Russian Economist Konstantin Sonin explains what a recent report on the Russian economy – which argues that “Putinomics” can both keep the war going and ensure economic growth – gets wrong.

Konstantin Sonin: [...] here are a number of artificial statistical effects that create the impression that the economy as a whole is growing. The fact is that it is not growing. In fact, two processes are taking place in the economy: a decline in people’s standard of living and a decline in consumption – in both the quantity of goods consumed and the quality of goods consumed. This is how the war is being financed [...] We get a statistical illusion.

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If we take all these [official statistical] figures on faith, then we get something strange: you can take a working economy, remove a million people from the workforce – 500,000 for the war, 500,000 as emigrants – increase the costs of all transactions – because, owing to the chain of intermediaries, each transaction abroad now costs more and gets you less – and the end result is an economy producing more.

This contradicts what we know about the functioning of an economy. There is no such thing as pressing a button and producing more. Especially if your costs have increased. You can also imagine a situation where you press a button and produce more now at the expense of tomorrow, but my colleagues do not expect a downturn tomorrow.

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I do not think that the people sitting at [Russia's federal statistics agency] Rosstat are deliberately tweaking the numbers. But it would not be surprising if you, presented with the opportunity to decide, roughly speaking, how to calibrate a model, you did it in such a way that it gave you the most favorable numbers.

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If we roughly assume that inflation [which is officially at around 9 percent year on year at the moment] is actually underestimated by about half, then GDP growth disappears, as does the growth of real incomes [...] obviously does not exist. Because if this growth were real, we would have no idea where these real incomes are going, as there is no consumption growth in any data.

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Of course, the Russian economy has not collapsed, as some hotheads predicted; it has not gone away. But for each transaction, for each item, the costs have gone up. Every unit of Russian exports is sold for less than it was sold for before. Every unit of Russian imports is bought for more than it was bought for before.

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The effects we are talking about, which I believe indicate an economic deterioration, are a couple percent, single percentage points. Maybe even 10%. We have seen that GDP and other macroeconomic aggregates can halve in seven years – this was the case in the early 1990s. But did trams stop running? Did clinics stop working?

In other words, this alone does not lead to an economic collapse. [...] There is a war going on now and that it is being financed by reducing the country’s standard of living. We know from the 1970s, 1980s and 1990s that people can put up with a lot for a long time. Before my eyes, from the age of 10 to 18, we went from queues for quality products to queues for butter, and then to queues for eggs and bread.

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I do not think it’s possible to assist the brain drain more than it has already been assisted [...] Russia has experienced a brain drain that is unprecedented for any country in the last half century.

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Regarding capital flight, we also need to understand what it means to “encourage capital flight." [...] Dollars only make sense if our oligarch bought some goods abroad and brought them to Russia. In this case, the dollars are put to work. And what would our hypothetical oligarch invest in if he were allowed to? In the most profitable business today: circumventing sanctions. This is where the biggest margins are now. Allowing Putin’s oligarchs to invest money abroad now, allowing capital flight, would amount to subsidizing the most profitable business out there.

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If Putin today decisively carries out demilitarization and reduces spending on the security services and propaganda, then yes, he can prolong the life of his regime. But if, for example, next year he increases military spending and increases spending on the security services and propaganda, then he might bring it all down in a year.