Sergei Guriev grew up in the Soviet Union, in which economics was a doctrine rather than an academic discipline. He left school in 1988 and went to the Moscow Institute of Physics and Technology, where he studied mathematics and physics. The following year the Berlin Wall came down. “In my senior years in the university, I saw a great economic transformation,” he remembers, “and that made studying economics much more exciting.” He began to specialise in using mathematics to model economic processes.
By 1992 consumer price inflation in Russia had exceeded 2,500 per cent. “Even well trained, Harvard-educated economists at that point would not easily address the challenges the Russian economy was facing,” he recalls. In the same year the New Economic School opened in Moscow, and began training a new generation of Russian economists. A few years later, after returning to Russia from the US, where he had been conducting postdoctoral research at the Massachusetts Institute of Technology, Guriev became the school’s first tenure-track professor. It was 1998, and economic history was still being made in Russia; that August the central bank defaulted on its debts.
Russia, pressed by sanctions imposed because of its invasion of Ukraine, appears once more to have reached such a significant point. Sunday 26 June marked the end of a 30-day grace period for payment of around $100m in interest on the country’s government bonds, and the payments are nowhere in sight. In April Liz Truss, the British Foreign Secretary, said that Russia was “facing its first external debt default for a century”, partly because the UK, “using all of our economic levers… in a much more assertive way” was “cutting off the funding for Putin’s war effort”.
Guriev says that this time, however, the default is a “non-event”. The problem a default raises for any country is that it weakens its ability to raise money from financial markets, but that wasn’t really happening anyway. “Russia is a toxic partner. Nobody wants to lend to Russia.” Nor does Russia need to borrow: its foreign debt was already low, and its current account surplus is the highest since records began in 1994. In the first quarter of 2022 the EU’s trade deficit to Russia grew to €65bn. In the first seven months of 2022, as imports fell sharply and commodity prices boomed, Russia’s total current account surplus grew to $167bn.
This apparent prosperity relies mostly on a single commodity: oil. A plan to embargo 90 per cent of Russian oil imports to the EU by the end of the year will be significant, Guriev says, but it is still months away and until it is implemented, “it’s actually good for Putin, because an oil embargo in December raises oil prices today”.
This is why a price cap on Russian oil and gas, agreed by G7 leaders on 27 July, is vital: not only because it would reduce the market value of Russian oil before the embargo, but because it would affect how much India and China will pay for Russian energy.
“You can see how a country like India, which is now buying much more Russian oil than before, can say to Putin, ‘Look, we would love to pay you a lot of money. But if we pay you more than the price cap, the US will impose sanctions against us. So, sorry Vladimir, we’ll pay you $50 per barrel.’ And of course within India that will be popular.”
The fiction that Russia’s economy is doing well has become widespread not only in Russia, where it is crucial to maintaining support for Putin, but in the West, where commentators routinely mistake the fact that the rouble is trading at its highest level against the dollar and euro for seven years for a sign of economic vigour.
Guriev says this is actually a consequence of Western sanctions. The reason the rouble’s exchange value is high is that Russian businesses can’t import much – no software, no semiconductors, bearings, jet engines or car parts. Even products that aren’t sanctioned aren’t available, because Western companies don’t want to be seen doing business with a murderous regime.
“If you cannot import anything, that means you don’t need dollars,” Guriev explains. The apparently strong rouble doesn’t mean people around the world are rushing to buy roubles; it just reflects the fact that there is very little demand to swap roubles for dollars in a country in which dollars can’t be spent. “It’s not a sign of a stronger economy. It’s a side effect of something which really hurts Russia.”
Putin is also taking a huge economic risk with his policy of “gas blackmail”. In June and July, Russia sharply reduced the flow of gas through the Nord Stream 1 pipeline to Europe, forcing up energy prices and therefore inflation in the West. Putin’s goal is clear – to bring about recession and political turbulence in the West – but less has been written about the cost. “While in May and June Russia ran a fiscal surplus, in July 2022 it ran a huge fiscal deficit of 0.9 trillion roubles – 8 per cent of GDP,” Guriev points out. “It is a gamble.”
More revealing numbers are also to be found in Russia’s output. “The number of cars produced in May 2022 was 30 times lower than the number of cars produced in May 2021. This is something which you can tell much more than a default. A friend of mine has joked that we are going back to the 1980s, where you wait for your Lada for decades.”
Guriev knows from personal experience that the Putin regime does not welcome academic analysis. At the turn of the century, as Putin cemented his power, Guriev was becoming Russia’s most prominent academic economist. He became rector of the New Economic School in 2004, and president of its Centre for Economic and Financial Research in 2005. He also sat on the board of the country’s largest bank, Sberbank.
In 2011, during Dmitri Medvedev’s term in the presidency, Guriev was one of nine professors of economics and law who delivered a report to Medvedev confirming that the imprisonment of the oil tycoon Mikhail Khodorkovksy was politically motivated. He would later write that the report was “disregarded, but not forgotten”. Putin returned to power in May 2012, and in early 2013 Guriev began to be interrogated. His office was searched and five years’ worth of emails were taken (they later ended up in the hands of organised criminals).
“I talked to friends, and they said, ‘You shouldn’t be in this country.’ And I bought a one-way ticket.” He left for Paris, where he became a professor of economics at Sciences Po, France’s leading university for social sciences; he also became chief economist at the European Bank for Reconstruction and Development in London.
This June, another economist, Vladimir Mau, whom Guriev has known for 20 years, was arrested on suspicion of fraud. Guriev says he has “no doubt that that this is a political case… he’s a very careful person who would always obey the law”. Mau was close to Putin, a board member of the state-owned energy company Gazprom (a position to which he was re-elected on the day of his arrest) and a highly respected adviser to the Russian government. “His arrest suggests that we are reaching a new level of repression,” says Guriev, who thinks it sends “a very important message” to members of the Russian elite “who have doubts about the war”.
This refusal to accommodate doubt suggests Russia is moving from a “spin dictatorship” to a dictatorship of fear, he says. Spin dictators, as Guriev describes them in a recent book co-authored with the American political scientist Daniel Treisman, preserve a “narrative of competence” on the economy to maintain their popularity. People do vote for spin dictators, although perhaps not in the volumes the dictators claim. Such leaders are also heavily reliant on corruption, however, which creates only narrow and unstable economic growth, if at all. Eventually, this begins to show in public services and on supermarket shelves. To maintain the pretence, ever more repressive measures are needed.
As Western economies face their own impending recessions, Guriev says it is imperative they do not attempt to preserve their own economic fictions. Inflation – accelerated dramatically by Russia’s invasion of Ukraine – is causing widespread discontent, but this is probably part of Putin’s calculations. The leaders of Western countries are currently united in their opposition to Putin, but in the United States, France and other countries, economic hardship may clear the way for politicians much more accommodating to the Kremlin.
“It’s a bit like 1938. We know that Vladimir Putin, if he is pacified, is pacified only temporarily. So if he wins this war, that means that there’ll be a new war. And in that sense, if you don’t agree to pay this cost now, you will have to pay a much higher cost in the future.”