Fortunes of war: is Russia’s economy slowing?

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1:05The Economist

1:12Hello and welcome to The Intelligence from The Economist. I'm your host, Jason Palmer. Every weekday, we provide a fresh perspective on the events shaping your world.

1:26In China, the number of protests seems to be on the rise. But what's changing most is how and why demonstrations happen. Our correspondent looks at a complex loop of social media and the diaspora that magnify simple pocketbook issues. And if it's widely accepted that messing around on your phone screen while driving is a bad idea, why should the car's touch screen be any different? As buttons and switches disappear, we examine the dangers of the tap-tap-tap.

2:04First up, though.

2:12The European Union has been absolutely hammering Russia with packages of sanctions since the start of the war in Ukraine. Recently, the European Commission's boss, Ursula von der Leyen, proposed another. Again and again, President Putin has escalated, and in response, Europe is increasing its pressure. This is why today I'm presenting the 19th package of sanctions. Meanwhile, America has targeted thousands of Russian individuals and entities with sanctions. Yet the day before Ms. von der Leyen's announcement, Russian President Vladimir Putin claimed a recession is a long way off, talking up what he called his country's historic low unemployment.

2:55So it's time to ask Callum Williams, our senior economics writer, what's really going on with Russia's economy. Western policies mean that right now no other country faces more sanctions than Russia. There have been repeated predictions of economic collapse, largely as a result of those sanctions. But those predictions have been repeatedly incorrect. Yes, there was a brief recession in 2022, but since then the Russian economy has boomed. Now, though, we're entering a situation where Russia's economy is slowing almost to a standstill. What do you mean by that? What bears that out? OK, so monthly GDP data for July was just 0.4 % higher than the year before.

3:42So that's pretty slow. Lots of other real-time data point in the same direction. Corporate profits growth is pretty weak, and that's affecting the stock market. Growth in real wages has slowed down. In 2023 and 2024, there really was an economic party of sorts. As a result of massive growth in government expenditure, real wages boomed, corporate profits boomed, consumer confidence grew very substantially. But that economic party is now well and truly over. Who killed the party? I think two things killed the party. one was the decision by the government to take away a lot of the fiscal stimulus so in 2023 there was a fiscal boost worth about five percent of GDP this was the result of lots of extra spending on the military big boosts in welfare payments and that kind of thing this year we're looking at a mild fiscal consolidation the other thing that we're looking at is monetary policy so one of the downsides of the boom in 2023 and 2024 was that inflation started to rise quite rapidly And so as a result, the central bank increased interest rates, and those higher interest rates are now biting.

4:53It basically means that borrowing is more expensive than it was, and people have a big incentive to stash their money away in bank accounts and earn interest rather than spend it. So those two things together are causing the slowdown. So from the start of the war in Ukraine, we have spoken about the degree to which sanctions were or were not working and looked on with confusion as the Russian economy seemed to be doing okay during most of that time. The answer now, with the benefit of some hindsight, is the government was just chucking a great deal amount of cash around in the economy. The sanctions in isolation probably did have a negative impact on the economy.

5:31On the other hand, I would argue that the effect of what was implemented by the government in response to those sanctions far outweighed the effect of the sanctions. So you're basically looking at unbelievably massive fiscal stimulus. And the reason why the Russians were able to do this in 2023 and 2024 was basically because in the run-up to the Ukraine war during the 2010s, they had saved a lot of money. And so they had a lot of money just sitting on the sidelines waiting to be spent in case something bad happened. So that's the first thing. The second thing is, yes, sanctions almost definitely did have a negative impact on the Russian economy.

6:10However, I would argue that it was much less negative than people had expected. And this is largely because Russia proved more flexible at evading the sanctions than people had anticipated. So, for example, if you look at what's happened to Russian oil production in recent months, it's declined quite substantially, actually. And so it's tempting to conclude that sanctions, as it were, take the credit for that decline. but then if you think through the other reasons why russian oil production might decline it's quite hard to credit the sanctions so interest rates have been very high and that means that borrowing money to explore and drill for new oil becomes a lot more expensive global oil prices have been quite low which means that the incentive to export oil has gone down and the ruble has also appreciated this year which basically means that it's less profitable for russian oil companies to export oil.

7:09And then if you think about the sanctions, yes, the Russian oil trade has been disrupted, but basically Russia is still selling loads of oil, in particular to India. So I think it's quite hard to say that sanctions have had that much of a defect really on the Russian economy. So it makes you wonder what this latest round of sanctions will do. It looks like just the latest in a long line of not very much. Yes, and of course we don't know what the effects of these sanctions will be and perhaps the EU's 19th package and perhaps if the US puts stronger tariffs on countries that buy Russian oil, perhaps this really will be the time where sanctions start to bite.

7:51I think the history would suggest that there's a prima facie case for not thinking that they were going to have that much of an effect. There's basically ways that Russia can get around these sanctions. In particular, we're now seeing more barter between Russia and its trading partners. So Russia will give China some wheat and China will give Russia some cars. And so that means that you don't have to involve the banking system. So banking sanctions don't really have that much of an effect. And we also have the growth of a lot of countries, what you might call neutral or non-aligned countries, that are increasingly acting as a go-between between Russia and the West.

8:30My base case is that those kinds of workarounds will continue and that the latest rounds of sanctions from the EU and the US will have much less of an effect than the politicians expect. So the sanctions might have roughly the same small effect that they've had before, but you were saying the economy is finally starting to feel the pinch. I wonder what that's like on the ground when inflation is up and wages are down. Is this finally landing in the laps of Russian consumers, voters? So I suppose one argument could be that, yes, the economy now is slowing. And what that means is that domestic pressure will start to build on the Russian government, and that in turn will force Vladimir Putin to start negotiating towards the end of the Ukraine war.

9:14I think it's important to distinguish, though, here between changes and levels. So the change is that the Russian economy is no longer getting better. But the level is that the Russian economy and Russian consumers are sitting pretty at the moment. So if you think about real wages, they are at an all-time high. And in particular, if you look at consumer confidence, what people are saying about the strength of the economy, that is also at pretty much an all-time high. And so I think from those two data points, it's quite hard to make the case that the Russian electorate is on the verge of revolt and Putin needs to make some concessions as a result.

9:52Thanks very much for joining us, Callum. Thank you, Jason. for lots more about global finance business and economics check out our sister show money talks you'll need to be an economist podcasts plus subscriber to listen

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11:22About a month ago in China, a surprising protest took place in the southwestern city of Chongqing. Alice Su is a senior international correspondent for The Economist. There was a high-rise building in a busy area with a lot of college students around, and these words suddenly appeared on a tower block. They said,

11:44Only without the Communist Party will there be a new China. Freedom is not given. It is taken. It is fought for. So these messages were coming from a projector in a hotel room across the street. And there was actually no one in that hotel room. A man named Qihong had set up that projector days before and then left China and then turned it on from outside. He had also placed the camera on inside the hotel room so that he could film police coming into the room, seeing that it was empty and being very confused at who was doing all of this.

12:23He then uploaded the videos of his protests and of the police response to social media where they were seen more than 20 million times. So let's start with the protester and what he was protesting against. I spoke with Qi Hong a few weeks ago, and he's actually a surprisingly understated guy. He's 42 years old. He works as an electrician. He's originally from rural China. He was a migrant worker who in the 2010s started running an e-commerce shop and started learning about the outside Internet. That is the Internet beyond the great firewall of censorship in China. He had quietly observed the things that were going on around him.

13:00He told me about how during the COVID pandemic, he experienced this loss of personal agency or he saw the state cracking down on people. And the more that he went online and looked at information that was from the outside internet, the more he grew sickened by the contrast that he saw between what was being shown to him in the daily news in China, which was a lot of nationalist propaganda. But then online every day he was seeing ordinary people like him being brutally repressed. And, you know, Qihong, what he did was a bold and daring thing, but it actually wasn't entirely original because his protest was also inspired by other individual protesters that he saw online.

13:40And this is surprising given that China has the world's most advanced methods of surveillance and social control. And yet there are some striking trends that we've observed in the last few years since the end of the COVID pandemic. Which is to say more and more brazen protest. Well, not exactly. It is to say that we see an increase in the number of protests overall, but the vast majority of them are not so openly against the Communist Party. So we see growing dissent. But then among the percentage that is openly political, we see more creative methods. And we see this growing connection between protesters like Qihong and activists on the outside internet.

14:17We see them kind of watching each other, echoing each other and copying their methods. And the tenor of them is similar? Is that disconnect between what people are seeing and what people are being told they're seeing? That's something I hear from the more politically radical protesters. But actually, overall, dissent in China has been rising for the last few years. And it's largely, I would say, for economic reasons. And of course, it's always hard to get solid numbers on what's going on in China because of the censorship. But there is a platform called China Descent Monitor, and they track protests in China basically by racing against the censors to catalog incidents as they happen.

14:56They've documented nearly 12 ,000 protests since June 2022, and they've seen a steady increase every year. In the first six months of this year, there was a 73 % increase over the same period the year before. And these protests are almost certainly undercounted because obviously they get erased from the Internet. Lots of people try to take pictures and post things online, but they're not even able to get it uploaded. And of course, there are protests that happen without any online documentation. But overall, they do see that dissent is growing. And this dissent, you say, is largely about economic issues.

15:29The largest categories are protests related to labor or housing. And for workers, it's mostly unpaid wages. For housing, it's construction workers and contractors who haven't been paid. or there's a lot of protests by homebuyers who have bought properties, but those properties have been left unfinished. But economic protests can also easily turn political. I spoke with the manager of China Dissent Monitor, and he told me that one third of the protests they track are targeting local authorities. He put it to me this way. In China, you know, protest is not usually an explosion. It's like a slow bubbling process.

16:04And people's first instinct usually is actually to appeal to authorities. So they go to the local government. They go to the police. They try to petition an appeal and say, I'm being treated unfairly, like, please help me. But then if the local authorities are not responsive or if their first response is to basically suppress the protesters and shut them up so that everything is stable, everything looks good, then those authorities themselves also become targets of the protest. So from the numbers, we can see that the majority of people are angry for reasons connected to their own personal finances and their own personal well-being.

16:36But that can also quickly turn into resentment against authorities. And does that resentment go anywhere? Do these protests get any results or is everything shut down too quickly for it to have any result? You know, it really depends on how authorities respond. And what's interesting is when you look closely at dissent in China, there are some instances where their protest brings about change. Last December, there were 17 protests in 11 cities across 10 provinces and one municipality. So basically across China and people were protesting about this controversial law over shareholder liability for companies that had already gone bankrupt.

17:14And China's legislative authorities actually did change that law after they saw that people were mobilizing and coming out into the streets. And famously, of course, the end of China's zero COVID policy in late 2022 came about after nationwide protests, despite the country's highest leader previously saying, you know, this is our unswerving path and it will not be changed. But more commonly, protests are just suppressed. But it's like the more that you push down on these protesters, the more you create pressure, right? So because some people managed to take videos and preserve them and get them to activists overseas who posted them on platforms like YouTube and X where they were seen by not only people abroad, but people like Qihong, the man with the projector inside China who was using a VPN to get over the firewall.

18:00And there's this echo effect we can observe, which shows this new growing connection between the people inside and the people outside. So what is the Chinese Communist Party going to do to break that connection, which they must surely want to do? They are cracking down, as they always do. People like Qihong, who are able to do a remote protest, still suffer consequences. His family was taken for interrogation. He had police come to his mother in his rural hometown and take her away. There's evidence that the authorities are also cracking down on these Chinese digital activists overseas. One of the major social media accounts, the one on X that was sharing these videos, has heard from people within China that police would come to them and say, we know you are following this account.

18:40So he's actually made an announcement saying, keep opening the page of my account to see what I'm posting, but don't follow me because when you follow me, the police might come. Of course, Xi Jinping has also been promoting what he calls grassroots governance, which is this idea of telling the local authorities to keep conflicts contained at a local level and don't let them escalate, don't let them go to the central authorities. And the more that they resort to repression, the more pressure builds and the more likely that we will see these little explosions happening. But if they do actually do better grassroots governance and mediate conflicts and help people solve problems, then that could help relieve some of the pressure.

19:17Alice, thanks very much for your time. Thank you.

19:41When I was in college, I had a 1986 Nissan Maxima, pretty tricked-out hand-me-down from my grandfather. What he had liked about it was that it talked to him. Right door is open. At the time, this was pretty futuristic stuff. Fuel level is low. This wasn't a synthesized voice stored on a chip. It was actually a little phonograph record deep inside the dashboard. Ah, past future tech. Importantly, when I got tired of being nagged about low fuel, I could turn the feature off with the satisfying click of a real live rocker switch. I didn't know then that actual future tech would do away with all of that.

20:22So the idea of touchscreens in cars actually goes back to 1986 and a model called the Buick Riviera. But it didn't catch on then. Tim Cross is a senior science writer at The Economist. What really started the modern trend was Tesla's Model S. And these days, almost every new car you can buy, at least in rich countries, comes with a touchscreen that controls everything from the aircon to the sat nav to the radio to the heated seats. Even in some models, it'll control safety features like automatic lane keeping. But there's mounting evidence that touchscreens are less safe than the old way of doing things when you would control your car through real physical buttons and dials.

21:03But why is that, though? Why is the touchscreen any different from the button and the dials? It's a couple of reasons. So for one thing, if you've got real physical controls on the car, over time you learn where they are. So you can reach down and turn the air conditioning up without having to take your eyes off the road. And the fact that some of the controls are buttons and some are dials and some are little knobs, that helps as well because you get sort of direct physical feedback. You can tell when you've pressed a button in a way that you can't really tell if you've tapped on a touchscreen without looking at it.

21:31So part of the problem is that to operate a touchscreen, you really have to take your eyes off the road. that's made worse by the fact that one of the advantages of touchscreens and one of the reasons that car makers like them is you can condense all the controls into one place but what that often means is that the particular thing you want to fiddle with might be buried in a couple of sub menus so it might take two or three button presses to get what you want as opposed to just one with the old way of doing things and so for critics and for quite a lot of ordinary car drivers as well that amounts to a sort of dangerous distraction built into your car.

22:04And I guess the sort of most relatable version of this argument goes, you know, in most countries, it's illegal to be tapping along on your phone while you're driving a car because you're not paying attention to the road and it's dangerous. So if that's illegal and if that's dangerous, how come these cars have what are effectively gigantic mobile phone screens built into them that require you to tap away at them to control things? Well, and as a matter of fact, the research reflects that smartphones are in fact a danger, right? It does. And there's similar research out there for using touchscreens built into cars.

22:34So a few years ago, a Swedish motoring magazine called V Billigar, they tested a bunch of modern cars with touchscreens and compared them to an older model that used buttons and switches. And they found that doing tasks from the touchscreen took much, much longer. In one of the modern cars, for instance, the drivers were driving along at 110 kilometers an hour, and it took them 44 seconds to do some tasks on a touchscreen, in which time the car went nearly a kilometer and a half. So they They were sitting there, driving along, only paying intermittent attention to the road for a kilometre and a half driving, compared to about 300 metres for the car equipped with buttons.

23:07There's been research in Norway with gaze tracking cameras showing that even quick jobs, like changing the temperature, means you have to spend several seconds not looking at the road. And there was a British study done a few years back that concluded that using a touchscreen had about the same effect on your reaction time as driving while over the legal alcohol limit. Something which is a sufficient danger that it is regulated against. Surely regulators are on the task here in the same way that, you know, using a smartphone while driving is illegal in some jurisdictions. They're starting to be.