High oil prices are the only thing sustaining Putin’s extreme aggression and petro-nationalist authoritarian power.

President vladimir putin boasts about the strength of the Russian economy in the face of Western sanctions, citing estimates by international financial institutions that Russian gdp shrank only modestly in 2022. The Russian leader’s bullishness is hardly surprising, and he is not alone: it is a widely held view that the sanctions imposed on his regime have had little economic impact.

A recent overview of the Russian economy by the Re: Russia Project, a network of experts, challenges this thesis. The report, prepared by a group of economists including former top figures from Russia’s finance ministry and central bank, a professor at the University of California and myself, finds that sanctions have indeed had a big effect: they have led to capital outflows from Russia equivalent to 12% of its gdp. Under normal circumstances, that would precipitate an economic disaster. However, there is a powerful force that mitigates the effect of sanctions, namely high energy prices.

The boost in revenues from higher energy sales and the reduction of imports (due to sanctions) have resulted in a trade surplus of about 18% of gdp. This surplus and the inflow of petrodollars have helped Russia avoid economic meltdown. But a hidden crisis is not the same as a strong economy. We call this situation “worse than crisis” because high revenues from energy exports act as an anaesthetic that does not allow the economy to feel the damage done by sanctions and respond adequately.

Right now, supply exceeds demand in the global oil market. But according to the March forecast by the International Energy Agency, demand will increase significantly by the end of the year; this will push prices up again. Even taking into account a substantial discount on the price of Russian crude, in part the result of a g7-imposed price cap, oil will provide Mr Putin with enough funds to continue his war and sustain his repressive regime. Western efforts to limit Russian oil’s access to the market are likely to have little effect.

It is time to admit that high oil prices are the main factor in Mr Putin’s aggression outside and inside Russia. And it makes sense to put the problem in a broader perspective. In the 1990s the average price of a barrel of Brent oil was $27 (in constant 2010 dollars). In the 2000s it was $54, and in the past 12 years it has been more than $70 (it is currently around $80). Russia has received an average of $250bn a year from oil and gas sales over the past 15 years. The enormous size of this hydrocarbon rent has allowed Mr Putin to buy the loyalty of the population and form clientelist networks within the elites. All this strengthened his authoritarianism – and that of others, too.

In the 1990s many formerly authoritarian countries sought rapprochement with the West and looked to adapt Western market institutions and democracy, because they were interested in expanding trade and investment with developed countries. But the era of high resource prices has made such strategies much less attractive. Inward investment became less necessary because it was successfully substituted by the inflow of rents. And the expansion of domestic consumer markets in prospering authoritarian countries has enticed foreign firms to invest in and trade with them, turning a blind eye to corruption and human-rights abuses.

I am convinced that if energy prices had been much lower, the war in Ukraine would not have happened. Huge revenues from trade not only consolidated authoritarianism and the elites that profited from their distribution, but also gave Mr Putin’s regime and its hangers-on a general sense of power and invincibility, spurring on what we might call “petro-nationalism”. These same gains weakened the leverage of Western countries, as access to their markets and investment became less and less important to Russia’s economic well-being.

We can find, in all this, answers to two key questions: when will this war end? And when will we see a normalisation of the political regime in Russia? The answer is when the oil and gas revenues are significantly reduced. But it is likely to take more than one year of falling prices (such years have occurred three times in the past 20). It would take three, four or maybe five years to bring about the sharp fall in living standards and shortage of money in the economy that would force ordinary Russians and the elites to conclude once and for all that the regime is a busted flush and to seek political and economic alternatives.

Although it would probably take several years of financial starvation to bring about such a turn of events, the war in Ukraine and sanctions have now dramatically increased the regime’s vulnerability to falling energy prices. It needs to maintain high military spending, and high social spending to contain discontent, and at the same time it needs to deal with the consequences of massive capital outflows. It must also provide import substitution in critical sectors and build new infrastructure to expand trade flows to the east and south. If energy prices experience a sustained fall, Mr Putin’s war of attrition could turn into a war of self-exhaustion.

Conversely, if oil prices remain high, the West will have to produce weapons for Ukraine on the same scale that oil rents allow Mr Putin to produce them in Russia. And even if Ukraine manages a successful military counter-offensive in the next few months, making the Russian leader seek some form of armistice, his regime is highly likely to survive, with the threat of renewed war intact.

Only a substantial and sustained fall in hydrocarbon prices can change the situation. The only question is whether Russia, by then, will be too dependent on China both economically and politically to escape the authoritarian camp. ■7