By Jim Geraghty
Friday, March 11,
2022
In February 1918, the Communist revolutionaries who had taken over Russia announced that they no longer recognized the debts owed by the previous government under the czar. The new Soviet government declared that it had a clean slate, and anyone who was owed money by the previous Russian government was out of luck.
The Russian government owed about $4.4 million at the time, which is about $97 million today.
Simultaneously, the new Soviet government “decided to confiscate all the assets of foreign capitalists in Russia and restore them to the national estate.” The new Soviet Union knew that this would outrage foreign powers, but did it anyway, voluntarily cutting itself off from the world. The economic consequences — exacerbated by famine, disease, and the continuing strife of regime change — were off the charts:
Our study shows that until the year of the 1917, Revolution Russia’s economy was declining, but by no more than any other continental power. While wartime economic trends shed some light on the causes of the Russian Revolution, they certainly do not support an economically deterministic story; if anything, our account leaves more room for political agency than previous studies.
In the two years following the Revolution, there was an economic catastrophe. By 1919, average incomes in Soviet Russia had fallen to less than 600 international dollars at 1990 prices. Less than half that of 1913, this level is experienced today only in the very poorest countries of the world and had not been seen in Eastern Europe since the 17th century (Maddison 2001). Worse was to come. After a run of disastrous harvests, famine conditions began to appear in the summer of 1920 (in some regions perhaps as early as 1919). In Petrograd in the spring of 1919, an average worker’s daily intake was below 1,600 calories, about half the level before the war. Spreading hunger coincided with a wave of deaths from typhus, typhoid, dysentery and cholera. In 1921, the grain harvest collapsed further, particularly in the southern and eastern grain-farming regions. More than five million people may have died prematurely at this time from hunger and disease.
When a government declares that it will confiscate the assets of foreign companies and foreign investors and that it won’t pay its debts, severe and lasting economic calamity follows.
This may seem like long-forgotten history, but it is particularly relevant now that Putin has announced Russia will confiscate the assets of foreign companies and foreign investors and strongly hinted that it won’t pay its debts.
Yesterday, Putin revealed how he wants to respond to the challenges of foreign companies’ shutting down their operations in Russia:
With regard to those who are going to close their production, we need to act resolutely and in no case allow any damage for local suppliers, Russian suppliers of components. It is necessary then to introduce external management as the prime minister suggested, and then turn over these enterprises to those who want to work. We have enough legal, market tools.
Russian prime minister Mikhail Mishustin proposed that:
If foreign owners close the company unreasonably, then in such cases the government proposes to introduce external administration. Depending on the decision of the owner, it will determine the future fate of the enterprise. The key task will be to preserve . . . the activities of organizations and jobs.
“Introduce external management” means “introduce Russian management.” Those McDonalds restaurants, Starbucks cafés, and Adidas stores that are closed or closing may soon reopen under new management — although they’re going to be dependent upon Russian or Russian-allied suppliers. (Just how good are the beef, coffee beans, and leather from Belarus?)
Meanwhile, it is extremely likely that in the near future, Russia will either stop paying its foreign debts or attempt to pay them in now-almost-worthless rubles. Russia has “roughly $40 billion in Russian sovereign debt denominated in dollars and euros. Foreign investors hold $28 billion of Russian debt denominated in rubles as well.”
Kristalina Georgieva, the managing director of the International Monetary Fund, said yesterday that a Russian default is no longer “an improbable event.” The World Bank concurs. This coming Wednesday, Russia is supposed to make “a $117 million payment on some of its debts denominated in US dollars.” Russia will qualify for a 30-day grace period, which would make the default official in mid April. (The Belarusian government is also close to default, according to the World Bank.)
Usually, the consequence of a government’s default is that it becomes much more difficult, and much more expensive, for that government to borrow money in the future. But a default may not be as momentous in these circumstances; even if Russia paid off its debts, Western banks and investors would still be extremely wary of loaning money into the blood-soaked hands of the Russian government — even if they themselves didn’t have moral objections, most big financial institutions would recognize the public-relations damage those loans would inflict.
Nonetheless, it will probably be a long, long time before international investors feel safe putting any money in Russia in any form.
The world is cutting off Russia in just about every conceivable form — and on some levels, Putin probably doesn’t mind.
Putin doesn’t want Western journalists in Russia, giving the world the full picture, and contradicting his triumphant narrative. Putin doesn’t want Russians having access to YouTube, TikTok, or other forms of social media that could spread information contrary to his government’s propaganda. Putin doesn’t want his citizens leaving the country on Aeroflot flights.
Putin doesn’t seem like a guy who likes seeing Russians eating an iconic American food such as McDonalds, watching Disney movies, using Apple computers, or driving Jeeps. Each time a Russian citizen purchases and uses a foreign-made product, it is a reminder that even Putin’s fellow Russians recognize that foreign countries can make or do something better than Russians can. Russia’s growing economic ties to the West, steadily increasing since the 1990s, meant a form of dependence upon the West.
(Putin is willing to make exceptions, of course: “It is no secret that the president wears custom-tailored suits. His favorite brand is Kiton and Brioni [here the tastes of presidents and secret agents often coincide]. Such suits are made from start to finish by one tailor, take dozens of hours to complete, and have a starting price tag of €5000,” or $5,400. Kiton and Brioni are Italian brands.)
Eight days ago, Russian finance professor Maxim Mironov, who is based in Spain, warned that the Russian government was severely underestimating the consequences of the Western economic sanctions. Now, Mironov writes in Foreign Policy that the West may inadvertently be doing Putin a favor — effectively turning Russia into a bigger, badder North Korea:
If Western countries continue to tighten the economic screws on the Russian economy as a whole, instead of targeting specific figures in the regime with more tailored sanctions, they will risk turning Russia into something like a larger, more unstable, and more dangerous North Korea. . . .
Russians are not the only ones who are unprepared for what is about to happen. The Western countries that have imposed these sanctions have not fully thought through their likely consequences. Measures that make life miserable for ordinary Russians might have the opposite of their intended effect: they might rally the public behind Putin. Over the last 20 years, the Russian leader has built a powerful propaganda machine — one that has been working overtime since the Ukrainian invasion began. Right now, about half of Russians support the war. (Among them, initially, was my mother-in-law. She has a university degree but believed Putin’s claim that Ukraine and NATO had attacked Russia and that Russia was just defending itself. It took some time for my wife to convince her that Putin had attacked Ukraine and not the other way around.)
Mironov may well be right, but I’m not sure how many Western leaders want to hear that argument when they’re watching Russian forces shell cities and bomb hospitals. Economic sanctions are the biggest and most consequential non-kinetic tool in our arsenal; no one in their right mind wants NATO and Russia getting into a shooting war. (Kevin Williamson observes that because the Russian government says we are acting as a belligerent, we had better be prepared for Russia to treat us as a belligerent.)
The reason people fear Putin has lost his mind is that his stances are so spectacularly absurd; he contends that a Western-leaning European democracy with a Jewish president that presented no threat to Russia needs “denazification” that can only be achieved by sending in roughly 200,000 troops, using thermobaric weapons and cluster bombs, shelling cities, and attacking nuclear-power plants and critical infrastructure. Foreign Minister Sergei Lavrov is sent out to tell the world that, “We didn’t invade Ukraine,” and the Russian argument is that the Ukrainian military forces are shelling their own cities. Within Russia, it is literally illegal to call the invasion of Ukraine a “war” instead of a “special military operation.”
But the imposition of sanctions in response to all of this, Putin insists, is “economic war.” Even in these circumstances, Putin can see himself as the victim.
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