Bye-bye to the Big Mac: Russia’s war heralds a dark, isolated economic era

The big western brands showed Vladimir Putin how to do it. While the Kremlin’s army was getting bogged down in Ukraine, Coca-Cola and Starbucks lost no time in closing their doors to Russian customers.

But the most emblematic move of all came from McDonald’s, which has shut all 850 of its outlets in Russia. The availability of Big Macs in the Soviet Union was seen in 1990 as evidence that the west’s old cold war foe was turning its back on communism, but the past fortnight has rekindled memories of the bad old days. There were queues outside McDonald’s when it first opened in Moscow. Last week, Russians queued for one last burger before the pull-out began.

One of Putin’s predecessors in the Kremlin – Lenin – once said there were decades when nothing happens and weeks when decades happen, and that’s true of the period since Russian troops moved across the border into Ukraine on 24 February.

It is not just that Russia faces a brutal recession. It is the shattering of the idea of a seamless post-cold-war global economy. It is the return to days of higher defence spending in the west. It is the possibility that governments may backpedal on their net zero carbon pledges.

“Putin has created his own worst nightmare,” says Mohamed El-Erian, chief economist at Allianz and president of Queens’ College, Cambridge. “He has united the west in a way it hasn’t been for a long time; he has been the catalyst for arms to Ukraine on a large scale; he has changed Germany’s approach to military spending; and he has brought the Russian economy to its knees. It is incredible.”

Symbolism in politics and international relations is important. What does this signal? It signals ‘back to the USSR’

Freezing the bulk of Russia’s reserves has meant the central bank has struggled to shore up the rouble, which has plummeted by a third on the currency markets. Capital controls have been introduced, interest rates have more than doubled, and annual inflation is heading for 20%. The stock market has been closed and financial markets fear Moscow may default on a sovereign debt repayment later this week.

John Lough, an associate fellow of the Russia and Eurasia Programme at Chatham House, who in his previous role at Nato during the mid-1990s was the alliance’s first representative to be based in Moscow, says: “The middle classes are going to be very badly affected by the lack of access to foreign holidays, gadgets, and nice food – things they’re used to but are now going to dry up. Symbolism in politics and international relations is important. What does this signal? It signals ‘back to the USSR.’”

Analysts warn of the sharpest annual decline for Russia since the collapse of the Soviet Union, as the exodus of western capital, technology and knowhow draws a 21st-century iron curtain around the Russian economy.

Bank of America forecasts a plunge in gross domestic product of 13% this year – a bigger hit than the pandemic or the 2008 financial crisis caused.

The west’s sanctions have turned Putin’s Russia into a North Korea-style pariah state, but the tough measures will have consequences for a fragile global economy still recovering from Covid-19.

It may only be the world’s 11th biggest economy, with a shrinking population and fewer links to global supply chains than China, but Russia’s status as the world’s biggest exporter of natural gas and the second-biggest exporter of crude oil means it punches above its weight.

Russia accounts for just over a quarter of EU oil imports and 40% of gas, a figure rising to 65% in Germany and 100% in some eastern European states. For the US, the exposure is not so great.: it is the world’s biggest producer of oil, with a vast internal market, and just 7% of its oil imports come from Russia.

For Germany, gas deliveries started in the late 1960s, as a product of the Ostpolitik agenda of former leader Willy Brandt, who wanted closer trade links between West Germany and the east as a way of overcoming tensions with the Soviet Union.

The queue to get into a branch of Uniqlo in Moscow last week. Photograph: Maxim Shemetov/Reuters

Throughout her 16 years in power, Angela Merkel remained committed to imports, including the development of the now-halted Nord Stream 2 pipeline. Germany’s energy dependence only grew when the country scaled down nuclear production when Merkel’s Christian Democratic Union came under pressure amid a rise in support for the Greens in 2011.

“This whole legacy of Ostpolitik has been turned on its head,” says Lough. “What we’re seeing now is going to be a transformation. The EU’s commitment to dramatically reduce energy dependence on Russia goes to the heart of it.”

It is unlikely, though, to be a smooth process. With the world seeking alternative energy sources, commodity strategists at Bank of America estimate that less than half of Russian exports can be replaced by Iran, the Opec nations and US shale.

Global crises in energy markets have form for upsetting the international economy, as well as triggering lasting change. The long postwar boom was brought to a head when action by the Opec cartel led to a quadrupling of crude oil prices in late 1973. There were echoes of that last week, when Brent crude rose above $130 a barrel, within sight of its record high of $147 a barrel, reached in 2008.

El-Erian says there was a chance of stagflation – a combination of rapidly rising prices and weak growth – in the global economy even before the Russian invasion. “Now stagflation has become the baseline and a global recession has become the risk scenario,” he adds.

Russia is no stranger to economic crises. The “shock treatment” administered by the International Monetary Fund and other multilateral bodies after the demise of the Soviet Union was brutal. Output fell consistently until the middle of the 1990s, unemployment peaked at almost 14%, and rising alcoholism and suicides led to a sharp fall in male life expectancy. A debt default in 1998 sent ripples through global financial markets, leading to the collapse of the US hedge fund Long Term Capital Management.

The economy has been through three phases since the collapse of communism, according to Holger Schmieding, chief economist at Berenberg bank. An initial period of rapid but often disorderly change gave way to progress from the late 1990s onwards. Following other post-socialist countries, Russia started to build closer links with the wider European and global economy, helped by a surge in oil prices. In a third phase, global isolation has set in since the 2014 annexation of Crimea, pushing Moscow to focus on self-dependence and a “fortress Russia” economic policy to guard against western sanctions.

The only problem, economists say, is that the road to autarky is rarely a recipe for sustained success.

“Step by step, it is starting to resemble some features of the late Soviet Union of the Brezhnev era – an underperforming petro-economy with an oversized military sector,” says Schmieding.

A new branch of Starbucks in the city of Khimki, outside Moscow, in 2007. Photograph: Alexander Natruskin/Reuters

Away from oil, Russia is vital for rare earth minerals and agricultural products such as wheat, corn and sunflower oil. Together Russia and Ukraine account for a quarter of the world’s wheat exports; prices have surged by more than 50% as the breadbasket of the world grapples with war.

Some developing countries will find they are paying the price. Russia supplies Egypt, with a population in excess of 100 million, with 85% of its wheat imports, while as much as 90% of Lebanon’s wheat and cooking oil imports come from Ukraine and Russia.

For the UK, surging oil prices are already hitting motorists hard, driving pump prices of both unleaded petrol and diesel to record highs last week.

Although the UK gets as little as 5% of its gas and 10% of its oil from Russia – meaning a phasing-out of supplies is unlikely to lead to shortages – soaring gas prices on wholesale markets will add to the cost-of-living squeeze. Chancellor Rishi Sunak is coming under pressure to boost support for households in his spring statement on 23 March.

High inflation is expected to result in the biggest annual fall in living standards since at least the 1970s – costing the average household at least £1,000 a year – as pay fails to keep pace with prices.

Gerard Lyons, chief economic strategist at the wealth management company Netwealth, says: “I don’t think a recession for the UK can be ruled out, even though it is not the most likely scenario.”

Squeezing Putin’s financial power could encourage Russia to build closer ties with China. With the payments system, and central banks’ power to intervene in currency markets, snarled by sanctions, turning to the Chinese yuan and payment networks overseen by Beijing could prove attractive.

However, experts believe there may be reluctance in both countries for a Sino-Russian pact. Pipelines and other infrastructure for large-scale exports of oil and gas eastwards are not in place, while there could be repercussions for Beijing if it helps Russia evade extensive and coordinated western sanctions.

“They will be pushed closer to China, but that’s very uncomfortable for Russia without the balancing relationship with the west and access to western finance and technologies. That underlines the weakness of the Russian system,” says Lough.

“My view is this will fatally undermine his position. He’s brought a form of destruction upon Russia because the economic impact is going to be so great. There is just no justification for it. It’s an extraordinary miscalculation.”

And one with repercussions far beyond Russia.