Fears that Russia is circumventing sanctions are unfounded, say experts who say Moscow is taking a bigger hit than institutions such as the World Bank predicted.
Some analysts have interpreted the strength of the rouble, the size of the war chest at Vladimir Putin’s disposal and the Kremlin’s ability to redirect exports destined for Europe to willing southern neighbors as a signal that the arsenal of sanctions deployed against Moscow fails to bite.
But economist Mikhail Mamonov thinks otherwise. He was part of a team that modeled the Russian economy in 2014. It measured the impact of sanctions following Putin’s annexation of Crimea and found that even the minimal financial and trade blockade imposed on the times had an impact.
High-tech exports to the Russian oil industry have been banned. The army was unable to obtain coins from the west, and state banks were prevented from carrying out certain transactions. The impact of these measures was estimated to have reduced GDP growth by around 1%, private consumption by 2% and investment by 3.5%.
The financial reprisals against Ukraine are on a different scale. All high-tech exports are banned and Russia has been completely excluded from the international financial system.
Mamonov used his 2014 model as a benchmark to measure the impact on businesses, households and the macroeconomy. He says it will be much deeper this time. “The International Monetary Fund said earlier this year that Russia’s economy will contract by 6% in 2022; with the added impact of sanctions, our model shows it will be more like 10%,” says Mamonov. It estimates that household and business consumption will fall by 10-15% and that investment will fall by 17% in 2022. mobilize significant resources to offset the effects in the first six months.
Early on, Putin raised pensions and the minimum wage by 10% to protect the poorest families who are his mainstay from an 18% rise in inflation. And the strong increases in gas and oil prices seen this year have more than offset the drop in export volumes. In the second quarter of 2022, Russia recorded its highest current account surplus on record, thanks in particular to a record trade surplus. But while that partly reflects rising fossil fuel revenues, a slump in imports is another factor.
Mark Harrison, sanctions expert and emeritus professor of economics at the University of Warwick, says: “It is wrong to think that Russia’s energy profits are paying for the war in Ukraine. It’s not because Putin can’t buy what he wants for the war effort. And, he says, the ruble has regained its strength “largely because it is a currency run with capital controls that prevent Russians from spending their money outside the country.”
Catarina Martins, an economist at the Bruegel think tank in Brussels, and her colleague Zsolt Darvas discussed import and export data with Russia’s main trading partners after Putin banned the publication of official figures. In a report this month, they said imports had halved this year on 75% of all trade, indicating that companies and public agencies would likely start mothballing equipment and downgrading the manufacturing due to lack of spare parts.
The sanctions included bans by the UK, EU and US on the export of strategic goods, including high-tech equipment and components for use in electronics, telecommunications, aerospace and oil refining, among other sectors, the report says. “US sanctions apply not only to goods exported by US companies, but also to goods produced elsewhere using US technologies. The extraterritorial nature of US sanctions could help explain the general decline in imports from Russia since March 2022, even from countries that have not applied sanctions,” he adds.
Last month, two of Turkey’s biggest banks suspended acceptance of Russia’s Mir payment system – an alternative to Visa and Mastercard – after the US warned of sanctions for accepting ruble transactions .
Harrison says, “When we talk about waging a trade war alongside a military war, all the action is on the import side.”
Tim Ash, a Russia expert at the Chatham House think tank, said Putin had accepted tougher sanctions as the price of invading Ukraine and braced his economy for the initial shock. “But in the medium term, the sanctions are disastrous for Russia,” Ash said.
Russia depends on pipelines to export its gas, and most of these pipelines lead to Europe. The alternative is to cool the gas so that it condenses into a liquid and can be transported by ship as liquefied natural gas (LNG). But Russia does not have the infrastructure to do so. “Putin can cut the gas to Europe, but he can’t divert the gas to sell it to other countries because he would need LNG terminals to store the gas. He doesn’t have the time, the technology or the the equipment to do it, so it has to stay in the ground,” says Ash.
Yakov Feygin, a Russia expert at the Berggruen Institute in Los Angeles, says food prices are rising in Russia and shortages of basic commodities have started to appear.
“Despite the rosy picture painted by Putin, there are real material production issues that mean factories have to downgrade the quality of the things they make,” he says.
Ash has visited Ukraine for 35 years and is confident the country can sustain its rout of Russian forces with financial and military support from the West. “NATO is a $40 billion economic bloc while Russia is a $1.7 billion economy,” he says. “NATO spends 2% of its revenue on the military, which means whatever Russia spends, Putin doesn’t stand a chance.”