The Old Russian Reversal
There’s a scene in Cole Porter’s 1938 musical “Leave It To Me!” in which a character offers a gratuity to a messenger only to have the tip rebuffed.
“No tipping!” he is told. “In Russia, the messenger tips you.”
It’s one of the earliest form of the jokes that came to be known as the “Russian reversal.” Bob Hope supposedly used the form while hosting the 1958 Academy Awards ceremony. He had just returned from a trip to Russia, he told the Oscars’ audience, and was happy to report that every room in his hotel had a television. There was just one difference: “In Russia, the television watches you.”
The best-remembered Russian reversal jokes probably come from the Russian-born comedian Yakov Smirnoff. In a 1985 commercial for Miller Lite, Smirnoff extolled the wonderful things about America, including “blue jeans, unopened mail, and light beer from Miller.”
“In America, there is plenty of light beer, and you can always find a party,” Smirnoff said. “In Russia, the Party always finds you.”
The New Russian Reversal
These were brought to mind by the announcement on Friday that Russia was banning exports of diesel fuel. An updated version of the Russian reversal might go something like this: “In America, you sanction oil. In Russia, the oil sanctions you.”
When Russia invaded Ukraine last year, the Biden administration forecast that its sanctions would be crippling. Daleep Singh, the deputy national security adviser for international economics who is said to have designed the sanctions, estimated that Russia’s economic output would be cut in half.
“Think of it as an economic shock and awe campaign,” the Biden White House stenography firm known as CBS News wrote. “Never before has such a large, modern economy been cut off so quickly from most of the world.”
To put it mildly, this has not worked out as planned. The sanctions did succeed in making Russia officially the most sanctioned country in the world. That just proved not to matter as much to Russia’s economy as many of the experts in financial warfare were forecasting.
The Shock of Russia’s Resiliency
The Russian economy shrank 2.1 percent in 2022. That’s a serious recession but not exactly the economic devastation that the U.S. said would be visited upon the country in retaliation for the invasion. In July, the IMF said that it expected Russia’s economy to grow 1.5 percent this year. Russia is now projecting that its economy will grow by more than two percent this year.
The professional Western critics of Putin’s regime warn that we should not trust Russia’s official economic figures, much less the forecasts of its state economists. They say the numbers are inflated to dishearten the West and that they are just part of Putin’s propaganda war against the United States. But even if the Russian economy is not growing as much as its finance ministers say, there’s little room for doubt that its economy is growing.
What’s more, Russia has become a leader in the campaign by the OPEC+ group to raise the price of oil by limiting its production. While much of the world that is most susceptible to U.S. influence attempted to limit Russia’s ability to buy and sell goods and services, Russia has shown that it is perfectly happy to limit its own largest exports—petroleum and gas.
On Friday, after Russia announced an indefinite ban on diesel exports, the price of Brent Crude rose to $93.55 a barrel. With the U.S. Strategic Petroleum Reserve badly depleted after the Biden administration used it to push down oil prices last year and then failed to replenish the stockpile when oil was much cheaper, there’s no ready source of new supply to keep prices from rising even further.
If Russia were starved for foreign capital, it would be exporting everything it could. Instead, it is more concerned about shoring up domestic supply to prevent inflation.
In the Long Run, We’re All…
Analysts now say that the best that can be hoped for is that the sanctions will hamper the Russian economy in the long run. Even that might be too optimistic because the sanctions appear to be encouraging Russia to invest more in domestic production and to seek sources of goods and services outside of the U.S. zone of influence.
A big part of the key to Russia’s economic resilience appears to be rooted in the fact that it has realized that it enjoys a level of fiscal and monetary sovereignty very similar to that of the U.S. and the Eurozone. Russia does not need foreign capital to fund domestic production—and the Russian government cannot run out of currency to pay for domestic production or service.
The Wall Street Journal reported in August:
Economists attribute much of the growth in Russian industrial production this year to weapons and materiel. President Vladimir Putin has ordered the government to provide unlimited funding for the war machine.
The output of “finished metal goods”—a line that analysts say includes weapons and ammunition—rose by 30% in the first half of the year compared with last. Other lines associated with military output have also increased: Production of computers, electronic and optical products also rose by 30%, while the output of special clothing has jumped by 76%. By contrast, auto output is down over 10% year-over-year.
“What we’re seeing now is a massive boost in demand distribution via military-industrial complex and war beneficiaries, we can call it military Keynesianism,” said Alexandra Prokopenko, a former Russian central-bank official who is now a nonresident scholar at the Berlin-based Carnegie Russia Eurasia Center.
Before anyone scoffs at the sustainability of this “military Keynesianism,” keep in mind that new orders for “defense capital goods” in the U.S. are up 20 percent year-to-date, hitting nearly $94.8 billion in July, according to the U.S. Department of Commerce. New orders for defense aircraft are up by 17.3 percent to $36.2 billion. So, Putin’s Russia is not alone in getting an economic boost from war production.
Prokopenko, however, is confident that spending to build warfighting capability is “not productive growth.”
“The Russian economy is not sustainable in the long term. It all reminds of the Soviet times and we know how the Soviet economy went,” she told the Journal.
Well, sure. We do know how it went. But it took 69 years for it to finally go for good.