Russia’s Epochal Turn: A New “Shock Therapy”
As Russia’s special military operation in Ukraine is nowhere near its end the “special economic and financial operation” against Russia launched by the West also intensifies. It looks like a consensus is now forming that the Russian economy is set to contract by over 10% in 2022. Things may change going forward as Russia’s geopolitical risks can only increase – any outlook may be subject to a significant change. The actual outcome may be quite different as it happened with the initial assessment of the potential impact of the COVID-19 pandemic on the global economy – the very initial expectations were much rosier than later forecasts.
The two aforementioned “special operations” created a lot of headache for a vast majority of businesses and individuals as they are now forced to redesign their lifestyle and business in accordance with completely new realities, and reshape their financial and trade relations with the rest of the world. The challenge is as uneasy as was in 1992 at the start of liberal reforms, albeit the nature of Russia’s transformation at that time was the opposite. The majority of the Russian population will remain patient while the authorities will keep reinventing the Russian economy in the new geopolitical narrative – may be even more patient than in the past as the West will be blamed.
Russia’s reforms of the early 1990s were partial and slow, and the GDP contraction was prolonged. It wasn’t shock therapy at all. Those countries which experienced real shock therapy were able to resume economic growth within a couple of years on average. Russia’s modern transformation should not repeat the same mistakes. Given that not only the current generation of politicians on both sides won’t be willing to improve mutual relations, but it will be impossible for future generations as well, it is in Russia’s economic interests to cut ties with the West quickly. Part of the long-term reinvention experiment will require ring-fencing Russia’s financial system from the western influence, reducing transactions in USD, EUR, JPY and other “unfriendly” currencies. This strategy will require significant reduction of mutual trade and will be fully in line with the West’s intentions to stop trading with Russia.
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