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Russia’s economy will not collapse in a year or two, Ukrainian top strategist says

Andriy Klymenko
Andriy Klymenko. Credit: Foreign Ministry of Ukraine.
Russia’s economy will not collapse in a year or two, Ukrainian top strategist says
There are no signs of the disintegration of Russia or the collapse of its economy in the coming years. Time is working for Putin. That is why the Russian leader will do his best to prolong the war in Ukraine, the head of the Ukrainian monitoring group at the Institute for Black Sea Strategic Studies, editor-in-chief of BlackSeaNews.net, Andriy Klymenko said. In his interview with the Ukrainian newspaper Fakty, Klymenko shared his thoughts regarding the current state of the Russian economy, the future of the Russo-Ukrainian war, and the post-war order.

Andriy Klymenko is the author of several development strategies for Crimea. For many years he worked as an independent private consultant on the issues related to the Russian economy and the situation in the Black Sea, including that in Crimea. Since 2017, Klymenko has been working as the head of the monitoring group of the Institute for Black Sea Strategic Studies, focusing on the situation in Crimea, militarization and security risks in the Black Sea region, freedom of navigation, and international sanctions against Russia.

Fakty: Let us talk about the situation in Russia. It is good that the local public all over Russia is already starting to ask questions like “Why do we need this war?” but it is useless to expect any Russian protests. What may happen there, in your opinion?

Andriy Klymenko: There may be a “black swan,” an unpredictable event after which something will change. Or maybe not. Much depends on the rigidity of the internal terrorist regime in Russia. So far, they are going full steam ahead to 1937 [times of mass repression in the Soviet Union during the rule of Joseph Stalin]. Russian authorities are stepping up repression against anyone who can think. The story of the liquidation of Memorial [an international human rights organization founded in Russia during the fall of the Soviet Union to study and examine the human rights violations and other crimes committed under Joseph Stalin’s reign] is illustrative: searches, interrogations, and criminal cases.

Of course, the repressive regime will intensify. Russia is now run by professional intelligence and counterintelligence officers. Putin is 70 years old. He studied at the Krasnoznamennyi Institute of the KGB (now the Academy of Foreign Intelligence). Back in the 1970s, Soviet intelligence and special operations activities around the world were at their peak. He was taught by the coryphaei of Soviet intelligence, such as the legendary Kim Philby, Conon Molody, and others.

All of his peers who are running Russia with him are also from the Soviet intelligence of that time. Why is this important? Where economists and geopoliticians think in terms of strategies, these people think in terms of special operations. This is a professional deformation. That is, if a country does not behave the way they want, it means that its policy should be changed not through diplomacy, economics, and so on but through special operations. This is what they are used to.

As for the internal situation, they have not been taught anything other than to maintain stability through information operations and repressive means. In other words, they can only use the experience and knowledge they gained in those intelligence schools. They do not have anything else. Therefore, their behavior in this sense can be predicted.

There is no opposition in Russia at all. Everyone is either in prison or has left the country and is now trying to do something abroad.

The propaganda brainwashes the population in Russia. How many years has Putin’s militarist propaganda in Russia lasted? A quarter of a century, for sure. While the whole world was saying, “Never again,” Russians said, “We can do it again.” That is, this propaganda has created a corresponding effect on the bulk of the population in Russia.

As for an average person, I have a feeling that they have the same attitude towards the government as football fans. Whatever the situation on the pitch, Russians say, “This is our team, and we are rooting for it.” I recently saw a study (I think it is close to reality) that the primary mood is as follows: “Maybe we should not have started this war. But since we started it, we must win because Russia cannot lose.”

The next important topic is the collapse of Russia. Many experts predict that it will disintegrate. I think this our wishful thinking that has little to do with reality. I do not see any signals of disintegration coming yet.

Fakty: How about national republics inside Russia, such as Chechnya, Bashkortostan, or Tatarstan? Will they strive to be independent states?

Andriy Klymenko: I do not think so. The republics on the banks of the Volga River have no access to the Russian borders with other countries. They are inside Russia, surrounded by other Russian regions. In addition, the elites there have been purged, and everyone who said anything about independence has lived in exile abroad for a long time. Of course, there may be some outbursts in the North Caucasus, but this does not fundamentally solve anything economically or territorially. These people will support their dictator.

Now let me say something important. Let us imagine that, as a result of the talented and heroic actions of the Ukrainian military, Ukraine regained its territories in the 1991 borders. That is, we will have more than two thousand kilometers of border with Russia. Along these two thousand kilometers, Russians will shoot at us from their territory with whatever weaponry they have at that time as they are now shooting at Chernihiv and Sumy oblasts.

Therefore, at a distance of, say, one hundred kilometers from the borders, no serious systemic business will develop on the territory of Ukraine, and no investments will be made in restoring or creating something new. What investments can be made if there is a risk of shelling from Russian multiple rocket launchers?

In my opinion, we need to discuss this situation now. We must think about what might happen after the liberation of the entire territory of Ukraine. We must take measures to prevent such a situation.

Fakty: What is the state of Russia’s economy today? Some experts say that the sanctions are super-effective, while others say that there is a large margin of financial strength, so their economy will withstand many more blows.

Andriy Klymenko: There has been no economic disaster in Russia so far. We hear some experts say that Russia will run out of money. Well, maybe it will run out of money someday. But it will not happen today or tomorrow.

The point is all economists (Russian emigrants, Ukrainians, and foreign experts) have admitted that their forecasts that Russia’s GDP would collapse by up to 30% in the first year after the beginning of the full-scale invasion were wrong.

There is a decline of eight percent of GDP due to sanctions. But there is also a plus of up to five percent, caused by the fact that the Russian Federation started pumping money into arms production. When they switched their defense plants to three shifts, money appeared there. This compensated for the GDP losses from the sanctions. And unemployment in Russia is the lowest in recent years, as Russian authorities say. And this can be true because many people joined the armed forces, and a considerable number found work at these defense plants, most of which were previously impoverished.

Sanctions impair Russia’s ability to manufacture high-tech weapons – British intel

And one more thing. Ukrainian and Western economists are used to the idea that the economy operates in a market environment governed by market laws. But in Russia, the economy has remained criminal. All the criminals of the 1990s went into politics. And the main thing is that they use the same methods and schemes.

Look, the whole world applauds when Russian Finance Minister Siluanov and the head of Russia’s Central Bank Nabiullina say: “Oh, we have a budget deficit. And this is bad.”

I am sure that Putin is laughing when he reads that the world is rejoicing at such assessments by Russian heads of financial institutions. Because Russia has closed almost all economic statistics, one will not find any figures for the last year today except for those fed to us by Siluanov and Nabiullina. So now the question really arises (we discussed this a few days ago with scholars from Germany and the Netherlands who are finance experts): how can we get an accurate picture of the Russian economy in this case? Perhaps we need to look for some other methods than the ones we are used to.

Back in the day, you went to the central bank’s website, looked at the inflation chart, exports and imports, and everything was clear. Now Russia has separated itself from the civilized financial market. Today, its financial system is no longer wholly integrated into the global one.

In this regard, I recall how the Soviet Union regularly published data on the ruble-dollar exchange rate. For years it was 68-69 Soviet kopecks for an American dollar. Back then, the whole world laughed at this. Because when you are not on the stock exchange, financial and commodity exchanges, such an exchange rate is sheer propaganda and nothing else.

That is why there is still no information about the actual state of the Russian economy. I am sure that the Americans, the British, and economists in the European Union are working hard to get a clearer picture.

Russia started to trade in Chinese yuan or Indian rupees. It is no coincidence that I said that Russia is run by special services people. For example, you sold oil to China (sales volumes are growing significantly, by the way) and received yuan as payment. Why would you want to have yuan or Indian rupees in Russia in the first place? But the special services have always set up a bunch of companies abroad that retained significant portions of such revenues. This money could be used to buy weapons, some industrial products, plus leave something “for their loved ones.”

Many economists feel that something like a parallel budget has appeared in Russia. It could be the savings of oil companies or some shadow funds abroad. That is, there is a hypothesis that a significant portion of Russian money remains in foreign companies associated with Russia. Even the discounts at which their oil is now sold are much lower, and the delta remains in foreign accounts and is used in the way Russia needs. This is also a huge problem. Therefore, there are great doubts about our hopes that Russia will experience a financial catastrophe in the next year or two.

Fakty: Will Gazprom [a Russian state-owned natural gas company] collapse after many countries refuse to buy Russian gas?

Andriy Klymenko: Gazprom has almost lost the European market, which was its primary market. But 70% of the gas it produces is used not for export but in Russia itself. That is, they will develop domestic demand. Yes, Gazprom has problems, but these problems are not catastrophic.

By the way, Russia received only 20-22% of its revenues from gas exports and 70% from oil and oil products sales. Therefore, oil is more critical.

Windfall tax on oil and gas industry: a perfect way to fund Ukraine’s reconstruction

And finally, when you are isolated from the civilized world, the national currency exchange rate does not depend on fluctuations in global markets, and you have a budget deficit, you can launch the emission of money. Russia will print rubles or bonds without any problems.

Fakty: Many foreign companies have left the Russian market. Is there a shortage of goods there? It is predicted that the most essential things will soon disappear from store shelves. There have even been rumors that Russian oligarchs are buying two identical cars to use one of them for spare parts.

Andriy Klymenko: Let us put it this way. The Chinese car industry is now entering the Russian market. Russians will drive Chinese cars, and that is it. There will be no local production. Western plants have left, and China is taking their place.

Russia will not receive chips, microprocessors, and other technological equipment from European countries and the United States. That is why Russia will have counterparts from China, Malaysia, Indonesia, and India. Of course, such counterparts will not be of the same quality, and the weapons will not be as accurate. But there will still be something, even if it is worse in quality and more expensive. And this applies to everything.

G-7 nations consider outright ban on exports to Russia, Bloomberg says

To solve this enormous problem, we need to develop the global sanctions policy further and find new adequate methods of analyzing the actual state of the Russian economy.

We do not see a catastrophic shortage now. It is just that goods are being replaced. In addition, there are what Russians call parallel imports, which is actually smuggling. Russians will develop it.

Russia is a large country. It has more than four thousand kilometers of border with China and almost three and a half thousand kilometers with Mongolia. Of course, they will use this border to circumvent sanctions.

The civilized world has already begun to study these loopholes and try to block them. Americans and Europeans have taken measures against Türkiye and Kazakhstan. And this process will continue. There is a big game going on, where some are looking for new schemes to circumvent the sanctions, and those who imposed the sanctions are using new means to prevent this. This is actually an economic war.

British company supplied $1.2 billion in electronics to Russia despite sanctions – FT

In addition, Russia can create favorable situations in world markets regarding its exports. Last year, especially in the first half, they earned incredible amounts of money from gas and oil exports when prices were high. There are estimates that $600 billion of their reserves were blocked, and they earned an additional $300 billion. That is, they compensated for half of the blocked amounts.

All experts agree that Russia, unfortunately, has a substantial currency cushion that will allow them to hold on for quite some time. What can be done now? During the existence of the Soviet Union, the United States and two dozen other countries had a program called CoCom, which prohibited the export of any technology to the USSR and Warsaw Pact countries that could theoretically be used for military purposes. Perhaps something like this should be done now. I think that the Ukrainian leadership understands everything perfectly well.

Fakty: Are you sure about that?

Andriy Klymenko: Absolutely. And this is already good. On 23 March 2023, the President of Ukraine participated online in a meeting of the European Council, the highest body of the European Union. In an address entitled “If Europe hesitates, evil can prepare for years of war,” he named five key reasons why the war can last longer, and peace can move further away. That is, if the civilized world does not speed up the process of providing Ukraine with assistance, the war may last for years. The central thesis is that time is an utterly important factor.

Fakty: Time is now working for Putin.

Andriy Klymenko: This is true. All the actions of Russia are now aimed at prolonging the war. That is, they need any truce, any negotiations to gain time. Because it takes time to ramp up production in the defense industry. Training new hundreds of thousands of mobilized soldiers is a long process that takes many months.

The Kremlin realizes it must turn the war into a long one. Russia simply has more people physically, more tanks (although they are inferior in terms of parameters), and other weapons. Kremlin believes that the West will not be able to withstand years of support for Ukraine so that Russia will achieve its goals. And this is the leading risk for us. If we are reasonable people, we cannot hope that our territories’ liberation will happen this year. We have to consider other options: what if it does not happen? What if it does happen, but they do not stop shelling Ukraine along the entire Russo-Ukrainian border and maybe even from Belarus?

The model of the functioning of the Ukrainian state under such conditions must be developed. Of course, everyone understands that if there were no unprecedented support from the United States and the European Union with military equipment, money, etc., Ukraine would have run out of resources in several months, and we would have been engaged in guerrilla warfare on our territory now. Therefore, acting fast is of fundamental importance today.

By the way, I was delighted when, just in recent months, respected Western analysts and even several leaders of the European Union began to say something more than “We will support Ukraine until victory.” They also stressed the fact that the way to victory could be long. The election processes in the United States, countries of the European Union and NATO must be taken into account too.

Therefore, we must do everything possible to ensure that our victory on the battlefield is swift.

Fakty: What will we discuss in a year: the restoration of Ukraine or the war?

Andriy Klymenko: Of course, I would like to talk to you in a situation where the Ukrainian Armed Forces will reach the borders of 1991. But I still think that we will talk about at least a partial restoration of Ukraine. For example, it is good news that on the western bank of the Dnipro River [Ukraine is split into two parts by the Dnipro River], closer to the western border, the industry is developing, including our own defense industry (perhaps jointly with our allies), which produces military equipment, etc.

I worked as an investment consultant for many years. So far, I do not see any substantial investment programs to restore the eastern bank of Ukraine. So, most likely, it will be the defense and restoration of what is essential for the more or less normal functioning of Ukrainian regions.

It is just that in any investment project, starting even with a small amount of five to ten million dollars, and even more so when it comes to hundreds of millions or billions of dollars, the investor who will invest money has a business plan with a mandatory huge section on risk assessment. Systemic Western investors have robust structures that deal with risks. This is always one of the priorities.

For example, suppose we will build a plant here. And a Russian missile will hit it. That is why it is unlikely that anything will be built on the territory that is located at least one hundred kilometers from the border with Russia.

It is clear that the West will be involved in the restoration of Ukraine. Therefore, we need to remove these risks. Thus, we must understand what the Russians will use against us and where such weaponry is produced. These factories (there are hundreds of them) should be subject to sanctions. The financial and technological flows of these plants must be blocked. This is an important and challenging job. We have to do it. We have no other way out.

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