“There’s a catastrophe looming that Putin doesn’t want to talk about”

He was the chief economic adviser in the Kremlin and was responsible for major reforms. In an interview, Andrei Illarionov explains why Europe doesn’t see the real reason for Putin’s panic, who the Kremlin boss is most influenced by today – and why he will not be overthrown despite everything.

Eduard Steiner, Die Presse : Let’s start with Vladimir Putin. You were his chief economic adviser. Has his character changed since then?

Andrei Illarionov: Yes and no. The main character traits remained the same. He carefully calculates his steps, acts rationally and purposefully. He meticulously plans his actions. Considers possible options. Attentive to details, listens to expert advice.

However, according to Joe Biden, he miscalculated with the war against Ukraine.

In this case, too, not everything is so simple. Many judge Putin based on their experience of living in a civilized democratic society. But he has other criteria. He thinks he can still win. Of course, he failed to control the whole of Ukraine, even half of it. But he thinks he has already secured four new Ukrainian territories. Even if 90,000 people had to pay for it with the death, he can cynically and prudently say that it was a worthwhile gambit – he sacrificed a “pawn”, with the help of which he received a “queen” – a territory with a population of 6-7 million people. Since 2000, Putin has been regularly talking about the need to solve Russia’s demographic problem.

Moving on to the economy, the International Monetary Fund (IMF) now expects Russia’s GDP to fall by just 3.4 percent of GDP in 2022, down from the previous 6 percent. And for 2023 – minus 2.3 instead of 3.5 percent. Where have we been wrong in our predictions so far? Are we looking at the wrong numbers?

It’s good that you asked about it. Many people like to talk about Putin’s mistakes, few people want to admit their own mistakes. A big misconception of many observers was the assessment of the scale of Russia’s integration into the world economy and the world community. If there is integration, it is a one-sided orientation towards the export of oil and gas. Due to rising energy prices since the start of the war, Russia has managed to earn at least as much from energy exports as before. However, there are signs of a real impending disaster that Putin does not want to talk about because it is dangerous for him. Which in the West, too, few people pay attention to.

What is it?

State of gold and foreign exchange reserves. In this area, the catastrophe for Putin is approaching rather dynamically. During the seven and a half months of the war, official reserves fell by 16 percent. Even this reduction looks quite significant. But that’s only part of the picture.

Draw it all!

Six days before the start of the war, Russia’s international reserves stood at $643.2 billion. Since then, they have shrunk by $102.5 billion, or 16 percent. But the official estimate includes roughly $300 billion frozen by Western sanctions that Russia now has no access to. It turns out that shortly after the start of the war, Russia had only $343 billion worth of liquid reserves at its disposal. If we take into account the subsequent reduction in liquid reserves by 102.5 billion, then the Kremlin now has only 240 billion dollars left – that is, the reduction in reserves has occurred by 30 percent!

Money went to war?

The $102.5 billion cut in reserves is close to the Kremlin’s conservative estimates of military spending. What conclusion can be drawn from these facts? If the West had not frozen $300 billion dollars at the beginning of the war, then, given the average monthly rate of reduction in reserves, they would have been enough for 47 war months. So Putin could count on almost four years of war. Due to the imposition of Western sanctions, liquid reserves were enough in February for a little more than two years, and now, in September, they are only for 17-18 months. In addition, part of the reserves is denominated in SDRs (special drawing rights), and is also on the account of Russia’s reserve position in the IMF, the liquidity of this part of the reserves is limited. In addition, $130 billion dollars of reserves is gold, its use is also subject to sanctions. It turns out that the reserves will be enough at best for only a year.

Let’s assume there are no more reserves. What then?

If the central bank can no longer offer dollars to economic entities wishing to exchange rubles for dollars, then a currency panic will begin, the so-called. “raid” on banks, currency catastrophe. When banks fail, the economy can stop in the blink of an eye, which can bring the war to an end. Due to the war, budget expenditures increased markedly. And it will be difficult to finance them, since now Russia will not be able to export more oil and gas, as Western restrictions on Russian exports come into force.

Putin could raise taxes, suck special dividends out of corporations like Gazprom, as he already does, or issue government bonds.

In all three cases, he can indeed get additional rubles, but during the war he is unlikely to receive foreign currency loans abroad. However, he spends rubles, and economic entities want to exchange these rubles for dollars. Putin needs dollars, not only to buy foreign goods or pay his diplomats and spies abroad, but also to maintain a balance between rubles and dollars at home. If he fails to do this, then the ruble is threatened with devaluation, the economy with inflation, and banks with a flight of deposits. Ultimately, this can lead to political disaster. Putin fears such a development of events, but Russia is gradually approaching this scenario. Under conditions of war, the dynamics of gold and foreign exchange reserves is a more important indicator than the dynamics of GDP, which is usually monitored.

How will Putin react to dwindling reserves? Will he become more unpredictable?

This is not a question of the future, this is the present, it is already visible. Putin has already taken a number of aggressive measures. This is a reflection of the despair that gripped him. He wants to end the war by escalating it.

But the lack of money is probably not the only reason?

There are two more reasons. First, there is the uncomfortable realization that he cannot win the war of attrition he fought between the end of March and the end of August, not only financially, but also in terms of military equipment losses, which have skyrocketed.

And the other reason?

Foreign policy – a change in China’s position. In early February of this year, Putin was able to agree with Comrade Xi on the so-called “comprehensive strategic partnership” between Russia and China. And he really counted on him. If the Chinese had really helped Putin, then Ukraine would have had a very hard time. Although Putin sent his envoys to Beijing, China did not respond to them. That is why Putin was so looking forward to the first face-to-face meeting with the head of the Chinese state, Xi Jinping, on September 15 in Samarkand since the beginning of this stage of the war. But Xi denied him both military and economic assistance. Moreover, now China is also distancing itself from Putin in foreign policy. So if there is one thing that Putin has really completely miscalculated, it is in relation to the position of China.

What are the consequences?

Now Putin wants by all means to end the war quickly. Therefore, he launched an escalation process, with which he raises the stakes in order to have bargaining chips to reach a more or less acceptable agreement for himself. He is trying to intimidate Ukraine, Europe and the US in order to achieve a negotiated settlement. And you are already seeing signals in the West, from Viktor Orban and the Pope to Elon Musk offering peace talks. Unfortunately, in the matter of intimidating the Western public, Putin was supported by Joe Biden, who started talking about the impending nuclear Armageddon. Only British Prime Minister Liz Truss said that Britain would respond to a nuclear strike with a nuclear strike. That is how the entire collective West should have reacted. That’s why Putin wants to get a meeting with Biden,

Who in Russia has the greatest influence on Putin?

Xi Jinping has the greatest influence on Putin. As we have just seen, he turned out to be more influential than all of Putin’s entourage in Moscow. It seems that the West has not yet understood this.

What is the current atmosphere in the Kremlin? Is there chaos? Fear?

There are no signs of chaos. Putin’s entourage continues to work with discipline and carry out his instructions. But they are increasingly afraid of what will happen to them if they fail to reach an agreement with the West. But they believe that only Putin can negotiate with the West. Therefore, it is hardly to be expected from them to overthrow him.

What if he can’t reach an agreement?

Then the end of the regime will begin to approach. Economically and politically. Since they are all dependent on Putin, they will go down with Putin.

Vladimir Putin – World Economic Forum Annual Meeting Davos 2009 by World Economic Forum is licensed under CC BY-NC-SA 2.0