Putin's economy is starting to show cracks, and Russian public opinion could soon follow

  • Oops!
    Something went wrong.
    Please try again later.
  • Oops!
    Something went wrong.
    Please try again later.
A food delivery man wearing a hooded jacket opens the door to leave an exchange office displaying currency rates.
A food delivery man in Moscow leaves an exchange office on Feb. 24 with a screen showing the exchange rates of the U.S. dollar and euro to the Russian ruble. (Alexander Zemlianichenko Jr./AP)

WASHINGTON — On more than 30 occasions, the U.S. government has imposed sanctions on Russia in response to its invasion of Ukraine. The sanctions have targeted oligarchs and banks, the sale of Russian resources, the flow of capital. They have also included corporate flight and travel bans, all actions meant to choke off the Russian economy and make the Kremlin reconsider its aggression.

President Vladimir Putin of Russia has called sanctions a form of economic warfare. Even as the Russian economy grows more isolated, the Kremlin believes it can outlast the West, which is not used to the kind of privation — inflation, shortages — that has been routine in both recent and distant Russian history.

So far, that calculation has proved to be sound, and the Russian economy has confounded expectations as Putin’s war enters its fifth month. Russia’s currency, the ruble, is thriving, its valuation rising to a seven-year high earlier this month. Energy exports to China and India are as robust as ever. Abandoned McDonald’s outlets have been turned into near-identical Russian fast food restaurants.

A long line of customers wait outside a Russian version of a former McDonald's outlet.
Customers outside the Russian version of a former McDonald's restaurant in Moscow on June 13, the day after its opening. (Kirill Kudryavtsev/AFP via Getty Images) (AFP via Getty Images)

Yet the apparent signs of economic strength may disguise an increasing — and well-founded — anxiety in Russia about the state of the economy, some experts believe. They say that sanctions are having their intended effect, both in shaping public opinion and in constraining Russian leadership and industry from continuing to operate effectively.

"The [Russian] economy is not yet showing acute signs of crisis," Oleg Itskhoki, an economist at the University of California, Los Angeles, told Yahoo News. “There is no collapse yet. But everyone expects a deterioration."

Russia's recent default on its international debt underscored the argument. The Russian finance minister dismissed this as a “farce,” but Western observers compared the development to the most calamitous moments in post-Soviet economics. Putin himself came to prominence during the tumult of those years. Now the economic chaos is of his own making.

Detractors of the Putin regime, like Alexei Navalny, the imprisoned political dissident, believe it is only a matter of time before the sanctions impoverish and immiserate the Russian populace to a degree that is no longer tenable to the Kremlin.

Confined in a steel cage, Alexei Navalny stares into the camera.
Russian opposition leader Alexei Navalny appears from prison on a video link at a court session in Petushki, Russia, on Jan. 17. (Denis Kaminev/AP) (AP)

“They don't want this war. They need to live better,” Navalny said after an organization he founded, the Anti-Corruption Foundation, released a poll showing that Russians are showing increasing anxiety about the economy, if not yet the outright disaffection that could portend trouble for the Kremlin. “But they are well aware that because of Putin's war, things will only get worse and worse.”

When the United States and Western allies first imposed restrictions on Russian imports, American credit card companies fled, and governments seized the assets, like yachts, of oligarchs favored by Moscow. There were hopes that isolating the Russian economy from the West would rattle the Kremlin badly enough to make it reconsider the war.

“Russia’s Looming Economic Collapse,” read a headline in the Atlantic.

No such collapse has occurred. The Central Bank of Russia raised interest rates to 20% to fend off a bank run (it has since steadily dropped the rate to 9.5%). Meanwhile, Russians no longer able to use their American Express or Visa cards have turned to the domestic payment system Mir.

An image of Vladimir Putin appears on a screen behind the U.S. presidential podium, with a headline on TV reading Escalating Crisis.
President Biden discusses gas prices at the White House on June 22 with a photo of Russian President Vladimir Putin on a screen behind him. (Evan Vucci/AP) (AP)

The Russian economy can survive in large part because it has always been sustained by energy exports. After European nations stopped purchasing Russian energy, China and India made up the difference. Russia continues to earn about $1 billion per day in energy exports; in May, China bought a record $7.47 billion of Russian crude oil.

Robin Brooks, chief economist at the Institute of International Finance, recalls the famous quip of the late Sen. John McCain, R-Ariz., that Russia is a “gas station masquerading as a country,” after it failed to diversify its economy in the last 30 years.

“If you're hoping for a Big Bang moment, that almost by default can't happen in Russia,” Brooks told Yahoo News, noting that its exports are continuing to serve as a lifeline despite increasing Western pressure. “We never went as far as shutting down the gas station, which is what an energy embargo would be."

Two bicycles pass a gas station on a wide and empty boulevard in Moscow.
A gas station selling fuel from the Russian oil producer Gazprom Neft in Moscow on May 11. (Natalia Kolesnokova/AFP via Getty Images) (AFP via Getty Images)

So far, an outright embargo appears to be more than energy-hungry European countries are willing to countenance. So “they kind of waddle along,” Brooks says of Russia, which uses strict currency controls to stabilize the ruble, while searching for new customers in Africa and Asia for its natural resources.

“There are a lot of countries in the world that are still willing to do business with Russia,” says one economist, Christine McDaniel of George Mason University, who has studied the effect of Western sanctions on Russia. “They’re inching towards this new state where their ties to the global economy — particularly to the Western economies — are getting weaker and weaker. But they are not cut off yet.”

Nor was the severing of European ties exactly a surprise to the Kremlin, which has regarded the West with increasing suspicion since the bungled economic privatization schemes of Putin’s predecessor, Boris Yeltsin.

Having been subject to sanctions after invading Ukraine for the first time in 2014, Russia has been preparing for the kind of isolation it has experienced since it launched its second invasion earlier this year. It is doubtful, though, that the Kremlin was prepared for the severity of the new penalties, or the unity of the Western coalition.

As a military band plays in the background, mourners surround blue and yellow Ukrainian flags and large floral bouquets at a cemetery with wooden crosses.
Mourners at the funeral of a Ukrainian serviceman, Ruslan Skalskyi, in Lviv, Ukraine, on June 11. (Yuriy Dyachyshy/AFP via Getty Images) (AFP via Getty Images)

Much attention has been devoted to Russian oil, but the question of whether it can find new buyers, and the choking off of imports into the country, could prove even more consequential, given how badly Russia relies on Western technology both for the war effort and for its domestic production.

“There is no coming back to normal,” says Itskhoki, the UCLA economist, noting that a lack of essential parts is causing chaos in the Russian automotive industry and other sectors that rely on Western imports. Last month, the Russian flagship carrier Aeroflot announced that it would have to use spare parts from older airplanes to make upgrades to its fleet.

Russia’s efforts at “import substitution” — that is, finding new sellers in East Asia and elsewhere — have proceeded only haltingly, according to one think tank, Geopolitical Intelligence Services, recalling the assessment of a Moscow-based financial analysis center: “There has been practically no progress in terms of import substitution in recent years.”

A police vehicle drives by an Aeroflot Airbus A321-211 with the registration VP-BOE, marked: Russian aviation.
An Aeroflot Airbus A321-211 aircraft at Cointrin airport in Geneva on March 9. (Denis Balibouse/Reuters) (REUTERS)

Ordinary Russians are caught in the middle of the economic warfare between the Kremlin and the West. Whether they will continue to support the war in Ukraine as they continue to experience economic hardship has been a matter of great interest in the West.

Polls have shown that Russians generally support the invasion, but dissidents believe such support is overstated. It is difficult to measure public opinion accurately in societies where the fear of retribution forces people to simply say whatever officialdom expects of them.

The Kremlin and state media are fastidious in referring to the invasion of Ukraine as a “special operation,” and Russians who refer to it as a "war" can be prosecuted, subject to the penalty of a 15-year prison term. A poll conducted by Navalny's Anti-Corruption Foundation looked for circumspect ways to discern Russian attitudes, revealing not only tepid support for the invasion but deep reserves of economic unease that are likely to be exacerbated as sanctions persist.

“We all know that opinion polls show that the vast majority of Russians support Putin's aggression against Ukraine,” Navalny wrote on his website. “We believe you can't trust these numbers: People are intimidated, they refuse to talk to sociologists, or they don't tell them the truth,”

Customers enter a recently opened supermarket of the Russian chain Mere, under a sign saying, Low Cost, Every Day.
A recently opened supermarket of the Russian chain Mere in Opwijk, Belgium. (Nicolas Maeterlinck/Belga Mag/AFP via Getty Images) (BELGA MAG/AFP via Getty Images)

Among the questions the poll asked was what the Russian government should do if it were to find extra profits on hand. Of Russians surveyed, only 7% said they supported an increase in military spending, and the vast majority called to increase funds for education (15%), health care (27%) or government pensions (32%).

“Putin's propagandists call what is happening World War III, in which Russia is opposed by the whole world. But are Russians ‘buying’ this rhetoric? Obviously not,” Navalny commented.

Moreover, sanctions appear to be biting: While only 28% said that sanctions had affected them personally in early April, by late May the percentage had risen to 37%.

Other questions revealed that 75% of respondents knew someone who had lost a job in the previous three months and that 49% reported they had no savings whatsoever. Nearly 8 in 10 (78%) said they were not planning any major purchases this year.

"All of this will accelerate massively if there is a price cap or if there's an embargo," says Brooks of the Institute of International Finance. While an embargo would be the more audacious move, putting a ceiling on how much Russia can charge for oil, a move currently being considered by the G7 nations meeting in Germany would probably put significant new constraints on Russia's economy, which has little room for maneuver.

A food delivery courier on a motorcycle rides past a Rosbank branch, carrying the logo of the French bank Société Générale.
A food delivery courier rides past a branch of the Rosbank bank in Moscow on April 11. (Maxim Shemetov/Reuters) (REUTERS)

"By the end of the year, the level of GDP will be 30% below where it was a year ago," Brooks predicts. That would represent an astonishing economic collapse for a nation once considered a superpower.

Then again, even at the height of its geopolitical might, the Soviet Union treated its own citizens with a certain disregard. The Russians defeated Hitler and survived Stalin, and they regard Western griping over prices and shortages with some contempt, in a nation where the weather itself is a persistently malign force and where history runs through endless plains of hardship.

“They have very, very thick skins,” McDaniel of George Mason University says of the Russians. “Talk about resilience. They're almost born to suffer."