Foreign Affairs Committee
Tuesday 20th October 2026
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11:31
11:31
11:31
Speaker 1
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Speaker 1
Well, all the accounts we read of people who've been in this system indicate that human rights are violated on a truly massive scale. And it's not the Russian prison system is not somewhere where you you are going to end up and enjoy good health. Let's put it that way. It may or may not be as bad as it was in the 1930s, for example. And people are not going to die of starvation.
But at the at the same time, it's a pretty brutal environment.
But at the at the same time, it's a pretty brutal environment.
11:31
11:31
Speaker 2
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Speaker 2
Yeah, I'm afraid that for the ones who are committing the human rights violations, that comes from the most hardline group, and yeah, I'm not sure they they really care about having access to their properties in France or, or wherever. They'll seek to redraw global maps and re-establish themselves in Dubai, Istanbul and other places where the sanctions don't hit. But of course, I mean, it's an annoyance, but I don't think it will change those that particular faction of the Russian elite.
I don't think it will change their behaviour.
I don't think it will change their behaviour.
11:32
Abtisam Mohamed
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Abtisam Mohamed
My final question, doctor Daymond, do Russia see the international human rights legislation as beneath them in terms of like, do they have their own standards of what they perceive to be human rights, and do they see it as we're not really going to be responsible for anything that the West or others hold us accountable to. And, you know, will continue to operate as we please.
11:33
Speaker 3
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Speaker 3
So the Russian state, I think , certainly since the start of Putin's presidency, has seen kind of international human rights discourse, human international human rights standards as really a cover for hypocrisy as as a set of ideas that the West uses in order to, to, to con everybody while they can then advance their own national interests. This was something that developed particularly, I have to say, during the US presidency of George W Bush, where the Russian view was that the language of democracy and human rights in the West was really just being used to advance U.S.
national interests and absolutely nothing else. That's still something that you see. I think it's it's now embedded in Russian governmental attitudes towards human rights. It one of the other things that the Russian government does, and I think this is partly to. Well, it's to push back against Western human rights pressure, but also to to generate kind of broader confusion about it or uncertainty is to, to mirror the Western language of human rights back against the West. So, you know, for example, the US State Department used to issue an annual human rights report detailing human rights violations around the world.
And it always used to talk a lot about Russia. And so the Russian government started producing their human rights report, in which they set out all the violations of human rights in the UK and in the US and elsewhere. And this, you know, I think, is designed to cause global uncertainty around the legitimacy of human rights challenges in Russia. And very, very quickly to come back, I think, on, on, on the issue of, of media as it relates to this, I think actually kind of the, the targeting or the, the, the engagement with, with media, the need to ensure that there is kind of free and widespread access to, to fair reporting is also as it relates to Russia, something that that needs to be thought about in relation to the global South, the global majority, because at the moment, Russia really is making the running in these places.
It's telling a very strong story about Western hypocrisy and human rights violations, how, you know, resisting the West in Ukraine is really resisting Western colonialism, which lands understandably, very powerfully in states that are living with a legacy of Western colonialism. And so, you know, and therefore, by extension, all the things that the West are saying about human rights violations, war crimes in Ukraine and in Russia, these are all lies, right? These are Western lies. So I think the UK needs to be doing more to target that narrative as well.
Thank you.
national interests and absolutely nothing else. That's still something that you see. I think it's it's now embedded in Russian governmental attitudes towards human rights. It one of the other things that the Russian government does, and I think this is partly to. Well, it's to push back against Western human rights pressure, but also to to generate kind of broader confusion about it or uncertainty is to, to mirror the Western language of human rights back against the West. So, you know, for example, the US State Department used to issue an annual human rights report detailing human rights violations around the world.
And it always used to talk a lot about Russia. And so the Russian government started producing their human rights report, in which they set out all the violations of human rights in the UK and in the US and elsewhere. And this, you know, I think, is designed to cause global uncertainty around the legitimacy of human rights challenges in Russia. And very, very quickly to come back, I think, on, on, on the issue of, of media as it relates to this, I think actually kind of the, the targeting or the, the, the engagement with, with media, the need to ensure that there is kind of free and widespread access to, to fair reporting is also as it relates to Russia, something that that needs to be thought about in relation to the global South, the global majority, because at the moment, Russia really is making the running in these places.
It's telling a very strong story about Western hypocrisy and human rights violations, how, you know, resisting the West in Ukraine is really resisting Western colonialism, which lands understandably, very powerfully in states that are living with a legacy of Western colonialism. And so, you know, and therefore, by extension, all the things that the West are saying about human rights violations, war crimes in Ukraine and in Russia, these are all lies, right? These are Western lies. So I think the UK needs to be doing more to target that narrative as well.
Thank you.
11:36
11:36
John Whittingdale
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John Whittingdale
Actually on the issue of I mean, both Russia's attempts to put across its own narrative, but also against that to stop news and information coming from the West. I mean, I know a lot has happened in terms of their attempting to close down internet access, VPNs, etc.. I mean, can you say a little bit more about the attempts that Russia is making to control information and make sure that, you know, Western reporting doesn't reach its citizens?
11:36
11:36
11:37
Speaker 1
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Speaker 1
Well, I again, I can't say that I claim that I have expertise in this area, but it's, it's, it's clear that the, you know, slowing of YouTube, the, you know, requirement effectively to have a VPN access that works is a precondition, for example, being able to read Western media in, in Russia these days. And the VPN channels are regularly being challenged, but there still seem to be ways of getting around this. I speak to people in Moscow on a regular basis who are able to do this. So the authorities seems to me, have not completely shut down that access.
And no doubt on the assumption that the elites still need it. And I think there's also a desire in a higher up in the system to be able to read what Western media are writing, how Russia is being portrayed, how they can therefore influence. So they do need these things. But, you know, more more broadly, society, I think, has become much more isolated in the nature of reporting in Russia has become very different in in recent years. And I think it's really fair to say that since February 2022, Russia as a country has changed significantly.
And I'm not sure that we so far understand the degree to which it's changed. And therefore, in countries such such as Britain, we we really do, I think, need to sharpen our expertise, find other ways of studying what's going on in Russia so that we we simply are better informed about what sort of country is emerging and what we're going to be dealing with.
And no doubt on the assumption that the elites still need it. And I think there's also a desire in a higher up in the system to be able to read what Western media are writing, how Russia is being portrayed, how they can therefore influence. So they do need these things. But, you know, more more broadly, society, I think, has become much more isolated in the nature of reporting in Russia has become very different in in recent years. And I think it's really fair to say that since February 2022, Russia as a country has changed significantly.
And I'm not sure that we so far understand the degree to which it's changed. And therefore, in countries such such as Britain, we we really do, I think, need to sharpen our expertise, find other ways of studying what's going on in Russia so that we we simply are better informed about what sort of country is emerging and what we're going to be dealing with.
11:38
11:38
Richard Foord
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Richard Foord
11:39
Speaker 2
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Speaker 2
Again, it's very difficult for any normal Russian citizen to protest against the regime just because, as John mentioned, you can face a 15 year sentence for daring to contradict the Kremlin in some way. We've seen some attempts at protests by soldiers, mothers over losses of lives of their sons. But every time something kind of flurries up, it's generally crushed pretty quickly. You get a Russian. The Kremlin has facial recognition. It can monitor anyone taking part in a protest. You'll get a knock on your door from the FSB if you're seen doing so. What the Kremlin considers to be its biggest risk of of social protest is if the Kremlin has to declare a public mobilisation to send reinforcements to the front and to have a new kind of onslaught, to take back the territory in Ukraine or to, to or to take all of Donbas, as Putin has vowed to do.
And for that reason, the Kremlin has stepped back from announcing a full mobilisation because they saw what happened when they tried to do that in September 2022. That was when we had the last meaningful protest in Russia. So instead, what they're doing, it's more of a covert system. They're not announcing mobilizations, but we've heard reports that doctors and other kind of medical workers are now being called up to the front, but it's being done quietly. There are institutions. Students have quotas now where students are getting sent to the front line, but it's all being done in an under the carpet fashion, so as not to provoke precisely this kind of social protest.
And that's really the only danger that faces the Kremlin, because, again, as John said, that unfortunately, the you know, most of the Russian population is so atomized, so isolated, and, you know, and so repressed. Now, the price of protest is so high that any kind of backlash to the Putin regime will come from within his own elite.
And for that reason, the Kremlin has stepped back from announcing a full mobilisation because they saw what happened when they tried to do that in September 2022. That was when we had the last meaningful protest in Russia. So instead, what they're doing, it's more of a covert system. They're not announcing mobilizations, but we've heard reports that doctors and other kind of medical workers are now being called up to the front, but it's being done quietly. There are institutions. Students have quotas now where students are getting sent to the front line, but it's all being done in an under the carpet fashion, so as not to provoke precisely this kind of social protest.
And that's really the only danger that faces the Kremlin, because, again, as John said, that unfortunately, the you know, most of the Russian population is so atomized, so isolated, and, you know, and so repressed. Now, the price of protest is so high that any kind of backlash to the Putin regime will come from within his own elite.
11:41
11:41
Speaker 1
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Speaker 1
Well, the interestingly, the the pro pro-war community has been up in arms recently about the way the Russian general staff has been reporting to Putin on the progress on the front line, because it doesn't correspond to what they're seeing. And I think one can take it as read, that they do know what's going on on the front line because of their various networks. They had until relatively recently, probably until about three months ago. Some of them have been unhappy with what they saw as Putin's weakness in the the conduct of the war that couldn't understand why Russia wasn't hitting Ukraine harder since it had the means to do so.
And of course, we've seen over the last, particularly two months, that Russia has increased its attacks using ballistic missiles, jet powered drones and all these things, and in my view, is now systematically devastating the Ukrainian economy. So that's probably appeased that group to an extent. But that may only be temporary. And as I noted before, I think this problem of how war veterans will be treated in Russia when the war comes to an end, because these people who've benefited from the really extensive largesse of the state and people who've made, in some cases , unheard of money, and in the case of soldiers who've died, died in in service in Ukraine, their families again, have received really very generous compensation.
But this is firstly is financially unsustainable. And secondly, there's going to be a different problem when these people get home. And that is, you know, our jobs, are they going to be earning anything like what they were earning in the Army? No. So they're going to have to be packed off somewhere else. And of course, 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's going to be more complicated than that. And we've got to think also about the very large numbers of wounded soldiers and access to prosthetic limbs and proper rehabilitation.
I mean, this is extremely patchy, so I would expect there to be high levels of dissatisfaction with just the limitations of the Russian state. And these people will probably become forgotten about. They won't be treated as heroes in society because things will move on. So I think that will be their their real concern.
And of course, we've seen over the last, particularly two months, that Russia has increased its attacks using ballistic missiles, jet powered drones and all these things, and in my view, is now systematically devastating the Ukrainian economy. So that's probably appeased that group to an extent. But that may only be temporary. And as I noted before, I think this problem of how war veterans will be treated in Russia when the war comes to an end, because these people who've benefited from the really extensive largesse of the state and people who've made, in some cases , unheard of money, and in the case of soldiers who've died, died in in service in Ukraine, their families again, have received really very generous compensation.
But this is firstly is financially unsustainable. And secondly, there's going to be a different problem when these people get home. And that is, you know, our jobs, are they going to be earning anything like what they were earning in the Army? No. So they're going to have to be packed off somewhere else. And of course, 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's going to be more complicated than that. And we've got to think also about the very large numbers of wounded soldiers and access to prosthetic limbs and proper rehabilitation.
I mean, this is extremely patchy, so I would expect there to be high levels of dissatisfaction with just the limitations of the Russian state. And these people will probably become forgotten about. They won't be treated as heroes in society because things will move on. So I think that will be their their real concern.
11:44
Speaker 3
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Speaker 3
Just just very, very quickly to add on to that, I mean, I think as well, one thing that hasn't been talked about enough in the West perhaps, and is something that I think is, is, is concerning for, for the future of Russian society is really the kind of corrupting effect of, of the money that's been paid out, particularly to, to families who lose sons, husbands, you know, the lives of Russian citizens have been kind of commodified by the war where, you know, the life of a husband or a son, in the end, may be worth less than the life changing amount of money that that people get when they die.
And I think that's profoundly kind of concerning for the direction of, of Russian society that you have a society where, yeah, you know, it was often said in the West in the Cold War that Russians didn't value human life, which clearly was not the case amongst Russian society. But I do think that any the effect of the war of pumping so much money into society in exchange for people's lives or for, you know, for people's bodies, I think that's a big problem. It's going to be a big problem for Russian society. How to correct for that?
In addition to the other big problem for Russian society, which is that, of course, the the prisons were emptied to send, you know, murderers and rapists to the front to fight Ukraine. And they're coming home and they're causing havoc in in Russian society. So that's another big problem.
And I think that's profoundly kind of concerning for the direction of, of Russian society that you have a society where, yeah, you know, it was often said in the West in the Cold War that Russians didn't value human life, which clearly was not the case amongst Russian society. But I do think that any the effect of the war of pumping so much money into society in exchange for people's lives or for, you know, for people's bodies, I think that's a big problem. It's going to be a big problem for Russian society. How to correct for that?
In addition to the other big problem for Russian society, which is that, of course, the the prisons were emptied to send, you know, murderers and rapists to the front to fight Ukraine. And they're coming home and they're causing havoc in in Russian society. So that's another big problem.
11:46
Speaker 4
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Speaker 4
Well thank you. That was the end of our questions. Unless anyone has anything else. Thank you so much. Your evidence has been so interesting and and absolute tour de force. I think I will suspend the session at this stage in order to be able to change panels. Thank you again. To our second panel on Russia. Now, looking specifically at the Russian economy, thank you very much to the witnesses for coming.
And I wonder if you could introduce yourselves, perhaps if I begin on the left.
And I wonder if you could introduce yourselves, perhaps if I begin on the left.
11:48
11:49
11:49
Speaker 6
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Speaker 6
I am Isaac Levi. Thanks very much for having me today. I'm the team leader for the Russia Europe Energy Analysis at the centre for Research on Energy and Clean Air. We're tracking live all of Russia's fossil fuel export earnings, analysing the impact of the sanctions and identifying loopholes for policy makers. Thanks.
11:49
Speaker 4
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Speaker 4
We have another outstanding panel. Thank you very much for coming. I wonder if I could just begin with a with a general debate, a general question. It's about the ongoing debate that we have, which is looking at it from Britain, perhaps from the West generally, which is really what is the state of the Russian economy at the moment? I mean, sometimes we hear it's close to a collapse. Sometimes we hear that it isn't, you know, we get such contradictory evidence. I wondered if you could help us with that. And then also, I think we're also told that Russia is on a war footing.
And 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? And what would the Russian people make of it if it did become a complete war economy? Can I begin with Doctor Gould? Davis?
And 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? And what would the Russian people make of it if it did become a complete war economy? Can I begin with Doctor Gould? Davis?
11:50
11:50
11:50
Alex Ballinger
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Alex Ballinger
Yes, particularly in Russia. Perhaps they can be considered these two sessions, parts of a kind of a single whole, the political economy. Yes. So the Russian economy is an increasingly militarized economy, which means that servicing the needs of waging war take a priority. Now, an increasingly. So that does not mean it's a war economy in the sense that absolutely everything is subordinated to that. right now. I think it's a really striking fact about the way that the Russian state is turning its resources into the means of destruction is that, unlike every previous major war it has ever waged, and 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. 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 a mark on a market basis, albeit a market basis in which the state always looms large and which property rights are insecure. There's been no large scale forced commandeering of resources in the ways, for example, that all of the combatants during World War Two just took over their economy, including America, the most sort of market friendly. The story is even more striking on the human side of things.
And again, the previous session touched on this. It's really striking that, with a few exceptions and limited exceptions, the Russian state has done everything it can to avoid compelling its citizens to fight. There has been no large scale conscription. There has been no compelling of citizens to become soldiers. Instead, what the Russian state has done is offer very, very large indeed life changing sums of money to persuade citizens voluntarily if they wish to fight.
That means that military pay is extraordinarily expensive. The needs.
It is paying them to do so. 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 a mark on a market basis, albeit a market basis in which the state always looms large and which property rights are insecure. There's been no large scale forced commandeering of resources in the ways, for example, that all of the combatants during World War Two just took over their economy, including America, the most sort of market friendly. The story is even more striking on the human side of things.
And again, the previous session touched on this. It's really striking that, with a few exceptions and limited exceptions, the Russian state has done everything it can to avoid compelling its citizens to fight. There has been no large scale conscription. There has been no compelling of citizens to become soldiers. Instead, what the Russian state has done is offer very, very large indeed life changing sums of money to persuade citizens voluntarily if they wish to fight.
That means that military pay is extraordinarily expensive. The needs.
11:53
Speaker 4
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Speaker 4
May I just interrupt you for a moment? I mean, I hear what you say, but is there not also something about the fact that the that the those who are signing up come from the edges of Russia, come from the far flung parts of Russia. They don't come from Saint Petersburg and Moscow, where perhaps the amount of money that's on offer wouldn't wouldn't go as far. So it also speaks to how unequal the Russian Russian economy is. I'm sorry to interrupt.
11:53
Alex Ballinger
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Alex Ballinger
You, but very much so. Yeah. And it's a political matter as well, because one of the priorities of the Kremlin is to make sure its two most important cities, Moscow and Saint Petersburg, are insulated, shielded as far as possible from the effects of the war. But you're absolutely right. A given sum of money to go to. Well, there are several sums of money there signing up bonus. There's a military 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 and richest cities.
But the key point is that military recruitment is, in a sense, an extension of Russia's labour market as a whole. And that means, again, that it's extremely expensive for Russia to recruit, and it's not compelling people to do so in a true war economy. And again, this is true of all the combatants during the Second World War. The state just sends resources, whether they wish to or not. And the Russian state has not yet sort of crossed that threshold. There is some arm twisting at the margins, and there is some deception. And the previous session touched on some of this for one month only in September 2022, when Ukraine made its dramatic breakthroughs in Kharkiv and then Herson and Russia for a time was real on the back foot.
For that month, only the Kremlin said, write 300,000 of you have to fight. We're 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. Borders are still open and left. Left to flee. They voted with their feet, if you like. Russia since then has been at pains not to have to repeat that experiment. And I think that tells us quite a lot about the underlying popular anxieties about the war, the fact that performative support might run wide, but it doesn't run very deep.
And the Russian state knows this. And I'll just finish on this point. When the Russian state is advertising recruitment opportunities, these last large billboards on the streets all over the cities of Russia, it doesn't say your country needs you. It says this is the sum of money you'll get if you sign up. So militarized economy, increasingly militarized society, but not yet a war economy, a war society in that hard compelled sense.
And I think the Russian state does not want to go there.
But the key point is that military recruitment is, in a sense, an extension of Russia's labour market as a whole. And that means, again, that it's extremely expensive for Russia to recruit, and it's not compelling people to do so in a true war economy. And again, this is true of all the combatants during the Second World War. The state just sends resources, whether they wish to or not. And the Russian state has not yet sort of crossed that threshold. There is some arm twisting at the margins, and there is some deception. And the previous session touched on some of this for one month only in September 2022, when Ukraine made its dramatic breakthroughs in Kharkiv and then Herson and Russia for a time was real on the back foot.
For that month, only the Kremlin said, write 300,000 of you have to fight. We're 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. Borders are still open and left. Left to flee. They voted with their feet, if you like. Russia since then has been at pains not to have to repeat that experiment. And I think that tells us quite a lot about the underlying popular anxieties about the war, the fact that performative support might run wide, but it doesn't run very deep.
And the Russian state knows this. And I'll just finish on this point. When the Russian state is advertising recruitment opportunities, these last large billboards on the streets all over the cities of Russia, it doesn't say your country needs you. It says this is the sum of money you'll get if you sign up. So militarized economy, increasingly militarized society, but not yet a war economy, a war society in that hard compelled sense.
And I think the Russian state does not want to go there.
11:57
11:57
Speaker 5
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Speaker 5
I will just pick up on this because it's a very salient point. If you look at how states fund wars, they have a fundamental decision that they need to make when they suddenly find themselves embroiled in an expensive war. First of all, how long is it going to last? How much will I need? And second of all, where will I get the funds from? And if you have a war which has broad popular support, you can usually go for what's called direct resource extraction, and that is mobilization of the population and taxation, direct taxation of the population.
In Russia, we have seen almost no mobilization whatsoever and very little direct taxation. Most of the taxation has been indirect taxation at the corporate level, which is very difficult to see by ordinary Russians. They feel it in their pocketbooks now, but they don't see it necessarily. And this is the hallmark of a state which is afraid to demand of its population direct sacrifices, because they realize that the war is not actually broadly popular. And you see this throughout history. There are other examples as well. Now you asked the question, Is the Russian economy strong? Is it on the verge of collapse?
Why is it so difficult to understand what's going on? And let me clue you in to something. My background is in finance. And so I tend to focus more on capital markets and on corporate finance. Most of the people who are looking at Russia today are economists. So they're looking at broad macroeconomic indicators. How much growth is there, what's going on with the labor market, etc.. And if you read those headline numbers, what you see is the following pattern. Russia surprisingly seemed to be very resilient in 2023 and 2024 and had 4% plus growth. We've now seen that drop off sharply in 2025 and 2026, and we're seeing investments go down.
But nonetheless, people have been surprised at the resilience of Russia when they look just at the macroeconomic side of it. What we have neglected to look at is what's happening actually on the corporate finance side of things. These are private finances. These are companies raising money. And the reason that's important is that that part of the Russian cash flow system is much larger than the Treasury bond market or the way Russia funds its own deficit. And what we've seen happening in the last four years of the war is a credit boom that has been engineered by the state.
And in fact, it's 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, but in 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. But what this did was it it fed two things just 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. But it also funded the war economy because over a third of that amount went directly to arms manufacturers, and it is not being recognized as part of the defense budget.
It's a supplement to the defense budget, but it's a very costly supplement because what has happened now is Russia thought at the outset, like many states do, let's mobilize as much cash as we can from anywhere we have. And so they spent down their savings in the national wealth fund, and they ran and they overextended their credit capacity in the banking system. It's a bit like saying I've got to live large for the next year, so I'm going to spend down my family savings and max out my credit cards. And you look very vibrant and prosperous for a year.
But the problem is Russia's war has gone on too long, and now it's found itself saddled with a huge amount of corporate debt, and it's starting to actually have a profound impact on the broader economy. For two months this summer, the Russian state treasury market, this is treasury bonds. It's their equivalent of gilts, which is essential for financing. The growing war deficit was shut down. It was shut down because they were struggling to get sufficient demand from within Russia. And the only place they can source demand now, because of the effect of sanctions that have been placed on finance, is from domestic sources.
And so this is one of the hallmarks that anyone in finance looks for when they're looking at a system that's under increasing amounts of stress. And this is something that the Russians themselves are very aware of and they're very concerned about. And if I can just put my historian's hat on for a moment, if you go back in Russian history to all of 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.
So I think in response to your question, is the Russian economy doing well or not? It's now suffering from a shortage of investment. But the bigger problem is they've got a war finance problem. They've got a huge amount of debt bubble that they're trying to prevent from bursting. And this 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 actually end up with a cascading type effect that they can't control. And it comes back to this fundamental question of what can they demand from the population at large?
Do they dare have a forced mobilization where they stop all of these high payments that are bankrupting the system effectively and force people to fight? Or is that something that they fear to do because of the potential political blowback?
In Russia, we have seen almost no mobilization whatsoever and very little direct taxation. Most of the taxation has been indirect taxation at the corporate level, which is very difficult to see by ordinary Russians. They feel it in their pocketbooks now, but they don't see it necessarily. And this is the hallmark of a state which is afraid to demand of its population direct sacrifices, because they realize that the war is not actually broadly popular. And you see this throughout history. There are other examples as well. Now you asked the question, Is the Russian economy strong? Is it on the verge of collapse?
Why is it so difficult to understand what's going on? And let me clue you in to something. My background is in finance. And so I tend to focus more on capital markets and on corporate finance. Most of the people who are looking at Russia today are economists. So they're looking at broad macroeconomic indicators. How much growth is there, what's going on with the labor market, etc.. And if you read those headline numbers, what you see is the following pattern. Russia surprisingly seemed to be very resilient in 2023 and 2024 and had 4% plus growth. We've now seen that drop off sharply in 2025 and 2026, and we're seeing investments go down.
But nonetheless, people have been surprised at the resilience of Russia when they look just at the macroeconomic side of it. What we have neglected to look at is what's happening actually on the corporate finance side of things. These are private finances. These are companies raising money. And the reason that's important is that that part of the Russian cash flow system is much larger than the Treasury bond market or the way Russia funds its own deficit. And what we've seen happening in the last four years of the war is a credit boom that has been engineered by the state.
And in fact, it's 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, but in 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. But what this did was it it fed two things just 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. But it also funded the war economy because over a third of that amount went directly to arms manufacturers, and it is not being recognized as part of the defense budget.
It's a supplement to the defense budget, but it's a very costly supplement because what has happened now is Russia thought at the outset, like many states do, let's mobilize as much cash as we can from anywhere we have. And so they spent down their savings in the national wealth fund, and they ran and they overextended their credit capacity in the banking system. It's a bit like saying I've got to live large for the next year, so I'm going to spend down my family savings and max out my credit cards. And you look very vibrant and prosperous for a year.
But the problem is Russia's war has gone on too long, and now it's found itself saddled with a huge amount of corporate debt, and it's starting to actually have a profound impact on the broader economy. For two months this summer, the Russian state treasury market, this is treasury bonds. It's their equivalent of gilts, which is essential for financing. The growing war deficit was shut down. It was shut down because they were struggling to get sufficient demand from within Russia. And the only place they can source demand now, because of the effect of sanctions that have been placed on finance, is from domestic sources.
And so this is one of the hallmarks that anyone in finance looks for when they're looking at a system that's under increasing amounts of stress. And this is something that the Russians themselves are very aware of and they're very concerned about. And if I can just put my historian's hat on for a moment, if you go back in Russian history to all of 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.
So I think in response to your question, is the Russian economy doing well or not? It's now suffering from a shortage of investment. But the bigger problem is they've got a war finance problem. They've got a huge amount of debt bubble that they're trying to prevent from bursting. And this 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 actually end up with a cascading type effect that they can't control. And it comes back to this fundamental question of what can they demand from the population at large?
Do they dare have a forced mobilization where they stop all of these high payments that are bankrupting the system effectively and force people to fight? Or is that something that they fear to do because of the potential political blowback?
12:03
Speaker 7
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Speaker 7
Thank you. Yeah. I just wanted to dig down a bit more into what you're talking about in terms of the resilience of the economy. And in particular, I believe that we've now got Russia's draft 2027 budget, which includes a record allocation for defence. So I just want to understand a bit more about how sustainable that level of defence and security expenditure is and what it kind of says about the resilience of the economy for the ongoing war.
Who would like to take it?
Who would like to take it?
12:03
12:04
Speaker 5
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Speaker 5
So so it's a stretch target for them. Part of the reason that it is, is high as it is, is that there is a lot of financing costs that now has to be paid. They have put around $225 billion worth of additional debt on the defence sector, and 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 on that. The interest charges alone are in excess of $30 billion, which is a very sizable portion of the total amount of of defence.
We're talking 20% of the defence budget. So it's it's going up, but in part for this very reason that they're funding a huge amount of debt that's 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 now, which it then passes to the banks and the banks then use it to buy treasury bonds, which cover the deficit. But that is effectively Ponzi financing in in the terms of Hyman Minsky. And it's something which is just dangerous to do. And the longer you do it, the greater the risk that it suddenly begins to falter.
So much so that you have a credit event. And we saw this issue in country after country after the during the European sovereign debt crisis, where some countries recognize the excessive debt straight away. They took the pain. They had to bail out a lot of banks, and then they got through it. Others decided to try to hide the bubble, to finance it, to continue restructuring loans, to continue printing money through the central bank. And they managed to string it along for a while. But ultimately, there was a a credit event that led to a, a forceful resolution of the problem.
And that's the that's the challenge that Russia faces today. And nobody knows how long they'll be able to keep it going. All they know is it's a greater and greater risk. And this creates time pressure on negotiations. And it also focuses them very much on trying to extract concessions around sanctions, in particular, sanctions relating to access to Western credit in any negotiations that they're going to be having with the West. We can come back and talk about Britain's special role in that, if you'd like.
We're talking 20% of the defence budget. So it's it's going up, but in part for this very reason that they're funding a huge amount of debt that's 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 now, which it then passes to the banks and the banks then use it to buy treasury bonds, which cover the deficit. But that is effectively Ponzi financing in in the terms of Hyman Minsky. And it's something which is just dangerous to do. And the longer you do it, the greater the risk that it suddenly begins to falter.
So much so that you have a credit event. And we saw this issue in country after country after the during the European sovereign debt crisis, where some countries recognize the excessive debt straight away. They took the pain. They had to bail out a lot of banks, and then they got through it. Others decided to try to hide the bubble, to finance it, to continue restructuring loans, to continue printing money through the central bank. And they managed to string it along for a while. But ultimately, there was a a credit event that led to a, a forceful resolution of the problem.
And that's the that's the challenge that Russia faces today. And nobody knows how long they'll be able to keep it going. All they know is it's a greater and greater risk. And this creates time pressure on negotiations. And it also focuses them very much on trying to extract concessions around sanctions, in particular, sanctions relating to access to Western credit in any negotiations that they're going to be having with the West. We can come back and talk about Britain's special role in that, if you'd like.
12:06
12:06
Alex Ballinger
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Alex Ballinger
So defence spending has increased very substantially, of course, in every year Russia has been at war, but we're seeing the biggest jump planned for next year. It's really striking in nominal terms, something like like 40%. So how do you finance that. And there are a number of ways and Russia has drawn on all of them. One is that you draw upon your sovereign wealth fund, your national welfare fund, as it's called, and that's nearly empty. Now. There's very little of that left. The second is that you raise taxes. Russia has been doing that, and there are further plans to continue that.
The third is you cut spending on other things, and Russia has certainly been doing that and plans to continue doing that. So if you look at the draft budget plans for next year, they against the background of this huge increase in defence and security spending, they are saying that they are not going to increase the total level of state spending. And that's really striking. So that implies actually very substantial further cuts and things like education, health and other social services. Military spending now accounts for around 44 0% of total federal state spending. It's by far the biggest component and the final way of funding higher spending is to increase the deficit.
And that is something that has to be financed. And as Craig said, Russia cut off from international financing. No one is lending to it for all of the help of various kinds that China is giving Russia. Maybe you can talk about that. It's not lending or giving it money. That means that the only, as Craig said, the only source is domestic and from from its own banks. And it's not clear that these so-called repo operations, the way it's doing that is, is in the long term, more than a Ponzi scheme. I'll just finish by going back to the first question, because an important connection between them, it's worth considering what exactly how much Russia will get in return for this huge increase in spending.
I think the key point here is that because the Kremlin has done everything it can not to compel on commandeer either human or material resources to fight, but rather to pay for them at market rates. This this means that it's getting much less bang for its ruble, that the average soldier is much more expensive. The average tank or drone is much more expensive than it would be if the state had simply taken control of the economy. So not only is Russia having very substantially to increase its the financial burden it incurs, but it is getting much less for that than other major combatants of major wars have in the past.
The third is you cut spending on other things, and Russia has certainly been doing that and plans to continue doing that. So if you look at the draft budget plans for next year, they against the background of this huge increase in defence and security spending, they are saying that they are not going to increase the total level of state spending. And that's really striking. So that implies actually very substantial further cuts and things like education, health and other social services. Military spending now accounts for around 44 0% of total federal state spending. It's by far the biggest component and the final way of funding higher spending is to increase the deficit.
And that is something that has to be financed. And as Craig said, Russia cut off from international financing. No one is lending to it for all of the help of various kinds that China is giving Russia. Maybe you can talk about that. It's not lending or giving it money. That means that the only, as Craig said, the only source is domestic and from from its own banks. And it's not clear that these so-called repo operations, the way it's doing that is, is in the long term, more than a Ponzi scheme. I'll just finish by going back to the first question, because an important connection between them, it's worth considering what exactly how much Russia will get in return for this huge increase in spending.
I think the key point here is that because the Kremlin has done everything it can not to compel on commandeer either human or material resources to fight, but rather to pay for them at market rates. This this means that it's getting much less bang for its ruble, that the average soldier is much more expensive. The average tank or drone is much more expensive than it would be if the state had simply taken control of the economy. So not only is Russia having very substantially to increase its the financial burden it incurs, but it is getting much less for that than other major combatants of major wars have in the past.
12:09
12:09
Speaker 5
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Speaker 5
So I would just add that the military industrial complex in Russia is not known for its efficiency. And we talked about war economy. It is effectively on a war footing already. It's greatly expanded output, as it does so many people think, well, it must make them very profitable. In fact, they're operating at a loss. Part of the reason why they're having to borrow so much from the state banks is that they are being underfunded by the state budget. And so when we look at the state budget, the state budget is actually understating the total amount of resources that are going into the military industrial complex.
We talked about the various factors driving costs. One of the factors driving costs, again , is sanctions. While sanctions have not effectively stopped all of the different flows of technology coming into Russia, they've made it much more expensive. And so Russia is having to pay several times over normal market price, according to some reports, to be able to secure some of the technology that they need. And then, of course, there's always graft and corruption, which adds an additional margin to that as well. And so while you've got demand coming up and you've talked about what's happening with other parts of the economy, is , are austerity being used?
Austerity is, is a tool that's been used since the very first year, and it continues to be used. But the other thing that's going on, and maybe I'm jumping the gun here in talking about the energy sector, and we can go into that in greater detail. Isaac has been doing a lot of work on this as well, is that Russia's energy sector is 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 historical surplus. Energy revenues, which has been largely spent down.
There was a large amount of cash on the balance sheets of some of the Russian oil companies and gas companies, which has effectively been taxed away by special war taxes and the excessive amount of taxation that's been placed upon the energy companies has caused them to underinvest in upstream development activities. And that's leading to a steep fall this year in production levels for the first time for a very long time. And it's reminiscent of what we saw happening back in the 1980s as well, where the state was demanding too much from the energy companies. They're underinvesting in the upstream, they're starting to see production collapse.
And this is compounded, of course, by everything from kinetic strikes by the Ukrainians against infrastructure, but also technology sanctions. And I cannot stress this enough, having spent a lot of time in Russia over from 1992 to 2013 , in the energy sector, Western technology is critically important for maintaining the efficiency of the Russian oil sector in particular, and the restrictions that have been placed initially a little bit in 2014, a bit more in 2022, but especially 2024 on access to oilfield technology. Sanctions is really starting to bite. And it's it's something that's incredibly important. Russia has relied on Western advanced technologies really since the 1870s for its oil oil development, and continues to be highly dependent today.
And it's a technological edge they cannot get from China. Only the West has these technologies. And so it's it's as you think about sanctions and negotiations, it's important to recognize the things that Russia values because it's not always obvious. And technology sanctions are definitely one of them.
We talked about the various factors driving costs. One of the factors driving costs, again , is sanctions. While sanctions have not effectively stopped all of the different flows of technology coming into Russia, they've made it much more expensive. And so Russia is having to pay several times over normal market price, according to some reports, to be able to secure some of the technology that they need. And then, of course, there's always graft and corruption, which adds an additional margin to that as well. And so while you've got demand coming up and you've talked about what's happening with other parts of the economy, is , are austerity being used?
Austerity is, is a tool that's been used since the very first year, and it continues to be used. But the other thing that's going on, and maybe I'm jumping the gun here in talking about the energy sector, and we can go into that in greater detail. Isaac has been doing a lot of work on this as well, is that Russia's energy sector is 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 historical surplus. Energy revenues, which has been largely spent down.
There was a large amount of cash on the balance sheets of some of the Russian oil companies and gas companies, which has effectively been taxed away by special war taxes and the excessive amount of taxation that's been placed upon the energy companies has caused them to underinvest in upstream development activities. And that's leading to a steep fall this year in production levels for the first time for a very long time. And it's reminiscent of what we saw happening back in the 1980s as well, where the state was demanding too much from the energy companies. They're underinvesting in the upstream, they're starting to see production collapse.
And this is compounded, of course, by everything from kinetic strikes by the Ukrainians against infrastructure, but also technology sanctions. And I cannot stress this enough, having spent a lot of time in Russia over from 1992 to 2013 , in the energy sector, Western technology is critically important for maintaining the efficiency of the Russian oil sector in particular, and the restrictions that have been placed initially a little bit in 2014, a bit more in 2022, but especially 2024 on access to oilfield technology. Sanctions is really starting to bite. And it's it's something that's incredibly important. Russia has relied on Western advanced technologies really since the 1870s for its oil oil development, and continues to be highly dependent today.
And it's a technological edge they cannot get from China. Only the West has these technologies. And so it's it's as you think about sanctions and negotiations, it's important to recognize the things that Russia values because it's not always obvious. And technology sanctions are definitely one of them.
12:13
Speaker 7
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Speaker 7
Just before, because I know we've got a few questions on energy. I just wanted to say , sorry, Isaac, but just wanted to ask you in particular about Russia's regional budgets. They also have a substantial combined deficit. And just wanted to see if you had a view on how the cost of the war might be affecting the fiscal sustainability of those regions, and what the implication of that might be.
12:14
Alex Ballinger
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Alex Ballinger
Yeah, that's that's a very good question. Underappreciated one, because typically when we look at or 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 all of the what's going on in the regions. And that's important directly for war related questions as well, because it's the regions that have been sort of arm twisted by the Kremlin to finance, in particular, the large and attractive and steadily growing signing on bonuses, one of the parts of the overall financial incentive package that turns civilians into soldiers.
And what we've seen in recent months is clear evidence of fiscal pressures at the regional level affecting even those. I think it's something like nine regions have announced that they are actually having to cut their that the amount they pay for that signing on bonus and the fact they're doing that affecting the highest priority of the Russian state, its ability to to provide human power for the front speaks to the larger fiscal problems that they face. And one reason for that in particular is the financial distortions created by the war, especially the very high interest rates.
So for 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 is extraordinarily high interest rates, that is suppressing business activity in many of the regional the regions of Russia. And that in turn means that the tax take that these regions have access to is being restricted. Ultimately, the federal government will bail out the regions. It just has to. There's no alternative. So all of these regional deficits are implicit liabilities at the federal level. But that doesn't nullify the underlying point behind your question, which is that the real cost, the real financial costs of this war, go beyond what the official ledgers, as it were, in Moscow, suggest.
And what we've seen in recent months is clear evidence of fiscal pressures at the regional level affecting even those. I think it's something like nine regions have announced that they are actually having to cut their that the amount they pay for that signing on bonus and the fact they're doing that affecting the highest priority of the Russian state, its ability to to provide human power for the front speaks to the larger fiscal problems that they face. And one reason for that in particular is the financial distortions created by the war, especially the very high interest rates.
So for 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 is extraordinarily high interest rates, that is suppressing business activity in many of the regional the regions of Russia. And that in turn means that the tax take that these regions have access to is being restricted. Ultimately, the federal government will bail out the regions. It just has to. There's no alternative. So all of these regional deficits are implicit liabilities at the federal level. But that doesn't nullify the underlying point behind your question, which is that the real cost, the real financial costs of this war, go beyond what the official ledgers, as it were, in Moscow, suggest.
12:16
12:16
12:16
12:16
Speaker 6
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Speaker 6
Yeah, thank you very much. So just to touch very briefly on how Russia finances its war in Ukraine or the tax revenues that has been described and analyzed by my colleagues. So historically, Russia was about between a third and half dependence of all its state budget on oil and gas taxation. And what we've seen in the first nine months of 2026 is it's now dropped down to about 18%, down from 25% in 2025. So so this is a representative of a 17% drop in the taxation from the oil and gas sector. Of course, the homeless crisis and the US waivers provided Roebuck in sanctions, has provided a sort of golden ticket to Putin or the oil and gas sector.
So we've seen their export earnings rise by around £27 billion in the first six months of the Hormuz Straits crisis. But as you mentioned, what's really been hit has been the oil products due to the Ukrainian strikes on on those refineries. So we've seen estimates depending on the time period and region, but around 30 to 50% is the current estimation in their drop in refining capacity due to Ukraine's drone strikes. Bizarre situation. As you probably know, Ukraine Russia has loaded zero shipments of diesel in September. And of course, this statement that the US is going to perhaps import Russian diesel is a bizarre situation.
We don't think that Russia has the quantities to deliver those commitments of 300,000 tons in October.
So we've seen their export earnings rise by around £27 billion in the first six months of the Hormuz Straits crisis. But as you mentioned, what's really been hit has been the oil products due to the Ukrainian strikes on on those refineries. So we've seen estimates depending on the time period and region, but around 30 to 50% is the current estimation in their drop in refining capacity due to Ukraine's drone strikes. Bizarre situation. As you probably know, Ukraine Russia has loaded zero shipments of diesel in September. And of course, this statement that the US is going to perhaps import Russian diesel is a bizarre situation.
We don't think that Russia has the quantities to deliver those commitments of 300,000 tons in October.
12:18
12:18
12:18
12:18
Speaker 6
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Speaker 6
Exactly. There's actually a situation currently where Russia is importing diesel from India. I'm not in huge quantities, of course, but because of their huge impact from these drone strikes, Russia has a domestic shortage, spikes in prices. There's an export ban currently on diesel and jet fuel. And we've done some analysis to look at, along with other organizations, the lack of correlation between US diesel prices and Ukraine's drone strikes.
So this statement by Trump is really just a way to put pressure and blame Zelensky for what's really causing global shortages is the hormone street closure.
So this statement by Trump is really just a way to put pressure and blame Zelensky for what's really causing global shortages is the hormone street closure.
12:19
12:19
Speaker 6
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Speaker 6
Yeah, so we analyzed that the sanctions have had a significant impact on Russia's oil and gas exports. There's an array of loopholes, and we have some recommendations on those topics. But what we can see is even in the current situation. So if we take the most recent full month of September 2026, we see about a 30% reduction in their oil, gas and coal export earnings on pre-invasion levels when we compare to January 2021. So due to the sanctions, Ukraine's drone strikes on refineries, they have had a significant impact in reducing Russia's fossil fuel export earnings.
One of the main reasons is not so much been a reduction in Russian fossil fuel export volumes. They've still been able to export relatively stable volumes. Of course, if we're not talking about refined fuels, that's dropped to almost zero, as you mentioned, for cases such as diesel, but they've had to transport their fossil fuels, longer routes to replace supply that used to go to Europe, UK, USA and now sell the vast majority to India, China and Turkey. And to encourage those three countries or others to purchase Russian fossil fuels, taking on the risk, perhaps, of secondary sanctions, they've had to offer a significant discount in the sale of their fossil fuels.
So that's why we estimate, you know, around a 20% to 30% reduction in their oil and gas export earnings.
One of the main reasons is not so much been a reduction in Russian fossil fuel export volumes. They've still been able to export relatively stable volumes. Of course, if we're not talking about refined fuels, that's dropped to almost zero, as you mentioned, for cases such as diesel, but they've had to transport their fossil fuels, longer routes to replace supply that used to go to Europe, UK, USA and now sell the vast majority to India, China and Turkey. And to encourage those three countries or others to purchase Russian fossil fuels, taking on the risk, perhaps, of secondary sanctions, they've had to offer a significant discount in the sale of their fossil fuels.
So that's why we estimate, you know, around a 20% to 30% reduction in their oil and gas export earnings.
12:21
12:21
Speaker 6
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Speaker 6
Yes. So the sanctions will have different impacts on in many ways. You know, Craig touched on a great point that it's constrained Russia's ability to attain essential goods, especially those sanctioned goods. So we've seen that China holds huge leverage over Russia, and it knows this. So it's demanding, for example, when it buys Russian LNG from the sanctioned installations, the Arctic LNG two installation, for example, they buy it at a 3,040% discount in price because they know they have so much leverage over Russia. And also, when we look at the export side, China can export sanctioned goods, perhaps going into the military industrial complex at 60% increase in price.
So they know they can really rip off Russia, for example. There is significant leverage that sanctioning jurisdictions or Ukraine's allies still hold. For example, in the UK, the UK is the world's largest maritime insurance provider. So this is still something that is legally possible for UK maritime insurers to cover Russian fossil fuel shipments. There's, of course, the Russian oil price cap, which we can touch on if helpful, but maybe we can take an interesting example of Russian coal. So 60% of Russia's coal exports are still transported on UK insured vessels. Some of this is coming from occupied territories.
So there's an additional reason that we think that the UK should ban or use this leverage to really ratchet down Russia's export earnings further. And we have seen some success, the EU and the UK managing more so in the UK to phase out Russian fossil fuels. But we very much recommend this is undertaken at a much faster pace. Slovakia and Hungary still buy more Russian crude oil today than they did pre-invasion. So there are significant loopholes that where there. There is no ban to prohibit companies doing what's in their interest, maximizing profits, buying discounted Russian fossil fuels.
They will do so. They will maximize profits. So this is areas where we think that the UK and the EU could align better and really increase pressure on Russia, and we've seen that to be effective. Thank you.
So they know they can really rip off Russia, for example. There is significant leverage that sanctioning jurisdictions or Ukraine's allies still hold. For example, in the UK, the UK is the world's largest maritime insurance provider. So this is still something that is legally possible for UK maritime insurers to cover Russian fossil fuel shipments. There's, of course, the Russian oil price cap, which we can touch on if helpful, but maybe we can take an interesting example of Russian coal. So 60% of Russia's coal exports are still transported on UK insured vessels. Some of this is coming from occupied territories.
So there's an additional reason that we think that the UK should ban or use this leverage to really ratchet down Russia's export earnings further. And we have seen some success, the EU and the UK managing more so in the UK to phase out Russian fossil fuels. But we very much recommend this is undertaken at a much faster pace. Slovakia and Hungary still buy more Russian crude oil today than they did pre-invasion. So there are significant loopholes that where there. There is no ban to prohibit companies doing what's in their interest, maximizing profits, buying discounted Russian fossil fuels.
They will do so. They will maximize profits. So this is areas where we think that the UK and the EU could align better and really increase pressure on Russia, and we've seen that to be effective. Thank you.
12:24
12:24
Richard Foord
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Richard Foord
Thank you , chair. I think it's fascinating that this diesel deal might potentially not deliver any diesel to the Americans at all. Amazing. And in which case this is just electioneering by the Trump regime, isn't it? Just nothing else. So I wonder how the American public will react. Another question for you, Isaac. Just to just to just to rhetorical one, do you think this might be a precursor to other sanctions being eased? Do you think the American administration is thinking I mean, I know that Lindsey Graham package was not taken forward. Do you think there's any other sanctions that this might be leading towards?
And what effect might that have on the Russian Russian economy?
And what effect might that have on the Russian Russian economy?
12:24
Speaker 6
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Speaker 6
Thanks for that. Well, it's a shame because we see the US stance completely shift and obviously be very soft on Russia removing sanctions on diesel. Like we mentioned, there's statements from Trump even saying they might consider buying Russian LNG, which is a bizarre situation as the US is, you know, as they like to call them. And yeah, exactly. The world's largest exporter and is an energy superpower. So the fact that they are potentially considering buying LNG or diesel from Russia, or even if not alleviating sanctions, what we mentioned is where we've seen a huge effect from the sanctions, is reducing that price that Russia is able to sell its fossil fuels at.
They have to provide that incentive for those companies or buyers in, let's say, China, to buy from Russia and take on this risk of secondary sanctions or reputational damage, perhaps with interacting with with Russia. And that really does fall when we see waivers provided reductions in sanctions. So I do worry that the US stance will become even more softer, more sanctions will be removed. And we did see at the beginning of this year some really positive effect of those US and UK sanctions on Rosneft and Lukoil, some of the largest oil producers. We saw Russia have the lowest oil and gas export earnings pretty much on record, you know, in kind of decades.
They have to provide that incentive for those companies or buyers in, let's say, China, to buy from Russia and take on this risk of secondary sanctions or reputational damage, perhaps with interacting with with Russia. And that really does fall when we see waivers provided reductions in sanctions. So I do worry that the US stance will become even more softer, more sanctions will be removed. And we did see at the beginning of this year some really positive effect of those US and UK sanctions on Rosneft and Lukoil, some of the largest oil producers. We saw Russia have the lowest oil and gas export earnings pretty much on record, you know, in kind of decades.
12:26
12:26
Speaker 6
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Speaker 6
Is so the sanctions were implemented in November 2025 or October, if the UK excuse me, sorry, the UK sanctions. And we saw over time, you know, before the crisis. So between November, December, January and February, those having really low levels, I think February was was the number quoted as a record low. So it shows the power that sanctions can have when implemented and when implemented at pace, because sometimes we see long timelines, for example, the EU finally will 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 non-EU entities, start developing supply chains towards Asia.
So the more time that we give in these wind downs, the easier it is for Russia to replace that supply.
So the more time that we give in these wind downs, the easier it is for Russia to replace that supply.
12:27
Richard Foord
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Richard Foord
Are there are there other sanctions that the West may be excluding America should should be considering on Russia that will will increase that pressure. And I know people have been talking about secondary sanctions and that sort and that sort of issue. What sort of options are there on the table for us?
12:27
Speaker 4
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Speaker 4
And would you mind also just explaining a little more about what you were talking about? About 60% of of coal vessels from Russia are, are covered by British insurance because we because we sort of think about the dark fleet and, you know, carrying sanctioned oil and gas. But I mean, is coal coal isn't sanctioned then.
12:27
Speaker 6
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Speaker 6
Yeah, exactly. So legally the UK is allowed to provide maritime services such as insurance to facilitate the transportation of Russian coal. So that's about 60%. The value is about £7.9 billion of Russian coal that has been exported using UK insured vessels in 2026 alone. So that's the first nine months of this year. The situation for LNG has been that the UK is allowed to provide maritime services. Mainly insurance is a main area, although there are financial products that the UK is legally allowed to facilitate. Even some of these large energy companies have not. Russian energy companies as far as I'm aware.
But those that are purchasing Russian LNG might do it through a UK entity. They might have a UK subsidiary, and the UK is providing around half of all the maritime insurance to transport Russian LNG. So that will end at the end of this year, as long as the UK doesn't do what the EU did and row back on on that commitment. And then if we just focus lastly on on oil. So you're probably aware.
But those that are purchasing Russian LNG might do it through a UK entity. They might have a UK subsidiary, and the UK is providing around half of all the maritime insurance to transport Russian LNG. So that will end at the end of this year, as long as the UK doesn't do what the EU did and row back on on that commitment. And then if we just focus lastly on on oil. So you're probably aware.
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Speaker 2
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Speaker 2
Especially when it comes to oil, because at the end of the day, oil is the big money generator for Russia. Coal is important, LNG is important, but oil is really what matters most from from a dollars and cents point or rubles and kopecks point of view. And initially the approach was Russia's two biggest supplier. We don't want to upset global supplies. And so let's focus on ways that we can constrain the value they get for each barrel of oil, which was the idea behind the price cap. Unfortunately, the price cap had two big loopholes in it that have been partially closed, but not completely.
But starting in.
But starting in.
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Speaker 2
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Speaker 2
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. And that combined with several other sanctions that were coming into place late last year, such as closing the refinery loophole, saying, if you're buying Russian oil in India, say you can't turn around and sell the product into Europe straight away. This all worked. together to cause this deep widening of the. discount at which Russia was able to sell its oil compared to global benchmarks like Brent. And that was what was really squeezing Russia at the turn of the new year.
Iraq changed things, but not as much as we thought it might. But but.
Iraq changed things, but not as much as we thought it might. But but.
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Speaker 2
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Speaker 2
The EU and the UK use the leverage you have in order to make certain that the. discount or the volumes are further constrained? Now, the US, of course, we all know, has the dollar, which is very important in the global energy system. If you don't have a dollar account, it's very hard to be a refiner or a trader. No matter where you are in the world. But there is an.
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Speaker 2
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Speaker 2
Because spill liability. insurance is a very. specialized area, it's very hard to replicate its scale. And in the UK has a lock up on this effectively. And the question is how do you leverage that? And if you look at what the US has done over the years, they've developed a series of quiet. discussions with central banks around the world and major users of the dollar account. And then they've also had a number of instances where they've actually applied the sanction effectively, so that people see what the impact is and see that there's a willingness to use it.
But there's that whole muscle that needs to be developed over time. And so one of the challenges now for the EU and the UK is to. develop the. apparatus for being able to. utilize this leverage that you do have. Now.
But there's that whole muscle that needs to be developed over time. And so one of the challenges now for the EU and the UK is to. develop the. apparatus for being able to. utilize this leverage that you do have. Now.
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Speaker 2
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Speaker 2
One of the sanctions that was put into place that actually did. contribute to the widening of that discount was a sanction of a Chinese refinery called the Yulon Shandong refinery. They just invested a bunch of money into it to to turn it from a domestic refinery to an export oriented refinery. And the EU and the UK imposed sanctions on it. And one of the reasons was because they were. accepting cargoes on shadow fleet ships that had been sanctioned by the EU in the UK. And this very much damaged their. ability to actually execute their their international program, because they could no longer import any crude on Western insured tankers.
They couldn't use Western insured product tankers to export their crude. And so this is a very powerful thing to do. And it was very much of a shot across the bow to all of the Indian and Turkish. refineries that were still.
They couldn't use Western insured product tankers to export their crude. And so this is a very powerful thing to do. And it was very much of a shot across the bow to all of the Indian and Turkish. refineries that were still.
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Speaker 3
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Speaker 3
If I can add Craig's got this this. potential way of fixing the price cap. So there's two options. One of them would be to verify the price was actually paid below the price cap. Currently the price cap level is about half of the global market price. So one of them would be for bank statements and invoices. But if instead the desire is to basically scrap the price cap and say, this is a policy that isn't being effective at reducing Russia's export earnings, the UK could use the leverage, as Craig has recommended.
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Speaker 3
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Speaker 3
To to tax the use of this unique UK. maritime service. So about a. 5 or 10% tax on the use of UK. insurance to transport oil could generate around. between 1 and £300 million every month, and that could be used for whatever reconstruction of Ukraine, let's say, for example. So I think this is one of the cases where UK does have their leverage. If I can just lastly touch on the refining loophole, which the UK will finally implement at the end of this year, banning the import of jet fuel and diesel from refineries using Russian crude oil.
The UK does have leverage here. You know, we are a big market that these refineries want access to. So at the beginning of the year, the US put pressure on India to stop buying from from from Russia. And they actually did some of the big refineries, Jamnagar, which is the world's largest refinery. It buys 9% of all Russian seaborne crude oil, which is, you know, one one refinery alone is .
The UK does have leverage here. You know, we are a big market that these refineries want access to. So at the beginning of the year, the US put pressure on India to stop buying from from from Russia. And they actually did some of the big refineries, Jamnagar, which is the world's largest refinery. It buys 9% of all Russian seaborne crude oil, which is, you know, one one refinery alone is .
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Speaker 3
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Speaker 3
If the UK and the EU said that they would stop. interacting and buying products from. There's only four refineries we've identified globally in Turkey, India or Georgia that buy from Russia. They're buying around. £700 million worth of Russian crude oil every month. So by saying, you know, you're interacting with sanctioned shadow.
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Speaker 4
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Speaker 4
If the question is what more we can do on. sanctions is as much as anything about better. enforcement of what's there already. This is. particularly true of the oil price cap, where there's widespread so-called. attestation fraud that that Isaac refers to is really rampant. And there are ways that we can try to do better there, make sure that this is not.
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Speaker 4
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Speaker 4
Many of the. beneficiary ownership. registries there a long planned and committed reform that keeps being rolled back. There is reason to believe there's a great deal of Russian money there that warrants scrutiny. A third, and this couldn't be something on our own. It had to be something that we do with our European partners is think more carefully and concertedly and creatively about where our China policy fits into all of this, because China is, in NATO parlance, the, quote, 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 in our China relationship. And finally, and again, something to work on with our European .
resources that Russia cannot make for itself. We need to try to. incorporate that more. systematically in our China relationship. And finally, and again, something to work on with our European .
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Speaker 4
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Speaker 4
With, as we've already heard, Russia hugely. increasing its own financial commitments to the war next year and Ukraine suffering a severe 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 aggressors money. directly and make it available to the victim. It's the.
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Alex Ballinger
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Alex Ballinger
That really would be a game changer. You've actually gone through a whole scope of things I was going to ask you about. So that's very convenient for me in terms of the questions, but just but just one, one more. I met a Chinese delegation last week and we talked about the technology exchange with with Russia and those dual use things that you were talking about, talking about Nigel, they were very clear to the to deny that anything like that was happening as you as you might expect them to do so. But, but maybe you could just say for the record here, what sorts of.
technologies and what sorts of. equipment is being used that enables Russia in their war and, and what measures why might we, as .
technologies and what sorts of. equipment is being used that enables Russia in their war and, and what measures why might we, as .
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Speaker 4
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Speaker 4
Some of the essential, I think, brush magnets, things like that. You have to speak to an engineer, which I am not to do this. I'll just add an intriguing. detail that was publicly reported just a couple of months ago. A Chinese company had actually taken out an equity stake. directly in a Russian drone manufacturer. And when when that was made public, that that detail was expunged from the the share record. But I think the further you look here, the more. evidence you will find. There is a deep and dense. relationship is even closer with with North Korea.
But that's not a country we really have any relationship with. So it's all about China. So what do you do about it? That's a probably a longer and larger. discussion on another occasion, but very.
But that's not a country we really have any relationship with. So it's all about China. So what do you do about it? That's a probably a longer and larger. discussion on another occasion, but very.
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Speaker 4
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Speaker 4
The goal of such a. conversation or such an engagement, and again, it has to be with our European partners is not to do what it seems to me we're currently doing, which is all our. leaders beat a path to Beijing's door. Maybe there's. 10 or 15 minutes about Russia's war in Ukraine, and the rest of it's all about trade investment with us. Can we link those two together? Can in some way we make China think more.
carefully about the. consequences of its own decisions? Because if it is the decisive enabler of Russia's war against.
carefully about the. consequences of its own decisions? Because if it is the decisive enabler of Russia's war against.
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Speaker 4
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Speaker 4
We know that war has. profound and long term. implications for all of Europe's. security and Europe as a whole. Including us, of course, is a fundamentally important trade and investment partner of China, as China really thought through, where its. support essentially unalloyed and deepening support for Russia might lead. Force it to think .
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John Whittingdale
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John Whittingdale
Which is manpower and labor? We understand Russia continues to lose over. a thousand casualties a day in Ukraine, and that has been the case. So that it's now, what. 1.4 million losses is the estimate of. At the same time, they've had a lot of their younger people trying to escape being called up or service. How is that. impacting on the labor. supply and how are to what extent are they going to be able to.
sustain .
sustain .
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Speaker 4
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Speaker 4
The losses that they're currently incurring? Yeah, so it's an excellent question. And if we are looking in the round at all the ways that the war is causing trouble for Russia, I think there are two. One is the prospect of a financial. crisis that Craig touched on. The second is this labor aspect. Russia suffers now by a long way, the most severe labor shortage in its history, and that's a consequence.
Both of the huge increase in demand for.
Both of the huge increase in demand for.
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Speaker 4
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Speaker 4
That again, as long as the Kremlin wants to avoid forcing people to fight instead of paying them very well to fight, it means it has to. Those financial incentives have to increase. It also means that it's the. citizens themselves who. decide whether to fight. And it's those in greatest financial need. increasingly doing so. And that is, frankly, you know, the halt and the lame and sadly, the alcoholic and the drug addicted. So it's not only a problem of quantity, it's a problem of quality. And there is growing evidence that this year, Russia's. capacity to. replace the numbers that are being lost on the.
battlefield is steadily.
battlefield is steadily.
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Speaker 4
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Speaker 4
Not to that critical point where it will have to. impose an open second force. mobilization after that one in. September 2022 that I mentioned. But it's quite clear that that elements of a so-called hidden or covert. mobilization are taking place at the margins. People are being given offers they can't refuse. People who, 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 pretenses.
I think this came up in the first session. They're told there's a job in a military factory. They arrive, oh, you know, here's a gun, you're off to the front now. But that is the really the thing to watch. And again, finally, just to end on this, military recruitment is part of the overall labor market. That means that. wages are rising far beyond productivity. That is stoking inflation as well, which is eroding the living. standards of ordinary Russians. I think the very first question we asked for the session was, how is the Russian economy doing?
Briefly, the economy as a whole is stagnant now. The only part of it which is sustaining growth is the. defense industrial complex. Others are finding .
I think this came up in the first session. They're told there's a job in a military factory. They arrive, oh, you know, here's a gun, you're off to the front now. But that is the really the thing to watch. And again, finally, just to end on this, military recruitment is part of the overall labor market. That means that. wages are rising far beyond productivity. That is stoking inflation as well, which is eroding the living. standards of ordinary Russians. I think the very first question we asked for the session was, how is the Russian economy doing?
Briefly, the economy as a whole is stagnant now. The only part of it which is sustaining growth is the. defense industrial complex. Others are finding .
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Speaker 2
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Speaker 2
These are soft credits from Russian banks that will not get repaid by those industries themselves. It'll eventually need to be assumed by the state. And that's that's a big post war problem that they will be dealing with. But what's happening is that they're borrowing this money not to. invest in capital goods. It's why we're seeing a steep decline in capital investments. They're borrowing this money to pay higher wages and to cover losses.
And so we're seeing a credit bubble, which is.
And so we're seeing a credit bubble, which is.
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Speaker 2
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Speaker 2
Of debt to deal with. And if I may just come back to this question about the U. K in the in the EU, but the U. K in particular, and the US people often think that when it comes to credit markets and providing, you know. reopening global credit markets to Russia, it's a US call. So I work for two of the US largest investment banks for over 20 years based here in London. London is where all these. decisions ultimately get funneled through. And we're all all of this investment into Russia gets channeled through. If the UK continues to have.
sanctions on the. access of Russia to Western credit markets, even if the US lifts them, you're not going to see a big rush of American money going in. So the UK actually has a huge amount of. leverage over the ability of Russia to access Western credit markets. And I promise you, it's one of the first things that they will be. demanding in.
sanctions on the. access of Russia to Western credit markets, even if the US lifts them, you're not going to see a big rush of American money going in. So the UK actually has a huge amount of. leverage over the ability of Russia to access Western credit markets. And I promise you, it's one of the first things that they will be. demanding in.
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Speaker 1
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Speaker 1
Rearmament post-conflict. And I want to I've got the impression this morning that that whilst there is sort of chronic. corruption in Russia, it it seems to be something that people kind of expect and tolerate. And I suppose the real question is, does it I mean, does it does it add to economic. insecurity or is it because it sort of seems so much a part of the system? It doesn't.
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Speaker 2
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Speaker 2
Why is it that civil. society failed to congeal. effectively and demand more rights from an overbearing state in Russia? And if you look at the late 19th century, the early 20th century, it's 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.
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Speaker 2
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Speaker 2
Sorry. But but it was off the back of the loss in the Crimean War and the Crimean War. Loss was a huge wake up call. And they stopped short. They could have kept on fighting, but they realized that they had they had overburdened themselves with debt. And the technocrats advised the tsar, don't keep fighting because our situation will only get worse. And we're up against a West which, while not fully committed to this, they're committed enough and they have enough of an .
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Speaker 2
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Speaker 2
Advantage over us. And then they embarked on massive reforms, right following that. So and same thing happens after the loss and the. Russo-Japanese war, massive reforms. It's the it's the one period where you actually have a parliamentary moment in Russia for about eight years. And then the second, the .
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Speaker 2
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Speaker 2
He comes here to London in July of 1991. He's asking for a further handout from George Bush and Helmut Kohl for debt, because the Russian deficit has. ballooned too much spending in the. military and not willing to demand the. population to work for slave wages because they're afraid if they do, there'll be an uprising. So very similar situation to today. I could go on, but finally we said we're not seeing enough progress in reforms. And within four months, the Soviet Union had defaulted on its foreign debt. And three days later, the Belavezha accords that disband the Soviet Union get signed.
So debt is is actually really important to watch. And then you have these moments where the old regime has been rejected. You have civil society trying to reassert itself, but then Russia has the resource curse that comes back and the leadership has realized, if you can simply control a few key rents from key natural resource extraction areas, you can have a great deal of control without financial.
So debt is is actually really important to watch. And then you have these moments where the old regime has been rejected. You have civil society trying to reassert itself, but then Russia has the resource curse that comes back and the leadership has realized, if you can simply control a few key rents from key natural resource extraction areas, you can have a great deal of control without financial.
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Speaker 4
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Speaker 4
Debt to GDP ratio is low on paper, enviably low compared to any European countries, only about 20% of GDP. That might lead one to think that Russian public finances are in a healthy state. But that's just a number. It's a statistic. What really matters is the annual payments. Repayments that a state needs to make in order to satisfy those debt requirements. And now it's an astonishing fact.
Russia pays more servicing its debt every year than Germany does. And as a percentage of.
Russia pays more servicing its debt every year than Germany does. And as a percentage of.
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Speaker 2
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Speaker 2
Higher than it is for many European countries, including Germany. Just to help you understand that, because Nigel brings up an incredibly important point. So the German Bund. 3% 4% yields. So that's how much it cost the German government to borrow. Guess how much it costs the Russian government to borrow on the ten year. Right now it's almost 17%. Right. So it's incredibly expensive funding.
Not only that, but Germany has pretty much the.
Not only that, but Germany has pretty much the.
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Speaker 2
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Speaker 2
To appeal to. So they have a very broad addressable market. Russia has its tiny domestic market and only that. All right. So I've seen plenty of economists talk about and even Vladimir Putin talked about Russia's strong debt to GDP ratio. And we're just fine. He mentioned this in Vladivostok at the .
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Speaker 2
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Speaker 2
High on the consumer debt at a high level. So certainly consumer debt is very expensive. And again, as you look for. signs of a system under. stress that could lead to a critical event where you get a. cascading effect. We saw the single a bond index in Russia move up from. 19% to 24% over the course of just September. So 5%. increase for. corporates 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 this whole problem of the debt bubble. Now reading across into the broader financial system and everyone slowly starting to realize, oh my goodness, there's so much more unfunded debt that the government has got to bail out.
They're going to have to bail out the regions. They're going to have to bail out all this bad debt that's on the arms manufacturers. And 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. So it's and the markets are starting to recognize this in Russia, and they're pushing up borrowing costs.
They're going to have to bail out the regions. They're going to have to bail out all this bad debt that's on the arms manufacturers. And 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. So it's and the markets are starting to recognize this in Russia, and they're pushing up borrowing costs.
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Speaker 1
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Speaker 1
Higher rates that the Russian state has to pay year after year. And we had another question about the confiscation of assets. But I think that you've been making it clear that actually, the way that right at the beginning of our evidence that the way that the Russians are, are pushing forward on this war is that they're not. confiscating assets in the way that a war .
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Speaker 3
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Speaker 3
Last word. I'll be quick. No no no it's fine. Just in terms of UK leverage and I think, you know, in summarizing the leverage and the things that UK can do, I think as we mentioned, oil is a huge finance resource for the Russian state budget, especially of the fossil fuel types. And I just wanted to briefly touch on the shadow fleet, which has been built up over time. Now. 560 vessels have left from Western ownership or insurance to start moving away from connections to those sanctioning jurisdictions. It is something that, so France believe it was beginning of last week, detained a falsely flagged Russian shadow tanker off the coast of India.
They've detained five. Now UK .
They've detained five. Now UK .
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Speaker 3
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Speaker 3
So I do think that they've given assistance to others. Yes. The other area is the Russian flag registry has now become the largest flag registry for all. The Russian shadow fleet. And the UK could sanction that as well. The EU has done so, but also working with those false flags. So those flags in, you know, small island states or that are. facilitating a huge network that is required to transport Russian fossil fuels,
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Speaker 1
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Speaker 1
Big win, I would say. Yes. Thanks. And again, if you have any further thoughts on that, please do send us a note, because I think, well, subject to what the committee thinks, but I think that it will probably be a good idea for us as a. committee to be writing to the Foreign Office before we finish our.
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Speaker 1
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Speaker 1
To highlight the things that we think that the government should be doing, sort of now on sanctions. We will never get a proper response because they always say they can't discuss it. But I think it's important that we that we nudge them. All I can do now is just. Thank you very much for your time. I'm sorry it's been so cold in here. But but but your but your evidence has .
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