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How Putin Cannibalizes Russian Economy to Survive Personally

6 minute read
Sonnenfeld is the Lester Crown Professor of Leadership Practice at the Yale School of Management, President of the Yale Chief Executive Leadership Institute and led the historic initiative to catalyze and certify the exit of 1,200 major global enterprises from Russia in protest over the invasion of Ukraine.
Tian is research director of the Chief Executive Leadership Institute.

Nearly 18 months into the Russian invasion of Ukraine now, amidst last week’s failed coup attempt, battlefield setbacks, and global diplomatic condemnation, Putin is coming under increasing strain to finance his increasingly-expensive war—and there’s a history lesson for how this will all end.

Far from the prevailing narrative on how Putin funds his invasion, Putin’s financial lifeline has his merciless cannibalization of Russian economic productivity. He has been burning the living room furniture to fuel his battles in Ukraine, but that is now starting to backfire amidst a deafening silence and dearth of public support. That is far from the prevailing narrative on how Putin funds his invasion. Ample western commentators posit that Putin is pulling in billions from trade to finance the invasion thanks to high commodity prices, weak western sanctions, and sanctions evasion.

But energy prices across both oil and natural gas are now cheaper today than before the invasion, as are grain, wheat, lumber, metals, and practically every commodity that Russia produces. Amidst lower commodity prices across the board, thanks in part to the effective G7 oil price cap, Russia is now barely breaking even on oil sales with unwanted Russian Urals oil trading at a persistent discount but continuing to flow in ample volumes – exactly as it was designed. In short, the world has now largely replaced Russian supplies so commodity exports are no boon to a desperate Russia right now.

It is often overlooked that Putin is funding his invasion of Ukraine not only through marginal commodity exports or trickles of sanctions evasion but through the cannibalization of Russia’s productive economy. As an extractive authoritarian dictator with state control over 70% of the economy, Putin will never really run out of money since he can always pull the authoritarian equivalent of finding money under the couch, or pull a schoolhouse bully act and shake down kids (i.e. oligarchs) for their lunch money at recess time.

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Putin has levied draconian “windfall taxes” on basically anything that moves. Many thought last year’s record $1.25 trillion ruble windfall tax on Gazprom and certain other Russian state owned businesses was a one-time occurrence, but Putin has only doubled down and ordered more windfall taxes in the months since, raising trillions of rubles more from companies and oligarchs alike. Likewise, first Putin resorted to levying onerous taxes on both companies and people leaving Russia after the invasion before he dropped all pretense and just started indiscriminately seizing money and property instead.

Similarly, Putin has abandoned all pretense of responsible fiscal policy, running record budget deficits, printing record amounts of money out of thin air, forcing Russian banks and individuals to buy near-worthless Russian debt, and drawing down Russia’s hundreds of billions in sovereign wealth funds, mortgaging away Russia’s future. No wonder disenchanted elites such as oligarch Oleg Deripaska are reduced to complaining to the press while across Russia, labor strikes are taking place with increasing frequency in a throwback to 1917 amidst already disastrous labor shortages.

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Some, like Deripaska, even argue that Putin’s shakedowns are hurting the Russian economy even worse than western sanctions – which are already causing entire sectors of the Russian economy to implode, as we’ve shown before. And on top of sanctions, with over 1,000 western companies leaving Russia practically overnight, already Russian consumers are hard-pressed to find erstwhile staples, ranging from consumer electronics to automobiles.

Amidst such undisguised plundering of the Russian economy, stripping it down for war toys, it is perhaps no surprise that Prigozhin’s failed putsch this past weekend revealed no lost love for Putin domestically from the Russian populace and elites. After all, not only did military leaders and civilians alike passively wave columns of Wagnerites through checkpoint after checkpoint on the road from Rostov to Moscow without a shred of resistance; even Putin’s own regional governors were lethargic in their response, and even now, a whopping 21 of them have yet to express any support for Putin. Ironically, the only group of Russians who rushed to Putin’s defense with any genuine enthusiasm prior to Belarusian President Lukashenko’s diplomatic intervention were brigades of Chechens who sped to Moscow and Rostov, led by Putin’s longtime ally and newly-minted selfie-pal Ramzan Kadyrov.

There is a historical pattern here. Of the two major Russian revolutions over the past century, both were undergirded by debilitating economic woes caused partially by military overreach and struggles on the battlefield. After all, wars are never cheap: economic analysts estimate that sustaining its military efforts costs Russia at least $1 billion a day, and it surely didn’t help that Putin sunk billions in not only the Wagner Group but also Prigozhin’s other companies. Likewise, World War I drained Tsar Nicholas II’s coffers prior to his abdication in 1917, when Russia was wracked by over 100 labor strikes amidst widespread famine, exacerbated by both forced conscription as well as returning military veterans. And prior to the collapse of the Soviet Union, the escalating costs of the Cold War combined with low oil prices and severe recession undermined the Soviet economy from within. Losing wars seems to go hand-in-hand with economic morass and regime change in Russia.

For over a year, we have been saying that the Russian economy was imploding despite claims of Russia’s economic resilience. That resilience is nothing but a Potemkin façade, sustained not through genuine economic productivity but rather through shaking down the entire country for pennies to direct towards war.. Putin can continue to sustain his invasion of Ukraine this way, but in doing so, continues to rip off his own people. In avoiding outright economic collapse by mortgaging Russia’s future, he grows more unloved by his people and is thus increasingly weakened. Economic decay is never the only cause of regime collapse; but nor should it be ignored as a demonstrated potent force in bringing down tyrannical regime after tyrannical regime, especially amidst military overreach.

Historian Daniel Goldhagen’s 1996 book Hitler’s Willing Executioners reminds us that the evil of the Third Reich triumphed through the complicity of average Germans through their complacency. We now see Russians’ willing complacency with the murderous autocratic Putin.

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