Russia is militarising its economy

9 July 2022

7:00 PM

9 July 2022

7:00 PM

The ‘special military operation’ in Ukraine isn’t a war – there’s a law and a possible maximum sentence (though no one seems to have faced it yet) of 15 years in prison to stop you claiming it is in Russia. Yet Russia does seem to be inching towards a wartime economy, for all Vladimir Putin’s recent bullishness.

At the recent (if rather sparsely-attended) St Petersburg International Economic Forum, Putin struck a triumphalist note, crowing that ‘the economic blitzkrieg against Russia never had any chances of success,’ and ‘gloomy predictions about the Russian economy’s future didn’t come true.’

That’s both true and not true. There has been no meltdown, not least thanks to eight years of conscious sanctions-proofing in Russia, and down to the financial wizardry of technocrats like Central Bank chair Elvira Nabiullina. Yet economic war, like the mills of God, grinds slowly.

Already, Russia is heading for a year-on-year decline in GDP of up to 15 per cent, and inflation has hit 17 per cent. Although it is easy to be mesmerised by the huge sums of money still heading to Moscow, largely thanks to its exports of oil and gas, the problem is that Russia cannot necessarily buy what it needs, from microchips to spare parts, thanks to sanctions. It is in much the same position as consumers in late Soviet times, with rubles in the pocket but nothing on which to spend them.

Does Putin realise this and is simply putting on a brave face with his breezy claims that ‘like our ancestors, we will solve any problem’? Quite possibly not. Are his economic advisers any more willing and able to tell him hard truths than his foreign policy specialists and generals were, back in February?

After all, facing the facts doesn’t seem to be his strong point. When Nabiullina told him that the war was ‘flushing the economy down the sewer’ during a video conference, he apparently simply ended the call.

In any case, others do seem to be noticing, and this past week, the Russian parliament has rushed through two bills that, in effect, will mean that ‘special military operations’ will, to all intents as purposes, be considered like wars for the same of economic mobilisation.

Admitting that they were driven by the need to support the military in a time of ‘colossal sanctions pressure,’ Deputy Prime Minister Yuri Borisov admitted that it was necessary ‘to temporarily focus our efforts on certain sectors of the economy’ in order ‘to guarantee the supply of weapons and ammunition.’

Behind this bland language are measures which would not only allow the government to open up mobilisation reserves, but also force workers in strategic industries to work overtime and prevent companies from refusing to take on state contracts.

Of course, the laws still have to be signed by Putin, but there is little doubt that the initiative came from the Kremlin in the first place.

On one level, it represents a grudging acknowledgement that while Russia has weathered the first few months of sanctions, things will get tougher. Even close Putin allies such as Sergei Chemezov, CEO of state-owned defence conglomerate Rostec, have begun warning that the Russian economy is going to take a serious hit.

It also represents an ideological victory for the hawks. Right after the invasion, they began talking about the need to militarise the economy, and at first Putin seemed willing to let them have their way.

However, the technocrats, led by Prime Minister Mikhail Mishustin, Nabiullina, and Presidential Administration head Anton Vaino managed to persuade him that this was a mistake and instead he opted to hand them control of the economy.

They have been trying to preserve as much as possible of the old, liberal market economy, but as it becomes more and more clear that this war will drag on for months – and that sanctions may well remain for years – this is looking less viable.

Hawks such as Security Council Secretary Nikolai Patrushev have thus returned to the attack. His vision appears to be akin to that of the Bolsheviks’ ‘war communism’ policy adopted in 1918 amidst civil war. Industries were nationalised, workers brought under military discipline and food rationed. It was brutal, but it worked.

Patrushev and his allies are by no means leftists though; this looks like war communism, but without the communism.

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