Hosted by Christina Ruffini and Sir Richard Dearlove
Guest
Alexandra Prokopenko
Alexandra Prokopenko is a fellow at the Carnegie Russia Eurasia Center who left a role as an advisor to the Bank of Russia after the 2022 invasion of Ukraine.
Episode Summary
How fragile is the state of Russia’s economy?
In this episode of One Decision, hosts Christina Ruffini and Sir Richard Dearlove, former MI6 Chief, sit down with Alexandra Prokopenko, a fellow at the Carnegie Russia Eurasia Center, who left her role as an advisor to the Bank of Russia after the 2022 invasion of Ukraine. Prokopenko discusses how state spending, Chinese trade, and quick adaptation by Russian firms have kept economic growth alive — even as inflation and labor shortages strain the system. They examine the cracks in Putin's war-fueled economy, why the Kremlin is unlikely to cut defense spending, and how sanctions are strengthening, rather than weakening, domestic solidarity.
Episode produced by Situation Room Studios. Original music composed and produced by Leo Sidran.
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Transcript
COLD OPEN
Prokopenko: I think it's half propaganda, half real understanding that it would be super difficult to spend even more than they're spending now on military. I mean, it wouldn't bring any solid outcomes in terms of output. It wouldn't bring more munitions, wouldn't bring more soldiers, it wouldn't bring more results.
INTRODUCTION
Raffini: Hello, and welcome to One Decision. I'm Christina Raffini, joined, of course, by my cohost, Sir Richard Dearlove. And in today's episode, we're speaking with Alexandra Prokopenko, a former adviser to the Bank of Russia and a current fellow at the Carnegie Russia Eurasia Center. She was also with the Bank of Russia from 2019 to 2022, but left just after the invasion of Ukraine. She, of course, also previously worked as a journalist and was later banned from the Kremlin press pool in 2017. So we're gonna ask her how Russia's economy has managed to endure rather unprecedented pressure and sanctions, if the current rate of military spending is in fact sustainable, and what following the money can tell us about Putin's plans for foreign policy.
INTERVIEW
Dearlove: Alexandra, the key question I wanted to ask you, where we could start with mainly, is how fragile is the state of the Russian economy. Because on the one hand, you have these, let's say, artificial growth figures which seem to be related to wartime production and the dynamic armaments industry. But on the other hand, we are told that there's a huge sort of hollowness under those figures, and that, as it were, Russia is heading for some sort of economic cliff. Is it, and how close to the edge is it?
Prokopenko: That's a great question. I like to answer this with a quote from the Chernobyl series, not great, not terrible. That would be, I think, the most accurate definition of what's going on with Russian economy. So let's say this. Days before the Alaska summit, Putin held a meeting with his top economic team where they discussed the state of economy. And the picture was, I would say, not so rosy as Putin liked to brag from the TV screens. The economy was on what economists called overheating stance, when all additional demand created by population and state went into inflation, and inflation was big last year. It surpassed 10% and it was turned now to 8%, I guess. But the key rate, which is the cost of money in Russia, now it's 18%, but it was for more than twelve months the key rate was over 21%. So now we can say that the economy returns on its so-called normal trajectory after overheating, and normal trajectory of Russia's economy is growth from 1 to 1.5%, not 4 as it was last year. The economy is shrinking a little bit, so less money got into the pockets of the state. So some sort of fiscal consolidation, which means higher reprioritization of targets and objectives for the budget coming in 2026. But if we are speaking about expenditures on defense and national security, we usually mean a federal budget and it's 7.7% of GDP now. It's a lot, or it's 40% of all federal budget expenditures. It's a lot. Second line in the budget is social spending. So it's pensions, social handouts, maternity handouts and other payments that states provide to people, which is also so-called protected budget line. This brings us to the point that other budget items like spending on national economy, infrastructure construction, health care, education, all these will be shrunk a little bit because Putin's priorities are military. Regardless of what happens with the war this year, Putin bets on military constitution. And it requires money and it requires time. So I think that economy will remain on military footage for a while. And social spending, which means that other budgetary items remain underfinanced. And the current signal from Russia's economic authorities summing up what I just said is that the time when Russia's economy was a war economy on steroids is over. And now because of the permanent militarization, less money for civil, more money for military, debts would be the slogan for the next budget in Russia.
Raffini: But that's really interesting because there was this Reuters article not too long ago where the headline was Russia has decided to cut back on defense spending. Putin is saying, you know, in 2026, we're gonna cut back from what we have this year, and it kind of was a dig at NATO. He's saying, you know, NATO is ramping up. What does that tell you about who's really defense and who's really, you know, because he always likes to paint NATO as the aggressor in this conflict. What is your take on that? Do you think that's just lip service? I can't see a world where, given where he is and everything you just talked about, Putin is drastically scaling down how much he's spending on the military. Do you think this is just propaganda? Why is he saying this?
Prokopenko: I think it's half propaganda, half real understanding that it would be super difficult to spend even more than they're spending now on military. I mean, it wouldn't bring any solid outcomes in terms of output, wouldn't bring more munitions, it wouldn't bring more soldiers, it wouldn't bring more results. If they will put additional money into military, well, it probably will create inflation. So they are kind of maxed out where they are right now for military spending. Yeah, in terms of capacity, the rest of the economy, they can find money, but there is capacity of manufacturing and there is a huge problem with the labor force, telling it in a very simple way. You can bring all money to the factory, but if you don't have workers, this money couldn't create a tank or whatever you need. That's the problem with the workers. When Putin brags that unemployment rate is 2.2%, it literally means that there is not enough workforce within the economy. So I think that they are on maximum. And of course, there is military lobbyists, military industry complex. There is a former economist, current minister of defense, Andrei Belousov, who absolutely on that Putin needs to double down military expenditures, that they can be a driver of economic growth, which is possible if you don't have a limitation on the side of a workforce, which Russia has. And it's absolutely impossible to bypass with the current policies of Russian government towards migrants and with ongoing war. So what I've heard from people I communicate in Russia that economic bloc considers 7% of GDP is that level of military expenditures, which is not super painful for the economy, is bearable. They will consider a victory if they convince Putin to remain at this level. So not to increase military spending, but not to decrease it either. And I'm pretty sure that he's not going to downsize military expenditures, of course, because of NATO. From the sense of politician, it's unwise to decrease your military expenditures when your adversary is increasing its military budget. Putin lost Soviet-style army in Ukraine, and now he wants to rebuild a Russian army, which would have modern weapons. And Russian authorities see that Russian drones and anti-drone system has export potential. So they need money to invest to new facilities, to the industry. So I don't think that it's possible to decrease military expenditures.
Dearlove: Alexandra, does the money being paid to families as a recruitment premium or compensation payments for soldiers that are wounded or killed. I mean, understanding is that that money has come out of the sort of sovereign wealth fund built up originally through the sale of Russian energy, but that money, I'm told now, is much diminished and running out. I mean, where does Russia go if it can't make these huge pay? I mean, they are, even in Western terms, very, very large scale payments to both recruit and compensate. And apart from printing money, there isn't really anywhere to go if your sovereign wealth fund runs out.
Prokopenko: They have two types of payments to recruits. One goes from federal budget, and that's where money not directly from sovereign wealth fund, but indirectly could be involved. They are signing up bonuses, mostly is a burden on regional budgets. The problem here is for some regions, these payments become unbearable.
Raffini: Yeah, it seems to me like that would be even harder for regional governments to shoulder, especially because, and correct me if I'm wrong, but a lot of these recruits come from specific regions, right? They're being pulled from areas where there aren't a lot of other options. The population is less educated, more rural because these are jobs you can get, right? And this is how you can pay your family. So are certain regions really feeling the pain from this kind of budget burden?
Prokopenko: Regional finances are not in a great stance. It's unclear. So they are not putting this money directly. So we cannot track that this is the particular cause of the pain in regional budget. But well, mostly it's obvious that it is. And so with the ongoing drafting campaign getting from, I think, 20,000 to 30,000 people monthly recruiting them for money. And mostly these people have problems with loans. They have legal problems. So some of them were recruited from prisons and so on and so forth. So it's not the happiest and the wealthiest part of the population or those who are really well educated. But the problem here is if Putin wants, for instance, to have an offensive, he requires more manpower. And I don't think that printing money can save them because everyone who wanted to sign up already there. Another option is second wave of mobilization. Depends on what Putin's objective in Ukraine are. We don't know.
Raffini: But can you explain in basic terms, what is propping up the Russian economy? I mean, there's all these sanctions, there's all these limitations, there's price caps. Is it just basically LNG and gas sales to China and Russia? I mean, is that what's making it? Or are there other places that we don't think about that are helping this economy continue? Because you would think that it would be in a worse state than it sounds like it really is, given the international pressure.
Prokopenko: So there are three pillars of Russian economic resilience during the last three years. First, it's budget injections. And from the last, I think, two and a half years, Finance and government spent more than 10 of GDP in terms of expenditures into economy. So they injected a lot of money. They're pulling from their own savings account, basically. Yes. And they increased expenditures. This is totally 100% mortgage from future. Russian reserves are almost depleted. I mean, with the current pace of spending, its liquid part will be depleted in the middle of next year. It means that Russia will require other sources of financing deficit. So first, it's budget injection. Second, it's market structure of the economy. So there was a lot of speculations about planned economy, about that everything is ruled from the Kremlin and so on and so forth, which is not true, simply not true. The economy is still functioning as a market economy. The Russian authorities, Russian government, changed a little bit procurement system, easing it on the supply side. They have a lot of different types of subsidies to the businesses, which actually was a lifeline. Then there was a niche freed by foreign companies who withdrew their businesses from Russia. So Russian businesses filled this niche. They're widening their business. They're paying taxes. That's what's going on. And third and very massive, there was a lifeline from China. Previously, before the war, Russia sold the most part of its export to Europe, which was the premium market for Russian oil and gas. Now most part of this go to China. And there is a second buyer, India. In terms of market economy and functioning, it's not great. So Russia has only two big customers who can dictate discounts. But for Russia, it's enough. Russia still gets oil and gas revenues, which is a big part of the budget. It's more than 20% of the budget.
Dearlove: Now, Alexandra, do you think in relation to this aspect of the economy, China and Russia buying cheap energy, is there any possibility that secondary sanctions, which of course are being proposed and discussed in the US, could cut that? I mean, I can see it might work in the case of India, but in the case of China, there does seem to be huge complexity in terms of implementation, so you could take a decision. But how do you actually get anywhere near enforcing it?
Prokopenko: I absolutely agree, and in case of secondary sanctions, especially those who are discussing, we need to be very clear. Are they really going to be implemented? And I don't see any kind of guts from a side of US administration to impose new sanctions on Russia. And actually, China was quite clear saying that they are going to retaliate. And I don't believe that this step could be effective, but there is a lot to do. And in America, were lots of brilliant experts who could advise Trump administration. But it seems that one of Putin's strategy here is to engage with Trump. And as long as Trump engages with Putin, Trump not imposing sanctions, which is good for Russia and a tactical win for Putin. And I think that's what's going on. So I do not believe in secondary sanctions on China. China will retaliate here because alliance with Russia is quite beneficial for China. It's not only cheap energy resources, but Chinese manufacturers become a backbone of Russia's industry, forcing import substitution from European machinery tools and stuff on Chinese machine tools and stuff. So basically in a couple of years, Russian industry will become 100% dependent on Chinese stuff as it was before. So Russia become a very important market for second and third tier companies in China. So I don't think that China will drop Russia in this situation, will abandon Russia in this situation.
Raffini: I always think it's interesting when the American perspective on sanctions versus the Russian or even Iranian perspective on sanctions, you know, there's this indication in American policymakers, and I've seen it through Republican and Democratic administrations, you know, we're gonna put sanctions on these people. They're gonna feel the squeeze on the economy, and they're gonna rise up and throw over the government, and it's gonna be democracy for all. And when you put pressure on a people and economic pressure, it seems to me more often than not to almost spur solidarity and nationalism. And I'm wondering if we've seen that in Russia because there doesn't seem to be as much pushback against this war against Putin's policies as you think there would be given the economic pressure. But I was reading something, you said where you think that the war and the state of the economy are kind of mutually exclusive when it comes to Russian public opinion. Can you explain that a little bit?
Prokopenko: Science defines this as a rally around the flag effect. When one country imposed sanctions on elites or businesses of other country, elites and businesses surrounding their leader and unity within the sanctioned country improves. In Russia, well, let's say it was forced rally around the flag, but it was. So sanctions created a very interesting situation because economic sanctions and personal sanctions hit Russian economic and business elite, who before the war, putting their bet on the West in a very broad way. They sent their kids to study there. They kept their money there. They owned giant palaces. But besides that, lots of people lower level who worked in investment business and so on, who had a couple thousand dollars on their bank account in the Western system, who apparently working in ministries, which was not forbidden by Russian legislation if you were in the zeros in investment bank. They were all on sanctions list. Their money was blocked, was frozen with no perspective and no clear understanding what they need to do to unfreeze their assets. It creates some sort of institutional vacuum. So there was only one place they could go, and that was the place was Kremlin, that was place was Russia. So they started to withdraw their own sanctioned money and brought them into Russia. And we saw this in data of high net individuals. So there was basically a contraction back to Yes, yes. That was one of Putin's objectives. He was quite happy that all these disappointed people bring back their money to Russia. And no, they are not became Putin's fan base, but they were very disappointed and they decided, okay, we'll stay there and we can try to double our assets and try to get some more money. We'll try to live our life here and we'll wait until something happens with Putin, with the current state of the regime, and then we'll see. So that's how I can describe the situation. But sanctions create a huge Western sentiment. Instead of bringing these people back to the West or using them as a potential asset to crack the regime from the inside, sanctions created this zone of toxicity around them. Now they are wishing to their country and to Putin not to lose this war. So Richard, I'm wondering, I've never actually asked you what your opinion on the effectiveness of sanctions is.
Dearlove: My memory of sanctions goes back to, way back to the sixties with Rhodesia and South Africa and other countries, you know, when there was a UK policy to put sanctions on. And I think that their political gesture, and they have limited effect, and implementation is enormously difficult, even when you have a clear cut issue. And if you remember the buildup to the war in Iraq, I mean, the isolation of Saddam Hussein's regime, I mean, that really didn't work because the secondary economy grew up locally around the borders, which was based on smuggling, and it certainly didn't hurt the elite for sanctions. It hurt the civilian population, were very people who didn't support Saddam. So it's always a dangerous and complex policy. And, I mean, in the UK, continuously, one has that debate. It's very hard not to put them on when you want to make an international gesture and you don't want to interfere militarily, if you see what I mean. But they are definitely limited in their value.
Raffini: Yeah. Alexandra, I'm wondering what you think. I understand the need to do something, and international law is so limited. It often seems like that is really the only tangible thing these nongovernmental or multigovernmental institutions, or even governments like the United States, can get done to have some sort of an impact. But to your point, Sir Richard, it just never seems like the people they're trying to target are the ones who suffer the most. It always seems like it's the average people, the middle class people. And when you disaffect that population, they do tend to rally around the flag and they do tend to resent the West. And it's often you see these folks that were very pro American, pro European, all of a sudden turn away and turn back to these regimes because they can't feed their kids.
Dearlove: I think that sanctions have been symbolically important on Russia, and I think Alexandra would probably agree with that. But the trouble is that the impact is probably very slow burn. If it builds up over time, it's going to take a very long time, particularly with a country as large, with an economy as complex as Russia's.
Prokopenko: I agree. I absolutely agree with that. And sanctions is a super complex issue. And from my point of view, with sanctions is better than without them. And of course, we need to divide that lots of sanctions were imposed at the very beginning of the full scale invasion was because of the need to do something, to send a signal. But because the structure of the world trade, the structure of the global economy and global relationship became more complex than it was since sanctions were imposed on South Africa or Iraq or even Iran, I think the reaction of government, of policymakers on sanctions to adjust the current sanctions regime, which already was imposed on Russia. I mean, there was a very hard and a very powerful gesture to freeze Russian reserves. And that's it. They're frozen. I understand 100% concerns of central bankers why these reserves shouldn't be confiscated. And I'm on the side of central bankers as a former central banker. Is that because of the precedent that it sets? Yeah, it sets a very bad precedent. And I think the current financial system allows policymakers to be creative. They also kicked them off the Swift system, right? Yeah. They moved to Ukraine interests of this frozen reserves. But then the oil sanctions came later. They were designed the way not to disturb the oil market in the whole. Russia wouldn't retaliate. Russia wouldn't try to circumvent them, but Russia will get along and say, okay, now we're under sanctions. We'll stop doing this. I mean, doesn't it sound stupid? And I think financial sanctions came very late, were quite painful and they're still painful. So I think that the current sanctions regime requires huge adjustment. And because of the complexity, I think there should be a lot of, well, think tankers and academics should study sanctions more. It outcomes its effects on different policy level, economic level, societal level, and we need new models how sanctions work because of the globe.
Dearlove: I mean, there's quite a large Russian diaspora in Berlin. What's the mood amongst you now? I mean, looking at the issue of Russia and Ukraine in particular, is there any optimism or are we in a one way street getting darker, if you see what I mean, with no reverse in it?
Prokopenko: We have two waves of immigration here: the third wave, those who came in the 90s, and my wave, fifth wave of immigration in Berlin. And third wave lives as Germans and there are a lot of Putin Versteher, Putin fans among these people who are at their 60s, I think, and their children. And that's quite pathetic to see. And I'm quite disappointed to know that these people living in Germany, having all benefits of life in Germany and satellite TV. And it's very easy to be a Putin fan from Germany.
Raffini: Wait, they're called Putin Versteher, like Versteher? Yeah, Putin understanders. That's what I thought that translated as. Okay. Yeah.
Prokopenko: So my best advice to these people is go to Russia and be a fan of Putin. You would be very surprised to see that Russia is different from what you see on the TV. And my fifth wave, it's most people of my age or younger with their families. They are adopting quickly. And lots of journalists, activists and those who works in NGOs, we cannot come back. Me personally labeled as foreign agent in my country and Carnegie labeled as undesirable organization in Russia. So all actions with me are criminalized in terms of Russian legislation. So most of us, well, we get used to the idea that we're not coming back, at least until Putin is alive. It's not Putin himself, but the whole repressional legislation which is in place. And even if something happens with Putin tomorrow, it will remain, and it would be a big political problem in Russia. So it sounds desperate, but it's not. We have great comedians among us. We're making jokes. And yeah.
Raffini: Now, speaking of Putin, before I let you go, I mean, you interviewed him quite a few times when he was prime minister before this change with the media crackdowns happened. How did he react to some of the tougher questions you asked him and what do you see as his endgame?
Prokopenko: It's interesting. So my impression of Putin as a journalist was that he usually is quite prepared speaker. So he knows how to answer tough questions. He knows when he doesn't want to say anything. He can, you know, just pour water as an answer. What is interesting, I spoke a couple of times with Russian officials who met with Putin one on one and asked about their perception of him. And they all said that he's very warm, soft. And when someone you are one on one, he's like very comfort in dialogue. I was surprised with that. And you don't think this was just like what they were supposed to say? You believe that that was their interactions? No, I believe that. I believe that he, I don't know, maybe it's on his spy training center that that's some sort of his previous training that you will learn how to mirror people and become a comfort. Yeah, I'm good at doing that. So with journalists, he can be informative, he can be tough, he can be hard, but that was back then in middle zeros. Now I see that he more and more reminds me an old person who sits in the bench and yelled at the cloud. Oh yeah, and actually one of his recent press conferences with Belarusian President, Alexander Lukashenko was on the bench, which I think also a great symbol. How he ends, I don't know. My best hope that aliens will kidnap him.
Raffini: So you want him abducted by aliens and just removed from the world. Why not? Okay. Yes. All right. I mean Yes. Yes. That's not not what I was expecting as an answer, but it is creative. And I think it would solve some of the problems that you have mentioned. Hopefully. Sir Richard, how do you see Putin ending either, I mean, I can't see him ever stepping down. Right? Do you ever see him being forced to step down? I mean, I have a very hard time picturing a world where he is no longer in charge of Moscow.
Dearlove: Well, the history of political change in Russia has always been complex and violent. But at the moment, the lack of political opponents, the lack of an organization which can, I mean, only people who could get rid of him are the people around him.
Prokopenko: History provides us two great role models. At the end, one was Stalin and second was Salazar. In the Salazar scenario, when Putin is isolated, there is a media created special for Putin. So he lives in his special artificial world created just for him so he could be happy.
Dearlove: And it doesn't seem so implausible, actually. And that's sad. Well, Stalin fell off his couch with a stroke and no one would go near him for thirty six hours.
Raffini: They were also terrified of him. Alexandra, would you go home if there were a different Russia?
Prokopenko: Of course. I'm a big fan of Russia. I'm missing Russian North. I'm missing my friends and family who left in Russia. Of course, will if it would be a different Russia. And it's not only me. There is a bunch of people left Russia in 2022 who still want to go back, if it's possible. But unfortunately, our state creates enormous obstacles on our way back.
Raffini: Do you think that's at all likely in your lifetime? I'd prefer not to think about that. Hopefully, yes. Fair enough. Thank you so much for coming and bringing your expertise. We really appreciate it, Sir Richard.
Dearlove: Thank you very much and it's really fascinating talking to you and I'm sorry that you are, as it were, deprived of your own culture and your own country. It must be very painful.
Prokopenko: Thanks, thanks.
Raffini: That'll do it for this week's episode of One Decision. Thank you once more to our guest, Alexandra Prokopenko. For conversations with leading decision makers and thinkers, check out our website, onedecision.com and our YouTube page, where you'll find additional videos, commentaries, and explainers. I'm Christina Raffini. Thanks for listening.
