Markets are now locked into a tit-for-tat barrage of leaks and occasional airstrikes between the US and Iran as talks continue. Coupled with the current strategic momentum Ukrainian forces possess from the success of medium-range strikes on logistics—an advantage that may not prove enduring—the mounting headlines about elite frustration are evidence of inertia. The political system is incapable of changing trajectory until Putin revises his war aims.
One need only look at one graph to grasp the nature of the crisis: the outlook for industrial production in wartime or war-adjacent industries versus everyone else. Military production is still posting growth while the rest slowly declines, a dynamic that looks like the unhinging of a jaw. But having bitten off more than it can chew, the Kremlin must somehow keep unhinging that jaw further to sustain a miserable pace of advance at the front.
Talk of elite discontent reflects this uncomfortable inertia verging on paralysis that has overrun much of the policymaking process. Even Aleksandr Shokhin, head of the Russian Union of Industrialists and Entrepreneurs, dares not claim that raising taxes on business would be ruinous for growth in present conditions. Instead, he suggests the state “not overdo it” with taxes to formalize business activity while pleading that it pay its biggest contractors on time. Times are tough for businesses competing to stay open. Even waste-sorting businesses are folding across the country—a visible sign of failure worth watching, given the salience of waste management in regional politics over the last decade. The entire waste management sector has been a market built by political intervention over the last decade. The supporting policy infrastructure is incapable of sustaining these rents as costs for everything keep rising.
Writing for Nezavisimaya Gazeta, Mikhail Sergeev framed the primary impasse as a “cold war” between the Bank of Russia and the government. Interest rates remain elevated because of the structural factors of the wartime economy holding inflation up, but the slow-motion hollowing out of the civilian economy will inevitably starve the state of the tax revenues it needs for the war effort. The downturn in metallurgy has gotten so bad that only four regions are currently on track to be net donors to the federal budget. But the framing of a “cold war” is somewhat misleading. Fiscal policy has the upper hand in every respect. The Bank of Russia is merely delivering on its price management mandate within its political limits. When Finance Minister Siluanov says “we cannot afford any financial slack in the face of such large-scale global transformations,” he is not speaking as someone fighting for authority. Rather, he will administer whatever poison is necessary to keep the war going.
The Bank of Russia’s approach may be frustrating for those in the Kremlin, but it reflects the regime’s own logic. Leaving the consequences of higher rates to the market avoids the biggest trap of planned interventions in the political system: whoever is allowed to decide who wins and loses accrues political power that must be kept in check. What follows is a political market failure. Institutions are incentivized to compete for policy influence within the limits of their respective mandates without coordination—coordination that would involve the creation of yet new institutional platforms that must confer formal power to existing incumbents if they are to have any effect. In other words, the “cold war” is the system working as intended, which is to say working badly and without any organized regard for public welfare.
A recent law allowing the Bank of Russia and private banks to arm themselves and shoot down drones is a perfect emblem of the system’s failures and contradictions. Instead of absorbing these costs with the public purse and extending any sense of national accountability, officials have effectively turned the degradation of air defenses into a private responsibility. Naturally, whoever is selling these weapons and services—perhaps private security contractors—will benefit. But these contractors will themselves be pulling from an ostensibly finite supply, creating a new channel of competition over what should be a public good. Suddenly, state failure becomes an opportunity for some while adding a new friction for doing business.
The timing is terrible. A strengthening ruble and weakening economic conditions drove a 22% month-on-month decline in bank profits for April. It’s hard to imagine bank managers relish the prospect of throwing cash at weapons when there are no structural tailwinds of note for the economy on the horizon. The longer private provision goes on, the more entrenched it becomes as a form of quasi-rent. Ironic, then, that the regime’s capacity to monetize and marketize its own incompetence is a source of strength. It binds interest groups to it even as it fails in its war on Ukraine.
The timing is terrible. A strengthening ruble and weakening economic conditions drove a 22% month-on-month decline in bank profits for April. It’s hard to imagine bank managers relish the prospect of throwing cash at weapons when there are no structural tailwinds of note for the economy on the horizon. The longer private provision goes on, the more entrenched it becomes as a form of quasi-rent. Ironic, then, that the regime’s capacity to monetize and marketize its own incompetence is a source of strength. It binds interest groups to it even as it fails in its war on Ukraine.
There is no magical tipping point at which elites are going to rage against the regime in its current configuration. Everyone individually is too invested in their own survival and the value of their assets or political influence. Those assets and that influence rapidly lose their value the moment they stand up—not only because they cannot coherently challenge Putin, but also because they expose themselves to counter-attacks from other elites hoping to gain more by showing their devotion to the boss. The regime is remarkably adept at turning its failures into business opportunities. Unfortunately for the regime, there is a whole lot of failure to come if it can’t resolve the tension between monetary and fiscal policy alongside deteriorating conditions at the front. Putin’s capacity to directly impose pain on interest groups has weakened, hidden behind technocratic instruments of governance that spread the pain around. But that weakness is strength in the system now governing a regime carried forward by inertia and his refusal to make difficult decisions.
