Foreign Affairs Committee
Oral evidence: Russia, HC 568
Tuesday 20 October 2026
Ordered by the House of Commons to be published on 20 October 2026.
Members present: Emily Thornberry (Chair); Fleur Anderson; Alex Ballinger; Aphra Brandreth; Richard Foord; Abtisam Mohamed; Edward Morello; Sir John Whittingdale.
Questions 1-53
Witnesses
I: Catherine Belton MBE, Author and investigative journalist, The Washington Post, John Lough, Senior Research Fellow and Head of Foreign Policy, New Eurasian Strategies Centre, and Dr Ruth Deyermond, Senior Lecturer in Post-Soviet Security, King’s College London.
II: Dr Nigel Gould-Davies, Senior Fellow, International Institute for Strategic Studies, Craig Kennedy, Associate, Davis Center for Russia and Eurasian Studies, Harvard University, and Isaac Levi, Europe-Russia Policy and Energy Analysis Team Lead, Centre for Research on Energy and Clean Air.
Witnesses: Catherine Belton, John Lough and Dr Ruth Deyermond.
Q1 Chair: Welcome to the Foreign Affairs Committee’s first oral evidence session in our new inquiry on Russia. We will hear from two panels today, the first focusing on Russian domestic politics and society, and the second on the Russian economy. Can I ask the witnesses to introduce themselves?
Catherine Belton: Hi. I am Catherine Belton. I am the author of “Putin’s People” and I am a reporter with the Washington Post writing about Russia.
Dr Deyermond: I am Ruth Deyermond. I am a senior lecturer in post-Soviet security in the Department of War Studies at King’s College London, and I work primarily on Russian foreign policy.
John Lough: I am John Lough. I am the head of foreign policy at the New Eurasian Strategies Centre, which is a think-tank that was founded a couple of years ago with seed funding from Mikhail Khodorkovsky.
Q2 Chair: Thank you all for coming. Let me start at the most general level, and then we will come down into more specifics. People watching this session may never have been to Russia, or may have been but many years ago, so will you paint a picture of what Russia is like these days and how it may have changed recently for ordinary Russian people?
Catherine Belton: The picture in Russia has changed a great deal, especially this year, when Ukraine was able finally to bring the war home to many Russians. Before then, Russian society had become increasingly militarised. Of course, there were a great many ordinary Russians agreeing and volunteering to go and serve in the war because they were being given massive payouts by the state to risk their lives on the frontline, and many wives were encouraging their husbands to go there so they could get the money, but life in the biggest Russian cities, despite sanctions, was pretty much going on as usual. The restaurants were still full; people were bustling around going shopping. Yes, perhaps you would not be able to buy the latest Louis Vuitton handbag because of sanctions, but goods were coming in via routes through Turkey, India, and Kazakhstan and central Asia, and if you closed your eyes and shut out the Kremlin propaganda, you could really try to pretend that life was the same as before the war.
This year, that has really not been the case, because you have Ukrainian drone attacks reaching ever deeper into Russia—to Moscow—and hitting oil refineries. People have really felt the impact of strikes, too, on Wildberries, the Russian e-commerce giant.
Q3 Chair: That is their equivalent of Amazon, isn’t it?
Catherine Belton: Yes. People have really been feeling the strain on their pocketbooks as well. As I said, in previous years, restaurants and shops had been bustling; this year, there has been a record amount of restaurant closures, and shops are shutting down. That is because the Russian budget is coming under increasing strain. The Kremlin had to impose a massive tax hike at the beginning of this year, and it is forcing a lot of normal consumer companies out of business.
So people are feeling it now. It is a much bleaker situation. Everywhere, you would see patriotic posters and advertising for people to sign up for the war, but there is not the same enthusiasm for this any more. You see this in the opinion polls. In a poll in August, 66% of people believed that things were only going to get worse. That was a level that we had not seen since the years of the Soviet collapse.
Q4 Chair: That is very interesting, and really helpful and comprehensive, but is there anything that you want to add, Ruth?
Dr Deyermond: If we are looking at the very big picture for people who are not as familiar with Russia, just to give some context to the picture that Catherine painted, we are over 25 years into Putin’s presidency now, so we have really two generations of adults who have grown up with an authoritarian Russian Government.
Q5 Chair: Has there been a period when there has not been an authoritarian Russian Government?
Dr Deyermond: The 1990s were different, partly because it was chaotic and the political centre was weak, but there was pluralism, there was media pluralism, there was civil society to a degree, and that really went—
Q6 Chair: And that was a change from forever, in terms of Russian history—just so we get the broad sweep.
Dr Deyermond: Yes, precisely. There was this brief window when you did not have a highly authoritarian Government, although the Yeltsin presidency in the 1990s certainly was very far from an ideal democratic one.
The degree of authoritarianism that Putin brought to the presidency has slowly expanded. Initially, there was a big wave of authoritarian crackdowns on media and political dissent in the noughties during the second Chechen war, and it has grown much worse, of course, since the start of the full-scale war against Ukraine in 2022.
The reason I mention this is that Russia now has at least two generations of people who have known nothing but Putin’s presidency, and that, I think, makes it very difficult for people to conceive of a world where Russia looks different and behaves differently.
Q7 Chair: John, is there anything else?
John Lough: To build on what Ruth said, 30 years ago I was working in Moscow as a NATO official, and I struggle to recall how, in that world, in which there were obviously tensions between NATO and Russia because of NATO enlargement but Russia was co-operating with NATO, it seemed that Russia was trying to build a relationship, particularly with Europe, that would solidify some of the positive changes that had taken place with the collapse of the Soviet Union. Instead, we have seen this re-emergence of what I can only really describe as muscle memory. Russia now finds itself in a posture—the notion that confrontation is natural, “The west is our enemy”, “Britain only wishes us ill”; all this sort of thing—with which I think a good deal of society feels actually quite comfortable. People have really very easily fallen into line.
One must also say that there is a high degree of repression in Russian society at the moment. You have people being sent to jail for 12 years for a Facebook post or something that supposedly maligned the Russian army, or for giving $10 to the Ukrainian army or something like that. This is a really very nasty, very repressive system, and it was difficult to imagine 30 years ago that Russia could turn so quickly back in that direction.
Q8 Chair: Thank you. That takes us to the next question: how resilient do we believe Putin’s regime is? We hear that it is renewing itself, but how is that going? To what extent does Britain’s approach to Russia reflect an understanding of what Putinism is? Is it anything? Is it an ideological project, or is it simply a response to the actions of the Russian state? Does it hang together as an ideology? Is it renewing? How resilient is it?
John Lough: First, it has proved over the last five years, while facing this hurricane of sanctions under various pressures of war, that it is in fact very resilient. It certainly has a strong ideological content to what it is doing at the moment, which is proving to be quite effective in motivating the ruling class.
Q9 Chair: Could you explain what the ideology is?
John Lough: The ideology is one of Russia having a distinctive place in the world; feeling that the world is governed in an unjust way by a group of western countries that have simply got too big for their boots; and that there is a chance now to re-engineer the global system to the advantage of countries such as Russia. What goes hand in hand with that is the notion that Russia should have certain rights in Europe. It should have the right to establish a zone of influence on its borders—a buffer zone, if you like—or what a former Russian President called a zone of privileged interests on Russia’s borders.
It has now embarked on that project in a very serious way. In my view, there is no reason to believe that at the point at which the war in Ukraine comes to an end—though I do not see that happening any time soon, at least as long as Putin is in power—Russia’s appetite is going to stop there, assuming it holds on to those territories it has already seized, and maybe even extends its influence further into Ukraine.
There is a very coherent worldview here, that is, of course, allied to a notion of how Russia should be governed. That is on a strongly centralised model, which has been substantially refined over the past 25 years. As Ruth said, in the ‘90s there was certainly pluralism in Russia. If you looked at the way the regions of Russia interacted with the federal centre, it was very different. We have moved far away from that model, which might have been some sort of embryonic parliamentary system, to something that is heavily centralised, autocratic and very much in the Russian tradition.
To maintain that system requires preserving an enemy, and we are currently the enemy, or part of the so-called collective west. I am sure you will want to talk about this in more detail, but the UK is definitely singled out as playing a particular role.
Q10 Chair: I have heard you speak about this before. Forgive me if I have got it wrong but, essentially, the focus has historically been America although is obviously not now. We are now enemy No. 1 in terms of Russia’s focus. The rhetoric certainly focuses on the UK, is that correct?
John Lough: The rhetoric has focused in recent years, particularly since the start of the big war in Ukraine, very heavily on the UK. I would say that Germany is now starting to compete for that attention, as the No. 1 hostile actor.
In the case of Britain, you have to understand that this history goes back hundreds of years. For the most part, our relations with Russia have been difficult, confrontational and indeed adversarial on occasions. We are seen as being a civilisational other, if I can put it that way, with our tradition of liberal democratic values, and things that simply contradict so much of what Russia thinks about the world and how the world and societies should operate.
For that reason, there has historically been a significant degree of antagonism. There have, of course, been moments when the Russian elites have indulged in some Anglophilia. I think Britain is admired in certain ways. There is the tradition of Peter the Great, and all that sort of thing. It goes back a long, long way. There is an expression in Russian that implies that the English woman is always doing bad things in Russia—Anglichanka gadit—and every time anything goes wrong these days—
Chair: It’s the women! I know you didn’t make up the phrase, but we just want to be clear about this.
John Lough: I shall explain. Because England—Angliya—is a female noun in Russian, it goes from that.
Chair: Oh, I see. It is not English women.
John Lough: It is not pointing at English women as such; that needs to be made clear. To this day, when things go wrong in Russia, very often the finger is pointed at Britain, which must be the malign actor that has somehow brought it about.
Q11 Chair: Is there anything you want to add, Ruth?
Dr Deyermond: Just a couple of things on Putinism as an ideological project. In addition to what John said, which I entirely agree with, it is important to recognise that Putinism taps into a wider and much older ideology of Russia as a bearer of a distinct civilisation and as having a unique role in the world that is radically different from, but perhaps in a similar style to, the idea of American exceptionalism.
That is also deeply and intimately connected to the idea of Russia as a great power—not just Russia as a state that happens to be a great power at any given moment, but Russia as a state that is destined to be a great power. Being a great power is essential to Russian national identity and, as one Russian official said recently, if Russia is not a great power, Russia is nothing and does not exist as a state. That obviously has implications for Russian foreign policy. It also has implications for the way that the Russian Government understands the immediate past.
To go back to the 1990s, this was a period when Russia was not by any measure a great power, except for the continued possession of nuclear weapons and the fact that it has a permanent seat on the UN Security Council. By most measures, Russia is still not a great power, but the responsibility for that failure to be a great power clearly cannot be anything to do with Russia itself; it must be the fault of external malign actors who want to bring Russia down. There is the narrative about Russia’s immediate past and the end of the Soviet Union, as you can see in Putin’s recent speech to the Valdai Club, but the way that they talk about the 1990s and later is always in terms of Russia having been betrayed by the west or Russian naivety leading to Russia being undermined by a malign west—historically, as you said, particularly the United States, but now particularly the UK.
Catherine Belton: I just want to go to the point about the resilience of this system and how much the Russian elites have united behind what John described as a very coherent worldview that they are seeking to redraw the global security map to redraw global trade. The war in Ukraine is to some degree an opportunity to do that, because it can gain various leverages. At the outset of the Ukraine invasion, Putin wanted the west to give Russia various concessions, including the return of NATO to its 1997 borders. These were the discussions before he went ahead with the invasion, and this is what he is seeking to entice the west into rehashing as part of the discussions over peace in Ukraine and so on. These are his ultimate objectives.
Of course, most of the Russia elite have lined up behind Putin’s war, even though many of them were shocked at the invasion. They did not know or believe that it was going to happen, and they did not think that Putin was going to rip off the mask in such a deliberate way. Every other incursion or interference that he had had in foreign countries before that had always been done with a measure of plausible deniability. Whether it was the Salisbury poisonings or the death of Alexander Litvinenko, there was always an excuse or a reason why it was not actually the Kremlin’s hand, but here you had missiles killing Ukrainian civilians and so on. Most of Russia’s elite will line up behind the Kremlin agenda, but only if they perceive that the Kremlin is winning, so it very much depends on the moment.
Earlier this year, in April, we began to see Putin’s ratings plummeting to lows not seen since the start of the war. We had signs of fissures within the Kremlin elite. There was Sergei Kiriyenko, who was the first—
Chair: Sorry to cut across you. We have so many ideas coming out at the moment, which I think will spark a lot of other questions, so we will come back to what is happening in relation to the Opposition and the strength of Putin in the face of that. Shall we start with the Duma elections? Fleur, perhaps you could ask some questions on that.
Q12 Fleur Anderson: I am Fleur Anderson, the MP for Putney. I have a couple of questions, so that we can understand the State Duma elections, which happened from 18 to 20 September, a little bit more. I will start with you, Ruth. What do the election results signal about the confidence of the Putin regime’s control of the Russian political system? What should external observers read into the election results? Beyond the crazy numbers, which we are obviously very envious of, what should we be considering when we look at them?
Dr Deyermond: I do not think the Duma elections tell us that anything radically different has occurred, because in many respects, Duma elections have looked the same for a very long time. Some of the attempts to control the nature of the elections—to control the outcome—have been certainly interesting and potentially significant. I am thinking particularly of the fact that Yabloko, the only anti-war liberal party in Russia, was blocked from standing in these elections, which tells us something potentially about anxiety around creating a space for opposition to express itself electorally. Yabloko has been around since the 1990s, so the fact that this party was not allowed to stand for the Duma elections now is noteworthy. Beyond that, I will defer to my colleagues.
Q13 Fleur Anderson: John, do you want to add to that? Also, what is the significance of 60 new deputies who fought in Ukraine now entering the State Duma?
John Lough: First of all, I would not dignify this spectacle that calls itself the Duma elections by describing it as real elections. We know that the Kremlin was always going to manage this process, and it did succeed in managing it quite effectively. But as Ruth was saying, having to take one party off the ballot at a very late stage was embarrassing, because the Yabloko party was expected to probably get about 1% to 1.5% of the vote and therefore just be a convenient decoration for the authorities, who could then say, “Well, look, we give people this choice of a liberal party with democratic views, and our society just doesn’t buy it.” Then, suddenly, the internal polling was showing that the party—which had a 43-word programme, by the way—was actually probably going to do rather better, because its message was that the war in Ukraine needed to be ended; it was running on a peace ticket. That, in itself, is very interesting and suggests that the Kremlin, as always, is worried about how to manage certain attitudes in society.
Beyond that, we have this combination of the United Russia party and then these loyal parties, the Communists among them, who are all basically aligned on foreign policy and the war and so on, but on what one calls domestic policy, they have some slightly different emphases when it comes to the economy and how resources should be distributed.
You refer correctly to one of the most interesting elements of this spectacle, which was the encouragement of war veterans to run. Some of these people have been specially schooled and put through programmes to prepare them for Parliament and then roles in government. There are now well over 40—maybe nearly 50—of these people, who, it has to be said, have varying degrees of experience of the war in Ukraine. Some have just been there for a few weekends in a drone unit far from the front, and others have been on the front. Some, indeed, are accused of war crimes. It is a mixed bag. When the first Duma session took place after the election, there was something like a 20-minute standing ovation for these people, which indicates that they are receiving a certain status.
Putin has been trying to encourage the notion that a new elite is being established in Russia—these deeply patriotic people who are going to play a role in shaping the country’s future. We could see on that first occasion with these people in their military uniforms, standing up in the Parliament, that this process is well under way. Where exactly it is going to lead, and whether those people are going to become a problem remains to be seen. Probably those in Parliament will be less so, but the networks around them—the war veterans, particularly those people who have been accusing Putin of being weak in his conduct of the war—are likely to play some sort of role in Russian political life, simply because of the number of veterans coming back with all their PTSD and the lack of access to adequate services for people who have been seriously physically injured. We know from the experience of Afghanistan that these groups can become very well organised and often criminalised and will present a challenge for the authorities.
Q14 Fleur Anderson: We are going to continue with some more questions about the opposition and the Duma, but I have two other more general questions first. Catherine, as a Committee we have done a report on disinformation in which we talked about Russia and looked more into this. What is the strongest evidence we have that Russian disinformation efforts targeted the Brexit referendum here? Has that targeting increased, evolved and changed with social media and AI and what should we know about that?
Catherine Belton: I am afraid that I have not researched Kremlin disinformation efforts on the Brexit referendum. I was writing my book at that time, and I was not looking deeply into this. However, we have seen how this whole ecosystem has evolved in the Kremlin, and I have been lucky enough to have access to some intelligence materials which show the role of Sergei Kiriyenko, the first deputy head of the Kremlin administration, and his role in directing various political strategists in concocting a whole machinery of disinformation and seeking to undermine western support for Ukraine in France, Germany, Spain and the UK. We have seen documents on the orders that have been given. This is almost the second front in Russia’s war against Ukraine. It is almost as important as the military battle itself, because if you have undermined western support for Ukraine, then the battle is won. They have poured huge resources into this—it is so important for them.
As I was starting to say before, the strength of the cohesion around the Putin regime depends first on how the war is going in Ukraine, but secondly, how the west is reacting and how the west is doing in comparison. Earlier this year there was a great deal of concern because not only were Ukrainian missiles hitting targets deep into Russia, but Trump was starting to praise Zelensky for the deep strike campaign. He was basically saying, “Yes, it is an escalation, but this is an escalation that might bring an end to the war.” Putin was no longer enjoying such cosy relations with the American President, and Europe had been showing this remarkable degree of unity that no one really expected and was continuing to funnel huge amounts of money to support Ukraine’s war. However, in a matter of months the Kremlin and the entire Putin elite seem to have changed their view because they see that the winds are again changing and the disinformation campaigns that have been going on since the start of the war are having an impact.
We can see the rise of the AfD in Germany, which parrots Kremlin talking points. Its representatives recently travelled to Moscow. They are talking about reopening the Russian gas pipeline, Nord Stream. Russian disinformation stokes the fears in Germany that they are going to face an energy crisis by winter and that they are going to run out of gas supplies and that they need cheap gas. We saw how many voters in east Germany really buy into that, which was one of the reasons for the success of AfD there, as well as this fear that somehow Europe is going to be pulled into war. The disinformation networks very ably stoke that.
Putin and most of the Russian elite are looking at Europe. They see the riots in France, as well as the rise of Marine Le Pen and the fact that she was saying, “Well, we can’t afford to give any more assistance to Ukraine.” They then think, “Okay, this war has been very difficult. No one expected it to go on as long as it has—it has now gone on for longer than world war two.” Earlier this year, the members of the Russian elite who I was speaking to just had their head in their hands, saying, “We don’t see any good way out of this.”
However, it has flipped 180° in a matter of six months, because they see that unity in the west is now crumbling. Some of that is due to the disinformation campaigns, but it is also obviously due to our own political problems, which they leverage for their own needs.
Q15 Chair: Can I ask a follow-up on this? We heard about the Ukrainians attacking data centres in Russia, and that it was having an impact on the number of right-wing bots and the traffic on X in the United States. I am sure that Members, who are used to having a certain amount of nonsense on their social media, have found that there has been a decline in it. Is this part of a fight-back? Are you able to answer questions like that? Where is this coming from? Is this a co-incidence?
Catherine Belton: No, I am afraid that some of the reporting on the diminishing activity of Kremlin bots was perhaps exaggerated or misreported.
Chair: It is misinformation on disinformation.
Catherine Belton: Yes. There had been a very narrow look at a few days around the attack, but there is always a big spike in Kremlin bot activity on Putin’s birthday, which is 9 October. The data centre attacks were straight after that, so there was a very natural dip.
There is a very good tracker of Kremlin bot activity called Antibot4Navalny, and it showed over a longer period of time that, in fact, the bot activity has not really diminished from the average. It is just that there had been a spike a few days before because it was Putin’s birthday. I am afraid that the Kremlin bot activity is not dependent on those data centres being hit.
Q16 Fleur Anderson: I would like a very quick answer to my next question please, Ruth or John, if either of you have more evidence about that Russian disinformation. In general, what would you say are the most common misconceptions that western policymakers have about Russia today? Is there anything you would like to say to us and to Parliament about misconceptions that we have about Russia that we should know about? Just in a brief answer, before we move on.
Dr Deyermond: A couple of things quickly. One misconception is that Russia is simultaneously both a great power and vulnerable to collapse, but I do not think neither of those things is true. There is an anxiety about what is going to happen to Russia that drives broader western thinking—I am afraid that you could see it in the Biden Administration—and that includes western thinking about the war in Ukraine, as well as wider approaches to Russia.
Beyond that, there is a more general assumption that is much more evident in some other European countries—perhaps, above all, in Germany—that once the war is over, Russia can return to being some kind of relatively normal international actor with whom the UK and other states can do business to a degree. I think that fails to recognise the extent to which the Russian political elite, which includes not just Putin but the people around him—and, to a degree, Russia more generally—see the west as an existential threat to Russia. That is not something that is going to change, unless there is a radical change in regime type in Russia.
Q17 Sir John Whittingdale: May I return to the question of the stability of the Putin regime and the opposition? With the fall of the Soviet Union, we saw the colour revolutions sweep through a lot of former Soviet countries, but in Russia there has never seemed to be any concerted attempt to change the nature of the regime. After Boris Nemtsov’s death and after Alexei Navalny’s death, there was a brief flurry and then it all disappeared and went quiet again. Is it that there isn’t any great feeling that this is an unrepresentative, wicked regime that people would like to remove, or is it that the opposition exists but it is simply not possible to organise? To what extent do you think that there is a groundswell against Putin within Russia itself? John, why don’t we start with you?
John Lough: Those are big questions. First, the elites, by and large, are not happy with the way Putin has got Russia into the war in Ukraine, a war that he can’t really win satisfactorily on his terms. My view is that, as a result of what he has created in Ukraine, we are going to have a smouldering situation there probably for decades. So this is a real mess. And, of course, he has then complicated their lives and the running of their businesses because of sanctions, which are probably going to hang around in some form for a very long time.
As far as Russian society is concerned, we have to keep it in mind that it is atomised and the authorities have done a great deal to ensure that it stays that way. So you don’t have the type of horizontal linkages in society that you have in, for example, Ukraine. This is what makes Ukraine’s example so fascinating. If Russia were allowed to develop in a less autocratic, top-down-driven model, you would probably see many of those things appearing in Russia. In fact, we were starting to see, in the noughty years, as volunteer networks and other things were forming and with the way charities were working, that it was not dissimilar. But, for historical reasons, Ukraine is much more advanced in that respect.
There is no real opposition, joined-up opposition, to the current regime. The authorities will do everything to keep it that way. So at what point might change come in Russia? It is going to be driven by the elites. Society may be instrumentalised for that purpose, but change is not going to come from below. We have to be very clear in our understanding of that. The question then arises: are there ways in which we could incentivise parts of the Russian elite to think differently about their interests, in such a way that the interests of the state could then be somehow moderated? We are only at a very early stage of trying to understand that particular puzzle, but it seems to me that is where change in Russia is going to come from.
Russia is a country where change can happen very suddenly. This regime has many strengths, but it also has clear vulnerabilities, and the biggest vulnerability is Putin’s heath and his ability to run the system currently. But it is also brittle in the sense that because rule has been so heavily centralised, it is not good at crisis management. If it has two or three crises to manage simultaneously, that is when it starts making serious mistakes. The laws of biology are, of course, working against Putin and those of his closest associates who are well into their 70s, and it seems to me that we are going to see, certainly over the next decade, some probably quite fundamental change in Russia.
Q18 Alex Ballinger: You mentioned Putin’s health. He is 74 years old; he is not going to live forever. Does he have a plan for succession? Are there heirs apparent? What do you think the dynamics might be if something were to happen to Putin?
Catherine Belton: I will speak briefly. We can see some of the manoeuvring already within the Russian elite. I mentioned Sergey Kiriyenko, the first deputy head of the Kremlin Administration. Before the Duma elections is really when you see some of the tension coming to the fore, in the infighting that arises in the Russian elite at times of tension. For instance, earlier this year—over the summer, when they thought the war was not going their way—there was an ally of Kiriyenko and others who were somehow popping up and speaking freely publicly. There was a former Kremlin lawyer called Ilya Remeslo, who went viral for daring to say that Putin was a war criminal and a thief, and should go to jail. This was somebody who used to work for Sergey Kiriyenko in the Administration.
Observers who were watching then were saying that it was a real bunfight within the Russian elite over Russia’s direction. There was rising discontent over the prolonged war. In an interview, Remeslo said that half the Kremlin Administration were not behind Putin’s war and thought that it had gone on for too long, and they had hoped for a negotiated settlement through Trump, so that they would be able to walk away with Donbas, and have their cake and eat it. Obviously, when that did not happen, the tensions came to the fore. You could see Kiriyenko fighting against hardliners in the FSB.
It was also partly a battle over internet restrictions, which the hardliners and the FSB had been behind, but which caused a lot of disgruntlement in the Russian elite, because they are used to a very digital society and suddenly they could not access basic services, conduct phone calls over WhatsApp, or anything like that.
You could see the manoeuvring, and in some ways Kiriyenko is continuing it. He has his own faction in the Duma elections; it is a political party called New People. One quite prominent political commentator was saying, “Well, you know what? In some ways, it doesn’t matter how much the Kremlin ruling party win in this upcoming vote, because this might be the last Duma election for Putin.” It is a six-year term; according to normal Russian life standards, Putin might not be around at the end of this Duma. Then, it does not matter whether United Russia is behind Putin or not. Maybe Kiriyenko would seek to scoop up those votes and bring United Russia to join his party, New People.
Kiriyenko is really the front man for a more progressive, technocratic wing in the Kremlin that would like a more pragmatic relationship with the west. I do not think they would ever give up this idea of great power competition, but they might want a return to Russia’s integration with the west, as long as they can continue to compete, and they might be more willing to make some concessions on Ukraine than hardliners in the FSB, who still want the war to be prosecuted ever more toughly.
Q19 Alex Ballinger: I can see some scepticism on Ruth’s face; maybe you would like to share your view.
Dr Deyermond: A little bit of scepticism, as it relates to foreign policy. It is important to recognise that since the start of the war, and it was actually happening before, everything about the Russian state has been geared towards war. The economy has been re-geared to prioritise war, as have the structures of the state. The penal system is very taken up with prosecuting people who have the temerity to object. Even the education system—five-year-olds are being educated to be warriors, right? They are being dressed up in little uniforms, given little toy guns and taught about the great patriotic war—the second world war—and they also have visits from veterans of the war in Ukraine. This is a state that has been re-geared for existential war, including existential war with the west.
Although there might be some changes—in fact, I am sure there would be some changes—and possibly a desire to kind of pull back a little from the war in Ukraine, I am afraid that I do not think you will see anything really fundamental changing until you have a change of regime type in Russia.
Q20 Alex Ballinger: Can anything be read into the Wagner mutiny—the Prigozhin attempt at a coup? Is something like that possible in the future, or was that very much a one-off?
John Lough: It certainly sets a precedent. It shows it is possible. We do not see where that challenge would come from currently. Looking forward, if Putin’s authority in office weakens because of his health and his inability to carry out his duties as before—the way he manages all these different factions and interests is a job of manual control, and it is fair to assume that he would probably not do it as well in his late 70s as he did 25 years ago—then that can open up opportunities, because systems this kind can weaken very dramatically at that point.
The view in my institute, the NEST Centre, is that when Putin goes—and that is assuming he either dies in office or is unable to carry out his duties—we are probably going to see a period of collective leadership akin to what happened at the end of Stalin’s rule. Similarly, just as it took three or four years for the next Soviet leader to emerge unchallenged, we could see something of that kind.
If you put that into the mix and fast-forward a little bit, the generation of people who are likely to be the players in that configuration will have grown up in somewhat different circumstances. I do not think that they will necessarily have the same obsession with the idea that the collapse of the Soviet Union was the greatest trauma or this sense that Russia was mistreated in the 1990s, which is what Putin demonstrates. He comes back to that again and again—that Russia was deceived and that western countries took advantage of Russia’s weakness. I think they will be imbued with something else.
Q21 Sir John Whittingdale: Can I come back to your answer, John, about where the opposition lies? You said it was most likely to be the elites. Do you not see the efforts of people like Open Russia to try and promote some kind of popular movement—democracy, in whatever form it might emerge—as a realistic future for Russia any time in the foreseeable future?
John Lough: Not for now, although I would like to think that if it is possible to preserve Ukraine’s independence and for Ukraine to develop successfully as an independent democratic country—and Ukrainians would most certainly be capable of doing that if they were not being attacked by their neighbour—we would see a very important example being set. In this case, the fact that Russians in many cases think that Ukrainians are the same as Russians—which of course they absolutely are not, but this is in the Russian mindset—could have an enormous impact on Russian society as a whole and give encouragement to those parts of the elite that think that Russia needs to be governed on a different model and that the whole Russian state needs to be reorganised. We could potentially see some very dramatic change, but if it were to happen, it would take place over decades rather than five or six years.
Q22 Sir John Whittingdale: Are you suggesting that if there is a succession resulting from Putin’s removal—for one reason or another—and the elites step in, then their attitude towards the west might be different because they might not have the same experience and knowledge of what went before? Are you suggesting there might be a willingness to reach an accommodation, which Putin clearly is unwilling to even consider?
John Lough: There might be, but a lot will depend on what western countries can offer and how they can possibly incentivise some of those groups to change their behaviour. Let’s face it, there are others who are invested in confrontation, making money out of it and see their futures in that paradigm. That does not mean to say that it is all going to be stable and will go forward in the form that we see it today. It will be challenged and will undergo some significant change.
Q23 Sir John Whittingdale: I am interested in the attitude of ordinary Russians. Dr Deyermond, you were talking about the militaristic society. I remember the “Mr Nobody Against Putin” movie, which was the most extraordinary exposure of the way in which children are being brainwashed. Do you think that has had an effect, and that the vast majority of young people and ordinary people in Russian buy into the idea that they are defending the motherland and it is under threat from these wicked western countries? Is there that sort of popular support for what Putin is doing?
Dr Deyermond: I will be very careful in my answer because, of course, it is difficult to get clear evidence. Given the nature of Russian authoritarianism, it is difficult to say this with a high degree of confidence. Certainly, one thing you can see that has transmitted itself, at least in my experience, through the generations, away from the generations that remember and resent the Soviet collapse, is, as John was saying, a deeply conspiratorial attitude to the west—the idea that the west is engaged in a whole succession of conspiracies against Russia. Those conspiracies range from the large scale—trying to bring down the Russian economy in the 1990s—to the really trivial.
I will quickly give an example. A couple of years ago—or slightly more, now—a group of Russian students who I taught were absolutely convinced that when Hillary Clinton gave Sergei Lavrov a reset button to mark Obama’s reset and accidentally misspelled the Russian word for “reset”, that was not an accident; it was a deliberate conspiracy to humiliate Russia by showing that the west did not care about Russian. You find those kinds of attitudes quite often in my experience. That view of the west as engaged in a large-scale, ongoing conspiracy against Russia is going to take a lot of work to overcome. In that regard, the UK and other western countries should be reinvesting in Russian-oriented free media. Clearly, the BBC World Service is vital, even more so given the Trump Administration’s cuts to similar programmes in the US. If the UK and other western states want to see even the beginnings of a different kind of Russia, that has to start with things such as addressing disinformation and making clear, accurate information available to Russians through media.
Q24 Sir John Whittingdale: That is something I have a great deal of sympathy with. Catherine, you have done an enormous amount to expose the corruption and the way in which the Putin regime operates. Do you think that what you have revealed in your publications has reached into Russia? Are people aware of the kind of things that you managed to uncover? I know that they have waged a campaign to try to shut you down, but to what extent are people becoming aware of the reality of the Putin regime?
Catherine Belton: I do not think people in Russia, to a great degree, really care about corruption in the elite. It is, by and large, expected that the Tsar of Russia should live in a palace. As long as they are buying into the Kremlin propaganda—that Russia is trying to reassert its rightful role on the world stage; that the west has been acting against Russian interests and is trying to tear apart the country and break it up; that their feelings as a great power are somehow being attacked—then most of them do not really care about corruption at the top of the Kremlin, but again it depends. Most Russians are starting to feel that the war is now dragging on, and that the losses to the economy and to society are becoming too great. We see the fall in ratings for Putin, despite the outstanding result in the Duma election, which, of course, was rigged. So yes, the corruption allegations can have some impact, but they are not as important as the overall direction of the economy.
Going back to John’s point about ways to incentivise groups in the Russian elite to take a more accommodating stance towards the west in future, I still disagree with my colleague Ruth because there is still a significant element within the Russian elite who made their fortunes in the 1990s and remember different relations with the west and how that was. We have also seen an increasingly vocal stance from those groups this year, including from some who are close to Putin.
The chief economist of one of Russia’s biggest state banks, VEB, gave a presentation in which he said that Russia cannot win a war of attrition with the west. Therefore, if the west is to change the stance of Russian elites, it has to continue to show unity and show that it continues to be able to fund Ukraine and is not going to diverge from that goal. We also had German Gref, who is a very close ally of Putin indeed and is the head of Russia’s biggest state bank, Sberbank, allow himself to publicly dare to say, “But, actually, everyone wants this war to end as soon as possible. That is all we want.” That was earlier this summer.
I therefore think that that group still exists, but the only time they are willing to put their heads above the parapet is when things do not look to be going well for the regime. Also, in September 2022, when Putin was forced to withdraw from regions such as Kherson, Zaporizhzhia and so on, there were Russian billionaires who were sort of whispering then. Of course, they would not say it publicly, but privately they were saying, “If there are further military losses like this, we are going to see a palace coup. Something will happen. Putin’s legitimacy and standing will not be able to withstand it.” Again, it is all dependent on the outer environment and how they consider Putin to be doing in this wider war.
Q25 Abtisam Mohamed: I would like to touch on media freedoms. Dr Deyermond, you referenced the importance of the west perhaps being able to support people in Russia in receiving more independent news. How do you think that might work when Russia controls the media coming in and there are various restrictions there?
Dr Deyermond: Of course, that was also the case in the Soviet period, and the impact of western media was enormous at certain points in the Soviet Union.
Obviously it is difficult, because the Russian Government took steps to limit access to a free internet and therefore the availability of alternative news sources and information sources. States continue to try to promote freely available Russian-language information for that reason. I do not have technical expertise on this, so I do not know what the good workarounds would be for the restrictions, but it is something that we need to be focused on because it is critically important. Sorry, that was a rather vague answer.
Q26 Abtisam Mohamed: That’s fine. This one is perhaps for you, John. I recently read a report by Amnesty that came out in September, which referenced how individuals from low-income countries were being trafficked into Russia on the promise of jobs, but then being used on the frontline in Ukraine. What does it tell us about the capacity of the Russian army, for it to be moving in that direction? Do you think that that is a central strategy or perhaps an individual regime in Russia operating in that way?
John Lough: It tells us, first, that the Russian army is short of soldiers—particularly, good soldiers. They need to recruit people who can operate drones and more complicated systems, rather than what one might call simply cannon fodder. Recruiting enough soldiers appears to be an increasing problem for them because of the very serious losses that they are sustaining. You are absolutely right that there have been stories of people who have essentially been trafficked to the frontline. The Indian Government had to intercede at one point and liberate a large number of Indians who found themselves effectively in captivity in Russia. There are supposedly representatives of up to 40 countries who have been fighting with the Russian army—notably, of course, there is a large North Korean contingent, which in itself is absolutely fascinating.
As long as the war continues in this form, I would expect to see the Russian authorities do absolutely everything to keep the numbers up, including going after foreign citizens, who can be tricked in some cases. It is also a money-making mechanism for the people responsible for recruiting. These people are just numbers at the end of the day, and the fact that they have had no military training or cannot speak Russian is probably irrelevant.
Q27 Abtisam Mohamed: You referenced earlier the fact that the regime is very repressive and that individuals go to prison for the smallest of things. What are the conditions like for prisoners in Russia?
John Lough: For prisoners generally?
Abtisam Mohamed: Generally—the human rights conditions for prisoners.
John Lough: All the accounts that we read of people who have been in the system indicate that human rights are violated on a truly massive scale. The Russian prison system is not somewhere you are going to end up and enjoy good health—let me put it that way. It may not be as bad as it was in the 1930s—people are not going to die of starvation—but at the same time it is a pretty brutal environment.
Q28 Abtisam Mohamed: Catherine, when we implement sanctions in relation to human rights violations, do you think they make a difference, or will Russia continue to do as it pleases?
Catherine Belton: I am afraid that the ones committing the human rights violations come from the most hardline group, and I am not sure they really care about having access to their properties in France or wherever. They will seek to redraw global maps and re-establish themselves in Dubai, Istanbul and other places where the sanctions do not hit. Of course, it is an annoyance, but I do not think it will change the behaviour of that particular faction of the Russian elite.
Q29 Abtisam Mohamed: This is my final question. Dr Deyermond, do Russians see international human rights legislation as beneath them? Do they have their own standards of what they perceive to be human rights? Do they think, “We are not responsible for anything that the west and others hold us to account for. We will continue to operate as we please”?
Dr Deyermond: The Russian state, certainly since the start of Putin’s presidency, has seen international human rights discourse and standards as really a cover for hypocrisy—as a set of ideas that the west use in order to con everybody while advancing their own national interests. This was something that developed particularly during the US presidency of George W. Bush. The Russian view was that the language of democracy and human rights in the west was really just being used to advance US national interests and absolutely nothing else. That is still something that you see, and it is now embedded in Russian governmental attitudes towards human rights.
One of the other things that the Russian Government do—this is partly to push back against western human rights pressure, but also to generate broader confusion or uncertainty about it—is to mirror the western language of human rights back against the west. For example, the US State Department used to issue an annual human rights report detailing human rights violations around the world. It always used to talk a lot about Russia, so the Russian Government started to produce their human rights report, in which they set out all the violations of human rights in the UK, the US and elsewhere. That is, I think, designed to cause global uncertainty around the legitimacy of human rights challenges in Russia.
If I may very quickly come back to the issue of media, the engagement with media and the need to ensure that there is free and widespread access to fair reporting as it relates to Russia also needs to be thought about in relation to the global south—the global majority. At the moment, Russia really is making the running in these places. It is telling a very strong story about western hypocrisy, western human rights violations and how resisting the west in Ukraine is really resisting western colonialism, which understandably lands very powerfully in the states that live with a legacy of western colonialism. Therefore, by extension, all the things that the west is saying about human rights violations and war crimes in Ukraine and in Russia are all western lies. The UK needs to be doing more to target that narrative as well.
Q30 Sir John Whittingdale: On Russia’s attempts to put across its own narrative and, against that, to stop news and information coming from the west, I know that a lot has happened in terms of their attempts to close down internet access, VPNs and so on. Can you say a little more about Russia’s attempts to control information and ensure that western reporting does not reach its citizens?
Chair: And what we can do to counter that, which is the other side of the coin.
Dr Deyermond: I would defer to one of my colleagues on that because it is not my particular area.
John Lough: Again, I cannot claim to have expertise in this area, but that is clear in the slowing of YouTube and in the fact that having VPN access that works is effectively a precondition for being able to read western media in Russia these days. The VPN channels are regularly being challenged, but there still seem to be ways of getting around that. I speak regularly with people in Moscow who are able to do that, so it seems to me that the authorities have not completely shut down that access—no doubt on the assumption that the elite still need it. I think there is also a desire, higher up in the system, to be able to read what western media are writing, how Russia is being portrayed and how they can influence that, so they do need these things.
More broadly, society has become much more isolated, and the nature of reporting in Russia has become very different in recent years. I think it is fair to say that, since February 2022, Russia as a country has changed significantly. I am not sure that, so far, we understand the degree to which it has changed. In countries such as Britain, we really do need to sharpen our expertise and find other ways of studying what is going on in Russia, so that we are simply better informed about what sort of country is emerging and what we will be dealing with.
Q31 Richard Foord: Catherine, I was struck by what you said about the war having been brought home to many Russians this year, through drone strikes and shortages of fuel and consumer goods. Do you think that that will increase or reduce the likelihood of social unrest, and why?
Catherine Belton: Again, it is very difficult for any normal Russian citizen to protest against the regime because, as John mentioned, you can face a 15-year sentence for daring to contradict the Kremlin in some way. We have seen some attempts at protest by soldiers’ mothers about their sons’ loss of life. But every time something flurries up, it is generally crushed pretty quickly. The Kremlin has facial recognition, it can monitor anyone taking part in a protest, and you will get a knock on your door from the FSB if you are seen doing so. What the Kremlin considers to be its biggest risk of social protest is if it has to declare a public mobilisation to send reinforcements to the front for a new onslaught to take back territory in Ukraine, or to take all of Donbas, as Putin has vowed to do.
For that reason, the Kremlin has stepped back from announcing a full mobilisation, because it saw what happened when it tried to do that in September 2022. That was when we had the last meaningful protest in Russia. Instead, what they are doing is more of a covert system. They are not announcing mobilisations, but we have heard reports that doctors and other medical workers are now being called up to the front, but it is being done quietly. There are institutions with quotas now, whereby students are getting sent to the frontline, but it is all being done in an under-the-carpet fashion, so as not to provoke precisely this kind of social protest. That is really the only danger that faces the Kremlin, because again, as John said, unfortunately most of the Russian population is so atomised, isolated and repressed now. The price of protest is so high that any backlash to the Putin regime will come from within his own elite.
Q32 Richard Foord: There is also a faultline between the Kremlin and the so-called Z community—the more pro-war lobbyists. I wonder whether either John or Dr Deyermond might like to talk to that faultline between the pro-war populace and the Kremlin.
John Lough: Interestingly, the pro-war community has been up in arms recently about the way that the Russian general staff has been reporting to Putin on the progress on the frontline, because it does not correspond to what they are seeing—I think one can take it as read that they do know what is going on on the frontline, because of their various networks. Until relatively recently—probably until about three months ago—some of them had been unhappy with what they saw as Putin’s weakness in the conduct of the war. They could not understand why Russia was not hitting Ukraine harder, since it had the means to do so. Of course, we have seen over the last two months particularly that Russia has increased its attacks using ballistic missiles, jet-powered drones and all these things, and in my view it is now systematically devastating the Ukrainian economy. That has probably appeased that group to an extent, but that may only be temporary.
As I noted before, there is this problem of how war veterans will be treated in Russia when the war comes to an end. These are people who have benefited from the really extensive largesse of the state and made, in some cases, unheard-of money. In the case of soldiers who died in service in Ukraine, their families have received very generous compensation. But this is financially unsustainable, and there will be a different problem when these people get home: are they going to be earning anything like what they were earning in the army? The answer is no, so they will have to be packed off somewhere else. It may be convenient to send them off to the north of the country, now that Finland and Sweden are in NATO, but I think it is going to be more complicated than that.
We also have to think about the very large numbers of wounded soldiers. Access to prosthetic limbs and proper rehabilitation is extremely patchy, so I would expect there to be high levels of dissatisfaction with the limitations of the Russian state, and these people will probably become forgotten about. They will not be treated as heroes in society, because things will move on. I think that will be their real concern.
Dr Deyermond: To add to that very quickly, one thing that has perhaps not been talked about enough in the west and that is concerning for the future of Russian society is the corrupting effect of the money that is being paid out particularly to families who lose sons or husbands. The lives of Russian citizens have been commodified by the war. The life of a husband or a son, in the end, may be worth less than the life-changing amount of money that people get when they die. That is profoundly concerning for the direction of Russian society. It was often said in the west in the cold war that Russians did not value human life, which clearly was not the case among Russian society, but the effect of the war—of pumping so much money into society in exchange for people’s lives, or people’s bodies—is a big problem. Correcting for that is going to be a big problem for Russian society, in addition to the other big problem for Russian society, which is that the prisons were emptied to send murderers and rapists to the front to fight Ukraine. They are coming home and causing havoc in Russian society. That is another big problem.
Chair: Thank you. That is the end of our questions. Your evidence has been so interesting—an absolute tour de force. I will suspend the session at this stage to change panels. Thank you again.
Witnesses: Dr Nigel Gould-Davies, Craig Kennedy and Isaac Levi.
Chair: Welcome to our second panel on Russia. We will now look specifically at the Russian economy. I thank our witnesses very much for coming. Could you introduce yourselves?
Dr Gould-Davies: I am Nigel Gould-Davies, the senior fellow for Russia and Eurasia at the International Institute for Strategic Studies.
Craig Kennedy: I am Craig Kennedy. I am an adviser to the KSE Institute. I began my career teaching Russian history at Harvard. I spent 25 years in global finance, much of it in Russia. Over the last 10 years I have focused on scholarship and public service around Russia.
Isaac Levi: I am Isaac Levi; thanks very much for having me today. I am the team leader for Russia-Europe energy analysis at the Centre for Research on Energy and Clean Air. We are live-tracking all of Russia’s fossil fuel export earnings, analysing the impact of the sanctions and identifying loopholes for policymakers.
Q33 Chair: We have another outstanding panel; thank you very much for coming. I want to begin with a general question about an ongoing debate that we have in Britain, and perhaps the west generally. What is the state of the Russian economy at the moment? We sometimes hear that it is close to collapse, and sometimes we hear that it is not. We get such contradictory evidence, so I wonder whether you could help us with that.
Also, we are told that Russia is on a war footing, so is it a war economy? What does it look like? Does it look like a war economy? Does it have further to go before it becomes a war economy? What would the Russian people make of it if it did become a complete war economy?
Dr Gould-Davies: I will say first that it is very good that this session was preceded by the session on politics. In Russia, all the important economic questions ultimately lead back to politics.
Chair: Everything does.
Dr Gould-Davies: Particularly in Russia, perhaps. These two sessions can be considered part of a single whole: the political economy. The Russian economy is an increasingly militarised economy, which means that servicing the needs of waging war takes priority, and increasingly so. However, that does not mean that it is a war economy in the sense that absolutely everything is subordinated to that.
A really striking fact about the way in which the Russian state is turning its resources into a means of destruction is that, unlike every previous major war that it has ever waged—indeed, unlike most other major wars that other countries have waged—it is not compelling its resources to fight; it is paying them to do so.
If we look at the material side of things, although the largest defence manufacturers are in state hands, much of the economy, in practice, remains primarily on a market basis—albeit a market basis in which the state always looms large, and in which property rights are insecure. There has been no large-scale forced commandeering of resources in the ways that, for example, all the combatants during world war two just took over their economy, including America, which was the most market friendly.
The story is even more striking on the human side of things, which the previous session also touched on. It is really striking that, with a few limited exceptions, the Russian state has done everything it can to avoid compelling its citizens to fight. There has been no large-scale conscription or any compelling of citizens to become soldiers. Instead, the Russian state has offered very large, life-changing sums of money to persuade citizens, voluntarily if they wish, to fight. That means that military pay is extraordinarily expensive.
Q34 Chair: May I interrupt you for a moment? I hear what you say, but is there not also something about the fact that those who are signing up come from the edges of Russia—or the far-flung parts of Russia. They do not come from St Petersburg or Moscow, where the amount of money on offer would perhaps not go as far. It also speaks to how unequal the Russian economy is.
Dr Gould-Davies: Very much so. It is a political matter as well, because one of the priorities of the Kremlin is to make sure that its two most important cities—Moscow and St Petersburg—are insulated or shielded as far as possible from the effects of the war.
You are absolutely right about the sum of money—well, there are several sums of money. There is the signing-up bonuses, there is a high military salary and then, when the soldier is killed, their family gets a huge death-in-service benefit. Those sums of money together amount to much more in the far-flung regions, where the average salary is much lower, than they do in the largest and richest cities.
The key point is that military recruitment is, in a sense, an extension of Russia’s labour market as a whole. Again, that means that it is extremely expensive for Russia to recruit and it is not compelling people to do so. In a true war economy—this is true of all the combatants during the second world war—the state just sends resources, whether they wish to or not. The Russian state has not yet crossed that threshold.
There is some arm-twisting at the margins, and some deception—the previous session touched on some of that. For one month only, in September 2022, when Ukraine made its dramatic breakthroughs in Kharkiv and Kherson, and Russia for a time was really on the back foot, the Kremlin said, “Right, 300,000 of you have to fight. We are going to forcibly recruit you and this time you have no choice.” That was the moment when the war came home to most Russians. That was the moment when all the indicators of anxiety shot up and close to half a million Russians crossed the border—the borders are still open—and fled. They voted with their feet, if you like.
Since then, Russia has been at pains to not have to repeat that experiment. That tells us quite a lot about the underlying popular anxieties about the war: the fact that performative support might run wide, but it does not run very deep. The Russian state knows that.
I will finish on this point: when the Russian state advertises recruitment opportunities, with large billboards on the streets all over the cities of Russia, it does not say, “Your country needs you,” it says, “This is the sum of money you will get if you sign up.”
Russia has a militarised economy and an increasingly militarised society, but not yet a war economy or war society in that hard, compelled sense. The Russian state does not want to go there.
Craig Kennedy: I will pick up on that because it is a very salient point. If you look at how states fund wars, they have fundamental decisions to make when they suddenly find themselves embroiled in an expensive war. First of all, how long is it going to last, and how much will I need? Secondly, where will I get the funds from?
If you have a war that has broad popular support, you can usually go for direct resource extraction—that is the mobilisation and direct taxation of the population. In Russia, we have seen almost no mobilisation whatsoever and very little direct taxation. Most of the taxation has been indirect taxation at the corporate level, which is difficult for ordinary Russians to see. They feel it in their pocketbooks now, but they do not necessarily see it. That is the hallmark of a state that is afraid to demand direct sacrifices of its population because they realise that the war is not broadly popular. You see that throughout history—there are other examples.
You asked whether the Russian economy is strong, whether it is on the verge of collapse and why it is so difficult to understand what is going on, so let me clue you into something. My background is in finance, so I tend to focus more on capital markets and corporate finance. Most people looking at Russia today are economists, so they are looking at broad macroeconomic indicators—how much growth there is and what is going on with the labour market and so on.
If you read those headline numbers, you see the following pattern: Russia surprisingly seemed to be very resilient in 2023 and 2024. It had growth of 4% plus. We have seen that drop off sharply in 2025 and 2026 and we are seeing investments go down. None the less, people have been surprised at the resilience of Russia when they look just at the macroeconomic side of it.
We have neglected to look at what is happening on the corporate finance side of things—private finances and the companies raising money. That is important because that part of the Russian cash-flow system is much larger than the Treasury bond market or the way Russia funds its own deficit. What we have seen happening in the last four years of the war is a credit boom that has been engineered by the state and, in fact, has now turned into a credit bubble. We saw a massive amount of money injected into the economy, both into the consumer part of the economy and the corporate part of the economy, during 2022, 2023 and 2024—much higher levels than we ever saw before, and much more than the Russian economy can actually manage.
That fed two things. It fed a general feel-good sense in the economy and caused a lot of growth—when you put that much cash into the economy, you get lots of growth. It also funded the war economy, because over a third of that amount went directly to arms manufacturers, and it is not being recognised as part of the defence budget—it is a supplement to the defence budget, but it is a very costly supplement. Russia thought at the outset, like many states do, “Let’s mobilise as much cash as we can from anywhere we have,” so they spent down their savings in the national wealth fund and they ran and overextended their credit capacity in the banking system. It is a bit like saying, “I’ve got to live large for the next year, so I am going to spend down my family savings and max out my credit cards.” You look very vibrant and prosperous for a year, but the problem is that Russia’s war has gone on too long. Now it has found itself saddled with a huge amount of corporate debt and that is starting to have a profound impact on the broader economy.
For two months this summer, the Russian state treasury market—this is treasury bonds, their equivalent of gilts—which is essential for financing the growing war deficit, was shut down, because they were struggling to get sufficient demand from within Russia. The only place they can source demand now, because of the effective sanctions that have been placed on finance, is from domestic sources. This is one of the hallmarks than anyone in finance looks for when they are looking at a system that is under increasing amounts of stress, and this is something that the Russians themselves are very aware of and very concerned about.
If I can just put my historian’s hat on for a moment, if you go back in Russian history to all the major wars, starting with the Crimean war, the Russo-Japanese war, world war one, world war two and the cold war, they all ended with Russia in debt distress, and that debt distress had a profound impact on their endgame strategies in those wars. In response to your question, is the Russian economy doing well or not? It is now suffering from a shortage of investment, but the bigger problem is that they have a war finance problem. They have a huge debt bubble that they are trying to prevent from bursting, and that is causing stress across the broader system. They might be able to manage it for another year or two, but the risk is growing that they will end up with a cascading effect that they cannot control.
It comes back to the fundamental question: what can they demand from the population at large? Do they dare have a forced mobilisation where they stop all of these high payments that are effectively bankrupting the system and force people to fight? Or is that something that they fear to do because of the potential political blowback?
Chair: We are going to talk about sanctions and energy, which we would particularly like to have your expertise on, Mr Levi. I will pass over to Aphra at this moment, because I know that she has more general questions in relation to the economy.
Q35 Aphra Brandreth: I wanted to dig down a bit more into what you were saying about the resilience of the economy. In particular, I believe we now have Russia’s draft 2027 budget, which includes a record allocation for defence. How sustainable is that level of defence and security expenditure? What does it say about the resilience of the economy for the ongoing war?
Craig Kennedy: It is a stretch target for them. Part of the reason it is that high is that there are a lot of financing costs that now have to be paid. They have put around $225 billion-worth of additional debt on the defence sector. The defence sector is being effectively funded through the defence allocation system, and that now has to include enough money to cover the interest charges. The interest charges alone are in excess of $30 billion, which is a very sizeable portion of the total amount for defence—we are talking 20% of the defence budget. It is going up, but in part for this very reason: that they are funding a huge amount of debt that has built up in the system.
In terms of resilience, they may be able to tweak it along. The central bank has been printing a lot of money, which it passes to the banks. The banks then use it to buy Treasury bonds, which cover the deficit. That is effectively Ponzi financing, in the terms of Hyman Minsky, and it is dangerous to do. The longer you do it, the greater the risk that it suddenly begins to falter, so much so that you have a credit event. We saw this issue in country after country during the European sovereign debt crisis. Some countries recognised the excessive debt straightaway; they took the pain, they had to bail out a lot of banks, and they got through it. Others decided to try to hide the bubble, to finance it, to continue restructuring loans and to continue printing money through the central bank, and they managed to string it along for a while, but ultimately there was a credit event that led to a forceful resolution of the problem.
That is the challenge that Russia faces today, and nobody knows how long they will be able to keep it going. All they know is that it is a greater and greater risk, and that creates time pressure on negotiations. It also focuses Russia very much on trying to extract concessions around sanctions—in particular, sanctions relating to access to western credit—in any negotiations that they have with the west. We can come back and talk about Britian’s special role in that if you like.
Q36 Aphra Brandreth: At this stage, have they had to cut any public services to fund this? Have they had to cut any pensions or benefit payments to fund the defence spending?
Dr Gould-Davies: Defence spending has increased very substantially in every year that Russia has been at war, but we are seeing the biggest jump planned for next year. It is really striking; in nominal terms, it is something like 40%.
How do you finance that? There are a number of ways, and Russia has drawn on all of them. One is that you draw upon your sovereign wealth fund—the national welfare fund, as it is called—which is nearly empty now; there is very little of that left. The second is that you raise taxes. Russia has been doing that, and there are further plans is to continue that. The third is that you cut spending on other things. Russia has certainly been doing that and plans to continue doing that.
If you look at the draft budget plans for next year, against the background of this huge increase in defence and securing spending, Russia is saying that it is not going to increase the total level of state spending. That is really striking. That implies very substantial further cuts in things like education, health and other social services. Military spending now accounts for about 40% of total federal state spending. It is by far the biggest component.
The final way of funding higher spending is to increase the deficit, and that has to be financed. As Craig said, Russia is cut off from international financing. No one is lending to it. For all the help of various kinds that China is giving Russia—maybe we can talk about that—it is not lending or giving money. That means that, as Craig said, the only source is domestic—from its own banks. It is not clear that the way it is doing that—these so-called repo operations—is in the long term more than a Ponzi scheme.
I will finish by going back to the first question, because there is an important connection between these issues. It is worth considering how much Russia will get in return for this huge increase in spending. The key point is that, because the Kremlin has done everything it can not to compel or commandeer either human or material resources to fight, but rather to pay for them at market rates, it is getting much less bang for its rouble. The average solder, tank or drone is much more expensive than it would have been if the state had simply taken control of the economy. Not only is Russia having to substantially increase the financial burden it incurs, but it is getting much less for that than other major combatants of major wars have in the past.
Craig Kennedy: I will add that the military-industrial complex in Russia is not known for its efficiency. We talked about war economy. Russia’s economy is effectively on a war footing already. It has greatly expanded output. As it does so, many people think it must make them very profitable; in fact, they are operating at a loss. Part of the reason why they are having to borrow so much from the state banks is that they are being underfunded by the state budget. The state budget is understating the total amount of resources that are going into the military-industrial complex.
We talked about the various factors driving costs. Again, one of the factors driving costs is sanctions. While sanctions have not effectively stopped all of the different flows of technology coming into Russia, they have made it much more expensive. According to some reports, Russia is having to pay several times over normal market price to be able to secure some of the technology it needs. Then, of course, there is always graft and corruption, which adds an additional margin. So that is happening while you have demand coming up.
You talked about what is happening in other parts of the economy and whether austerity is being used. Austerity is a tool that has been used since the very first year, and it continues to be used. Maybe I am jumping the gun here in talking about the energy sector—we can go into that in greater detail and Isaac has been doing a lot of work on that—but the other thing going on is that Russia’s energy sector’s capacity for funding the war has been severely degraded. Part of it is the accumulated savings. There was the cash in the national welfare fund, which was effectively a historical surplus. Energy revenues have been largely spent down too. There was a large amount of cash on the balance sheets of some of the Russian oil and gas companies. That has effectively been taxed away by special war taxes.
The excessive amount of taxation that has been placed upon the energy companies has caused them to underinvest in upstream development activities, leading to a steep fall this year in production levels for the first time for a very long time. That is reminiscent of what we saw happening back in the 1980s as well, where the state was demanding too much from the energy companies. They are underinvesting in the upstream and are starting to see production collapse. That is compounded, of course, by everything from kinetic strikes by the Ukrainians against infrastructure to technology sanctions.
Having spent a lot of time in the energy sector in Russia from 1992 to 2013, I cannot stress enough how western technology is critically important for maintaining the efficiency of the Russian oil sector, in particular. The restrictions placed on access to oilfield technology, initially a little bit in 2014, then a bit more in 2022 and especially in 2024, are really starting to bite. That is incredibly important. Russia has relied on western advanced technologies for its oil development really since the 1870s and continues to be highly dependent today. It is a technological edge that they cannot get from China. Only the west has those technologies. As you think about sanctions and negotiations, it is important to recognise the things that Russia values, because it is not always obvious. Technology sanctions are definitely one of them.
Q37 Aphra Brandreth: We have a few questions on energy, but I want to ask you in particular about Russia’s regional budgets, which also have a substantial combined deficit. Do you have a view on how the cost of the war might be affecting the fiscal sustainability of the regions and what the implications of that might be?
Dr Gould-Davies: That is a very good question, and an underappreciated one. When many people look at Russia’s public finances, they focus only on the federal budget. We should, as your question suggests, focus on the consolidated budget, which includes what is going on in the regions.
That is important directly for war-related questions as well, because it is the regions that have been arm-twisted by the Kremlin to finance, in particular, the large, attractive and steadily growing signing-on bonuses, which are one part of the overall financial incentive package that turns civilians into soldiers. In recent months, we have seen clear evidence of fiscal pressures at the regional level affecting even those: I think something like nine regions have announced that they are having to cut the amount they pay in that signing-on bonus. The fact that they are doing that, affecting the highest priority of the Russian state—its ability to provide human power for the front—speaks to the larger fiscal problems that they face.
One particular reason for that are the financial distortions created by the war, especially the very high interest rates. For the reasons that Craig touched upon, many of the stresses and strains of meeting the costs of the war are concentrated on the financial system. That is producing extraordinarily high interest rates, which is suppressing business activity in many of the regions of Russia. That in turn means that the tax take that the regions have access to is being restricted. Ultimately, the federal Government will bail out the regions—it just has to; there is no alternative—so all those regional deficits are implicit liabilities at the federal level, but that does not nullify the underlying point behind your question: the real financial costs of this war go beyond what the official ledgers, as it were, in Moscow suggest.
Q38 Richard Foord: Staying with energy, Isaac, I would like to ask you about the degradation of Russia’s refining capacity. What effect is that having on the wartime economy in Russia?
Isaac Levi: I will touch briefly on how Russia finances its war in Ukraine, although the tax revenue has been described and analysed by my colleagues. Historically between a third of and half of Russia’s state budget has been dependent on oil and gas taxation. In the first nine months of 2026, that proportion has dropped to about 18%, down from 25% in 2025. That represents a 17% drop in tax revenues from the oil and gas sector. Of course, the Hormuz crisis and the US’s waivers—the row-back in sanctions—have provided a golden ticket to Putin and the oil and gas sector. The sector’s export earnings rose by around £27 billion in the first six months of the Hormuz strait crisis. As you mentioned, what have really been hit are the oil products, due to the Ukrainian strikes on the refineries. Estimates depend on the time period and region, but around 30% to 50% is the current estimate for Russia’s drop in refining capacity due to Ukraine’s drone strikes.
There is a bizarre situation. As you probably know, Russia loaded zero shipments of diesel in September. The statement that the US is going to, perhaps, import Russian diesel is bizarre. We do not think that Russia has the quantities to deliver the commitment of 300,000 tonnes in October.
Q39 Chair: I didn’t know that. That’s amazing.
Isaac Levi: Those quantities are very small.
Chair: In any event the quantities are really small, but if they are not even going to be able to meet that part of the contract anyway, it is an awful lot of huff and puff, isn’t it?
Isaac Levi: Exactly. There is a situation currently where Russia is importing diesel from India—not in huge quantities, of course, but because of the huge impact from the drone strikes, Russia has a domestic shortage. There are spikes in prices. There is currently an export ban on diesel and jet fuel. Along with other organisations, we have done some analysis to look at the lack of correlation between US diesel prices and Ukraine’s drone strikes, so that statement by Trump is really just a way to put pressure and blame on Zelensky. What is really causing global shortages is the Hormuz strait closure.
Q40 Richard Foord: Isaac, you talked about the imports of refined fuel products. What does that tell us about the effectiveness of the sanctions that the west has imposed on Russia so far?
Isaac Levi: In our analysis, the sanctions have had a significant impact on Russia’s oil and gas exports. There is an array of loopholes, and we have some recommendations on those topics. If we take the most recent full month, September 2026, we see about a 30% reduction in their oil, gas and coal export earnings compared with the pre-invasion level of January 2021. The sanctions and Ukraine’s drone strikes on refineries have had a significant impact in reducing Russia’s fossil fuel export earnings.
That has happened not so much because of a reduction in Russian fossil fuel export volumes; they have still been able to export relatively stable volumes—of course, if we are not talking about refined fuels, that drops to almost zero for cases such as diesel—but they have had to transport their fossil fuels along longer routes to replace supply that used to go to Europe, the UK and the USA. They now sell the vast majority to India, China and Turkey. To encourage those countries or others to purchase Russian fossil fuels and take on the risk of secondary sanctions, they have had to offer a significant discount in the sale of their fossil fuels. That is why we estimate a 20% to 30% reduction in their oil and gas export earnings.
Q41 Richard Foord: What deductions can we make from all this for Ukraine and its international partners, in terms of our sanctions regime?
Isaac Levi: The sanctions have different impacts in many ways. Craig touched on a great point: Russia’s ability to obtain essential goods, especially sanctioned goods, has been constrained. China holds huge leverage over Russia and it knows this. It is demanding, for example, that when it buys Russian LNG from the sanctioned installations—the Arctic LNG 2 installation, for example—it buys it at a 30% or 40% discount in price, because it knows that it has so much leverage over Russia. When we look at the export side, China can export sanctioned goods, perhaps going into the military-industrial complex, at a 60% increase in price, so it knows that it can really rip off Russia.
Sanctioning jurisdictions and Ukraine’s allies still hold significant leverage. For example, the UK is the world’s largest maritime insurance provider, so it is still legally possible for UK maritime insurers to cover Russian fossil fuel shipments. There is of course a Russian oil price cap, which we can touch on if helpful, but maybe we can take the interesting example of Russian coal. Of Russia’s coal exports, 60% are still transported on UK-insured vessels. Some of that is coming from occupied territories, so there is an additional reason why we think the UK should ban it or use that leverage to really ratchet down Russia’s export earnings further.
We have seen some success. The EU and the UK—more so the UK—are managing to phase out Russian fossil fuels, but we very much recommend that it is undertaken at a much faster pace. Slovakia and Hungary still buy more Russian crude oil today than they did pre-invasion. There are significant loopholes. Where there is no ban to prohibit companies doing what is in their interest—maximising profits and buying discounted Russian fossil fuels—they will do so. They will maximise profits. Those are areas where we think that the UK and the EU could align better and really increase pressure on Russia. We have seen that that is effective.
Q42 Alex Ballinger: It is fascinating that this diesel deal potentially will not deliver any diesel to the Americans at all. In that case, this is just electioneering by the Trump regime more than anything else, and I wonder how the American public will react to that. I have another question for you, Isaac. Do you think this might be a precursor to other sanctions being eased by the American Administration? I know the Lindsey Graham package was not taken forward, but do you think there are any other sanctions that this might be leaning towards, and what effect might that have on the Russian economy?
Isaac Levi: It is a shame because we see the US stance completely shift. Obviously it has been very soft on Russia by removing sanctions on diesel, as we mentioned. There have even been statements from Trump saying that they might consider buying Russian LNG, which is a bizarre situation, as the US is—
Chair: An exporter.
Isaac Levi: Exactly; it is the world’s largest exporter and an energy superpower, but it is potentially considering buying LNG or diesel from Russia—or, if not, just alleviating sanctions. We mentioned that where we have seen a huge effect from sanctions is in the reduction in the price at which Russia can sell its fossil fuels. It has to provide an incentive for those companies or buyers in China, for example, to buy from Russia and take on this risk of secondary sanctions, or perhaps reputational damage from interacting with Russia.
That really falls when we see waivers provide reductions in sanctions. I worry that the US stance will become even softer and that more sanctions will be removed. At the beginning of this year, we did see some really positive effects from those US and UK sanctions on Rosneft and Lukoil, which are some of the largest oil producers, when Russia had pretty much the lowest oil and gas export earnings on record in decades.
Q43 Chair: When was this?
Isaac Levi: The UK sanctions were implemented in October 2025. Over time, before the Hormuz crisis—so between November and February—we saw that it was having really low levels, and I think February was the number quoted as the record low.
It shows the power that sanctions can have when implemented, and when implemented at pace. Sometimes we see long timelines; for example, the EU will finally be phasing out Russian LNG at the end of this year, but Russia has been able to shift all of its LNG vessels to non-UK and non-EU entities and to start developing supply chains towards Asia. The more time we give in these wind-downs, the easier it is for Russia to replace supply.
Q44 Alex Ballinger: Are there other sanctions on Russia that the west—maybe excluding America—should be considering that will increase pressure? I know people have been talking about secondary sanctions and those sorts of issues. What sort of options are on the table for us?
Chair: Would you mind also explaining a little more what you said about 60% of coal vessels from Russia being covered by British insurance? We think about the dark fleet carrying sanctioned oil and gas, but is coal not sanctioned?
Isaac Levi: Exactly. Legally, the UK is allowed to provide maritime services, such as insurance, to facilitate the transportation of Russian coal, which accounts for about 60%. The value of Russian coal exported using UK-insured vessels has been about £7.9 billion in 2026 alone—so that is the first nine months of this year.
The situation for LNG has been that the UK is allowed to provide maritime services. Insurance is the main area, although there are financial products that the UK is legally allowed to facilitate. Even some of these large energy companies that are purchasing Russian LNG—not Russian energy companies, as far as I am aware—might do it through a UK entity, so they might have a UK subsidiary. The UK is providing around half of all the maritime insurance to transport Russian LNG. That will end at the end of this year, as long as the UK does not do what the EU did and row back on that commitment.
Last, if we focus on oil—
Q45 Chair: Before we move on to oil, what is the excuse? Why is it that there has been a carve-out for coal? If we are sanctioning oil and gas, what is the justification on coal?
Craig Kennedy: It is still perfectly legal today to lift oil out of Russia on a western-owned ship insured by a maritime insurance club through London. That is perfectly legal still, provided that the cargo itself is priced below the price cap.
If we step back for a moment—I think this cuts to the heart of the matter—there has been understandable debate within the sanctions community over volume versus value, especially when it comes to oil, because at the end of the day, oil is the big money generator for Russia. Coal and LNG are important, but oil is really what matters most from a dollars and cents, or roubles and kopeks point of view. Initially, the approach was, “Russia is too big a supplier and we do not want to upset global supplies, so let us focus on ways that we can constrain the value the Russians get for each barrel of oil.” That is the idea behind the price cap. Unfortunately, the price cap had two big loopholes, which have been partially closed, but not completely.
Starting in 2025—Isaac alluded to this—there was more of a volume-focused approach in directly sanctioning Russian oil producers. When the US, the UK and the EU all jointly had 80% of Russian oil production under sanctions by the end of 2025, that had a really chilling effect on the global marketplace for Russian oil. Some people would still buy oil which was suspect, but they were demanding a much deeper discount. That combined with several other sanctions that were coming into place late last year, such as closing the refinery loophole; if you were buying Russian oil in India, say, you could not turn around to sell the product into Europe straight away. That all worked together to cause the deep widening of the discount at which Russia was able to sell its oil, compared with global benchmarks like Brent. That was what was really squeezing Russia at the turn of the new year.
Iran changed things, but not as much as we thought it might. None the less, a fundamental question still is, how else can the west, and in particular the EU and the UK, use the leverage you have to make certain that the discount or the volumes are further constrained? The US, of course, has the dollar, which is very important in the global energy system—if you do not have a dollar account, it is very hard to be a refiner or a trader, no matter where you are in the world—but the EU, and the UK especially, have an unrecognised superpower, and that is marine insurance, because spill liability insurance is a very specialised area, and it is very hard to replicate it to scale. The UK, in effect, has a lock-up on it, but the question is, how do you leverage that?
If you look at what the US has done over the years, it has developed a series of quiet discussions with central banks around the world and with major users of the dollar account. In a number of instances, it has also applied the sanctions effectively, so that people see what the impact is and see that there is a willingness to use them. But that whole muscle needs to be developed over time, so a challenge now for the EU and the UK is to develop the apparatus to be able to utilise that leverage that they have.
Interestingly, back at the end of 2025, one of the sanctions that was put in place that actually did contribute to the widening of the discount was the sanction of a Chinese refinery called the Shandong Yulon refinery. The Chinese had just invested a bunch of money in it to turn it from a domestic refinery to an export-oriented refinery, and the EU and the UK imposed full sanctions on it. One of the reasons was that it was accepting cargoes from shadow fleet ships that had been sanctioned by the EU and the UK. That very much damaged the refinery’s ability to execute its international programme, because it could no longer import any crude on western-insured tankers and could not use western-insured product tankers to export the crude.
That was a very powerful thing to do, and very much a shot across the bow of all the Indian and Turkish refineries that were still accepting cargoes on EU and UK-sanctioned tankers. They did not accept cargoes on US-sanctioned tankers, because they were afraid of the US and the dollar ban, but they had not yet developed a sense of what might happen with their ability to utilise your unique insurance infrastructure for their businesses. That is an underutilised area. It is a tool you want to use prudently and in a balanced way, but it is an underutilised capacity. You can do a lot to further constrain Russian energy export revenues by utilising that more effectively.
Q46 Chair: But it is all threatened by a change of policy in the United States.
Craig Kennedy: No, it is not actually. The US cannot unilaterally do much to affect the insurance markets. It is a small player in the global maritime insurance business. Europe and the UK dominate. It is your superpower.
Isaac Levi: To add to that, on the potential way of fixing the price cap, there are two options. One would be to verify that the price actually paid was below the price cap. Currently, the price cap level is about half the global market price. That would be via bank statements and invoices. However, if instead the desire is to scrap the price cap and say that this is a policy that is not effective at reducing Russia’s export earnings, the UK could use the leverage, as Craig has recommended previously, to tax the use of a unique UK maritime service. A tax of about 5% or 10% on the use of UK insurance to transport oil could generate between £100 million and £300 million every month, and that could be used for the reconstruction of Ukraine, for example. I think that is one of the cases where the UK does have leverage.
Let me, lastly, touch on the refining loophole: at the end of this year, the UK will finally implement a ban on the import of jet fuel and diesel from refineries using Russian crude oil. The UK does have leverage here. We are a big market that those refineries want access to. At the beginning of the year, the US put pressure on India to stop buying from Russia, and some of the big refineries actually did. Jamnagar, which is the world’s largest refinery, buys 9% of all Russian seaborne crude oil, which is significant for one refinery alone.
There are only four refineries that we have identified globally, in Turkey, India or Georgia, that buy from Russia. They buy around £700 million-worth of Russian crude oil every month. By saying, “You’re interacting with sanctioned shadow tankers and buying from Russia, so we don’t want to do business with you,” the UK and EU could cut off a significant amount of Russia’s revenue—we estimate £400 million in tax revenues every month.
Dr Gould-Davies: Perhaps I can briefly add a couple of points. As my colleagues have suggested, if the question is, “What more can we do on sanctions?” it is as much as anything about better enforcement of what is there already. That is particularly true of the oil price cap, where the so-called attestation fraud that Isaac referred to is rampant. There are ways that we can try to do better there to ensure that it is not violated systematically in the way that it currently is, including by using our near-monopoly on maritime insurance services.
A second, UK-specific point—an old chestnut, I know, but it is important not to forget it—is our overseas territories and the continued untransparency of the beneficial ownership registries there. A long-planned and committed reform keeps being rolled back. There is reason to believe that there is a great deal of Russian money there that warrants scrutiny.
A third point—something that we cannot do on our own, but only with our European partners—is to think more carefully, concertedly and creatively about where our China policy fits into all this, because China is, in NATO parlance, the “decisive enabler” of Russia’s war in Ukraine. It provides a huge and continuous flow of dual-capable war resources that Russia cannot make for itself. We need to try to incorporate that more systematically into our China relationship.
Finally—again, this is something to work on with our European partners—there is the use of Russia’s frozen assets. As we have already heard, Russia is hugely increasing its own financial commitments to the war next year, and Ukraine is suffering a severe and growing funding gap as a consequence of the escalation of Russia’s attacks on critical infrastructure. The best way to address this is to use the aggressor’s money directly and make it available to the victim—that is the only sanction that simultaneously hurts the aggressor and helps the victim. Most of that money is locked in continental Europe, but we have some, so we should find a way together to make that happen. That is $300 billion, which really would be a gamechanger.
Q47 Alex Ballinger: You have gone through a whole scale of things I was going to ask you about, which is very convenient for me. I just have one more question. Last week, I met a Chinese delegation. We talked about their technology exchange with Russia and the dual-use things that you talked about, Nigel, and as you might expect they were very clear in denying that anything like that was happening. For the record, what sorts of technologies and equipment are being used to enable Russia in their war? What measures could we, as the UK or with our allies, put in place to try to interdict that?
Dr Gould-Davies: There are all sorts of components, particularly those used in UAVs, or drones, including some of the essential things, such as brush magnets and things like that—you would have to speak to an engineer, which I am not. To add an intriguing detail, a couple of months ago, it was publicly reported that a Chinese company had taken out an equity stake in a Russian drone manufacturer directly. When that was made public, that detail was expunged from the share record, but the further you look, the more evidence you will find. There is a deep and dense relationship—their relationship with North Korea is even closer, but we do not really have any relationship with that country, so it is all about China.
What do we do about it? That is probably a longer, larger discussion for another occasion but, briefly, the goal of such a conversation or engagement, which again has to be with our European partners, is not to do what we seem to be doing currently, where all our leaders beat a path to Beijing’s door, there is maybe 10 or 15 minutes about Russia’s war in Ukraine and the rest of it is all about trade investment with us. Can we link those two together? Can we in some way make China think more carefully about the consequences of its decisions? If China is the decisive enabler of Russia’s war against Ukraine, given that that war has profound and long-term implications for the security of all of Europe and that Europe as a whole, including us, is a fundamental trade and investment partner of China, has it really thought through where its essentially unalloyed and deepening support for Russia might lead? We should force it to think harder about its choices and the implications.
Craig Kennedy: While it is absolutely essential to have those conversations, at the end of the day, the area where you have the greatest leverage is the area in which you have a dominant role in the global trading infrastructure: oil and oil exports. Everybody has limited resources; focusing them on what more can be done to constrain oil exports and the value of them gets you the best bang for your buck—the greatest return on your investment of administrative resources.
Q48 Sir John Whittingdale: That is hugely helpful. In the short time we have left, I will turn to another aspect: manpower and labour. We understand that Russia continues to lose more than 1,000 casualties a day in Ukraine, such that its estimated loss is now 1.4 million. At the same time, a lot of its younger people have been trying to escape attempts to call them up for service. How is that impacting on the labour supply? To what extent will Russia be able to sustain the losses that it is currently incurring?
Dr Gould-Davies: That is an excellent question. If we look in the round at all the ways that the war is causing trouble for Russia, there are two points. One is the prospect of a financial crisis, as Craig touched on. The second is the labour aspect. Russia now suffers by a long way the most severe labour shortage in its history. That is a consequence of both the huge increase in demand for labour to be sent to the front—and to die in very large numbers—and the huge increase in demand for labour in the military factories, which are now working round the clock, three shifts day and night.
The other blade of the pair of scissors is the enormous losses on the battlefield, as well as those who have left Russia and continue to do so as mobilisation rumours once again resurge. As long as the Kremlin wants to avoid forcing people to fight instead of paying them very well to fight, that means that financial incentives have to increase. It also means that it is the citizens themselves who decide whether to fight, and it is increasingly those in the greatest financial need who are doing so—that is, frankly, the halt and the lame and, sadly, the alcoholic and the drug addicted. It is not only a problem of quantity, but a problem of quality.
There is growing evidence that, this year, Russia’s capacity to replace the numbers being lost on the battlefield is steadily declining. It is not at the critical point where it will have to impose an open second force mobilisation, after the one in September 2022 that I mentioned, but it is clear that elements of a so-called hidden or covert mobilisation are taking place at the margins. People are being given offers they cannot refuse. People who have chronic debt burdens, for example, are being told, “Well, you can go to prison for a long time or you can go to the front.” They are trying to import people from other parts of the world to fight, often under false pretences—I think this came up in the first session. They are told there is a job at a military factory. They arrive and are told, “Here’s a gun—you’re off to the front.” That is the thing to watch.
Finally, military recruitment is part of the overall labour market. That means that wages are rising far beyond productivity. That is stoking inflation, which is eroding the living standards of ordinary Russians. I think the very first question we were asked in the session was, how is the Russian economy doing? Briefly, the economy as a whole is now stagnant. The only part of it that is sustaining growth is the defence industrial complex. Others are finding that their real wages are beginning to fall.
Craig Kennedy: The labour issue and the financial issue are very directly linked. We are seeing credit continuing to expand, with 40% of it now going into the arms industry. These are soft credits from Russian banks that will not get repaid by the industries themselves. They will eventually need to be assumed by the state. That will be a big post-war problem for it to deal with. They are borrowing this money not to invest in capital goods—that is why we are seeing a steep decline in capital investments—but to pay higher wages and to cover losses. We are seeing an expanding credit bubble, a lot of it being driven by labour shortages, without that credit going into fundamental productivity. That is a huge issue. They are debating it in Russia. They know it is a problem. But it also leaves a big post-hostilities restructuring of debt to deal with.
I come back to the question about the EU, the UK in particular, and the US. People often think that, when it comes to credit markets and reopening global credit markets to Russia, that is a US call. I worked for two of the US’s largest investment banks for over 20 years, based here in London. London is where all these decisions ultimately get funnelled through and all this investment into Russia gets channelled through. If the UK continues to have sanctions on the access of Russia to western credit markets, then, even if the US lifts them, you are not going to see a big rush of American money going in. The UK actually has a huge amount of leverage over Russia’s ability to re-access western credit markets. I promise you that it is one of the first things that Russia will be demanding in negotiations, because it will be critical for it to try to accelerate the restructuring of its problems so that it can accelerate rearmament post conflict.
Q49 Chair: I have got the impression this morning that, while there is chronic corruption in Russia, that seems to be something that people expect and tolerate. I suppose the real question is: does it add to economic insecurity, or is it that, because it seems so much a part of the system, it doesn’t?
Craig Kennedy: The question that came up about civil society is connected with this and is incredibly important. In fact, it has been the primary focus of my scholarly research: why is it that civil society failed to congeal effectively and demand more rights from an overbearing state in Russia?
If we look at the late 19th and early 20th centuries, it is actually a very instructive period, because Russia was following many of the same patterns that western Europe had followed on its way to a more liberal order 50, 100 or 150 years earlier, depending on which country you are looking at.
Chair: Oh, you’re looking at serfdom, which was abolished in 1868?
Craig Kennedy: Well, 1861—sorry! That was off the back of the loss in the Crimean war, which was a huge wake-up call. Russia stopped short. It could have kept on fighting, but it realised that it had overburdened itself with debt and the technocrats advised the Tsar, “Don’t keep fighting, because our situation will only get worse. We are up against a west that, while not fully committed to this, is committed enough and has enough of an industrial advantage over us.” Russia then embarked on massive reforms following that.
The same thing happened after the loss in the Russo-Japanese war: massive reforms. It is the one period in which we actually have a parliamentary moment in Russia, for about eight years. Then the first world war comes along and the rest is history. We could go on and on.
Q50 Chair: Is that what happened before the 1990s?
Craig Kennedy: Yes. Again, Gorbachev comes here to London in July 1991. He is asking for a further handout from George Bush and Helmut Kohl for debt, because the Russian deficit has ballooned: there is too much spending on the military, and the Government are not willing to demand that the population work for slave wages because they are afraid that, if they do, there will be an uprising. It is a very similar situation to today.
I could go on, but finally we said, “We are not seeing enough progress on reforms.” Within four months, the Soviet Union has defaulted on its foreign debt. Three days later, the Belovezha accords, which disband the Soviet Union, get signed. Debt is therefore really important to watch.
We then have those moments when the old regime has been rejected and you have civil society trying to reassert itself. However, Russia has the resource curse, which comes back, and the leadership has realised that, if you can simply control a few key rents from key natural resource extraction areas, you can have a great deal of financial control without a lot of accountability to the broader population.
That will be the interesting question going forward, post this conflict. Isaac talked about the decline in the contribution to the budget from the oil and gas sector and from natural resources. We can change that: we can provide technology, welcome Gazprom and everyone else back into our markets and provide them with credit. That number will then go way up again, because we will breathe new life, as we have in the past, into the rent-generating natural resources part of the Russian economy. That will enable its authoritarianism to stay alive for longer.
Dr Gould-Davies: I will just make a point on debt, because it is really important and often misunderstood. There are many observers who say—and the Kremlin is happy to repeat this—that Russia’s overall debt-to-GDP ratio is enviably low, on paper, compared with any European country. It is only about 20% of GDP. That might lead one to think that Russian public finances are in a healthy state, but that is just a number; it is a statistic. What really matters is the annual repayments that a state needs to make in order to satisfy those debt requirements.
Now—this is an astonishing fact—Russia pays more servicing its debt every year than Germany does, and as a percentage of GDP, it is even higher. The real burden—the flow of costs for Russia—is higher than it is for many European countries, including Germany.
Craig Kennedy: Nigel had brought up an incredibly important point. To help you understand, the German bund has a 3% to 4% yield. That is how much is costs the German Government to borrow. Guess how much it costs the Russian Government to borrow on the 10-year right now? It is almost 17%. It is incredibly expensive funding.
Not only that, but Germany has pretty much the entire global debt marketplace to appeal to; they have a very broad addressable market. Russia only has a tiny domestic market. I have seen plenty of economists, and even Vladimir Putin, talk about Russia’s strong debt-to-GDP ratio and say, “We’re just fine.” He mentioned it in Vladivostok at the beginning of September but then went on to talk about the problems they have.
Q51 Chair: As far as the individual is concerned, I think your evidence earlier was that individuals face consumer debt at a higher level.
Craig Kennedy: Certainly, consumer debt is very expensive. Again, if you are looking for signs of a system under stress, which could lead to a critical event where you get a cascading effect, we saw the single-A bond index in Russia move from 19% to 24% just over the course of September. There was a 5% increase for single-A corporates—so investment-grade corporates borrowing in the Russian bond market.
Those are very unusual upward spikes, and it has to do with the whole problem of the debt bubble now reading across into the broader financial system and everyone slowly starting to realise, “Oh my goodness. There is so much more unfunded debt that the Government have.” They are going to have to bail out the regions and all the bad debt on the arms manufacturers. When you add it all up, the total amount of potential liability that the state has is double what the official treasury bond market would suggest. Markets are starting to recognise that in Russia and they are pushing up borrowing costs. That is the sort of thing that causes knock-on effects.
Dr Gould-Davies: To make the comparison once again and show what an expensive war this is for Russia to fight, during world war two the interest rate in Britain was 3% and in America I think it was 2.75%. The Russian state has to pay vastly higher rates year after year.
Q52 Chair: We have another question about the confiscation of assets, but you made it clear at the beginning of your evidence that the way the Russians are pushing forward on this war is that they are not confiscating assets in the way that most war economies normally do. I will not cover that.
Dr Gould-Davies: They are confiscating foreign corporate assets at a growing rate, actually. They are confiscating some of their own, but in the past two months there has been a spate of confiscations from the western companies that have unwisely stayed in Russia.
Q53 Chair: Oh, really? Could you give us some examples?
Dr Gould-Davies: I think it was Auchan—the big French retailer. There are others I can send to you; it can be easily checked.
Chair: If you can think of them later, do send us a note because that would be interesting. Unless anyone has any further questions—
Isaac Levi: May I make one last comment? I will be quick. In terms of summarising the UK’s leverage and the things it can do, oil is a huge finance resource for the Russian state budget, especially the fossil fuel type.
I want to briefly touch on the shadow fleet, which has built up over time. Five hundred and sixty vessels have left western ownership or insurance to start moving away from connections to those sanctioning jurisdictions. I believe it was at the beginning of last week that France detained a falsely flagged Russian shadow tanker off the coast of India. They have now detained five; the UK has detained one.
Chair: We have given assistance to others.
Isaac Levi: Yes. The other area is the Russian flag registry has become the largest flag registry for all the Russian shadow fleet. The UK could sanction that as well; the EU has done so. Working with those false flags—those flags in small island states—that are facilitating the huge network that is required to transport Russian fossil fuels, would be a big win.
Chair: If you have any further thoughts on that, please send us a note because—subject to what the Committee thinks—I think it would probably be a good idea for us to write to the Foreign Office before we finish our inquiry to highlight the things that we think the Government should be doing on sanctions now. We will never get a proper response because they always say they cannot discuss it, but it is important that we nudge them.
Thank you for your time. I am sorry it has been so cold in here, but your evidence has been incredibly interesting. Thank you very much indeed.