top of page

How technocrats under Putin fought a war they hated while preserving the economy

Vladimir Putin's closest economic allies visited him at his home in Novo-Ogaryovo, outside of Moscow, one month before Russia began its full-scale invasion of Ukraine to give him an update on the expected effects of western sanctions.

Putin listened as Herman Gref, the head of state-owned lender Sberbank, delivered a 39-page speech warning the Russian president of terrible repercussions if the already escalating tensions over Ukraine reached a new high.

Gref, a close associate of Putin's from their time together in the mayor's office of St. Petersburg in the 1990s, was known for being the most liberal person in Putin's inner circle and for speaking his mind.

The technocrats feared that Putin was about to recognize two Kremlin-backed separatist statelets in the Donbas region of Ukraine, which they thought would set off a violent western response and potentially destroy Russia's economy.

The other attendees, including the highly esteemed central bank governor Elvira Nabiullina, shared his concerns and had assisted in the preparation of the presentation. However, they allowed Gref to speak.

Putin was forewarned in the presentation that "harsh sanctions" may cause havoc on the financial system and put the Russian economy decades back.

In two years, the gross domestic product may decline by 30%. Real incomes would be reduced by a fifth if the central bank had to hike interest rates to 35% as a result of inflation.

Since import limitations would make it difficult for Russia to obtain basic necessities like food and medicine, as well as modern technologies, the quality of living for Russians would lag even behind that of emerging nations.

According to multiple persons with knowledge of the situation, as Gref ran through the potential repercussions, Putin interrupted him and asked him what Russia should do to evade the harshest of the penalties.

The technocrats had no conclusive answer and could not bring themselves to warn Putin that he was courting geopolitical calamity because they were too timid to caution him against military expansion.

The people claim that they left the meeting with little idea of what precisely Putin was planning or whether he had heeded their message.

"They were brave enough to ask the big man for a meeting. But they could not deliver the message.  They were unable to deliver the only answer," one of the people said.

Their greatest concerns were exceeded on February 24, three days after Putin recognized the Donbas separatists, when a full-scale assault on Ukraine began. Along with the rest of the world, they learned what Putin's genuine goals were via television.

The technocrats were utterly upset by Putin's disregard for their advice. " I’d never seen [Gref] like that. He was completely bereft, in a state of total shock, a  former executive who saw Gref in the early stages of the conflict recalls.  "“Everyone thinks this is a catastrophe, him more than anyone else."

Putin's economic brain trust gathered at the far end of a 20-foot table in the Kremlin four days into the conflict as he asked them how to reduce the sanctions. Putin seemed happy with his weird quip that the US was "the empire of lies" at the time.

Nabiullina, whose outfit is always examined by certain investors for hidden messages, sat dressed entirely in black.

Technocrats came to the Kremlin's aid, using skillful economic management techniques to diffuse the crisis as western nations shut Russia off from global financial markets and supply lines. They have prevented their own doomsday prophecies from coming true in the process.

Technocrats like Gref and Nabiullina were formerly seen inside the small circles of the Russian political elite as modernizers, a reformist counterbalance to the siloviki, the hardline security services veterans at Putin's other shoulder.

They declined, however, when given a historic opportunity to stand up for their conviction in free markets and oppose the war.

Former officials claim that rather than departing from Putin, the technocrats have solidified their position as his enablers by utilizing their skills and resources to lessen the impact of western sanctions and maintain the stability of Russia's wartime economy.

The impact of sanctions on Russia's economy has not been as severe as predicted by western economists and technocrats, with the GDP decline expected to be in the range between 3.5% and 5.5% this year.

Although Russia is mainly excluded from the world's financial and payment systems, the economy has been able to rely on ready substitutes that the technocrats had developed.

"The economic team really saved him. That’s why he keeps them around. If the siloviki had been in control [of the economy] the GDP fall really would have been 10-15 per cent," according to a former top Russian official. "He’s not crazy. That’s why he left them in their jobs."

The dilemma facing the technocrats was outlined by more than 20 Russian current and former politicians, oligarchs, bankers, and economists. Requests for response from the Kremlin, the Russian central bank, and Sberbank went unanswered. 

Critics claim that as the conflict intensifies, their continuous quiet while assisting the Russian government has taken the form of approval, making them complicit in a conflict that they ostensibly oppose.

According to Sergei Aleksashenko, a former deputy governor of the central bank, "being on Putin's team means that you share his values, you share his principles, and you are enormously loyal to him."

"It was not possible to be on Putin’s team after 2012," when he returned to the Kremlin after a four-year hiatus, "if you have even some degree of disloyalty. So I’m really not surprised all of them decided to stay."

Nabiullina diligently developed a reputation as the top technocrat in the Kremlin during her nearly ten years as the head of the Russian central bank. She oversaw Russia's recovery from its economic crisis in 2014, controlled inflation with an aggressive monetary approach, and fought back against strong interests in the notoriously corrupt banking industry.

Because of her accomplishment, she gained Putin's respect, and he supported her independence against a strong oligarchical campaign that wanted to replace her with Sergei Glazyev, a hard nationalist and proponent of conspiracy theories who is adored by the siloviki. Putin publicly backed Nabiullina against her detractors in December of last year, warning that if Russia abandoned inflation targeting to make business loans more affordable, it "could end up like Turkey," a symbol for unorthodox economic policy and a quickly depreciating currency.

Nabiullina took action to shield Russia from sanctions as tensions with the west over Ukraine escalated, notably after the annexation of Crimea in 2014. She did this by creating an independent payments system and building up a $643 billion war fund for foreign exchange reserves.

According to Alexandra Prokopenko, a former central bank official, Nabiullina was still taken aback by the scope of the invasion and the severe western sanctions that followed.

"Nobody had a scenario for Russia invading Ukraine. There were stress tests for state companies and the banking system, but nobody saw a full-scale military conflict, frozen reserves and this level of sanctions coming," she said.

Nabiullina started destroying her own legacy right away. About half of Russia's foreign exchange reserves were taken by Western nations, preventing Nabiullina from using a tool that was meant to stabilize the economy. Russia implemented currency restrictions to prevent a bank run and to reduce pressure on the rouble; she had already warned allies that this action would force her resignation. Someone close to her claims, "We destroyed everything we built over 10 years."

On the secure messaging platform Signal, Konstantin Sonin, an economist at the University of Chicago, contacted Ksenia Yudayeva, Nabiullina's top deputy for macroeconomic policy and an old friend. Yudayeva was encouraged to resign by Sonin, who also warned her that she was aiding the war effort and compared the bank's employees to Hjalmar Schacht, the leader of the German Reichsbank under Adolf Hitler.

However, Yudayeva believed she had a moral duty to stay, claiming "there was a lot of interest in Schacht" at the Bank of Russia. Yudayeva suggested that if the bank's top technocrats resigned in protest of the war, Putin would replace them with hardliners like Glazyev and impoverish common Russians through disastrous statist policies like price freezes. Sonin deleted Signal out of disgust and vowed to never speak to Yudayeva again.

"Glazyev would do the same things. There would be no difference between them now ," claims Sonin. A comment from Yudayeva was not received. Meduza, a Russian independent news outlet, broke the story first.

According to a current and former Russian official, Nabiullina came under pressure from influential siloviki who pushed for someone like Glazyev to succeed her in the spring because she failed to anticipate the freeze on the reserves. But Putin chose to appoint her to a third term, clearly believing in her capacity to guide Russia out of the crisis.

"Everything depends on the central bank. If the central bank doesn’t work properly the whole economy is completely fucked ," according to the former official. "If Glazyev came in, the rouble wouldn’t even be printed on paper. They’d just have to give out pieces of wood."

According to those close to her, Nabiullina openly pleaded for central bank employees to work together to help ordinary Russians weather the financial shocks of the conflict, which she sees as the most important aspect of her role.

But many of them came to the conclusion that they could no longer support it.

In the early weeks of the war, Prokopenko—whose parents are Ukrainian—resigned from her position as Yudayeva's advisor and left Russia. Nearly all of Russia's senior technocrats are still in their positions, despite a number of junior and mid-career employees quietly leaving the central bank and its economic ministries.

"They had to resign, morally. But she feels she is doing her job," according to a sanctioned Russian oligarch.

By late spring, much of the anxiety had passed. Even though the sanctions largely blocked off Russia from the outside world, domestic transfers could still be made freely because to the payment mechanisms that the central bank spent years creating.

High energy prices allowed Russia to increase its budget revenue, which is derived in half from oil and gas, by 34% from January to April while also assisting the rouble in recovering from its sharp depreciation against the dollar.

However, not all of this was due to the technocrats' actions. Although Russia's dollar revenue from energy sales increased, the sanctions made it considerably harder for Russia to purchase imports, which caused the economy to run at a significant trade surplus. By releasing some of the pressure on the rouble, Nabiullina was able to loosen currency restrictions and start lowering interest rates.

According to Sergei Guriev, dean and professor of economics at Sciences Po university in Paris, "the central bank reduced the panic in the first day."

Guriev continues, "but the central bank is backed by riot police. If you asked me a year ago what would happen if the government announces you can’t take your money out of the bank, I would say there would be a mass protest. But in this particular case, citizens understood that if they protest, they would go to jail or be beaten up."

Technocrats in Russia are concerned that they might meet a similar end. Although many of them are secretly disgusted by the conflict, according to Prokopenko, "there’s this fear that ‘if I leave, they’ll consider me a traitor and arrest me."

However, as the battle continues, many of the officials have begun to view their positions as a sort of patriotic obligation. "For the first 10 days, all of the elite was in a total state of shock. Then you had a second phase that was the thrill of the chase. Now it’s just become routine," says Alexei Venediktov, a former editor-in-chief of Ekho Moskvy, a liberal radio station the Kremlin closed at the start of the war.

Venediktov continues, "They are shocked and hurt so they try to find ways to justify what they’re doing. It’s a professional and intellectual challenge — how to stop a bank run, how to put together a budget. And Putin basically gave them the freedom to do what they wanted."

Former deputy prime minister Arkady Dvorkovich had a party in a southeast Moscow loft for friends to mark his 50th birthday one month after the invasion. The occasion served as a metaphor for how Russia's technocrats have adapted to the new normal of war for three of the attendees.

Prior to leaving government in 2018 and taking control of Fide, the world chess federation, with support from the Kremlin, Dvorkovich was a trusted advisor to former president Dmitry Medvedev.

Less than two weeks prior to the event, Dvorkovich, the most prominent Russian technocrat, expressed his opposition to the conflict, albeit in circumspect terms. He immediately submitted his resignation as the director of a state technological foundation.

However, at the party, attendees easily mixed with coworkers who overtly supported the war while also quietly moaning about their opposition to it. One visitor claims, "Everyone was there." According to three attendees, Igor Shuvalov, a different former deputy prime minister in Medvedev's cabinet, showed up wearing a T-shirt with the pro-war letter Z and delivered an impromptu speech on how the elite needed to band together under Putin. The visitors continued to drink and dance as a band continued to play well into the night.

An further former top official who was present said, "It was really unpleasant."

According to the former official, the party demonstrated how Russian technocrats had started to internalize and accept their position as cogs in the Kremlin's war machine. "Arkady’s an easy-going guy, and he’s not very self-aware."

Shuvalov's Kremlin-based development bank, VEB, did not reply to a request for comment.

Dvorkovich, who remained in Russia, said he had adopted "a strong position on the tragic events in Ukraine" when he won re-election to Fide in August.

According to him, the "information about my position or the positions of third parties is speculation" and "information of events does not correspond to reality."

According to the former senior official, continuing with business as usual becomes more difficult for those who stay in their positions. The former official claims, "They made their choice. It’s too late to quit in protest. But they know long term there’s nothing except for degradation and isolation ahead. They’ve lost their chance to leave."

That has gotten easier and easier in Moscow, which has generally escaped the economic turbulence and the overzealous draft officials that are typical in poorer, farther-flung places, according to Prokopenko.

"There are these billboards with ‘heroes of the special operation’ all over Moscow, but people are still eating fresh oysters," claims Prokopenko. "The war becomes this kind of TV show, and a lot of people aren’t regular state TV propaganda viewers. If you get what’s going on, you either have to deal with it in your own way or help refugees and people who are trying to leave," she said. "It’s a very non-public and personal kind of struggle. Like moving to Inner Mongolia."

Many have tried to completely ignore the conflict despite mounting pressure to declare their support in public. Prime Minister Mikhail Mishustin delivered the keynote address at the annual conference of the finance ministry in September. He praised the economic cabinet for overcoming the sanctions and praised Russia's fortitude in the face of pressure from the West, but he made no mention of their introduction. Nabiullina and a group of other top officials then spoke for two hours about the direction Russia's economy should take without once mentioning Ukraine.

Senior Russian state banker: "These guys are just going through the motions." They believe things would be worse without them. But they can’t talk about the real issue."

Gref is still the one who is most unhappy by the war, according to multiple individuals who have spoken to him, among the group who attempted to warn Putin about the risks of sanctions in January.

In his 15 years as CEO of Sberbank, he transformed the bank from a failed, corrupt Soviet monopoly on retail deposits into a global powerhouse with aspirations to compete with Silicon Valley's top IT firms. According to four former senior Sberbank executives, Gref, who was the former economy minister, originally thought Sberbank's performance would persuade Putin that market-oriented reform in Russia was feasible.

But one of them claims that "everything he built has been destroyed" because the sanctions cut off Russia from the world markets.

"He is a man of the world. He loved going to forums, conferences and meetings. He was in Silicon Valley all the time. He was friends with Jack Ma. And now he is a pariah," the former executive claims.

Gref's liberal perspective stands in stark contrast to the gray economy of "parallel imports" and state-managed autarky in the new Russia. According to Guriev, a former Sberbank board member, developing corporate culture and adhering to ESG norms are not going to be valued abilities in Russia in the future. He continues, "People who are in charge of those companies are not well-equipped."

Gref hired out the Bolshoi Theatre for a spectacular performance at Sberbank's anniversary celebrations in November. According to two persons familiar with the bank, neither the central bank nor the finance ministry, which controls Sberbank, showed up. "It was really sad. There was a bit of champagne, but nobody was joking or saying anything. They were just standing around being sad," one of them stated.

However, according to a different attendee, the party was for important bank clients rather than representatives from the finance ministry and central bank. "The guests were in a great mood, including the bank’s leadership, who hung out with their clients that evening. It was a great party," they add.

The people claim that since the war crushed Gref's hopes of creating a globally competitive "ecosystem" of financial services, he has withdrawn even further into his dim fantasies. In order to create a "metaverse" like the virtual reality world envisioned by Facebook founder Mark Zuckerberg, he insisted his executives change course.

Sanctions will make that challenging. Russia is prohibited from importing cutting-edge microchips and servers developed in the West, which might cause its tech economy to lag years. Gref, however, has declared that he intends to meet the challenge after electing to stay in his position.

Gref and Nabiullina participated in a panel in November, and Gref remarked, "Life has become more vibrant, colorful, and interesting. It looks like it’ll be even more interesting in the years to come."



bottom of page