The outcome of Russia’s election on Sunday (17 March) was inevitable, but democracy was not its purpose. The point was to remind the Russian people and the wider world that Vladimir Putin can decide how many votes he gets. That power is now being consolidated. His war in Ukraine may be taking longer than expected, but it has not bankrupted his country. In fact, there is growing evidence that Russia is covering up how well its oil-based economy is running.
Russia’s current account, meaning the balance of its exports against it imports, achieved a record surplus of $238bn in 2022. (The UK ran a current account deficit of £78.3bn in the same year.) By far the largest of Russia’s exports – around two-thirds of the goods that leave the country – is fossil fuels, mainly oil. The size of Russia’s surplus is closely correlated to the price of its biggest component, crude oil. When Urals crude rises in price, Russia’s current account swells. Plot the two figures on a graph, and the lines clearly track one another up and down.
Or rather, they did, until 2023. The economist Robin Brooks has shown that since last year, the price of Russian oil and the surplus in Russia’s current account have diverged. As the price of Urals crude rose last autumn to more than $80 a barrel, “the current account surplus did nothing”.
Brooks says there are a couple of possible reasons to rule out. The effect of the oil price can take a couple of months to appear in the current account, but “we should have seen an improvement by now; we've seen nothing”. The other explanation could be that the balance of payments has been distorted by very large imports, but again Brooks says that over the past year Russia’s imports have been “basically flat”.
So, where is Russia’s missing money? The most likely answer is that it’s not really missing at all. The Putin regime openly murders its critics, but it is not immune to domestic disapproval. A large current account surplus buys a stronger ruble and lower interest rates, which minimises the impact of the war on the Russian state and Russian consumers; it de-risks the war in Ukraine for Putin.
However, it also creates a risk, in that it is embarrassing for Europe. Western consumers continue to fund Putin’s war because we continue to import huge quantities of Putin’s oil, much of it routed through Russian-owned refineries in India in order to make it appear as if sanctions are working. Shipbrokers and insurers in London continue to enable this trade, and they are well represented by lobbyists in the EU. When the results become glaringly obvious – for example, when Russia records a trade surplus sufficient to fund its military for three years, as it did in 2022 – the West can be stirred into responding with harder sanctions, such as the price cap on Russian crude oil of $60 a barrel that was introduced at the end of 2022.
The answer for Russia is to pretend that it’s making less money from the West than it really is. “The incentives are for Russia to make things look less amazing than perhaps they are,” said Brooks. Russia has stopped publishing much of the data that would allow economists to establish whether its GDP or its balance of payments were consistent with reality. The economic data that are reported are now widely thought of as “a propaganda instrument”, he told me.
The clear conclusion is that Russia continues to enjoy a surplus, but that it is understating it. The mechanism for doing so is less obvious, but it would be consistent with the findings of other analysts that Russian oil has been traded above the price cap. Brooks says it’s probably being done by a combination of factors: companies may be massaging their figures; more money may be being held offshore. “The net result of that could be that the current account is just increasingly fictitious.”
This also suggests one immediate response. “One of the basic requirements for IMF membership is that your data are credible,” said Brooks. ”There should be voices in the West pushing for Russia to get kicked out of the IMF. It’s one of the few international organisations where Russia still has a seat at the table, so it would be another big move towards pushing Russia into isolation.”
Brooks says lowering the price cap on Russian oil again – from $60 a barrel to $50 – would be unlikely to impact the amount of oil Russia actually sells; at $50 a barrel, Russian oil would still be sold above the cost of production. There would be little to no cost to Western consumers, but it would impact the extent to which we finance the Russian war machine. Sanctions could also be strengthened by prohibiting the sale of tankers to undisclosed buyers, which would at least limit the growth of the “dark fleet” that ships Russia’s oil around the world. Putin’s near-total dependence on oil is a weakness as well as a strength, but it is one the West has so far failed to exploit.
“The thing that has been missed again and again is the counterfactual,” says Robin Brooks. “What could we have done to push Russia into a financial crisis? The West has the power to really turn up the heat on Russia's economy. And again and again, it has not.”
[See also: Revealed: how the City of London keeps Putin’s oil flowing]
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