Putin succeeded in a few weeks in completely destroying the Russian economy and making Russia radioactive for investment, trade and business. It’s not just the penalties. These were devastating. But it went way beyond that. Western brands that were integral to the booming Russian economy after the disastrous economy of the 1990s are going away. They were not required to leave by the sanctions. They just judged that thanks to Putin, Russia was too toxic for business.
McDonalds closed 850 stores that employed 62,000 Russians. IKEA closed 17 stores that employed 15,000 Russians. As big brands leave, it puts pressure on other brands to follow suit. In the age of social media, consumers are quick to punish brands that behave in ways deemed unacceptable. This created a rush to the doors of Western businesses that had become part of Russian consumer life.
When the first McDonald’s opened in Russia 32 years ago, signaling the arrival of the Western lifestyle, there were hours of waiting. Hour-long queues also formed in the final days before McDonalds and IKEA closed. It is not just the economic repercussions and the loss of jobs that are damaging. Perhaps the worst is the psychological damage to Russian consumer sentiment. These marks signified to a growing middle class that Russia had a world-class economy. That he had left behind the bad old days of Soviet deprivation and isolation. Then within a week, this whole world fell apart.
A significant portion of this growing middle class was in the tech sector. Young software developers have been plugged into the global technological revolution. Western companies have outsourced development to Russian software companies. In the past 3 weeks, 250,000 Russians have left Russia. Among them are the best and brightest young tech workers. A brain drain that will cripple Russia’s economic future.
Then there are the penalties. They are historic in their gravity. The most devastating sanction of all is the sanction against the Russian Central Bank. Putin spent 8 years building up a war chest at the Russian Central Bank to resist the sanctions that would come when he annexed Ukraine. It took 8 years to double the reserves and now half of that money is frozen. 8 years of accumulated reserves are now beyond its reach. Meanwhile, his “special operation” in Ukraine costs more than 20 billion dollars a day. This cost may increase as the Ukrainians destroy tons of expensive weaponry. The main tank production plant in Russia cannot produce tanks due to supply chain issues.
When credit markets freeze, economies collapse. It happened in 2008. It’s happening now in Russia. The Russian stock market and the Russian ruble were wiped out. Credit cards, currency transactions, lines of credit – it all goes up in smoke. Now just a memory of a time when Russia was a functional part of the global economy (3 weeks ago). Putin isolated Russia and caused historic and lasting damage to its economy.
In a matter of weeks, it swept away 30 years of economic progress. Without warning or preparation, the Russians were plunged into an economic nightmare. They returned overnight not to the economic disaster of the 90s, but to the isolation and deprivation of the Soviet 70s. Not only was Putin’s army totally unprepared for the reality of his decision to invade Ukraine. The Russian people are totally unprepared for the devastating and sudden consequences of the invasion on their own lives.
This may be far more dangerous for Putin than his catastrophic military failures in Ukraine. It’s hard to see the Russian public after experiencing the last 30 years of hard-earned economic growth and progress accepting becoming an isolated and impoverished hermit state ruled by a demented paranoid autocrat like North Korea.
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