Interview with Former Russian Central Bank Advisor "It's Time To Slowly Bleed Russia's Economy Dry"
Russian President Vladimir Putin during a visit to an arms factory: The sector accounts for a large share of the country's growth.
Foto:Ramil Sitdikov / AP
DER SPIEGEL: Ms. Prokopenko, Russian President Vladimir Putin has radicalized his domestic and foreign policy in recent years, while his economic policy has remained surprisingly pragmatic and constant. Why is that?
Alexandra Prokopenko
Alexandra Prokopenko works in Berlin at the Carnegie Russia Eurasia Center and the Center for East European and International Studies (ZOiS). She previously served as an advisor to the Russian Central Bank in Moscow. In March 2022, Prokopenko handed in her notice in protest against the war.
Prokopenko: Putin has clearly understood that great empires such as the Czarist Empire and the Soviet Union perished due to poor economic management. That is why he makes sure that the management of the Russian economy is as non–ideological as possible and remains in the hands of experts. Putin trusts them completely and does not interfere in the operational business.
DER SPIEGEL: Russia's good growth figures have long been doubted. What is the real situation?
Prokopenko: The official figures largely correspond to reality. The economic situation is not great, not terrible. The economy grew significantly last year. On the other hand, however, we are seeing clear signs that the Russian economy is overheating.
DER SPIEGEL: What does that mean?
Prokopenko: The economy has grown faster than its potential actually allows. The labor market is at its limit, as good as empty. Unemployment is at a record low. This shortage of skilled labor is already having a negative impact on production. In short, it is an unhealthy situation and the Russian economy does not have the necessary resources to expand so rapidly in the long term. Exports are also unlikely to expand any further. If we look at the statistics, we can also see that a large part of last year's growth was attributable to defense-related industries. This ranges from the metal industry to textile processing, which produces uniforms on a massive scale.
DER SPIEGEL: Could this affect the Russian economy and Russia's ability to wage war?
Prokopenko: We keep seeing local problems. The egg crisis last year was one example. There are always acute staff shortages or local bottlenecks in the supply of certain foods to the population. This is caused by logistics chains that are disrupted by the sanctions. However, they are usually re-established. But today they have to be longer and more complex than in the past. This also means: more expensive. At the moment, this does not look particularly threatening. In the medium- to long term, however, this development is not sustainable.
DER SPIEGEL: Is that a problem for Putin's warfare?
Prokopenko: The time horizon of 12 to 18 months is decisive for developments on the battlefield, and I don't see any significant economic problems for Russia.
DER SPIEGEL: Nevertheless, you speak of "Putin's trilemma." What do you mean by that?
Prokopenko: He has three main tasks: Putin must continue to finance the war. At the same time, the standard of living of the general population must not deteriorate drastically. Thirdly, it must ensure that the economy does not lose its macroeconomic balance. It will be difficult to fulfill all three tasks at the same time. They contradict each other. Stability requires low inflation. In order to keep the inflation rate in check, government spending would have to be cut. But that is not possible because of the cost of the war.
DER SPIEGEL: Citizens don't seem to notice a dramatic fall in living standards.
Prokopenko: It's a gradual process. Take a look at the car market: You can buy cars in Russia again, but they now generally come from Chinese rather than Western brands. Most of these vehicles are also imported from China and are no longer built by VW or Toyota in Russian factories. In order to maintain the standard of living in the country, sooner or later certain decisions will have to be made, including investments. Then the Kremlin will have to say which task is more important to it.
DER SPIEGEL: You used to work at Russia's central bank until the start of Russia's large-scale attack in 2022. Many of your former colleagues are continuing – and thus keeping Russia's war machine running. Yet some representatives of the Central Bank and the Economics Ministry were once considered liberals. Why is this "economic bloc" so reliable in its support of the regime?
Prokopenko: The "economic bloc" doesn't just support the Putin regime. It is an integral part of the system, just like its other pillars, such as the security services. Of course, its fundamental nature is interesting. The "economic bloc" is made of different material than the security bloc. In fact, the economists have proven to be more capable and reliable than the generals on the battlefield.
DER SPIEGEL: What do you mean by that?
Prokopenko: Let's look on the Russian actions after the Ukrainian counteroffensive. It took the Russian army a few months and thousands of dead and wounded to conquer the village of Avdiivka in eastern Ukraine. Apart from that, there were hardly any successes on the battlefield. In the area of economic policy, on the other hand, the defense measures were extremely successful, everything that has been described as the "Fortress Russia" strategy.
DER SPIEGEL: You are referring to the idea of making Russia's economy as invulnerable as possible to external pressure. How has that been achieved?
Prokopenko: Of course, it has only been partially successful, the sanctions are definitely affecting the Russian economy. However, fundamental stability has been maintained. And that has a lot to do with the earlier design of Russian economic policy, as it had already developed many years before the war. It allowed the Kremlin to rapidly reorganize the country for war. I observe all of this with a certain pang in my heart: the war and the sanctions have devalued many of the economic policy institutions and principles that an entire generation of economic policymakers helped to build.
DER SPIEGEL: Which ones?
Prokopenko: A vivid example is the Moscow financial center, which had actually developed extremely well. In the years before the war began, it had become increasingly interesting for many investors from other emerging countries. Today, there is nothing left of it. There are no more foreign investors, hardly any normal trade. Sure, formally this market still exists. But it has as much to do with a real trading center as a children's shop game has to do with a supermarket. Another example is the so–called "budget rule" ...
DER SPIEGEL: ... a kind of Russian spending brake to limit government spending.
Prokopenko: It has allowed Russia to save up a large financial safety buffer. This was made possible by transfers from the oil and gas business to the National Welfare Fund, but also by prescribed restrictions on government spending. Since 2018, the budget rule has prevented Moscow from inflating the state budget. Russia therefore entered the war with extremely solid state finances. This allowed the Kremlin to quickly divert a lot of money into armaments.
DER SPIEGEL: But that was not the original goal. The idea was to pursue a clever economic policy and save money for a rainy day. Shouldn't more economic policy decision–makers therefore have thrown in the towel?
Prokopenko: I don't think it's particularly surprising that many stay. In the United States, we didn't experience a mass exodus from government agencies during the Vietnam War and the growing criticism of it.
DER SPIEGEL: Are you still in contact with your former colleagues? How strong is the support for the war there?
Prokopenko: If people continue their work, that doesn't necessarily mean that they support the war. In any case, I haven't met anyone among my former colleagues who would be in favor of this war and say: Yes, we're doing everything right! We just need to kill more Ukrainians and really devastate the Ukrainian economy. There is no such thing there.
DER SPIEGEL: Are you talking about the Central Bank now?
Prokopenko: I have not heard any such statements from the Central Bank or the Finance Ministry, or even from the Russian government as a whole.
DER SPIEGEL: But these people are not against the war either.
Prokopenko: I don't perceive any enthusiasm for war in the bureaucracy or within the Russian business world. There is just this enthusiasm for war that we read about in the Russian official media. I don't think it is authentic at its core. This broad coalition among the Russian population, which allegedly actively wants the war, does not exist. It's an invention.
DER SPIEGEL: Let me ask you again: Wouldn't many more civil servants have to resign?
Prokopenko: Like me, some have left. But please bear in mind that people are in different life situations. For some, it is easier to burn all bridges. After the war began, the secret services started holding preventive talks at the Central Bank and the ministries. They went along the following lines: "If you resign, we will have your deputies thrown in prison or there will be other unpleasantness." What's more: In such large apparatuses, a resignation, even if it is demonstrative, changes little. For many, it is also difficult to find another position: Senior employees have been banned from leaving the country because they had access to classified documents. There are reports that some officials had to hand in their passports.
DER SPIEGEL: How many people are we talking about? Probably only a few top civil servants.
Prokopenko: No, it affects very broad groups of employees. We also see something similar in large Russian companies: There are employees who may not even formally come into contact with classified information. Nevertheless, they are given instructions that they must provide information about planned trips abroad in good time. For many, this is received exactly as it is intended: as half a threat, half a ban. So, the mood among many civil servants and managers is bad, they don't feel safe. Even in this situation, it is an enormous risk to demonstratively oppose the system. Not everyone is capable of doing this. And let's be honest: Where are these people supposed to go today? Anyone who has worked for the Russian state will not find a job anywhere except within the Russian Federation. Even if a person demonstratively declares their resignation, they can't expect to be able to pursue a career abroad again.
DER SPIEGEL: Are you talking about people against whom personal sanctions have been imposed?
Prokopenko: No, not at all. I also mean normal civil servants. Some of them are excellently trained and capable people with expertise that is internationally recognized. The few who have decided to resign have major problems. They find it extremely difficult to find a job in academia. They're not wanted in the consulting business, not even in international organizations. And I'll say it quite openly: Perhaps more people in Russia would make a different choice if they saw a way out. But the West doesn't offer them one.
DER SPIEGEL: What is your general assessment of the West's sanctions policy?
Prokopenko: There is no exit option. Why are no conditions being set? Distance yourself from the regime, pay in money for Ukraine here – and then the sanctions will be weakened or lifted. But there is no such offer. This also applies to many Russian businesspeople: Their assets are frozen, they can no longer travel. They have become pariahs of the international system. There is only Putin left, and he says: You stay with me. It may be that Putin is the devil – but for many, he is a devil that they know how to deal with. Added to this is the increasing repression and growing fear within Russia. All of this is fueling fatalism.
DER SPIEGEL: You once spoke of "moral sanctions" against all Russians. What do you mean by that?
Prokopenko: These are sanctions that have not been formalized at all, but which affect all Russians, regardless of whether they are civil servants or have left the country in protest. Every holder of a Russian passport in Berlin can tell you a thing or two about it: It is enormously difficult even for ordinary Russians to open an account in Germany, almost impossible. This is not only annoying for those affected: It also cements the narrative of Russian propaganda that Russians are being persecuted abroad across the board and that the West is pursuing anti-Russian propaganda.
DER SPIEGEL: Should the West change its sanctions policy?
Prokopenko: I think we have now reached a point where we can clearly see that the measures taken so far are not working as intended. I think it wouldn't hurt to experiment a little. Unfortunately, the EU has so far done the opposite: It is simply expanding its register of banned goods and sanctioned persons. Will this throw the Russian economy off course? Of course not.
DER SPIEGEL: What do you suggest?
Prokopenko: A more intelligent approach: Instead of sealing off the West from Russian money, we could, on the contrary, try to stimulate the outflow of capital from Russia. Every billion less in Russia means less support for the war machine. Even at a time when the Russian Central Bank had already introduced capital controls, tens of billions of dollars were still flowing abroad. Why shouldn't the West encourage such movements instead of fighting them as it does now? I believe it is time for the West to do everything it can to encourage both the brain drain and capital flight from Russia. That would undermine Putin's regime. It would be time to slowly bleed Russia's economy dry.
DER SPIEGEL: Hasn't the wave of emigration of critically minded Russians actually stabilized the political system in Russia?
Prokopenko: The Kremlin talks about traitors and always pretends that it doesn't mind the mass exodus. But that's not true. That's why the regime is doing everything it can to prevent even more people from going abroad.
