Oligarchs, maybe. Average Russians, definitely. Putin himself, not at all.
- By Daniel AltmanDaniel Altman is senior editor, economics at Foreign Policy and an adjunct professor at New York University's Stern School of Business. Follow him on Twitter: @altmandaniel.
Once upon a time, the world’s great monarchs would invade neighboring countries for reasons of honor, family, religion, or madness. Sometimes they also fought for money, but often they faced up to the costs of conflict only after the fact. Today, Vladimir Putin’s territorial ambitions are starting to hurt the Russian economy — but does anyone really care?
It depends who "anyone" is. Russia was not in great shape before Putin snaffled Crimea earlier this year, but things have only gotten worse since then. According to a report published last month by the International Monetary Fund (IMF), Russia will see almost zero growth in GDP this year, "with considerable downside risks." And the top IMF official in Moscow said the country was already in recession.
With slackening growth, rising uncertainty, and sanctions on some financial institutions, billions of dollars have been leaking out of the Russian economy. The usual effects of this kind of capital flight are an increase in interest rates, a depreciation of the local currency, and a drop in the stock market. And indeed, Russian bond yields have spiked; the ruble has recouped less than half of its 10 percent depreciation since protests began in Ukraine in November; and the MICEX index has only recently begun to recover from losses that reached 17 percent in March.
For the average Russian, none of this is good news. Falling exchange rates take a long time to translate into higher export volumes, but the tightening of credit markets will be felt right away by anyone looking for a loan. Less economic growth will mean fewer jobs and stingier raises, yet inflation shows no sign of abating. Prices have jumped by more than 7 percent in the past 12 months, well above the central bank’s target for this year of 5 percent.
This isn’t great news for many of Russia’s oligarchs, either. The ones closest to Putin have managed to maintain their holdings in the country’s industrial giants, particularly in oil and gas. Higher interest rates will likely make their companies less profitable, and lower stock prices may put a dent in their wallets. For instance, Gennady Timchenko, a close associate of Putin who owns 23.5 percent of the natural gas giant Novatek, may have lost about 1.3 billion rubles ($37 million at current exchange rates) on that investment alone since November. Moreover, he and several other oligarchs already have to contend with personally targeted sanctions imposed by the European Union and the United States.
It’s not as though rich Russians are the only ones suffering, either. In 2012, foreign investors had almost $200 billion worth of Russian securities in their portfolios. The IMF’s experts believe that as much as half that amount may be sold before the Ukraine crisis is over; much of the rest will surely lose value as part of the broader decline in the prices of Russian assets.
And yet there are a few people for whom Russia’s current economic situation is just peachy. If you happen to be a wealthy Russian whose riches are stored away in accounts abroad, or at least invested in foreign securities, then things could not be better. The lower ruble means that your wealth is worth more in terms of local currency; you can live like a king or queen on your foreign dividends and interest payments. As the Russian stock market falls, you can snap up valuable assets for a snip. Even higher interest rates aren’t a problem, since you’re probably the one doing the lending.
Who might fall into this fortunate last category? Well, direct ownership of important companies is a no-no for Russia’s top politicians, but hush-hush offshore investments may be a yes-yes, according to various news reports. Even if Putin doesn’t have a boatload of overseas riches, he has a great deal of job security and the lavish lifestyle that goes with it. For him at least, the crisis he helped to create may have little tangible cost.
This may be why Western officials have said that the sanctions against Russia are intended to prick Putin indirectly. But short of a coup or a popular revolution, it’s hard to see what would cause Putin to react. As I’ve written here before, his goal appears to be the restoration of a greater Russia, with all the territory and power that implies. The destruction of wealth among some rich investors, both inside and outside Russia, is unlikely to be a major obstacle to his ambition.