The video argues that Russia's war economy is more resilient than many Western analysts believe. It explains that traditional economic analysis often fails to account for the unique characteristics of a war economy. The video highlights how Russia has leveraged underutilized resources, implemented capital controls to prevent economic collapse, and still has significant room to intensify its war-time economic measures compared to historical examples. It suggests that waiting for an internal economic collapse in Russia is an unrealistic strategy and emphasizes the need for increased economic support for Ukraine.
Predictions of Russia's Economic Collapse and Historical Context #
- Repeated Wrong Predictions: Predictions of Russia's economic collapse have consistently been inaccurate.
- New Collapse Narrative: The latest narrative suggests that while the war has stimulated Russia's economy, it's unsustainable due to depleting funds.
- Race for Endurance: The current situation is framed as a race between Ukraine's military endurance and Russia's economic sustenance.
- Economists Still Predicting Collapse: Despite past inaccuracies, many Western economists continue to predict Russia's economic collapse.
- Video's Counter-Argument: The speaker argues that based on historical patterns of economic collapse, Russia's economy shows few signs of imminent failure, and may actually be “just getting started.”
Russia's Outperformance and War Economics 101 #
- Surprising Performance: Russia's economy has outperformed major European economies like the UK and Germany since the war began.
- Misunderstanding War Economies: This misjudgment is attributed to analysts' training in peacetime economics rather than war economics.
- Definition of War Economy: A war economy prioritizes military effort, shifting focus from civilian well-being to war needs.
- Short-term GDP Boost: War economies often experience significant GDP growth in the short to medium term due to rearmament and mobilization. Examples include WWII-era Britain, Nazi Germany, and the US.
- Increased Life Satisfaction: Paradoxically, average life satisfaction in Russia rose after the invasion, despite sanctions and casualties, due to the war's initial economic stimulus.
Mobilizing Local Resources and Monetary Theory #
- Underutilized Resources: Pre-war Russia operated below its potential with unemployed workers and idle factories.
- Activating Unused Resources: The first phase of Russia's war economy involved activating these resources through massive state spending, drawing down wealth, and injecting new money.
- Inflation and Money Supply: New money doesn't always cause inflation if it leads to increased production, as seen in Russia in 2022 (increased spending, reduced unemployment, higher industrial output).
- Historical Parallel: This pattern mirrors major economies preparing for war in the 1930s.
- Peacetime vs. Wartime Activation: The question arises why these resources are only activated during war, leading to a discussion of the monetary trilemma in Russia's pre-war economy.
The Monetary Trilemma and Fortress Russia Strategy #
- Pre-War Goals: In the early 2000s, Russia aimed for a growing capitalist economy with activated resources, foreign investment, and outward investment.
- Monetary Trilemma: The trilemma states that a country can only achieve two of three goals: a stable exchange rate, free capital movement, and an independent monetary policy. Russia's initial goals meant it couldn't have a stable currency.
- Ruble Demand: Ruble demand increases with exports (exporters selling foreign currency for rubles) or foreign investment in Russia. It decreases with imports or Russian investment abroad.
- Elvira Nabiullina's Role: In 2013, as Central Bank Governor, Nabiullina adopted the "Fortress Russia" strategy to stabilize the ruble after the US sanctioned Iran, causing its currency to collapse.
- Intervention and War Chest: Nabiullina aimed for a more stable ruble by having the Bank of Russia buy excess foreign currencies, accumulating a "war chest" to defend the ruble's value against sanctions.
- Cost of Stability: To build the war chest and maintain some exchange rate stability with free-flowing money, Russia had to reduce imports. This was achieved by limiting government spending and keeping interest rates high, making Russians slightly poorer and thus reducing their ability to import.
Failure of Fortress Russia and Capital Controls #
- Fortress Russia's Flaw: The strategy failed because Russia's foreign currency reserves were held in financial assets outside Russia, under Western jurisdiction.
- Frozen Assets: Western countries froze these assets, leading to capital flight and a collapse of the ruble.
- Nabiullina's Pragmatism: In response, Nabiullina introduced capital controls, shifting Russia's position on the monetary trilemma.
- Impact of Capital Controls: Capital controls allowed the Russian government to fully activate the economy without collapsing the ruble, even though Russians had purchasing power, they couldn't freely import.
- Surprise for Analysts: This move surprised many economists who no longer considered capital controls a viable option.
Four Ways Economies Collapse and Russia's Resilience #
- 1. Sudden Capital Flight:
- Causes: Financial bubbles (1997 Asian crisis, 2011 Eurozone crisis), excessive imports (2019 Lebanese crisis, 2022 Sri Lanka), or sanctions (2012 Iran, 2022 ruble collapse).
- Russia's Immunity: Russia essentially "ruled out" this type of collapse by introducing capital controls.
- 2. Squeezed Crucial Imports (Blockade):
- Example: Imperial Germany in 1918 (Allied blockade leading to food shortages and revolt).
- Russia's Immunity: Russia has abundant natural resources, is food self-sufficient, and has reliable trading partners like China and India, making it less vulnerable to import-related collapse.
- 3. Internal Collapse Due to Excessive Debt:
- Examples: Japan 1992 (housing bubble), US 2007 (housing bubble), Soviet Union (government printing money to pay interest groups).
- Russia's Immunity: Russian household and government debt are exceptionally low, despite some signs of a housing bubble and government spending reducing reserves, making such a collapse unlikely in the short term.
- 4. Economic Pain Leading to Public Unrest:
- Examples: Vietnam-era USA (increasing loss of life, inflation turning public opinion), Soviet Union (stagnation, rapid economic collapse partially due to public unhappiness).
- Russia's Vulnerability: Inflation remains high, and economic growth has slowed. This "easy phase one" is over, and Russians will experience more economic pain, potentially turning public opinion against the war.
- Why it's Unlikely to Happen Quickly: The speaker argues this is unlikely to happen quickly because Russia's war economy is "just getting started."
Why Russia's War Economy is Sustainable (for now) #
- 1. Low War Spending Relative to GDP: Russia's war spending, as a percentage of its economy, is lower than the US during Vietnam, the Soviet Union in the 1980s, and Nazi Germany during WWII. This indicates significant room for increased spending.
- 2. Untapped Economic Tools (Phase 2):
- Limited Tools Used So Far: Russia has primarily used capital controls.
- Historical War Economy Tools: Historical war economies (Soviet Union, Nazi Germany) employed more extensive "freedom-reducing" tools like price controls and wage controls to manage inflation amidst increased military spending.
- Sacrifices in Phase 2: Phase two involves sacrificing civilian industries (e.g., movie theaters, coffee shops, vacations) to free up resources for the war effort.
- Russia's Progression: Russia is only beginning this process, with credible reports of considering sweeping price controls for essentials.
- 3. High Public Opinion and Authoritarian Government:
- Authoritarian Resilience: Russia's authoritarian government can withstand a significant decline in public opinion due to its current high approval ratings.
- Slow Decline: The economic pain will be gradual, making a rapid shift in public opinion unlikely.
Conclusion and Call to Action #
- Naive to Wait for Collapse: Waiting for a Russian economic collapse is a "naive fantasy" given its stability across various collapse indicators.
- Sanctions' Impact: Sanctions can still hurt Russia's war effort by limiting essential war imports.
- Current Problems: Russia faces manpower and gas shortages.
- Untapped Potential: Russia has used "few really oppressive war economy tools" and its central banker is flexible.
- Call for Greater Support: The analysis suggests that Western nations need to "seriously ramp up economic support" for Ukraine, rather than simply waiting for Russia's economy to collapse.
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