Putin’s ‘unsustainable’ war economy can support the army but ‘screwed’ Russia’s future|Owen Matthews

Putin’s ‘unsustainable’ war economy can support the army but ‘screwed’ Russia’s future|Owen Matthews

like a whole raft of like totally disastrous awful things that have happened to the Russian economy as a result of this war um and you know in the long term of course those chickens are all going to come home to roost but right now and that’s what we’re concerned about since we’re talking about the Ukrainian War you know right now unfortunately the the oil exports are allowing Putin to essentially take the expenses of of this war in his St hello and welcome to Frontline for times radio I’m James Hansen and today we’re talking about the war in Ukraine and I’m delighted to be joined once again by Owen Matthews a writer historian and Russia correspondent for The Spectator Owen’s also the former Moscow and Istanbul bureau chief for Newsweek Owen Welcome Back to Front Line good to be on you wrote recently for The Spectator about how Russia is able to circumvent economic sanctions in particular when it comes to oil exports can you just tell us a bit more about the Russian Shadow Fleet that you’ve been WR writing about yeah um the um the whole package of Western economic sanctions was meant to be a kind of Silver Bullet to avoid getting into a shooting war with Russia over Ukraine and uh when they were introduced uh there was strong confidence in uh the US and the EU that a massive Exodus of uh Russian of of foreign foreign companies from Russia um that um around 16,000 different sanctions on individuals on financial transactions and so on that would all bring the Russian economy to its knees um but that hasn’t happened and that’s had an enormous impact on Russia’s ability to fight the war in other words Russia has been able to take the war and its massive expenses in its stride and the way it’s been able to do that is by maintaining its exports of oil and it’s done that essentially uh by shifting its customer base from uh selling directly to Europe um to selling to uh India China Indonesia and other countries that don’t have any strong views on the war they they don’t care about sanctions and um the they’ve done that partly by creating a fleet of oil tankers um that are essentially not registered within the G7 are not able to ship um about 55% of Russia’s exported oil in tankers that are essentially off the boats and the West originally did try and damage Russia’s economy by capping the price of oil for Russian exports at $60 a barrel how did they hope to enforce that yeah um Let’s uh it’s it’s really important to unpack this uh because lots of people think that the West is sanctioning Russian oil by stopping Russia from exporting oil not true at all what they’re doing is trying to slightly depress The Profit that Russia gets from oil by capping the price as you say at $60 a barrel now the world price of crude is currently about $78 a barrel um that’s for Brent crude Uh Russian crude operates of discount um uh at about7 $74 a barrel so basically you’re trying to knock $14 a barrel off the price I mean that’s a sanction but it’s not a ban by any means so let’s really get that straight is that actually even in a world where there was no Russian Shadow Fleet where sanctions were being perfectly enforced Russia would still make a gigantic profit and huge income from its oil um and the uh the the bottom line is that that price cap uh between $60 which they’re meant to get and 74 which they will get on the open market is very easily circumvented you can have all kinds of accountancy Tricks uh which is called attestation fraud you just basically um add on extra sort of costs for Freight and insurance um you load it on all the papers say it’s $60 a barrel that’s the contract price but actually you know with all the extal the add-ons you can sell it for much much less to to the to the world market price um you can pump the oil from one tanker to another you know there’s no way of identifying well um Russian crude particularly so uh that’s been happening in terms of uh by means of ship-to ship trans transfers literally one tanker pumps oil into another tanker off the coast of gotland in the Baltic Sea um off the coast of the peles and Greece it’s a very common practice it’s just basically fraud um or third way is that Russian companies can just sell to their own subsidiaries in Europe uh I think some people would be surprised to learn that uh major Russian private oil companies such as luuk oil still have major Refinery operations in Bulgaria in Romania they have nearly 50% stake in a major Northern refinery in the Netherlands and so on and uh it’s very easy to sell uh for for Russian company to sell to its own subsidiaries at a legal price and then recover that difference for the down the line once it’s been refined and processed so essentially uh Russia has been able to completely ignore the oil price cap and continue to export um actually almost as much in fact um as much oil as was exporting before the war and doing so at a at a higher price it’s a crucial point you makeen that when people think of Western sanctions on Russian oil they may think of a total ban but it’s very much not that it is as you say a limiting of their profits just for sake of argument why why couldn’t there be a total ban what impact would that have if you want to pay if you want oil to be $300 a barrel and to spend £300 filling your car then you can do that um they you know or Russia exports too much oil that’s that’s the problem um and it’s really significant that um even you know the right at the beginning of the war when enthusiasm for sanctions was at its height uh oil and gas were not sanctioned by the EU they were not uh especially not gas so you know it’s it’s ironic that you know we we and the West intended to bring Russia to our knees but we could not afford to cut off the Russian gas that was flowing mostly through the nordstream pipeline which was destroyed in September 2022 by unknown Sabers um but probably Ukrainian I think there’s a very strong balance of uh of evidence that suggests that it was Ukrainian actors that destroyed nor nordstream um but the EU was never able to afford sanctioning that gas Banning that gas and banning that oil Russia is the third largest exporter of oil in the world if uh it exports it produces around 10 million barrels a day it exports about 5 million barrels of oil a day if you take 5 million barrels of oil a day off the international market then the price spikes by twice and that’s uh that that would actually leave Russia even if it put a dent in Russia’s ability to export that oil it would the gigantic price jump would actually more than compensate Financial in financial terms for for for any potential loss or um sanction or blockade of its Seaborn oil so it’s a kind of Catch 22 situations there’s there’s actually technically uh it’s it’s very difficult to prevent Russia from exporting oil to customers who legally want to buy it uh and furthermore uh even if there were a way of doing that then it would impose massive massive costs on the west economically and paradoxically actually pretty quickly collapse uh public support for sanctions what about the impact though in of of Ukraine’s repeated strikes on Russian oil refineries is that having much of an impact on the Russian economy uh well yes it is um uh it seems that um uh that um nearly half of Russian Refinery capacity in Western Europe has been struck or affected in some ways by Ukrainian longrange drone strikes and it’s uh reportedly knocked out about 15% of Refinery capacity and that had uh an immediate knock-on effect in the sense that Russia uh the uh Russ ordinary Russians were paying much higher prices for refined um petroleum products basically petrol that they put in cars so it did have a short-term economic effect but actually the the the reality is that according to Russian reports so we don’t know exactly how um reliable they are but they’ve actually been able to repair those damaged refineries pretty quickly so um uh the the the bigger question is why don’t the ukrainians actually hit the Russian oil industry harder well um there’s a political reason for that um and that is that the Americans who have been providing the Lion Share of the military aid that Ukraine relies on have uh pretty explicitly told the ukrainians to refrain from striking um at the sort of most vital elements of Russia’s um oil production capabilities and the reasons for that are partly because uh the Americans they want to see a massive oil shock um in um in an election year and also uh right from the beginning of the war the US Administration has been absolutely crystal clear that one of their absolute top priorities in addition to um helping Ukraine not to be overrun by by Russian forces but like the second top priority um has been to avoid getting embroiled in a kinetic war in a direct war between NATO and Russia and um the uh ukrainians are for obvious reasons kind of very angry about that the the those those deep strikes those drone strikes are pretty much the only thing that that Ukraine’s been able to do to directly sort of harm Russia in addition to of course hitting uh airplanes on the ground and destroying uh military infrastructure but you know th those those drone strikes were like a major were a major new new front for for for the ukrainians but um they’ve been they’ve been told basically in their own certain terms to cease and assist or to scale down those attacks using their own drones and furthermore the the United States has you know expressly forbidden the ukrainians from using any us provided rocketry missiles to attack within Russia Propet to go back to the point about sanctions do you think the West needs to be more creative in terms of sanctions is it time as William he wrote about a few few months ago in the times to for example look at using seized Russian assets to fund humanitarian Aid and military aid in Ukraine do we need to look again at sanctions and be more creative uh yeah that’s the big debate um so uh while it’s not exactly clear how much um Russian State money is in Western Banks uh there’s some debate about whether they’ve actually succeeded in recovering some of that money but um in theory there’s about 350 billion dollars worth um of Russian State assets lodged um in Europe in the United States um they’re basically Sovereign Investments so uh the question is um from a point of view of ethics um sure um it makes total sense that you know we punish the Russian government by seizing Russian State money um um uh the question is how to do that while preserving the international order so um and like and that gets down to I mean it sounds like a sort of technicality but actually it’s more than technicality because if the the you know if if we’re going to put some sort of clear blue water between us and the Russians and I we the west and the Russians then actually there has to be you know if we’re fighting for anything it’s really for the rule of Law and you know if you just go around confiscating people’s assets because you happen to politically disagree with them that’s the kind of thing that Putin does so there’s like a major um legal and ethical debate going on in the west is you know who can authorize those assets to be seized and furthermore um you know there doesn’t exist it’s kind of part of the more General breakdown of the rules-based order you the only you know potential institution in the world that could maybe have the authority to do that is the United Nations but as we all know Russia has a a veto on the United Nations the security councel so um the the the sort of compromise that’s being looked at right now is not seizing those assets um that are currently Frozen is not literally taking them away and handing them over to Ukraine it’s using the income that those assets have generated in order to um in order to fund Ukraine reconstruction so I mean that’s um and I I think there is a there is a you know a moral case for doing that and it’s legally easier to do that because the income generated by Russian State assets you know since they’re frozen technically doesn’t belong to Russia because they’ve been generated since they’ve been frozen but there’s actually no legal basis for freezing those assets in the first place and that’s kind of the problem with all of these asset freezes against against the Russian state or indeed against Russian individuals it’s very hard to prove in a court of law that this person has actually engaged in any legal activity and once again if the West stands for rule of law you can’t just confiscate money and assets for political reasons you have to actually prove these people are guilty of something I suppose the counterargument would be if they’re already Frozen and there’s no legal basis of freezing them there’s already been a a new legal precedent set and also are these assets ever going to be returned to the Russian oligarchs who who owned them originally so why not use them for this purpose well no legal precent has been set because there’s been no legal ruling it’s just an administrative measure that’s the whole point is there hasn’t been a legal precedent in fact there’s if you’re talking about legal precedence it’s been in in exactly the opposite direction because I have several individuals who’ve been have had their assets foro and have successfully challenged those freezes and actually um you know what are the what you what is the basis of freezing the assets an individual who happens to be a Russian businessman you know is you know he’s he’s not a member of the of the kremin administration he’s not a member of of the Russian government you know sure anyone who’s done Russia has had to deal with the Russian state but you could say that of anyone in you know any Chinese businessman for that matter so um I think you know in in in the in the broader context I think there’s a lot of um the there’s a lot of danger and international Jeopardy in going down that road and it’s not really about Russian ass foreign Assets in Russia for instance um that are at risk because there basically are very few um major foreign investors left in Russia I mean there’s uh um and many of those like Danon for instance you know the the dairy company have already essentially had all their assets just totally illegally expropriated by by the Russians already because the Russians don’t care about the rule of law but I think that the the bigger sort issue going forward is if the West does it to uh the Russian State assets and to individuals who are associated with Russian State then for instance you know China could do precisely the same in a future conflict to us and Western uh investments in China for instance you know and that would be okay because it would be the West that that that had set the precedent so um there is a reason um that the West is proceeding with caution and it’s not just you know puel enmity it’s not just cowardice there’s like this this a a dangerous thing to do and it’s a dangerous precedent to set especially when it comes to you know um confiscating um individuals assets you know that’s just political persecution unless you can prove in the court of law that they’ve been guilty of criminality Might it not though increase the pressure on Putin personing his position within Russia because one of the arguments made early on after the full scale Invasion happened when some of these sanctions were first introduced was that if you could Target the ARs and those with power and influence in Moscow then you would apply pressure on Putin and they might start agitating against Putin is there any Credence to that uh well you’re completely right that was the logic and it was actually the logic uh uh you know I I a good friend of mine um was worked for the Obama Administration um and was basically sort of one of the major architects of the original you know sort of OG sanctions that were introduced back in 2014 over Crimea and that was precisely the logic you know we’re going to punish the people around around Putin the oligarchs they’re going to put pressure on Putin and he’s going to be in trouble 1 million per didn’t happen completely untrue that logic was utterly flawed and in fact it kind of had the precisely opposite effect because the Paradox was that even before 2014 Putin began a campaign that he called de-offshorization in other words and he and he announced like an amnesty for assets that were brought back from abroad he was pressuring the Russian Elite to bring back their assets from the West so basically um by targeting the oligarchs the West is doing Putin’s work for him he want he doesn’t want these people to have all their money outside Russia he doesn’t want all this like stolen money buying yachts in in in in in you know in south of France and so on he wants back in Russia and what we’ve been what we’ve seen since since 2022 is actually a large number of uh very wealthy individuals have you know attemp basically attempted to flee Russia and put some distance between themselves and the Kremlin regime and just sort of retire to a happy you know a happy life in the west with their assets they found their assets assets Frozen and uh essentially just return back home a very good example of this is is is one of the original 1990s oligarchs B mik Friedman he got into incredible trouble with uh uh he wasn’t convicted of anything yet his assets were frozen and um he basically ended up back in Russia so actually it’s strengthening the Putin regime not weakening it if you wanted to weaken it you would do the opposite you would say oligarchs we want your money it will be safe take every penny that you can from Russia and flee live in Mayfair that’s fine because actually you’re taking money out of Russia by sanctioning the oligarchs you’re forcing them to take you know you’ve frozen the money that they that they had have in Russia but you’re actually just forcing them to return and sort of make new deals new compromises with the Putin regime return whatever assets they can save back to Russia and so on the assets on the the the the sanctions on oligarchs have not weakened the Putin regime they straight through it that is fascinating and that and that partially answers my next question but wonder if there’s another solution you can think of what could work against Putin what type of sanctions are there any types of sanctions that would work to destabilize the Putin regime uh yeah uh there is um America could double this oil production um uh drop the price of oil to $30 a barrel and the Putin regime would collapse in six months that’s how you do it and is it that straightforward well you you don’t you don’t restrict Russian oil you encourage you you say like export more oil we want more of your oil persuade the Saudis because part of the reason why the oil oil is close to $80 a barrel is because last year Saudi and Saudi Arabia and OPC um who are the major swing producers as they called of petroleum of of oil uh reduced their production capacity in order to push up prices because that’s what OPEC and the major oil production companies do they vary their production in order to have an influence on all prices um and your question is is it that simple well uh that it’s actually already been done and it worked um in the 1980s in a nutshell um from 1983 onwards Saudi Arabia under strong political pressure from the United States uh and in protest at the Soviet Union’s invasion of Afghanistan started massively opening the Taps and dropped the price of oil by the mid 1980s to around $12 a barrel 12 and from 1986 onwards the Soviet Union was just completely unable to pay its bills and actually had to seek out its first Sovereign loan uh from Deutsche Bank and you know actually the Soviet Union couldn’t work because the central um centralized production um the centralized Communist economy and was not producing it was entirely reliant on high oil prices after the first oil C shock of 1973 so for that decade 1973 and to to to the mid 1980s you know brvs Russia the Soviet Union just lived on on oil Revenue just as Putin Putin’s does today so if you drop the oil price by 50% it went down to $40 $30 a barrel the Russian economy doesn’t balance it’s it just runs out of money extremely quickly so um sadly that’s really the the the end if you’re talking about ual U you know trying to do it through economics that seems to be the only feasible way to proceed because the alternative um none of the alternatives are really viable and just to recap if you’re trying if you ban Russia the Russia’s exports of oil the world price of oil massively Rises Russia benefits anyway you know if you try and um you know impose the the price cap they just find ways ways around it um and if you know uh freeezing the Russian State assets I confiscating Russian State assets again they’re already Frozen so that doesn’t really affect them right now I mean they are uh and um they don’t really need those assets that they have abroad because uh in 2023 Russia had uh the highest um state in uh budget income on record it’s making more money than it ever has and furthermore the Russian economy is set to grow this year more than any G7 country it’s budget deficit it was like the budget deficit last year was 1.9% close to 2% of GDP by the way America is a 6.5% of GDP this year they they’re pretty close to balancing their budget Russia was pretty close to balancing its budget the uh they’re expected to have a budget deficit of 0.8% of GDP and that’s despite the fact they’re spending 40% of their government spending on the war it’s insane I mean none of this should should be true it’s Russia is richer than ever it’s balance it’s growing faster than ever it’s Bal is budget is balanced because of one thing because it still maintained its oil export capacity that’s that’s the only thing that’s going right for Russia economically but unfortunately for Ukraine and for those who you know want to bring Russia to its knees and punish it um that one thing that is going right pays for everything else that’s going wrong so why doesn’t America do as you suggest why doesn’t America ramp up its own oil production and try and drive down the global price of oil to hurt Russia well it kind of already is actually um uh already actually this this this week today um America became the the biggest uh exporter of liquefied Na natural gas in in the world um the um uh there has been uh quite a lot of resistance to opening up new oil fields uh particularly like the the Alaska XL Pipeline you may have heard about that that was basically sort of uh put on put on hold uh for environmental reasons Trump wanted was trying to push it through then then then it got suspended I mean in theory um you know uh hydraulic factoring um is the tracking which has over the last 15 years created this gigantic explosion of um oil and gas production in the United States and has transformed the US from a net importer of oil to a massive exporter of oil and gas um fracking uh partly depends on high oil prices that’s kind of the problem because um the cost of extraction of a barrel of oil varies enormously depending on where it is and the geology and all kinds of technical things but but the bottom line is that the Saudis can extract their oil at around $7 a barrel that’s the production cost whereas if you have to do uh uh if you have to do use hydraulic fracturing as the Americans and the Canadians do uh it’s the the the the break even point is much higher and then of course you have to add tax to that so uh fra oil is up to costs has has a has a cost of up to $40 a barrel um plus tax so um the irony is to answer your question why doesn’t the United States just ramp up its production and drop the prices it’s because it’s uh if you drop the prices its entire oil industry goes out of business unfortunately it’s going to such money production cost would be higher than the than the cost of the oil yeah so so it’s it’s it’s sort of a maddening sort of swings and roundabout situation and unfortunately um you know Russia the Russian State and um has been spectacularly stupid um in launching the war at all it was uh unbelievably badly informed about political and Military conditions in Ukraine there’s all kinds of like massive screw-ups and idiocies inherent in the way the kremin has approached this war but the one thing that the Kremlin is actually super smart about is that they have this amazing economic team that actually have managed to you know brilliantly Steer public finances and uh manage The Sovereign wealth funds and you know U very very quickly adapt the Russian economy to you know getting round sanctions and absorbing costs of the war and so on you know there’s there’s there’s actually very good economists working with the Kremlin and the Russian Central Bank and they’ve you know done the deep thinking about this and the result of it is that they actually have put the Russian economy in a far more even Keel despite fighting a massive war than any economy in the west soly br br the British economy sadly and and just finally Owen is the Russian growth rate sustainable they’ve obviously moved the economy onto a war footing but what is the impact on living standards of ordinary Russians could that have a political pressure on Putin and is the growth rate sustainable well that’s an excellent question because actually um yeah what what you have it’s what economists call military kinism K kinism is like if the government ends lots of money then the economy grows it’s what theod what it’s what FDR the president revelt did in the 1930s just like poured tons of money into like building dams and Roads and you employ tons of people uh you know you prime the pump and this idea that you if you if the state pours tons of money into the economy the economy grows so yes you’re right to ask that question like how much of this is just like fake uh growth caused by this uh uh by Massive military spending um well largely it is fake growth and it’s not sustainable growth it’s just government spending of oil money um on the war effort and on a more fundamental level the war has completely screwed Russia in terms of you know F of development Russia’s been cut off from uh International Capital markets um the they’ve expropriated and screwed over all foreign investors you’d have to beet completely insane to invest money in Russia you know foreign Specialists will not work there and you kind of need those those kind of people if you’re going to want to develop you to save your um aging oil and gas industry there’s all kinds of um you know the the entire Russian banking system is being basically isolated from the West um you have a million people overwhelmingly young educated um professionals who have fled the country because of the war there’s like a whole raft of like totally disastrous awful things that have happened to the Russian economy as a result of this war um and you know in the long term of course those chickens are all going to come home to roost but right now and that’s what we’re concerned about since we’re talking about the Ukrainian War you know right now unfortunately the the oil exports are allowing Putin to essentially take the expenses of of this war in his stride and continue to bombard uh mercilessly um Russia uh Ukrainian towns mostly from from war planes launched inside Russia by the way they’re not even using Ukrainian airspace and um the political losses um you know the political system seems to be remarkably enough sustainable um people don’t really appreciate the the War has an economic cost um and I’m I’m I very often see people who you know I just a couple of days ago who who who had come back and forth from from Russia it just seems to be absolutely fine the war is invisible everyone just gets on with their lives and everyone is in this sort of state of of of of denial um there are three things that need to go wrong for the Putin regime to fall and the same three things that went wrong in Russia in 1917 same three three things that went wrong in Russia in 1991 last two regime collapses in in recent Russian history and that is you have to have a you economic crisis you know palpable deep economic crisis you have to have a government a state that’s completely discredited itself um and you know proved itself incapable of governing and you need to have like a clear alternative um successor to power and none of those three things pertain in Putin’s Russia Today well Matthews always appreciate your Insight and your analysis thank you so much for joining us today on Frontline my great pleasure thank you for watching Frontline for times radio for more on Global Security and the war in Ukraine you can listen to times radio take out a digital subscription to the times and click subscribe on our YouTube channel

“It’s just government spending of oil money on the war effort, the war has completely screwed Russia in terms of the future of development.”

Russia’s war economy will likely be able to support Putin’s invasion of Ukraine but has dashed future development and has made Russian finances ‘unsustainable’, writer, historian and journalist Owen Matthews tells Frontline on #timesradio

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