Eve Blau:
Good afternoon, everybody, and welcome. My name is Eve Blau. I'm the Faculty Director of the Davis Center for Russian and Eurasian Studies. And I want to thank you very much for joining us for the second session of this new year-long Davis Center series: Russia in Search of a New Paradigm, Conversations with Yevgenia Albats, This series, which meets on Tuesdays, every other Tuesday actually from five to seven in this room is the creation actually of our distinguished journalist and political scientist, Dr. Yevgenia Albats. And in this series, as you may know, she's going to talk with scholars, with military experts, with prominent journalists and economists this evening about the most pressing questions facing Russia and the region, indeed the world, today. Those questions among others are why did Russia evolve into an aggressive militaristic power? Where has Putin found the resources to run the war despite massive economic sanctions imposed by the West? What did economists get wrong about Russia's economic capacities? Will the Russian Federation survive in its current form and size or will it fall apart? And is there any chance for Russia to return to the road of democratic development? So those are among the questions.
And today we have the privilege of hosting Dr. Sergei Guriev, and Oleg Itskhoki who will discuss actually the topic today, which is the Russian economy two and a half years into the war against Ukraine, with our series host and also with you, our audience. And we invite you to participate actively in these discussions. They will be recorded, and they will be posted on the Davis Center YouTube channel. So brief introductions. First of all, Yevgenia Albats. She is a Russian investigative journalist, a political scientist, an author, and a radio host. Since 2007, she has been first the political editor and then the editor in chief and CEO of "The New Times," which is a Russian language, independent political weekly originally based in Moscow. In 2004, Albats started hosting, excuse me, "Absolute Albats," a talk show on Ekho Moskvy, the Echo of Moscow, which the last remaining liberal radio station in Russia. She was also an Alfred Friendly Press Fellow assigned to the Chicago Tribune in 1990, and a Nieman Fellow at Harvard in 1993. She graduated from Moscow University and received her PhD in political science from Harvard. She has been a member of the International Consortium of Investigative Journalists since its founding in 1996. She's also taught extensively at Yale, Moscow's Higher School of Economics, where she taught the institutional theory of the state and bureaucracy until 2011 when her courses were canceled at the request of top Kremlin officials. Since 2017, she's been a fellow at a number of universities in the United States, the University of Pennsylvania, University of Michigan in Ann Arbor. 2019 to 21 she was a senior scholar at the Davis Center, and she returned as a visiting scholar in 2025. She has returned to host this new speaker series at the Center. She was also a Shorenstein Fellow at Harvard last year. She is the author of many books, including one on the history of Russian political police, the KGB, and who are running the country today.
Sergei Guriev is the 10th Dean of the London Business School, a position that he has held since August 2024. He is also a Research Fellow at the Center for Economic Policy Research in London, and a senior member of the Institut Universitaire de France, and an Ordinary Member of the Academia Europaea, and an Honorary Foreign Member of the American Economic Association, as well as a global member of the Trilateral Commission. In 2006, he was selected as a Young Global Leader by the World Economic Forum. Prior to his appointment at the London Business School, Guriev visited the Department of Economics at MIT on a postdoctoral fellowship and received a degree of Doctor of Science in economics from the Russian Academy of Sciences. He was a Visiting Assistant Professor at the Department of Economics at Princeton University, and he's also served as a Professor of Economics and the Rector of the New Economics School in Moscow, Professor of Economics and Provost at Sciences Po in Paris, and Chief Economist at the European Bank for Reconstruction and Development.
Our third distinguished speaker is Oleg Itskhoki who is a Professor of Economics in the Department of Economics here at Harvard. Before coming to Harvard, he was the Venu and Ana Kota, you'll have to help me with this, Kotamraju Endowed Chair in Economics at the University of California, Los Angeles. He is also a fellow of the Econometric Society, an NBER Research Associate, and a CEPR Research Affiliate, and an Associate Editor of the American Economic Review. His research interests are in macroeconomics and international economics where he studies globalization and labor markets, currencies, exchange rates, international relative prices and other topics. He holds a BA in economics from Moscow State University and an MA in economics from the New Economics School and a PhD in economics from Harvard. He is the 2022 John Bates Clark Medalist, a participant in the review of Economic Studies tour, a Sloan Research Fellow, a recipient of the Excellence Award in Global Economic Affairs from the Kiel Institute for the World Economy, and was on the IMS list of 25 influential economists under the age of 45.
Before I turn things over to Dr. Albats, this has been very long because we have a very distinguished speakers here this evening, and we don't want to miss a thing. Before I turn things over to Dr. Albats, I wanted make a quick plug for the next events in the series. On Tuesday, October 8th, Dr. Albats will be in conversation with Dmitry Gorenburg and Alexander Goltz on Putin's military might, bluff and reality. On Tuesday, October 22nd, Dr. Albats will be in conversation with David Hoffman, Contributing Editor at the Washington Post. The topic is The Coming Arms Race: Russia, China, America, and Nuclear Weapons. So without further adieu, I turn it over to Dr. Albats. Dr. Guriev and Dr. Itskhoki.
Yevgenia Albats:
Thank you. Very nice for Professor Blau for your kind introduction. What I probably would just add that Oleg Itskhoki got his John Bates Clark medal in 2022, and as many of you know, that's the best predictor for the future Nobel Prize of course. So that's the expectations. Right, and also, I want to show you, as you know, after all this academia, this is the book, you know, the latest book by Sergei Guriev, which became a best seller. It was translated into Russia, even though it wasn't published in Russian, in Russian Federation, but it was translated in Russia. And so Russians now also can read this brilliant, brilliant study that he co-authored with Professor Daniel Treisman.
Okay, now to our topic. Yesterday, Bloomberg News published the upcoming Russia's Federal budget. And once again it acknowledges the same level of spending for the, at the 2024 for the war effort and military production. It's about, you know, direct and indirect costs, about more, about 40% of the Russian federal budget. How does Putin manage it? I really don't understand. I remember when I was still in Moscow after the war, the full scale invasion in Ukraine started in June 2022. Elvira Nabiullina, the then and the current head of the Russian Central Bank, she made a statement saying that, you know, acknowledging all kind of risks that Russian economy is facing, that there will be structural changes. There probably can be, will be some shortages, and et cetera, et cetera, et cetera.
She was aware that that Russian economy was going to experience huge problems. You may recall that two days after the beginning of the war, several countries, so Canada, European Commission, France, Germany, Italy, the United Kingdom, and the United States agreed to impose economic sanctions on the Russian Bank of the Central Russian Federation. $300 billion of roughly $476 US dollars held by the Central bank outside Russia in the form of foreign currency reserve were frozen. It was supposed to be huge blow to Putin, but it didn't, or at least, you know, we, at least we haven't seen it. Russia's, so as I said, now Putin is buying ammunition from the North Korea, from Iran, and he's turning the current Russian economy into the militarized economy. Yes, under the Soviet Union, probably about 75% of Soviet economy was producing the commodities which were in fact not commodities, but you know, the production of the military industrial complex.
But more than 40% of the federal budget goes to the war effort. You would expect that Russian economy was to collapse by now, but it doesn't. And my question to our distinguished speakers, to Professor Oleg Itskhoki and Professor Sergei Guriev, how did Putin and his people manage to keep Russian economy afloat? And what should be done in order to constrain Putin's ability to conduct this awful war against Ukraine? So we'll start with Professor Itskhoki who is going to do a presentation, and then we will follow up with Q&As. Okay, Sergei.
Oleg Itskhoki:
So thanks so much. So we indeed, we agree. I put together a little bit of slides to give a background of the Russian economy, where it was, in what state it was before the full scale invasion in '22, and sort of the state of the military economy. Yevgenia has a lot of questions. I have answers to some of them, and Sergei has answers to all of them, so.
Yevgenia Albats:
I have much more questions.
Oleg Itskhoki:
And so I should advertise the previous event was with Stephen Kotkin which was phenomenal, set an impossibly high bar for I think the future seminars. So if you haven't seen it, you can see it, the recording on YouTube. But it was indeed extremely insightful discussion. He touched upon a lot of questions, many of them had to do with economics, and I'm going to provide some details going back to things that he raised. So let me start with this broad overview. I have slides here. Let me see if I can share them. And there should be a full screen button somewhere. [presentation rotates] Ah, huh, usually the full screen button is here, and what's most embarrassing about it is it's actually my computer.
Audience Member:
Try Control + L or command + L if you are.
Oleg Itskhoki:
That's what I did, yeah, so control + L didn't quite work.
Audience Member:
It's okay, we see, yeah.
Oleg Itskhoki:
Okay, so lemme do a single page, and maybe this is good enough. Okay, yeah. So the first question I think that's worthwhile asking is how large is the Russian economy? It's a large country. It's among the top 10 world economies. So on one hand you'd think that it is a large economy, but on the other, it's truly like a very fat tail distribution of country sizes. And so US is the largest country in the world. China is the next largest country. European Union as a whole is roughly the size of China. And of course, you know, there is Germany, and this is as of 2021. So the UK is not part of the European Union. It's another big country. Japan is a big country. And then you realize that Russia is truly sort of in between the size of New York state, which is the third largest state in the United States. And BENELUX, which is the three countries together: Belgium, Netherlands, and Luxembourg, right? And it really sort nests the size of Russia.
So this kind of raises two questions. One is, given the overwhelming size advantage of the West, why the West couldn't design more effective economic sanctions against a relatively much smaller economy. Even compared to Europe, it's about one 10th of Europe. And the second question is like, what's the source of this completely unreasonable imperial ambition of Russia given its economic size in the world, right? And so that's the question that Steven touched upon quite a lot in his discussion. Obviously one thing that is important as a caveat is Russia does have a lot of nuclear weapons, right? And this limits the sort of military solution to the conflict in various ways. But the question is, what limits the economic solution to the conflict? We'll try to talk about this today. The second thing to point out is Russia is about 10 times bigger than Ukraine before the war began. So there was a fairly large economic recession in Ukraine as a result of the war. Russia is much less, relatively bigger than Ukraine in terms of population. They're much more comparable in terms of population size. But the gap in terms of economic size between Russia and Ukraine is as big as between European Union and Russia. So this is kind of first fact to keep in mind, and these magnitudes are useful to know.
So this is, what I wanna show here. This is kind of economic history of Russia in one chart. And this is GDP per capita. It's in PPP adjustment adjusted terms. You don't have to do PPP adjustment. The story is about the same if you do it sort of in real dollars or something like that. And so as you can see, you might not be able to see the dates, but it starts at 1990 as GDP per capita. There is a massive economic recession, much bigger than great depression in the United States. The GDP collapses by about 40, 45%. It troughs in '98. And after that there is a fairly spectacular growth for the next 10 years. And then there is stagnation after that, right? So between 98 and 2008, there is really fast growth. And then stagnation started in 2008 essentially, right? So by the metric of the level of income, it's actually a high income country.
So World Bank would classify it as a high income country. It's two and a half times richer than the average country in the world, but at the same time, it's only at 45% of the US GDP per capita. And this is like a classical what's called middle income trap, right? It's a country that managed to get to sort of half the level of the rich countries, but is a having hard time getting beyond that. And all sorts of political economy constraints are probably in the way of like closing the gap to the rich countries, right? And so what's important I think is this part, like this part of the history, of modern history of Russia summarized in a few numbers, right? And so this, you know, right now we're, I believe in the fifth term of Putin. So it's Putin's fifth term. For Xi Jinping in China, it's only the third term. But this kind of tells you what one can expect can happen in the fifth term, right?
And so the first term of Putin was spectacular. So the economy grew at 7.4%. And what's important, this was the period of low oil prices. So it was not high oil prices yet. So it was truly some institutional reforms, some economic reforms, and some kind of post this big recession recovery growth that really sort of like created a very dynamic economy. The second term of Putin is the growth rate again of over 7%. This is sort of as high as the fastest growing countries in the world, but now the second term is the period when oil prices reached their record highs, right? And so the second term is driven already by the oil prices, and then starting the third term, that's what, you know, usually happens when people stay beyond what's allowed by the constitution. And I mean, he didn't quite stay for the third term. It technically speaking was the term of President Medvedev, who was like a placeholder for Putin, but he's truly third term, the growth rate disappeared, right? And then the growth rate was just fully absent. So the average growth rate of that period starting from 2008 until the Covid pandemic was less than 1% GDP growth. And so for comparison, US had a pretty spectacular period of growth, which is high for rich countries. It was growing almost 3% that period. Europe, Germany in particular were not growing very fast, but still they were growing faster than Russia in that period. And Russia was not convergent, it was actually, the gap to each country was growing in that period. What's interesting, and obviously the world was growing much faster, and there was some convergence. The world was growing at 3.4%.
I'll come back to Poland. Poland was growing at 3.6%. So this is one of the parts of the Central European miracle. And I wanna say a few words about that. And so you can think of causality going in different ways, but like if Putin had the economic and political capacity to ensure another couple of terms of 7% growth, you probably would be less interested in military expansions to other countries, right? But once you cannot ensure growth, then you have to look for other things to do. And that's actually kind of part of the story I think. So this is a very interesting comparison in my mind, is Russia versus former Soviet block countries. So it's Central European countries. And so what's quite remarkable, there was that period of very fast growth in the first two terms of Putin where Russia kind of went ahead. But then suddenly 10 years later, what happens is that countries like Poland and Romania, and in fact all other central European countries surpassed Russia. Well, not all countries surpassed Russia.
Romania and Poland did do that in the last five years, but all other countries are on similar trajectories. And it's truly a miracle, an economic miracle that's somewhat overlooked. But it did happen in Central Europe over the last 30 years. These countries were not growing like, you know, South Korea at the peak of the growth, or China in, you know, recent 30 years. But they were growing about three, 4% a year for extended period of time, for 25 years. And that really created an economic miracle for 75 million people in central Europe. There is actually a recent paper called "The EU Miracle" by Grassi. He kind of does it in a very systematic way. We celebrate economic miracles because they're so infrequent, right? So you can really talk about a handful of countries that achieved sort of like this feat of reaching the rich countries, right? And so we truly are in a situation where, for example, Czech Republic fully closed the gap with, you know, the rich western European countries and pretty much all other countries on similar trajectories. And Poland has become a powerhouse, economic powerhouse in Europe.
One thing that I want to point out is of course Romania, when it was a Soviet block country, you know, 40 years ago, this was one of the poorer countries in the Soviet block. And you know, Soviet Union was considered a lot richer per capita and otherwise, right? And so it is in a way an embarrassment, economic embarrassment for Russia that, you know, Romania surpassed it without having any natural resources or oil for that matter. And it actually did so with much less economic inequality than what you have in Russia. So it passed by average GDP per capita. But if you look at measures of economic inequality, they're much, much lower in Central Europe, and it's a much more balanced growth in that sense. So this sort of sets the stage.
I think what's very important to emphasize here is that there is really nothing different about countries like Ukraine, Moldova, Belarus from the Central European countries. So these are countries that could be on the same trajectory. Similarly, Armenia and Georgia, potentially Kazakhstan, and in fact, Russia, if things were different, could have been on a different trajectory. The biggest resource here is of course the proximity to Europe and European institutions and the ability to copy from the European institution and get integrated by geographic proximity, right? And this is, this could be a truly remarkable kind of next stage where, this other countries now former Soviet Union countries joined the club of, you know, of the rich country, if this is to happen, you know.
So what's the engine of the Russian economy? Well, it turns out that since the 70s it became the oil prices, right? So in the 70s there were two oil price jumps. You can see them here. So this is the first oil price shock in the '73-'74. The second oil price shock happened in '78. And since then, the Soviet economy fully sort of relied on exports of oil, right? And so what happened then, a big part of the decline of the Soviet Union, economic decline of Soviet Union was the collapse of oil prices in the 90s, sorry, in the 80s. And they stayed very low in the 90s. And sort of one of the major, I mean, the way we thought about the collapse of Soviet Union, there were two big factors, maybe more, but one of them was the war of Afghanistan, which was highly unpopular. And, you know, we can come back to the numbers about the war in Afghanistan. The second thing was that economically the model became bankrupt. And a big part of that was when oil prices came down, the economy did become bank, right? And so, as you can see, Putin comes to power. Well, when oil prices are low, he does those reforms, and the economy grows before oil prices start to grow. And then, you know, he's lucky. So his second term is the spectacular growth of oil prices, the record highs, and then they sort of come down somewhat, but sort of his third term under Medvedev, which was economically very unsuccessful, is at high oil prices. So the economy stopped growing despite the fact that oil prices are very, very high.
And then of course, what happens in 2014-15, well, it's the first, it's the first, it's the beginning of the war in Ukraine. In 2014, but coincidentally, it's also the period of shale revolution in the United States. And oil prices fall to $40 a barrel, right? And so kind of the common sense at the time was that with shale oil available, the oil prices will never go beyond $60-$65 a barrel. They would be somewhere between $45 and $65, and this is sort of the new normal, right? And that was the new normal for about 10 years. So if we zoom on what happens, obviously there is a pandemic, but after pandemic, oil prices go up, and they go up back up to this record high levels, right? And that's sort of the single most important determinant of, you know, the state of the economy in Russia, and this would be sort of very important. Russia is not, it's a pretty large country, but it's not that large in absolute terms. But it is top three world producer of oil, and one top two exporters of oil, right? And so what's important to kind of keep in mind, the exports of oil, just the export part is about 10% of Russian GDP. That's the number that will come back again and again. So Ukraine is about the size, 10% of Russian GDP. Russian exports of oil is about 10% of GDP. And amazingly the war expenditure is about 10% of Russian GDP.
And so I think it's kind of important to emphasize that Putin every year is trying to spend on the war the size of the pre-war Ukrainian GDP. And it's kind of mind blowing if you think about that. So let me, I have a few more slides left before I pass it to Sergei. So I wanted to kind of just summarize the state of the war economy now in Russia. So 2014 was the beginning of the war. These were the first sanctions that were rolled out. There were some financial sanctions. There were, what also happened was quite a bit of signaling of what other potential sanctions could come. And so Putin did know what other potential sanctions can come, and he had eight years to prepare for them, right? And so that's part of the story of sanctions that a lot of the things that could potentially be done, it was known. And Putin take his time to prepare.
In principle, Europe could also prepare in that time, but Europe didn't, and that's part of the story why 2022 was so dramatic is that Europe did not take those eight years unlike Putin to prepare for the possible war. And indeed, who could imagine that this war would happen, right? So 2022 happens, and we can say that unprecedented number of sanctions are imposed, but what's important to keep in mind that actually expert sanctions were not imposed for about a year, right? And so Russia kept exporting oil at the record high prices throughout the 2022, right? Nonetheless, there was an economic recession, but that turned into an expansion in '23 and '24. So there was a modest recession in '22 in the Russian economy, and sizable expansion in '23 and '24. So I think it's fairly important to emphasize that the consensus forecast in the beginning of the war, as Yevgenia mentioned already was that there would be a significant decline in the Russian economy. So the consensus forecast was a decline of eight to 10%. In the end, the decline was probably around 2% in that year.
And so the question is kinda why, why a bigger decline didn't happen? The other thing to emphasize is there was a period of very high inflation right after the war began, and the sanctions were imposed, and sanctions were largely on the imports of Russia. And that created a spike in inflation. That was because imports either disappeared or became much more expensive. Then inflation came down, but by the end of '23, we entered the period of high inflation in the Russian economy, and the reason is that I forgot to mention what Putin did before the war during the eight years. And so this was done systematically. There was something that is labeled sometimes economic fortress Russia. So he built in particular reserves, right? In many countries, governments borrow. Well, the Russian government actually built reserves, and it was about 60% of GDP in reserves. Half of that got frozen right after the war began. But there was significant reserves still available to spend. And sort of what Russia's been doing since the beginning of the war, it turned into a military economy where sort of by most conservative estimates, it's six to 7% of GDP. That's the military budget.
But there are many other lines of budget that are not directly attributed to military, that are also related to military spending. And we can say it's about sort of like above 6%. I mean, I put a number of 10%. We don't know exactly. One thing that happened is statistics became much harder to find about Russia. A lot of statistics became secret. So we have to make guesses about a lot of the things. And so there is this huge fiscal stimulus in the form of military expenditure that happens in the Russian economy. And to a large extent, it's paid by accumulated reserves. The budget that was in profits most of the time went in deficit. But these are not such dramatic deficits that like suggest that things are completely unsustainable in the short term. So the short term looks like you can live with those deficits of the order of magnitude of 3% of GDP, but the situation is clearly unsustainable in the long run, right? And so when you look at this, something must give. The only problem we don't know sort of at which horizon, that's kind of like a hidden variable for us. How long this can still persist? And it's a war of attrition.
So what's important is not whether it's sustainable in the long run, but whether Putin can sustain it longer than the West is willing to support Ukraine in this war. One thing to emphasize is that Russian budgets were in recent years before the war prepared with the expectation of the oil price of $45 a barrel. The current oil price is $80 a barrel, and there is a deficit. So the government budget deficit was supposed to break even at $45 before the war. Now it's in deficit at $80. And so it sort of suggests that what keeps really the economy going is this, you know, unusually high oil prices, given the last 10 years. One thing that's quite important is remember how grew during the previous period of record high oil prices, right? It was 7% growth. And indeed something similar happened in Saudi Arabia in '22. Something similar happened in United Arab Emirates. Russia declined that year. So this gap in growth between Russia and Saudi Arabia that could be attributed to the war and sanctions. So kind of probably the baseline should not be like, you know, the decline relative to zero or relative to whatever number, but it's the decline relative to other oil exporting countries, and oil exporting countries grew spectacularly just because oil reached again $120 a barrel in '22. This is a completely sort of like crazy development is the unemployment rate in Russia is at 2.4%.
And so what this reflects is that there are a lot of people drafted to war. There was about a million people that left the country, a fraction have now returned, but sort of, and there is a deep scarcity of labor in the economy. Given that stimulus, that military stimulus, something that was hard to expect but kind of makes sense in retrospect that there is a deep shortage of labor in the economy. The other thing why this is not sustainable, and I think this picture is kinda maybe one of the most remarkable pictures. This is the age and gender structure of the Russian population. And you can kind of, it's sort of totally unnatural and sort of what you see here, well, these are males, these are females. This is the scar that goes back to the second world war, right? So these are the people that were not born in the second world war. Then their kids were not born 25 years later. And then 25 years later it was the 90s, which a huge depression of the economy. And now this is the 25 year olds that are sort of being sent to war and are killed in fairly large quantities. And so if you think about how sustainable it is, well this picture alone should suggest that things are not particularly sustainable, right? It's like a gender age pyramid where the lower part is wiped out, right? So in the long run this would be a massive economic problem in itself, but of course it's not the problem that's sort of gonna manifest itself in the next year or two. And I have two slides on sanctions, right? So what matters for sanctions?
Well, a couple of things matter. So first of all, the size of countries matters a lot. So on one hand you would assume that given that Europe and the US are so much bigger, they could have imposed effective sanctions, but Russia is not a small country. And so imposing those sanctions actually comes at the cost to sender. Countries that impose sanctions have to bear partly the economic costs. And Europe was not quite prepared to bear that cost early on. A lot of the sanctions that would've made a lot of difference right away, they were delayed by about a year. And so what was really surprising, I think, to a lot of economists is the speed with which countries adjusted. Both Europe adjusted very fast to the fragmentation from Russia, but Russia also managed to adjust a lot. If it were selling about 60% of its oil to Europe, and eight months into the war it was selling about 60% of its oil to China. And nobody really thought that that adjustment can happen in an eight month. Elasticities that, you know, economists typically think of, they're quite low in the short term. They're a little bigger in the long run, but nobody thought that the adjustment can happen that fast. And when a lot is at stake, the adjustment does happen, does happen fast.
And so now since China and India and Turkey to some extent buy most of Russian commodities, European and American sanctions on oil are not particularly effective anymore. They would've been effective before when Europe was the biggest customer, but they're not as effective now. Well, the second lesson about sanctions, it's very important to have a coalition of countries. Western world has a big coalition, but it's a highly incomplete coalition. And so I wanted to show you this picture. So this picture is the share of GDP produced by what is classified by Freedom House as free countries and as partial and not free countries, right? And so before the 1990s and before, the share of most of GDP was produced by free countries in the world. But that share has declined a lot in particular because China is the second largest economy, almost 20% of the world GDP now. And so as a result, if you don't have a full coalition, it's very easy to go around sanctions, right? And this is what happened. And so in the absence of a way to bring China into the coalition of countries or use effective secondary sanctions, it's actually very hard to impose sanctions that are so effective to, you know, truly have a major effect on the Russian economy. So one way to show this are semiconductors imports, and this is from the study of my co-author, Elina Ribakova.
So you can see in gray, I mean it doesn't really matter what the numbers are, but it's different countries from which Russia used to buy semiconductors. And Russia used to buy a lot of semiconductors from countries in Europe, from the US. It was always buying semiconductors from China after the war started, as you can see, the red lines is the semiconductor sales to Russia in 2022. All countries stopped selling semiconductors but China and Hong Kong, and China and Hong Kong essentially replaced fully the supply of semiconductors to Russia. And that happens across many, many industries, right? And so the question is can you effectively create a sanction coalition when trade is allowed with other countries, right? What's most important is this picture. So what this picture says is that the countries, they were really swift to do financial sanctions because they're cheap. You can really freeze financial assets. That comes at no cost. There is some reputational cost to freezing assets, but there is no direct economic cost to doing that. And that was done very swiftly. They were quite fast to do the import sanctions, so they banned imports to Russia of certain goods, and that was fairly easy to do.
And that you can see in the orange line that imports actually did collapse massively right as the war started. But it was very costly for the west to impose sanctions on exports of oil. And if you think from the perspective of the United States, the biggest concern was to keep Russian oil flowing to the world market and avoid the increase in oil prices in the world. And like given that, well, it's very difficult to do something that would really curb the revenues, right? And so despite the disruptions that came from the war and sanctions, the cash flows were coming into Russia economy at record levels in 2022, right? In fact, whatever was frozen with financial assets, roughly the same magnitude was the extra trade surplus that was created in that year because the record high oil prices and sort of the collapsed imports. So the gap between exports and imports is sort of the cash flow foreign currency that was coming into Russia. And that sort of largely upset the effect of the financial sanctions. I think I spoke enough, and I'll pass it to Sergei, but this is the last picture.
So we talked about the sanctions, but there is another component, that's the military budget. So the military budgets in Russia are back to the levels of the Cold War, somewhere between six and 10%. That's what US, so this is US, and I'm sorry it doesn't show very well. So this is 9%. And so US military budget was 9% of US GDP back in 1960s. These are cold war levels, but we live in, as we know, through the end of history, right? At least in the 1990s. And so what is the end of history in terms of military expenditure? Well, it collapsed around the world. It's, in fact if there were no wars, this would've been great. So the war, the US you know, is, I mean, it's interesting, right? So this spike is the Iraq and Afghanistan war where US military expenditure came back up temporarily, but they're coming down after the withdrawal from Iraq and Afghanistan. The war started in Ukraine in '22, and you would, you know, guess what happens to US military expenditure? Well it's at the lowest level ever. It's at 2.7% this year.
And so from the perspective of US, actually, it's the time to reduce military expenditure it looks like, right? And so I mean, the world has very low military expenditure. And Europe had, like here it's between one and 2% of GDP. These are record low levels in Europe. And so we do see that in Europe in the last two years, military expenditure starting going up. Poland is kind of going towards 4% of GDP. Germany is going towards two. Europe is converging with US with military expenditure. But clearly one thing that you would think is sort of like a win-win situation for a lot of countries, you do some, you know, some stimulus to your economy from military expenditure plus you achieve the sort of military objectives with that. This is not done on a large scale. And so if you're thinking sanctions is not just restrictions in Russia, but actually the subsidies to certain industries in Europe and the US that could have happened. And even that is really not happening on a sufficient scale. And so there is an obvious question why, which I think we'll discuss, but I'll leave it at that for now.
Yevgenia Albats:
All right, thank you very much for your brilliant presentation. Sergei, floors is yours. Do you want me to repeat the question or?
Sergei Guriev:
No, I remember your questions very well, Yevgenia. Thank you so much. So I, we discussed, we discussed Oleg's presentation, and these are just data, and so it's very hard to argue with them, and I will not argue with them. And Oleg and I actually have talked about those issues several times. We, in the beginning of this full scale war, we wrote a number of opinion pieces and also talk to European and American policy makers asking them to introduce tighter sanctions exactly on Russian oil exports. So in that sense, in that sense, I think there is not much to argue, but there are certain issues where I would say, as Oleg correctly said, data are not as reliable as we would love them to be. And there are multiple interpretations of the official data that may actually call into question certain issues.
So first and foremost, you ask why Russian economy has not collapsed. Oleg has correctly identified a number of issues. Only half of the world joined the sanctions coalition. Russia has a huge border with China, and only now in the last half a year, the sanctioning coalition started to use the most important tool it has, which is secondary sanctions. So basically Chinese banks finally start to fear that if they continue to finance trade with Russia and Chinese suppliers that have provided Russian counterparts with dual purpose technology and goods and help to circumvent sanctions, those companies and banks suddenly started to be aware that America and Europe can actually impose sanctions on those Chinese banks, on those Chinese companies. And the same, the same applies to other what's called third countries' companies and banks in Turkey, Kazakhstan, Emirates and other non sanctioning countries.
Now, you asked why freezing $300 billion did not help to stop Putin's war. Now I should say that we should not compare what happened to what we would like to happen. We should compare what happened to what would have happened without sanctions. So let's imagine a situation where sanctions are not introduced. The West says, well, sanctions are usually a tool to deter wars. So it's a threat. And so if the threat has not worked, the west could have said, sorry, Putin's already started the war. We express concern, but it's too late to introduce sanctions. The west didn't do that. The west did impose sanctions, but imagine that the West did not impose those sanctions, and Putin has $300 billion more than he had today.
So Oleg mentioned a number of numbers. So budget deficit in different years of this war were 1% of GDP 2% of GDP. 1% of GDP is like $20 billion per year. 2% of GDP is 20. When we talk about national welfare fund, the liquid part of national welfare fund remaining today in Putin's pockets is around $50 billion. Imagine Putin has $300 billion more. How many soldiers Putin would be able to recruit if he had $300 billion more. On top of that, Putin is circumventing sanctions, but it's costly. And imagine that if this cost were not introduced, and the west would freely allow Putin to buy military and dual purpose technology from the west without going around third countries. And in that sense, of course these sanctions are limiting resources in Putin's pockets and stop Putin from executing this war at the scale he would love to. So in that sense, I think sanctions are having an impact, and we should not deny it.
Now we, Oleg mentioned oil sanctions, and Oleg and I in the very first weeks of the war insisted, and we were not alone. A lot of economists actually insisted that we need to introduce sanctions against Russian oil otherwise those frozen $300 billion will be replenished, replaced by oil revenues. Oleg has shown data on Russian exports of Putin in 2022, pretty much almost got back this $3 billion, $300 billion through just exporting oil at higher prices. The trade surplus was something like $230 billion in 2022. So the fact that oil sanctions were introduced a year later actually helped Putin a lot. Now when the oil sanctions were introduced, an oil price cap worked for about half a year, three quarters of the year in 2023. There are estimates that Putin lost about $50 billion. Some estimates are a bit smaller, some a bit higher, but $50 billion again is a non-trivial amount. And currently Putin has a national welfare of $50 billion. He could have had twice as much. Oleg is talking about non-sustainability of this war. Again, if Putin needs to cover budget deficit of say 20 or $30 billion per year, $50 billion is enough for covering it for couple of years, but not for five years, right? And this is why Putin's already started to talk about raising taxes. Next year, he will increase taxes. This is the first year in 25 years of the years of Putin, where Putin actually introduced a major tax increase, not a marginal tax increase, but a major tax increase of one, one and a half percent of GDP.
So Putin sees that his budget constraint is binding, and sanctions play a role. Now Putin by the end of 2023 learned how to circumvent oil sanctions. He built a shadow tanker fleet, and this is where the battleground, the sanction battleground is right now. The West, Europe and US started to sanction individual vessels. They actually go ship by ship, tanker by tanker. They've already sanctioned something like 50 tankers. There are altogether I think 500 or 600 shadow tankers. And this is what Oleg's co-author Elina Ribakova that Alex mentioned and Kyiv School of Economics are doing right now. They actually are tracking all these tankers, and European and American policy makers we hope will limit Putin's capacity to export oil. So this is, this is very important.
Now the next question is, is Putin's economy doing very well? Now Oleg has said that there are many challenges there, but I would say that the situation's actually worse. For some reason, for two reasons. One is GDP statistics in the country at war is misleading, right? If Putin spends three more percent of GDP on military expenses, so Oleg used this estimate of 10% of GDP for the war. Official data for defense expenditure now is around 6%, used to be 3%. Now it's 6%. I would not argue with Oleg because indeed we can also add additional expenses for this war, which are not part of the defense spending item in the national budget, in the federal budget. But just imagine he goes from 30% of GDP to 6% of GDP. So not surprisingly you have additional influx of 3% of GDP into this economy. You buy tanks, you recruit soldiers, the soldiers and tanks go to Ukraine. Tanks are burned, so soldiers are killed or wounded. So it doesn't end, it doesn't add, sorry, to quality of life within Russia. So every billion dollars spent on tanks that are burned in Ukraine is a billion dollar, which is equivalent to just printing this $1 billion and injecting it into the economy. Like some people would say helicopter money. It's not helicopter money because this money are given to specific interest groups, to producers of tanks, to families of soldiers.
But this production is not actually adding to economic performance of Russian domestic economy. This is an important consideration we shouldn't forget. And indeed, if you look at growth numbers in 2023, in 2024, economic growth is exactly in this range of 3.6% of GDP in 2023. That was the growth, official data on growth in 2023. In 2024, IMF forecast is 3.2%. So again, almost all economic growth is explained by this. There is a paper by Bank of Finland Institute for transition economies, which shows that the whole growth is concentrated in military industries. Civilian industries are not growing. Now these are official data in rubles adjusted for inflation. And this is what brings me to my second reason to be more skeptical about economic performance in Russia, about GDP growth in Russia. Official inflation now is 9%. Now is that possible that inflation is underestimated? There are various ways to look at this. There are surveys looking at like for like changes in prices of similar goods. It's very hard to replicate what Rosstat does because nobody can actually calculate inflation. But there is a survey by Romer, which shows that overall accumulate price increases in the range of 70% and not if you just add several years of inflation, that would give you something like 30% in those two and a half, three years.
So it's not, it is very likely that inflation's much higher than we think. Why? First reason is policy rate of the Central Bank is now 19 percentage points. Think about this. Inflation's nine points. Policy rate is 19 points. So the real policy rate is 19 minus nine, 10 percentage points. It's a huge interest rate. Here in the US where you are right now, policy rate is five and a half, inflation is two and a half. So the difference is 3% and everybody's saying it's too high. We need to lower it, we need to lower it. It's killing the economy. In Russia, the gap is 10 percentage points. I just cannot imagine how economy can function with a real interest rate of 10 percentage point. If inflation is not 9% but say 12% or 15%, it's much easier to understand how this economy can function.
So the other, the other argument why inflation may be underestimated is quality adjustment. Rosstat is a wonderful organization, but it's very hard to adjust for quality of goods when you have this major structural change in the economy like the war economy Oleg was talking about. So imagine Russian car market. Before the war, majority of cars were European cars. You would also have Chinese cars. But Chinese cars were twice as cheap as German cars. So average car sold in Russia was a German car. Let's say it would cost, I don't know, 3 million rubles. And now German cars are gone. But instead an average car is a Chinese car, which is also 3 million Rubles. It's twice as expensive than it was. But for Rosstat, you have the car. It costs 3 million Robles no inflation. And there is a study by the journalist of the publication called "The Bell," which actually look at like for like. They look at the same cars, the same makes the same models in 2021 and today. For European models which are still produced or sold in Russia, they are twice as expensive than used to be in the rubles. For Chinese models that used to be cheap and now are sold at the price of European models, they're 50% twice as expensive. So in that sense, I think there are reasons to believe that inflation is underestimated.
Why does that matter? Because if inflation is underestimated, real GDP growth is overestimated. We know GDP in rubles. I don't doubt those data. But if you deflate, if you divide GDP in rubles by inflation rate, if you use official inflation rate, you see GDP growth. If you look at real inflation rate, whatever it is, the actual GDP would not be doing well. Now you would say, but Moscow is doing well. People are happy, restaurants are full. Nobody's complaining, nobody's protesting. Everybody says life continues.
Now we should not forget another structural change, which is a different repression vision. People do not protest because they know they shouldn't protest because it's dangerous. So comparing the situation with public opinion today and just in 2021 would be hugely misleading. Polls are, polls should be treated with a lot of caution. Even polls today show that people are not very happy about this war. But people understand that they should not complain about their living standards for all kinds of reasons. And in that sense, I think it is quite likely that quality of life has actually declined a lot. But people do not fully understand how to communicate that to pollsters or journalists. They're afraid. Or they understand that they should not complain. So I think this is also, this is also a very important issue. So Russian economy is not doing very well, I think.
Now your question was also how long it's going to continue. I think the way we understand this economy, and Oleg has talked about this military economy, is this economy consists of two parts. One part is a economy which works for the war, and the other economy, which works for the civilian sector. The war economy, that part of the economy, whether it's 6% of GDP or 10% of GDP or 20% of GDP, we don't know. This economy is paid in advance. So this economy doesn't care about policy rate because it's prepaid in the beginning of the year. This economy pays very high wages. But again, it doesn't care because government budget is very generous towards this particular part of the economy. So this economy is functioning 24 times seven. It cannot probably extend the level of output because for that it needs to build new plants. And for new plants you need new equipment. And new equipment should come from the west, and the west will not do it. And Chinese equipment will also not come because China is afraid of sanctions, secondary sanctions. But the interesting part is the rest of the Russian economy, and the civilian economy is facing much higher interest rates because the central bank must fight inflation. So inflation doesn't turn into hyperinflation and much higher wages.
So the civilian sector is in trouble. Putin doesn't really care much about this. He knows that entrepreneurs will not protest because he has 400,000 of riot police, Rosgvardiya. Again, this is something to bear in mind when people are saying Russians are very happy about this war. They don't protest. Remember that Putin holds a huge repression machine in Russia. He is short on men in Ukraine. He would really be extremely happy if he could take these 400,000 men and send them to Ukraine. But he knows he needs them in Russia because Russians are not very content and very optimistic about this war. So this civilian economy is not doing very well, but what matters for Putin is whether he has enough cash, has enough dollars that Oleg was talking about to fund the military part of the economy. And this is exactly when we need to watch the National Welfare Fund. It's come down a lot.
As we said, it's now in the range of two and a half percent of GDP. So if sanctions are tightened today, and Putin runs a much bigger budget deficit, Putin may run out of money a year from now. In the status quo scenario, probably two or three years from now. Much depends on the oil price, enforcement of oil sanctions. And if the west does a serious job right now on the shadow tanker fleet, on secondary sanctions with China, Putin is going to face difficult times already a year from now if nothing changes, and Putin is running 1% of GDP budget deficit, he has enough cash for the next two or three years. Now what happens when Putin sees that he's running out of cash? So there are two responses.
One is he can raise taxes more. He's not done that before because he knows it's unpopular, and it's harder to collect taxes. And higher taxes result in slow down in the economy. Putin can also squeeze other parts of the budget. So reduced spending on the economy, on communal utilities, on teachers and doctors. And then indeed that means he will also need to spend more money on repression. So these things become difficult, and we discussed this issue with Oleg many times. So Putin would prefer not to do that. But I think the safe assumption is the sanctions limit the amount of soldiers Putin can recruit. The sanctions limit the number of tanks he can produce, limit number of Iranian drones and North Korean rockets Putin can buy. They limit number of high precision technology and semiconductors he can buy through third countries, fifth countries, seventh countries. These chains are actually very long and very expensive for Putin. So the less money he has, the fewer semiconductors he will be able to buy.
So this is not useless, but I think as long as Putin is in the Kremlin, his priority will be this war. It's just the intensity of this war and the number of Ukrainians killed depends on the amount of money Putin has in his pocket. And in that sense, I think sanctions really matter. Let me stop here, and I'm happy to answer questions.
Yevgenia Albats:
So thank you very much. You know, I'm afraid that if we wait till he runs out of money, the Ukraine will be totally destroyed. We see that he already destroyed 70% of Ukraine energy sector. In the upcoming winter months, there is a predictions that Ukraines will have to stop electricity supply all the way up to 18 hours a day. He destroyed, you know, the entire industrial east of Ukraine. He's destroying, today he wants . You know, he's destroying cities one by one. He's turning Ukraine into no-man land. So unfortunately we don't have the time, and that's why I'm a little bit concerned.
At the same time, you know, since I speak a lot to people in Moscow, and not just in Moscow, but in other cities, I can tell you, we know that in the summer of 2022, Putin had a meeting with his economic ministers as well as with some oligarchs, and he gave a task. He's a smart evil. So he said that there should be no shortage of groceries in the grocery shops, first. There should be no shortage of pharmaceuticals in the Russia apothecaries, and there should be no shortage of cars. That's precisely what was, you know, the major problem in the late Soviet Union, as you will remember. You know, every man, every woman was dreaming about having a car, and there was nothing to, there was no meat in one store, and no fish in the store across the street as the joke goes. But it was the reality of our lives, right? At the same time, so, and he has managed to deliver this. There is no shortage. Yes, there is no Frenchies, but you know, there are some Italian producers in Trieste almost who are capable of doing this. So yeah, they're all Italians, you know. Now, but it's not just there, it's not just about groceries. It's not just about cars and pharmacy, but it's also, you know, we see that in the regions there is a construction boom. Why? Because now, you know, for those who volunteer to become canon fodder, he pays 2 million Rubles.
It's roughly $20,000 at the signing of the contract. So $20,000 multiplied by 30,000 volunteers each month. It is, I calculate $600 million monthly or $7 billion a year. He needs this money to pay. But what happens? They receive money. Their wives, you know, they couldn't care less, you know, when the alcoholics go dead, you know, at this, all these meat storms. They build, they buy apartments. There is booming construction precisely in the region. The war has become a force of mobilization for, that raised the poorest of the poorest. He gave money to the most low levels of the Russian society in the rural areas where people used to receive, you know, 200,000 rubles a month, which is what you know? Approximately $200 roughly, right? And now they receive $20,000 just for signing a contract, and if a officer got killed, his family are 25 million rubles. That's about, what is it? About $370,000 or something like that if she knows that. \
So anyway, so we see that he has, it's not just that Russians are afraid of repressions. Of course, they do, but it's also that they see that this war give to the poorest of the poorest money and ways to raise their kids, to have apartments, to buy cars, to put their kids in schools, you know? They have, you know, free entrance to all the higher schools in Moscow and et cetera. So, so it means that you have to cut off cash supply, right? You need to strip Putin of cash. And I don't see that this is happening.
Oleg Itskhoki:
So that's a good segue to remind what Stephen Kotkin said last time, and he summarized it really well. So he said that dictators don't care about real GDP growth. They care about cash flow. And that's exactly summarizes the situation that the cash has been flowing to the Russian economy. There's been a continued trade surplus, that's the in flow of cash into the Russian economy. Sure, imports got more expensive. Sure, there was inflation. Sure, like real cost of living has increased. But if you need to pay double for some of the imports that you need, you can do it from the oil revenues, and again.
Yevgenia Albats:
Or fly to Turkey, I'm sorry, Oleg. Just real life. You fly to Turkey, you buy pharmaceuticals there, you buy all clothing there. It's much cheaper than to order from the United States or from Dubai.
Oleg Itskhoki:
But again, I don't think we should be concerned about the consumption outcomes for regular people. It's not what concerns Putin. If consumption falls by 10%, which likely the real consumption probably declined by 10% as a result of this war. It's not his concern. His concern is that his budget constraint allows him to do the expenditure that he wants to do. And primarily it's the war, it's the military expenditure, and given $80 a barrel for the oil, and given the fact that Russia exports every day 5 million barrels a day, that was the pre-war exports. And this is the post post-war exports, right? So one thing that sanctions were quite successful at is at keeping the volume of exports going outside of Russia very, very stable, right? It didn't decline, right?
And then we can talk about how effective was the price cap, and we exactly agree with Sergei on that $50 billion number. It actually comes from some estimates that we did that it's a range of numbers between 30 and $50 billion that was shaved off using the price cap. It was effective for about eight months. It's much less effective now. But, you know, the bottom line is that quantity of oil that is exported did not decline. And the prices are at record high level still. And given that this can last for a long time. There is no imminent end to that cash flow.
So one thing I forgot to talk about actually, in my slides, I had three things which I think are missed opportunities in terms of sanctions. And so in my mind there are three clearly missed opportunities. The first one was a swift sanctions on Russian energy exports. Right when the war started, when the financial sanctions were imposed, there was a window of opportunity for about three months to really have swift sanctions on exports to cut off that cash flow very early on to trigger a financial crisis, right? Then it would not be sort of the long run sustainability. It it would've been the effect through like the lack of foreign exchange liquidity in the system because both the financial assets were frozen, and the exports would've been cut off. Would be extremely costly for Europe in the short term. But that was a potential opportunity gap. That's exactly the open letters that many economists wrote, including me and Sergei.
Sergei actually made it as far as to talk with the German Minister of Economy, Robert Habeck, and it looked like Europe was ready to do it, but that was a blunder on the part of US largely when they really were worried that oil prices can go not to $120 a barrel but to $200 a barrel. And that was like a very conscious decision by the US Treasury that this is too dangerous to go along with oil sanctions early on because it would destabilize the oil market. And so that was the first missed opportunity. We don't have the counterfactual. We don't know how things would've turned out, but that was one point.
The second thing, which is a missed opportunity is if you think about it, US is the largest world producer of oil at the moment. It's hard to imagine why OPEC has such a tight hold on the oil prices in the world, given that US and Canada together produce about 25% of world oil production. I guess, Craig Kennedy is here to correct me on that.
Craig Kennedy:
Oil's priced into margin.
Oleg Itskhoki:
Exactly, and so US could become the marginal player by, US production has increased from $10 million a barrel to 12, something like that. And why not? You know, like during Covid there was different government projects how to deal with it. This is a big, you know, it's a big event in the world, the war in Ukraine, and why there is no equivalent decisions at the government level to try to use the monopoly power or oligopoly power that US could have in that market.
Well, first of all, to deal with the concurrent problems of high oil prices and Russia using them to finance the war in Ukraine, but even in the longer term, why OPEC should have such a tight hold on those prices if US has the capacity to produce more oil. And I mean, the estimates by economists differ how much oil will stay in the ground after we have a green transition. But presumably some of that oil stays in the ground, and it's kind of remarkable that oil prices are as high as they are right now. And clearly, I probably don't fully understand that market, but to me that's a missed opportunity, number two, of not doing more was just bringing down the oil price.
And the third missed opportunity is the last picture that I showed you is the military budgets are at record lows. And of course another way to stop that war is to crank up military production quite substantially in the west. And I mean, Europe should clearly do more of that. And that's a very, it's also using the economic tool, but it's a very different means of solving the problem is by actually producing a lot of military equipment that Russia currently lacks. And Ukraine might have a surplus of military equipment, and that's also an economic problem to do. And so these are the three missed opportunity in my mind that I can identify. Thank you, Sergei?
Sergei Guriev:
Yes, I agree with Oleg. I would also try to follow up on what you've said, Yevgenia. So one thing is it's a hot war. And this war happens on the battlefield. And indeed, whatever we talk about, we talk about sanctions, how we can use economic tools to limit Putin's ability to execute this war. But this war will be won or lost on the battlefield. And in order to defend Ukrainian cities, Ukraine should have weapons. And neither Oleg nor myself are military experts. We don't know how exactly, Oleg mentioned the money that US and Europe have, especially the US could deliver a lot more military equipment, materials to the Ukrainian army. And that's unfortunately been slowed. It's not happened. And this is a great success of Putin who projected this image of red lines here and there and slowed down the delivery of modern weapons which could have protected Ukrainian cities, Ukrainian energy infrastructure and so on. Long range missiles, F-16s, these are exactly the tools military experts tell us that could actually reduce Putin's capacity to destroy Ukrainian cities.
So I think we should not forget about this. This is a war. It's not an economic war. It's a real hot war. It's not just a hybrid war. It's not just a sanctions exercise. The other thing I would mention, we talked about this, $50 billion, right? $50 billion is not a trivial amount. So you mentioned how much soldiers are getting, so imagine the soldier is getting 300,000 rubles per month so that makes 3.6 per year. At the current exchange rate, it's $4 million, sorry, $40,000 per year per soldier. So if you want to recruit a million soldiers, million soldiers, that would give you $40 billion year, right? So if you take $50 billion out of Putin's pockets, you already pretty much reduce Putin's capacity to pay a million soldiers for the full year, right? And of course you need to add payments for training those soldiers and so on and so forth. But we are talking about a major impact of economic sanctions on Putin's capacity to recruit those soldiers.
Now you were talking about construction boom, happy families and so on. One of the things we should not forget is we are talking about a very small part of Russian population. So there is a military sector, the 10% of GDP produces sort of often. So these people are extremely happy as well. But when we talk about actual soldiers and their families, this war has probably impacted directly about a million Russian soldiers, maybe a bit more, maybe a bit less. People are talking about 150, 200 killed, probably 300, 400,000, 150,000, 200,000, killed, probably 300,000, 400,000 wounded. Right now in Ukraine, probably Putin has something like 700,000 men. So we are talking about not half of Russian population who are excited and happy about capacity to spend and buy cars and apartments. We are talking about very small proportion of Russians, and we shouldn't overestimate how many Russians want to fight this war in Ukraine.
The simple answer to this question is you have to pay a lot for a family to send a soldier to Ukraine. Nobody wants to go to this war for free. You mentioned 2 million rubles. I think in Moscow, the posters are now saying 5 million rubles sign up bonus for a soldier to go to Ukraine. This is $55,000 just a sign up bonus to go there, right? So it's not something which we should over generalize. It's not like the whole Russian population wants to fight in this war in Ukraine. We are talking about hundreds of thousands of people, maybe a million, maybe million and a half, but not more. So we should not say that the whole Russian construction sector is really, really happy about this war because the families that received those million payments, multimillion payments after the soldier is killed or wounded, we are talking about hundreds, thousands of families.
Yevgenia Albats:
Sergei, the question is not about, you know, how many receive these payments, the question is how to cut the cash flow so Putin won't have money to pay it. You know, I will give you another example. You know, one of the sanctions were, you know, were against, you know, all kind of Russian oligarchs, you know. So some of them repatriate the money from European banks and from American banks back to Russia. I just, you know, recently I was told, I spoke to somebody in Moscow, a very good source of mine, and he told me an anecdote. There was a guy in Moscow who was working around Moscow with $300 million, $300 million in cash. And he was trying to, and he was asking everyone where to invest, where to put this money, and oh, $300 million, you know, after all, you know, you say. And finally, you know, he failed to find anything, and he invested in a deposit in Chinese currency.
But trick is that when you ask people, you know, in the economic center of the Russian government, how you going to substitute, you know, your losses, they say, oh, you know, a lot of money repatriated and there's probably about, you know, 35, $50 billion on its own accounts that basically Putin can use. So once again, the problem is that the kind of sanctions that were imposed and the kind of tools that which were used didn't preclude or haven't precluded Putin from spending that much on military production, paying that much to those who are ready to turn themselves into the cannon fodder. That's my question, how to deal with that?
Sergei Guriev:
So the answer to this question, once again, we should not compare the actual situation to what we would like to see. We are doing what we can, we should have done more, and Oleg correctly identified several missed opportunities. And this is sad that sanctions were slow, not as tight as they could have been, but they have limited Putin's capacity to recruit soldiers and to kill Ukrainians. Without those sanctions, Putin would have more semiconductors, more cash, more soldiers, and the war without sanctions introduced in the first couple of weeks of the war, I think the outcome on the battlefield would be very different. It would be very likely that Putin would get much more territory in the first couple of weeks of the war. Now one of the things you mentioned, this is actually a very interesting question. We didn't talk about individual sanctions. A lot of people are saying why oligarchs are sanctioned? Why shouldn't we just all lure oligarchs to the west and ask them to bring all their money to the west?
Now, just to, I talk to policymakers and to oligarchs quite a bit, and basically there are several answers to this. No western politician can say any Russian oligarch welcome. So it is not possible to welcome an Russian oligarch with his yacht, with his palace without this Russian oligarch saying, I'm against Putin, right? If somebody wants to have his business in Russia and at the same time keep his bank account in Switzerland or France or the UK, it's not going to work simply because voters will be outraged. This is no longer the times when Russia was a normal country. This is the times like 1940s. Imagine a German business person doing business in Germany and also doing business in London, living in London, spending money in London. The situation's very different, and politically it's just impossible. Now the second question is, and this is a very important question, I can understand Russian oligarchs who don't want to speak against, speak up against Putin. It's dangerous people fall out of windows. I fully agree with that. Some people, however, speak very clearly Oleg Tinkov spoke against Putin. He was removed from sanctions. Arkady Volozh, the founder of Yandex, spoke against this war in the summer of 2023. He was removed from sanctions half a year later. Why wouldn't the west just say we know that this particular oligarch doesn't like the war, but is not going to speak publicly against the war and against Putin.
Well, the answer here is this oligarch may be a nice person. We may like him, he may like us, but he's afraid of Putin for very good reasons. But if he's afraid of Putin, Putin can use this fear, this blackmailing, because the oligarch has real estate, business in Russia, friends, family, doesn't matter. There is a war. And Putin can use this blackmailing and force this oligarch to use billions of this oligarch parked in London, in Switzerland, France, and the US for Putin's purposes. And the west doesn't want to do that. The west doesn't want money, which Putin can through blackmailing, through threats, use as a tool against western democracies.
The west is already very concerned, and from what I see from my closed door conversations, we don't even know a small part of sabotage undertaken by Putin. This hybrid war is happening in the West. Some of those things we observe. They're published. Information about them is investigated by journalists. But some of the stuff is not just reported because western governments don't want to show to the public how they sometimes fail to protect western democratic institutions and sometimes western individuals. So they're very much aware that Putin is executing this war, not just a bloody war in Ukraine, but it's also a hybrid war, and sometimes not so hybrid in the Western countries as well. So they don't want tools of Putin to be present here with the billions.
Yevgenia Albats:
Thank you. I have more questions, but you know, I really don't want to deprive the audience from the possibility to ask questions. So let me give floor to your questions and then, but you know, first Evsei Gurvich, who is here? He is the former head of the economic analytical group of the Minister of Finance of the Russian Federation. He was one of those few people who knew the real life of the Russian economy. Do you have any comments to what you heard? Do you have questions to Oleg and Sergei?
Audience Member:
Thank you. First I would like to put questions to both speakers. How do you see prospects of Russian economy and what would be the key limitations for economic development?
Oleg Itskhoki:
I can do a quick one and pass it back to Sergei. So I'm the kind of economist that doesn't work so much with numbers. I work with letters. And with letters I mean it's not like writing a lot of text.
Sergei Guriev:
Greek letters, Greek letters.
Oleg Itskhoki:
Greek and Latin letters, proven convergence results and stuff like that. And so one thing that you can say, and this was in my slides, is that it's not a long term sustainable situation. So you cannot roll this forward as is for decade, right? So we clearly know that this thing doesn't converge over a medium term, but also there is nothing that suggests right now that it's sort of going to break down within the next year or two. So, so clearly the economy can go, given the current oil prices, given kind of, and even if the oil prices fall somewhat to 70 or $60 a barrel, there is a lot of capacity to depreciate the ruble, which something that Soviet Union didn't have because Soviet Union committed to a fixed exchange rate. And the current government is very flexibly using the, you know, flexible exchange, right? That could always kinda rearrange the relative revenues that they get from the oil prices at lower oil prices.
But when they convert it to rubles, this would be a bigger amount to cover quite a bit of expenditure. In that sense, the situation doesn't look like it will break down in the next couple of years. So the problem is that we don't know how that pacing will happen. How like the short term which can be rolled forward for a number of years probably will merge into a situation in a long run that's long run sustainable. And so clearly the types of issues that will come out from this is right now the economy runs on this huge stimulus from the military expenditure. When that stimulus is taken out, that sets the situation for a transition crisis, right? So quite a lot of financing will be pulled out out of the economy. This will shrink the aggregate demand on the economy quite substantially. And the question is how the transition there would look like, right? And so this is, this is something that's difficult to predict, but it's hard to imagine that this would happen before sort of the war is over one way or another.
And so in that sense, in my mind, I had an article on the topic which suggested that it's hard to imagine that the economy would be constrained to this war because, you know, like this war can continue for a number of years. It's much harder to see that you can sustain the war where the military action, like people get killed and wounded at the rate of hundreds per day, oftentimes up to a thousand per day. It just doesn't seem like the economy would be the first thing that would put an end to it. And so then how the transition happened is just to me, it's extremely difficult to predict. But you do know that something has to give, but I think it's completely unpredictable in which way, given that the war would be the key determinant of what's going on
Yevgenia Albats:
Sergei?
Sergei Guriev:
Yeah, I fully agree. I will just remind you the numbers that Oleg presented on stagnation before 2022. Russian economy has been stagnating for 10 years. And compared to the pre-pandemic, pre 2022 Russian economy, today's Russian economy is in much worse situation. A lot of qualified people have left. Relations with the biggest market, Europe, have been broken. For god's sake, there is even no pipeline going to, the main pipeline's blown up. And of course Russian economy is going to, when the war is over, even after this transition, which Oleg has mentioned happens, economic growth will be constrained by lack of human capital, lack of access to technology. It will be very hard to reinstate normal relations with the west and start importing advanced technology again. So that would be very, very difficult.
So Russia will probably be a resource appendage to China in the sense that it will be something like North Korea, much more educated, much richer country than North Korea, but still the technology will be coming from China. And in some areas China is a world leader. So we should not under underestimate that. But still Russian economy will be growing slower than it was growing before this full scale war. And before this full scale war, Russian economy was not growing fast as all of us know. On the issue of transition, I think that's very important. People usually compare this transition to early 1990s recession when Soviet Union went bankrupt and had to reduce military spending and a lot of defense dependent industries and sectors and regions collapsed. And that of course created a major transitional, transformational recession, which Oleg was talking about. Now we are not there in the sense of the magnitude. Oleg mentioned that US was spending 9% of GDP during the Cold War. Soviet Union, probably 12, 15, some people would say 18% of GDP. Now we are talking about six. So if we compare like for like, probably we are talking about a smaller magnitude of transition. So this transformational shock will not be as painful as in the early 1990s.
Yevgenia Albats:
Thank you. Yes, please, this is Craig, Craig Kennedy.
Craig Kennedy:
Craig Kennedy. First of all, Yevgenia, thank you again for a fantastic panel. I mean you've got such not only distinguished but incredibly insightful presenters today. So thank you for that.
Yevgenia Albats:
Yes, thank you to them.
Craig Kennedy:
I wanted to first of all to echo observations made by both Sergei and Oleg about 2022 because we often recall 2022, we expected that there was going to be shock and awe from sanctions and that the economy would teeter and then keel over. And I know looking at some of the moves that were made, specifically the macro move on the natural health fund, that was a very powerful and unexpected and surprising move. But for those of us who focus on both cash flows and specifically the oil and gas industry, we were scratching our heads why people thought the Russian economy was going to keel over because Russia in 2022 had record high, historically record high oil and gas income. We talked a lot about oil and high oil prices, but what we haven't mentioned is actually gas. Gas bought in 2022 contributed 23% of state revenues itself, almost a quarter of all state revenues. Now we often miss this number because we look at the official Ministry of Finance numbers, but if you actually dig into the company's accounts, and you look at all of the contributions it makes, it's much higher.
The same goes actually for the broader oil and gas sector, the broader oil and gas sector through its contributions, through its subsidies of oil product at home selling cheap, instead of exporting, they are keeping oil product at home and selling it below market, world market prices are providing a large subsidy to the economy as well. And when you add it all up, oil and gas in 2022 contributed about 55 to 60% of adjusted state revenues. So it was a huge amount, it was a bumper crop, and it pretty much exactly as Sergei said, canceled out the effect of blocking those funds. Russia still has a lot of sovereign wealth left it would use. Its just for the future it's not able to call on that $300 billion. So 2022, there was no reason from an industry of finance and a cashflow point of view to think that anything bad was going to happen. Only good things were happening.
Now on the sanctions themselves on oil, as Sergei said, you know, they have certainly caused some structural issues for the Russian oil industry. They're not getting nearly as much actual profit from $80 oil because they have to spend much more now on transportation. And there are other transaction costs as a result of sanctions. But nonetheless, we have really pulled our punches on oil. There's much more we can do. If you look at what we've done on LNG, liquified natural gas, this was Russia's big growth opportunity arctic to LNG. We have very systematically gone after all aspects of these projects from technology to shipping to partners, et cetera. And we have shut it down completely. It's been a huge black eye for Putin. It was one of his big prize projects. So we certainly have the capabilities to do that. We could do it on oil as well, but we're in a very highly sensitive political season right now, and there's zero risk tolerance to actually turn back up the heat. We know that we have the capabilities, but the punches are being held. And we need to make certain that whatever administration comes next, we push them to apply the sanctions as well as they can be. But also we continue working with colleagues in Europe, the UK in particular, who have growing sanction capabilities and are able to to act unilaterally now. So there's a lot more that can be done on the oil front.
One final thing though, that hasn't come up today, or maybe only obliquely, but we've been focused primarily on oil and gas as a source of all of Putin's war funding. But there's been another very powerful source of funding. And again, if you look at the world through finance, one of the things you look at is credit. And there's been this massive expansion of credit in the Russian economy since the beginning of 2022. 35 and 40% expansion of the amount of debt that's being given out, loans being given out to the public, primarily to the corporate sector. A lot of this is in oil, and the magnitude is equivalent to a full year of the Russian state budget, which is two to four times their military spending. $400 billion roughly of expanded credit. Now if we, I was discussing this through Sergei, and since then we've seen the latest interest rate hike, and Nabiullina in her comments said something very interesting she hadn't said before about why they had to push rates up to 19%. She said there's a large segment of the loans that we've giving out that are not sensitive to interest rates.
Now what does that mean? That's code effectively for saying the banks are being told to lend to the military complex, industrial complex, come what may, whether they can pay it back or not. So what people have been, some economists in Russia are concerned about now, and there was even a question to Nabiullina about it. Are we actually looking at a credit default forming in Russia that could lead to a credit crisis, major need to bail out companies, major need to bail out the banks as well? So this is, I wanted to put this to far more qualified economists to comment on. But I'm just to add one more thing. We talked about gas having done so well in 2022, but once it lost all those cash flows in Europe starting in 2023, it went into deep cash flow deficit. And how has it been managing its cash flows? It's been forced to borrow as well, and it's paying 21% now, it's loans. So about as much you pay on for a credit card in the US. How sustainable is this?
Oleg Itskhoki:
Sergei, I'll pass it to you. You probably know more. I have a little caveat to add to this.
Sergei Guriev:
No, go ahead, go ahead.
Oleg Itskhoki:
Well, so one, one thing that Sergei mentioned actually is that the interest rate is 19%. How can that be? Well, it's 19% for the private loans. It's indeterminate for the ones that are subsidized, right? That the government gives. And that's why it's so hard to fight inflation. That's exactly what Sergei described. There are two parts to the economy. One lives not on market conditions, right? This is the part of the economy where you can pay the payrolls and borrow, and this is the first priority of the government through the government banks. And that's not subject to market conditions, right? So that 19% interest rate applies to the market part of the economy. It's a sizable part of the economy, but it's not all.
So in the end of the day, it's this mixture of these two pieces, right? And so in my mind, the question's very simple, right? Is at the end of the day, it's all part of the government budget. There are government banks. There are government companies almost in every sector. The employment and the government sector, correct me please if I'm wrong, but think it's above 50% of the economy. It's a crazy economic structure where more than 50% of employees are actually employed by one way or another, government enterprises. And at the end of the day, it comes down to the government budget constraint, the consolidated, not the federal government, the consolidated, which includes all the banks, and it includes all the oil companies, and it includes the transportation companies that they use. And the question is when that budget constraint will not come together, right? And there are many things that you can do.
You can devalue the ruble to reduce the amount of money that you need to pay out in the budget, have inflation, you can have taxes. But when all it's counted together, there would be a point where the budget constraint doesn't work anymore. That's what happened in Soviet Union. What I don't know, what I can tell you for sure, and that was my remark that it's not sustainable. We cannot roll it forward indefinitely. That budget constraint will bind eventually, right? But the problem is that they have absolutely no expertise to tell whether you have three years before that happens or five years before that happens. And I think that's the crucial question because it's a war of attrition. So it's not that you have to be sustainable in the long run. It is that you have to be able to sustain it longer than the other side of the conflict, right? And I think we're, as of today, you know, like the fall of '24, it doesn't look that that crisis of the budget constraint of the Russian government, of the, taken together, right, is gonna bind in that way sort of like in a foreseeable future. That's how I see it.
Yevgenia Albats:
Thank you, Sergei?
Sergei Guriev:
Yes, I agree. I agree, I agree. And indeed Russia had this subsidized mortgage scheme, which Central Bank tried to stop all these years because it was contributing to inflation. And it's a bit like subsidizing construction through federal, pretty much federal budget. And it finally stopped this summer, and now we'll see a major decline in lending. And there was a burst of borrowing because people thought that it's going to stop now and also the interest rate is going to be hiked, increased. So we need to borrow in the very last moment as much as we can, because later on we will have to borrow it higher rates. And we already see that rates on mortgages are higher, and loans will now be going down.
Yevgenia Albats
Yeah, real estate market in major cities have the problem, except for the very, very expensive real estate on Rublyovka, you know, in this special places. Sergei, I wanted to ask you, you said, you mentioned that the Russian growth is basically consisted out of the military production, but what's wrong about that? Why is it fatal for the Russian economy? You know, quite a few economies in the world do make, you know, get their financial sources out of selling weapons. What's wrong about that?
Sergei Guriev:
Well, there is nothing wrong about this. It just doesn't contribute to quality of life. So I produce, I produce a tank. The tank is burned, so nothing has changed except that I got paid by Russian Ministry of Finance. So it's completely equivalent. And so it's a statistical, statistically it's correct, it's a correct measure of GDP. It's just economically nothing good has happened. It's just the government printed some cash and gave it to the tank producer because we don't see the tank, it's burned. We just see some cash being printed and given to the tank producer. And the same with soldiers. As a soldier, I provide services to the state. The state counts it as a value added. I produce something useful for the state, sounds great. I go to Ukraine and get killed. My family gets cash. Looks like the country has not actually benefited from this particular transaction. So economically this GDP is not actually productive.
And the very, why I'm saying that this is so important because the growth, as I was saying, the growth in military spending has been so big. So Oleg was showing numbers for other countries where share of military spending to GDP is more or less stable. In Russia, it went as I said, from 3% to 6%. And if you believe the estimates Oleg's been presenting about 10% of GDP, this is a huge growth. And so if you think about this, a lot of Russian growth is explained by those tanks, which are recorded as value added, but in fact they're burned. We are not talking about a couple of tanks, right? We are talking about thousands of tanks. Russia has lost more tanks in Ukraine than all European armies have in their armies combined, right? So we are talking about a major, major operation in terms of burning tanks. And Russia, by the way, is the biggest supplier of tanks to Ukraine. So Ukraine has got, has received more tanks from capturing Russian tanks than from anywhere else, and.
Oleg Itskhoki:
Yevgenia was asking actually I think can you make a business out of it in the long run?
Yevgenia Albats:
Yeah.
Oleg Itskhoki:
If you create this production capacity, the big question now would after the failures of this war, how many countries in the world would actually buy Russian military equipment? That's not so obvious. But the same question you can actually ask about European countries and the US right? Like obviously if you expect no war to happen, it's completely wasteful to produce military equipment, but at the same time, the only way to prevent the war happening is make sure you have enough of it, right? And so that's kind of this weird equilibrium that obviously if nobody expects a war to happen, it's efficient and makes sense to have military expenditure that go towards, you know, one, below 2% of GDP. But that is not an equilibrium because this is exactly when there would be an actor like Putin who would want to try, you know, the west, whether they would be able to crank up their capacities to, you know, bring up military production back and support Ukraine or not. And as we've seen, I mean, it's, like the way to think about it is what happened in Ukraine was not supposed to happen in equilibrium. It should be completely off equilibrium. And how do you support it to be an off equilibrium situation? Well, you do need to have that military expenditure in the background, right? And so then there is a question, you produce all those tanks and airplanes, and they sit somewhere in the desert in Nevada or in California, right? And so it's not particularly useful. So that creates kind of like this very unsustainable situation. But obviously the military expenditure above four or 5% of GDP in the long run is unsustainable for any country right now it seems like.
Yevgenia Albats:
Thank you. Soviet Union economy collapsed for many, you know, red sunset became a huge surprise for the west and for people in political science field and the Sovietologians, et cetera. Economy collapsed, Russia, Soviet economy got bankrupt for outsiders all of a sudden. Your expectations about Russian economy, will it slowly rotten, will it collapse? What economic factors, what variables we have to look for in order to get some predictors for when Putin is going to go down?
Oleg Itskhoki:
Let me say very quickly, I think medium to long run is extremely hard to predict. You know, something is bound to happen, but you don't know how it's gonna happen. What we can say can happen in the short run is if oil prices go below $40 a barrel and then it becomes instantaneously unsustainable in that very moment. The range between $80 and $40 is kind of uncertain. So if it goes from $80 to $60, you can see how a ruble devaluation can keep it sustainable, and so on. If it goes below $60, it becomes harder and harder for the budget to come together. But at $40, it's just unsustainable. And the cost of exporting oil will not be covered at that price, right? And so, and this is an event that can happen very easily, right? During Covid, you know, famously the oil prices were negative in the US, but they came down to $20 a barrel. So if that happens within, you know, next year or two years, that clearly puts an end to it. But shy of something like that happening, if oil prices stay above $60 a barrel, that's a situation again that can be rolled over over a number of years.
Yevgenia Albats:
Yeah, it's like a lottery.
Sergei Guriev:
Even then I would say, I would say it's not like it would collapse like Soviet Union has collapsed. It's a market economy. Russia will be poorer. If Russia just stops exporting oil at all, it will still be a functioning economy. It's just much poorer. Maybe 30% poorer. Oil accounts for 20 or 30% of Russian GDP depending on the oil price and the year. And so maybe a lot of people will take to the street not accepting their incomes going down by 20%. But it's not like a shortage of cigarettes or food that we would observe in Soviet economy. Which Soviet economy was not a market economy.
Yevgenia Albats:
Thank you. Questions? Yes, please.
Audience Member:
In the last 40 years, the Soviet Russian economy have died twice because of lower oil prices, first in the 80s then in the 90s. We sort of have the playbook already. We talked about cash flow for autocrats. Why aren't we going down the route of a massive supply oil and gas where we turn loose the frackers, the Aussies, the Norwegians, any western exporter and get oil prices and gas prices down to the $40-50 range. If the break even for him is $40 or 50, how long would it take? It just seems like it's a much easier way to do this. Sanctions haven't worked for two and a half years, and I don't think there's any historical example of a large or medium country where sanctions have actually worked. So curious about your thoughts about supply side.
Oleg Itskhoki:
There is a lot to say here. I have a strong opinion on statements like whether sanctions work or not. Sanctions, it's not like, we use this words with Elina Ribakova. They're not like a magic wand or a silver bullet. They cannot solve all your problems. They're there to work on the margin and withdraw a portion of revenues, right? So instead of making $300 billion a year from export revenues, you're making $250, and that exactly has the marginal effect, right? And then you can talk about much more directed sanctions towards particular goods. If it's semiconductors or something else. You can talk about secondary sanctions through the financial system. It's a topic of a Brookings paper that I'm actually, my co-author will present on Friday. But I don't think we can classify as if sanctions either work or not. It's a much more continuous variable.
And you have, you need to have the right expectations of what sanctions can do. The second, the first thing that you said, I fully agree that there needs to be a national policy with respect, US national policy with respect to like what should be happening in the oil market. I think it's a missed opportunity to leave this market to be decentralized, to let the US oil producers to be responders, to be second movers in the game where the first mover is OPEC. Us can have a coordinated policy in the oil market and be a first mover and let OPEC be the responder. So why US is not changing that equilibrium is not fully clear in my head. Like one of the answers that I get when I ask that question, well, it goes into conflict with the green transition, and green transition has been more important at the high oil prices than really managing that market. So that's one possible answer.
Craig is much bigger expert than I am on this, but this is exactly what happened in LNG. So US used its dominant position in the LNG market, cranked up exports, replaced Russia in Europe in supplying gas. And that was part of, I guess, national policy in the LNG market. It didn't happen in the oil market, and to me it's a big missed opportunity. But I suspect I just don't know the full picture of the situation in the oil market.
Yevgenia Albats:
Sergei, do you have to add? Okay, yes, please.
Natasha Yefimova-Trilling:
Thank you so much. May I just add a question? I'm gonna take advantage of my position on the microphone. I wanted to ask whether in the recent criminal cases against Russian defense ministry officials, senior level officials, was there any economic rationale having to do with this current war time economy? Or was it really just a sort of political struggle of proverbial bulldogs under the rug?
Oleg Itskhoki:
I don't know much about that. So Sergei, if you?
Sergei Guriev:
Yeah, so I think Putin suspects that the Ministry of Defense is not very transparent and honest and wanted to replace those people with people he trusts better. There are some literally relatives of Putin who there is his nephew, niece, right? Or daughter of the cousin who's now Deputy Minister. But it's also a political issue as you rightly said, Putin needs to make sure that there are no popular people with a lot of resources around him. And so he always needs to reshuffle, rotate people. So the economic rationale is indeed to increase impact of those scarce dollars that Putin has. So Putin understands he doesn't have unlimited resources, and he wants to use them more effectively. And he thinks that if he replaces corrupt officials with less corrupt officials that would work better. So this is the hypothesis, but also another hypothesis is that he wants to make sure that there is no challenge from within, from people with a lot of money and guns.
Yevgenia Albats:
And also, you know, generals have became so important during the war and many of them did feel that they were very important. So it was essential for Putin to put them down and basically to tell them, you know. Stalin did the same, you know, it was done since decades 1821 when you know, each and every, you know, autocrat in Russia always went against militaries, so to not to allow any resistance. And Stalin was afraid of that. And Putin is afraid of his generals. Sergei and Oleg, there are plenty of conspiracy theories that are floating around as of why West is so slow in response to this war. Why, you know, time and again, Zelensky, who is now in the United States has to come and beg for weapons. There were expectations.
I remember in May, 2022, I even in a bet with somebody that, you know, F-16 were coming to Ukraine. They yet to come. There are problems with Patriots. There are problems with attack guns. You know, there are all these, you know, these red lines. We're not going to allow you that, that, anyway. And so there are plenty of conspiracy theories why it's happening. One is that the West in fact didn't want to induce Russia collapse, fearing chaos in a nuclear strong country. Otherwise, you know, the west would have banned Russian oil. What is your take on this and also what steps should or can the west undertake right now to at least slow this war, at least, you know, somehow to constrain Putin in his desire to destroy Ukraine?
Oleg Itskhoki:
I'll say a couple of things. So I don't really believe that the West said a lot of calculations about the collapse in Russia. I think the collapse doesn't look imminent to be too worried about it. What's certainly true, there is a range of studies that you can say. What's certainly true, West did want Russian oil on the market or the Western politicians. So that's definitely true. They wanted those 5 million barrels a day in the world market. It doesn't matter whether Europe buys them or India buys them or China buys 'em, they have to be on the market not to have oil prices going up.
And I will remind you that at the time in the US, when I lived in California at the time, the gas prices were $8 for a gallon. And that was kind of like viewed as the major national consideration in the US to keep gas prices lower and not let the oil prices go above $120 to the barrel, the price at the time. That was definitely a consideration. So then you can say, well there is a range of interpretation of why west is so slow with the policies towards helping Ukraine. At the one end, it just bureaucratic inefficiencies, right? And if you remember the vote in Congress, how many months it took, did it take six months to vote for the aid? It looks like political economy frictions all over the place, right? Is that this is the political equilibrium we live in. So that's one interpretation. At the other end of the spectrum is a very cynical interpretation, but maybe what's happening now in Ukraine is consistent with the American priorities for the foreign policy.
Yes, there is a danger from the war escalating beyond Ukraine, but is it really not in the US interest to see what's happening right there? And this is a very cynical interpretation. So the truth is somewhere in between those two, but it's not deemed as a urgent problem, right? Unlike, for example, even if you compare it to the war in the Middle East, which is viewed as a much more urgent problem to solve. Ukraine is not viewed as the problem at the same scale of magnitude. And that's why there are all these roadblocks that we're seeing. So if there was urgency to it, like we see in the matters related to China, the bureaucracy would've worked much more efficiently. But clearly there is no urgency assigned to this problem.
Yevgenia Albats:
Sergei, do you have anything to add?
Sergei Guriev
Yeah, I would confirm what Oleg has said on the oil sanctions. In Europe, they wanted to have a smooth transition. And when we talked to, for example, German policy makers, they said, we know we need to get rid of dependency on Russian energy, and it will take us some time. And indeed they got rid of Russian oil, gas and coal within a year. So by the end of 2022, Germany stopped importing Russian hydrocarbons at all. But it took a year, and Putin got a lot of money during this year. Americans as Oleg has rightly said wanted to keep Russian oil in the market, and that's why they created this oil price cap policy, which is a very normative policy if you think about this. It's never done before, never been done before. It's very hard to administer. Americans invested a lot of effort to convince everybody that they are serious about this. Very high ranking officials traveled around the world talking to western and non-Western partners. And so it took a lot of time and effort. And so eventually it happened, but again, a year was lost.
So one thing I would say, you asked what needs to be done? Well, on the conspiracy theories. I don't believe in conspiracy theories, but I think that Americans were afraid of red lines. They didn't want to have a nuclear war with Russia. And then they were testing progressively, okay, if we do this, well, it looks like there is no nuclear war this week, so let's give more weapons. Okay, again, no nuclear war this month, so let's do another, let's make another step and so on. So I think, I think, I think this is an unprecedented situation. Americans are effectively supporting a party in a war with the nuclear power, with the nuclear weapons, which can fully destroy Europe and US altogether. And so they don't know how to behave.
What needs to be done? I think oil sanctions need to be tightened. Tanker fleets should be sanctioned, eliminated from operations. Secondary sanctions should be used to go after non-Western intermediaries as well as western intermediaries that help with in circumventing sanctions. And so much more work should be done about this. And I hope, I hope it will be done. And of course, as I said, Ukraine should get more weapons because if Ukraine gets more weapons, it makes the war even costlier for Putin and saves Ukrainian lives.
Natasha Yefimova-Trilling:
Do we have time for one more question?
Yevgenia Albats:
Yes, what?
Ivan Ogansev:
And I come from Russia. I'm 40 years old, and I study here.
Yevgenia Albats:
I'm sorry, what's your name?
Ivan Ogansev:
Ivan, Ivan.
Yevgenia Albats:
And your last name?
Ivan Ogansev:
Ogansev.
Yevgenia Albats:
Okay.
Ivan Ogansev:
And for people of my generation Sergei Guriev is an authority on economics, but he is also a moral authority. And I would like to address this question to, I'm sorry, Oleg, not yet, but I'm sure you'll be there too. So my question is, how, would you mind assessing the role of people in Central Bank, in ministry of finance of Russia in their moral responsibility in this war? Because we're talking about that with America having its share, but a lot of people would say, you know, those people bear direct responsibility, but some, Nabiullina, as far as I remember, you know, would say that, you know, she's preventing a major shock and buffering common merchants. And I think she does. And I think, and my parents still live in Russia, and they benefit in a sense from the shock not happening. So I don't think there's a easy answer to this question, but I would like to hear your opinion. Thank you.
Sergei Guriev:
Thank you, Ivan. I think Oleg and I have discussed this many times and basically policy makers, economic policy makers around Putin save resources and create resources that Putin can spend on the war. Whenever you have savings, whenever you have additional economic resources. Putin doesn't invest in universities, right? He doesn't build roads in Russia. He doesn't build hospitals. He spends on the war because he needs money to recruit soldiers. So in that sense, indeed this is the same team, right? On the other hand, I'm not a moral philosopher, and I do know that I shouldn't judge other people. So it's not my job to advise other people what they should do, especially given that their situation's very different. I am not in their shoes. I made my choices long time ago, and I don't know what they feel. I talk to them sometimes, and sometimes they disagree with me strongly, but it's not my job to judge them. I'm not sure what would have happened to me if I were in those shoes. But I'm not in their shoes, and some of that is an implication of choices I've made in the past.
Oleg Itskhoki:
I have to add to this. I think the calculation is just very different, right? I mean, every day it's probably more than 500 Russians die in this war, right? And a continuation of this war, each next day, right? Like, I mean, we as economists, we typically use some welfare criterion for a country, right? And how do you put on the same scale the minimal economic benefits that the current central bank policies provide to like a bunch of people versus the tens of thousands of people that are dead in that war. And so clearly what the central bank is doing is supporting the war where 500 plus people die a day. I'm not sure how else one can evaluate that. So in that sense, I think once it became clear that it's a real hot war, that argument just stops being a valid argument, right? So I think, you know, every day that the Central Bank allows this war to continue, they, let alone of, let alone all the destruction that happens in Ukraine, right? But imagine that central banker only had the welfare of Russians somehow in their mind, putting zero weight on everybody else in the world, already, that clearly suggests that, you know, they're creating a, you know, in my mind of a theoretical economist a minus infinite utility, right? So I think the answer is quite clear here.
Yevgenia Albats:
So in a way, they are war criminals. Elvira Nabiullina, Siluanov, you know, all these people in the economic, they are.
Oleg Itskhoki:
Well, criminal is a legal category. We're talking about something else. We're talking about like, are they doing their job well? And in our mind, what is doing a job well for an economist is something about social welfare. And social welfare should put value on people who die in the war every day. And that's arguably a minus infinity part of that welfare. And then, you know, the answer is very clear then.
Yevgenia Albats:
Thank you.
Sergei Guriev:
I strongly agree with Oleg, and we talked about the long-term perspectives of this war, right, long-term perspectives of Russian economy, long-term implications of this war. So what the Central Bank and Ministry of Finance are doing now, prolonging this war, has major negative implications for long-term development of Russian economy. In that sense, you cannot say that they're doing their job very well.
Yevgenia Albats:
Thank you. I think, you know, we, our time, you know, is out. And thank you very much for all of you, you know, for coming, for asking your questions. Next event, we're going to assess the real Russian military might. We're going to talk Dmitry Gorenburg. He's a senior expert with CNA, naval office think tank. And Alexander Golts, one of the best Russian military expert who will try to figure out what kind of military might Putin which really have, how much weapons he really have, what his ability to get the weapons that were produced by the Soviet Union back, you know, in all the way since 1948 and et cetera. So that, it'll be on October the eighth. I'll see you all of you with . And also, you know, we'll put this, or in a couple of days we'll put this on download on the YouTube channel with Stephen Kotkin there is already more than 50,000 people watched this YouTube production. I also translated his talk into Russian, as I will, I'm going to do with this talk, with this session and did a Russian subs, and put it on my YouTube channel on The New Times YouTube channel, and New Times also just today we published the Russian translation of Stephen Kotkin's presentation so that Russian public will also be exposed to this discussion and will take part in this discussion as well. Once again, thank you so much.