janis, the Russian government is spending a lot of money propping up the military and its war in Ukraine. How long in this kind of war and with the costs that we’re talking about here, how long is this sustainable?
00:15:05:13 – 00:15:34:13
Janis Kluge
I think it is sustainable. It’s just a question of if the if the government manages to, put the costs on the population, it’s, you know, that the economy doesn’t really mind if a lot is produced for the war. And, you know, it can continue to function. There is not a real limit to that. It’s just a problem of the distribution of resources in the country who gets what the country produces and now more is needed for the war.
00:15:34:13 – 00:15:56:21
Janis Kluge
And the question is, how will the Kremlin manage to steer more resources into the war? And, the way this materializes is, for example, in the, in the state budget where you have a growing hole and, to, to fill that hole, the government, I mean, they already increase taxes several times. They might have to do that again.
00:15:56:21 – 00:16:23:04
Janis Kluge
They might have to cut spending in some other places. We saw that, the Iran war did not, help that much for the Russian budget. And, so cutting expenditures is back on the agenda. And this is a painful process, even in an authoritarian state like Russia is. It’s not, always simple to just take away, money from some parts of the population.
00:16:23:04 – 00:16:39:16
Janis Kluge
And but that’s what it’s going to take. So, I don’t see a real limit. I just think that it’s, a challenge and that, you know, it might have it might change also the face of the Russian regime at some point when it will impose harsher costs on the population going forward.
00:16:39:18 – 00:16:59:09
Kassandra
Janis, prior to the war, Russia, like many, fossil fuel, large fossil fuel exporting nations, had a pretty large sovereign wealth fund, which is I kind of think of it like a bit of a rainy day fund. And so I’m wondering, you know, four years into this war, has this rainy day fund, or any other buffer.
00:16:59:09 – 00:17:07:04
Kassandra
Does it still exist in the Russian economy? Like how much of a safety net is there still for the Russian government here?
00:17:07:06 – 00:17:31:15
Janis Kluge
The national wealth fund in Russia wasn’t that big before the full scale invasion. So, it, you know, there was already some of it withdrawn because of Covid, was used to cover deficits. It was used to cover, deficits. Also in the years 2022 to 2024, last year it was not used at all because it you know, the liquid part of it is, just about 2% of GDP.
00:17:31:15 – 00:18:01:15
Janis Kluge
So it’s not really, you know, it doesn’t make a huge difference. And the Russian government at the moment is simply borrowing domestically. So this national best fund, it doesn’t it doesn’t pay for all at the moment for financing. So it’s not a cushion anymore. It’s more like, sort of maybe you could say Putin’s personal power so they can invest funds from that fund into companies, into projects that they find politically important and maybe sometimes get around the budget that way.
00:18:01:15 – 00:18:12:17
Janis Kluge
So that’s another function it fulfills. But, yeah, there’s there’s basically no buffer there anymore. All that is there and deficits has to be, raised now from, from new debt.
00:18:12:19 – 00:18:31:11
Kassandra
Watching this war from my perch in Berlin for the last four and a half years, it has seemed like from my vantage point that maybe sanctions weren’t living up to their potential, that they weren’t these big punches on the Russian economy. But now you have these relentless drone attacks by Ukraine and Ukraine, and that seems to be doing the job.
00:18:31:11 – 00:18:43:13
Kassandra
Am I wrong here, Sergei, or is this more of just a recipe of, you know, sanctions, economic warfare, so to speak, physical warfare plus time equals the state that we’re at now.
00:18:43:15 – 00:19:14:02
Sergey Aleksashenko
No. Yes and no. Kassandra. Of course. Sanctions, indeed. They’re harm. They effect the Russian economy. But, as I said previously, the Russian economy is a market economy. And to all the past, the consequences of sanctions and the sanctions pressure, it’s, it’s not the job of the government into the job of Russian private business, which has a very simple choice, to die or to survive, live free or die, like I always say in New Hampshire and, that’s, that’s, that’s the issue.
00:19:14:03 – 00:19:47:18
Sergey Aleksashenko
Yeah. And for any business, sanctions is an obstacle, is a problem. You have to solve. And solving the problem in business making, I mean, I mean, it means, to spend a little bit more money, a little bit more efforts to use other logistics to rebuild your schemes and so on so far. And, Russia being the producer of, commodities being that is the very beginning of the industrial chain, Russia can survive because, the global economy cannot live without Russian resources.
00:19:47:20 – 00:20:23:13
Sergey Aleksashenko
Russia keeps, one, of top five places in producing of 20 different types of commodities. Not only, crude and refined products, but and Eminem, gold, nickel, palladium, copper and so on, the centralized and so on so far. So that’s that helps Russian economy to survive. And that’s why Russia’s economy is adjusted to sanctions. Yeah. And yes, sanctions harm the, overall price of the sanctions as additional transactional cost varies between 1 and 1 and half percent of GDP.
00:20:23:19 – 00:20:52:13
Sergey Aleksashenko
That is, deduction is deducted from the growth. But that does mean the Russian economy can grow. Ukrainian strikes is different. They destroy physical infrastructure. They destroy physical equipment. Which side is, which requires long time to rebuild and sometimes or a long time, to acquire equipment because many of Russian refineries, they were, renovated in 20 tens using a European or American equipment.
00:20:52:13 – 00:21:17:02
Sergey Aleksashenko
And of course, it’s not something small that you can bring in your suitcase, traveling by the plane. It requires the sophisticated skills to be ordered and transported via. So the first country. So it may take some months to, to rebuild this refinery. So that is the difference. That is the difference Ukrainians strikes. They destroy physical, physical, industrial and logistical infrastructure.
00:21:17:08 – 00:21:22:03
Sergey Aleksashenko
And it is very difficult and long time consuming to avoid this.
00:21:22:05 – 00:21:42:19
Kassandra
We’ve spoken here a lot about sanctions in this conversation, but one country that’s still, still doing a lot of business with Russia is China. I’ve been looking at some of these figures, though, and it seems like that relationship is growing stronger and stronger. Janis. At some point, could Russia tip into a dependency with China?
00:21:42:21 – 00:22:04:23
Janis Kluge
Oh, Russia is already in a dependency. The question is more what the political consequences of that are at the moment. I don’t think it’s a problem for the Kremlin. So Russia could not continue this war without the technology it gets to China. China is not only a supplier of Chinese technologies, but also the main supplier of Western technologies to Russia.
00:22:04:23 – 00:22:28:08
Janis Kluge
So a lot of sanctions circumvention goes through China. It’s also important for the Russian, reserve system, financial system. So I did place many roles and it. Yeah. So I see a clear dependency. But, I think that it’s not a huge problem for Putin at the moment because his goals and the goals of Beijing are to some degree aligned.
00:22:28:08 – 00:22:52:07
Janis Kluge
So, Beijing doesn’t want Russia to lose this war. It doesn’t want Putin to fall, it doesn’t want political instability. In Russia and those are also Putin’s goals. And so China will not do anything that, you know, weakens Russia or weakens the regime at this point. In that sense, does this dependency, from my point of view, at least at this time, is not a problem.
00:22:52:07 – 00:23:02:22
Janis Kluge
It could turn into a problem, maybe later down the road. But yeah, I think at the moment it’s a price that is accepted, by the Russian government. And there’s also no other choice.
00:23:02:24 – 00:23:20:20
Kassandra
What I’m hearing over this conversation, and you’ve both been so generous with your time. But as we start to wrap up, what I’ve been hearing is that there isn’t is not just to be clear, an impending collapse of the Russian economy coming any time soon, but it seems like stagnation is definitely the name of the game at this moment.
00:23:20:20 – 00:23:29:23
Kassandra
But looking forward, Sergei, what are the options for Mr. Putin to get this economy out of the doldrums?
00:23:30:00 – 00:23:33:08
Sergey Aleksashenko
There’s only one option to end the war. And to do.
00:23:33:14 – 00:23:34:17
Janis Kluge
That, I think.
00:23:34:17 – 00:24:08:07
Sergey Aleksashenko
I think he has to look on, the US president, Donald Trump, on his experience, and his, political, political talent to cut losses. So after the invasion of Ukraine, you know, Ivorian, President Trump recognized that he has a choice. Are there two full scale lending the invasion or to some type of peace agreement peace talks and, do not continue despite he was not able to reach his political goals, just his business approach.
00:24:08:10 – 00:24:33:13
Sergey Aleksashenko
Cut your losses. Putin doesn’t want to do it. Putin wants to increase his bets. And this mean that means all bets should be paid by Russian economy and by Russian households. And in fact, if he wants, Russian economy to revitalize, to regenerate growth, he needs to end the war. If he wants continue the war, there is no option for the economy once or one or another.
00:24:33:15 – 00:24:40:03
Kassandra
Janis, in your view, how long can Russia keep going on like this?
00:24:40:05 – 00:25:11:05
Janis Kluge
It can go and you know it. It can keep going on like this for a long time, but the price is going to increase. And so if you say it’s going to continue in a way where most Russians are not really affected by the war, I think that we are already reaching the limits of that. That war has become too big and too expensive, for that to and also Ukraine has simply developed too much militarily to, for, for the Kremlin to redistribute its population effectively from, at least in the European part of Russia from this war.
00:25:11:07 – 00:25:39:07
Janis Kluge
So, that that period probably is ending this year and it will be more of a factor in the everyday life of Russians. But, economically, again, I don’t see a limit. I also, you know, even looking at the budget problems and deficits, you can make some calculations how long it will take for this to become sort of a vicious cycle, with debt and, and it is still a few years of high deficits until that’s the case.
00:25:39:07 – 00:25:52:14
Janis Kluge
So, at least, you know, there is no strict limit in number. You know, in terms of, of months or years, you know, how long this war can continue from a strictly economic perspective.
00:25:52:19 – 00:26:02:23
Kassandra
Sergei, last one to you in the granite State of New Hampshire. Do you agree or maybe not to ask you to to peer into your crystal ball? How long can this war go on?
00:26:03:00 – 00:26:28:14
Sergey Aleksashenko
I fully agree with Janis. I can second his word. And that was my approach. Since the beginning of the war. Economy is not a limit for Putin’s war. War does not, it is not anything else except of political desire. A political maniac in, desire to destroy a neighboring country. And Putin is ready to pay any price, at least at the moment.
00:26:28:16 – 00:26:50:00
Sergey Aleksashenko
We can we have to recognize that, the price of the war is limited for Russia. And maybe it’s not a coincidence that he calls it, special military operation before the war, Russian military expenditures, where, 3% of GDP, plus or minus several decimal points. Today, it’s about 7 to 7 and a half percentage point of GDP.
00:26:50:05 – 00:27:09:04
Sergey Aleksashenko
So the increase is not significant. It’s not 50%, 15% of GDP that was spent by the Soviet Union. And of course, it’s not 40 or 50% that was spent during the Second World War. So he can survive. He can continue, unfortunately. And you I share this opinion with Janis.
00:27:09:06 – 00:27:13:15
Kassandra
Sergey, Janis, thank you both so much for taking the time to join us.
00:27:13:17 – 00:27:15:08
Sergey Aleksashenko
Thank you, Kassandra. Janis, Bye.
00:27:15:08 – 00:27:18:04
Janis Kluge
Thank you very much. Bye bye.
00:27:18:06 – 00:27:38:22
Kassandra
And that is it for us this week on the dip. Now, you’ve probably noticed that both Kai and Daniel are missing this week. They are actually off trading Pokemon cards somewhere. But they’ll be back with you and with me more importantly, very soon. And if you have any questions or comments, you can of course always leave them wherever you’re watching or listening to this podcast right now.
00:27:39:00 – 00:27:58:02
Kassandra
But if you need a little more space, if you have something on your mind or you have like a proper rant, go ahead and shoot us an email at the dip@dw.com. We love getting your messages there as well. But of course, until next time, thank you so much for watching the dip dip, the dip, the dip.