Fears that Russia is navigating its way around sanctions are unfounded, according to experts who say Moscow is suffering a bigger hit than institutions such as the World Bank have been predicting.
Some analysts have interpreted the strength of the rouble, the size of the warchest of cash available to Vladimir Putin and the Kremlin’s ability to redirect exports destined for Europe to willing southern neighbours as a signal that the arsenal of sanctions deployed against Moscow is failing to bite.
But the economist Mikhail Mamonov thinks otherwise. He was part of a team that modelled the Russian economy in 2014. It measured the impact of sanctions in the wake of Putin’s annexation of Crimea, and revealed that even the minimal financial and trade blockade imposed at the time had had an impact.
Hi-tech exports to the Russian oil industry were banned. The military was unable to get parts from the west and state-owned banks were blocked from making some transactions. The impact of those measures was judged to have cut GDP growth by about 1%, private consumption by 2% and investment by 3.5%.
The financial retaliation over Ukraine is on a different scale. All hi-tech exports are banned, and Russia has been thrown out of the international financial system altogether.
Mamonov has used his 2014 model as a baseline to measure the impact on business, households and the macroeconomy. He says it will be far deeper this time. “The International Monetary Fund said earlier this year that the Russian economy would shrink by 6% in 2022; with the extra impact from sanctions, our model shows it will be more like 10%,” says Mamonov. He believes consumption by households and businesses will shrink 10%-15% and investment will fall by 17% in 2022. “It takes time for sanctions to have their impact, and especially when the target is a country run by an autocratic leader who can marshal large resources to offset the effects in the first six months.”
Early on, Putin increased pensions and the minimum wage by 10% to cushion the poorer families who make up his core support from a rise in inflation to 18%. And the huge rises in prices for gas and oil seen this year have more than made up for a fall in the volumes exported. In the second quarter of 2022, Russia recorded its highest-ever current-account surplus, thanks primarily to a record-breaking trade surplus. But while this partly reflects higher fossil-fuel revenues, a collapse in imports is another factor.
Mark Harrison, an expert on sanctions and emeritus professor of economics at the University of Warwick, says: “It is wrong to think of Russia’s energy profits paying for the war in Ukraine. They are not because Putin cannot buy what he wants for the war effort.” And, he says, the rouble has regained its strength “largely because it is a managed currency with capital controls that prevent Russians from spending their money outside the country”.
Catarina Martins, an economist at the Bruegel thinktank in Brussels, and her colleague Zsolt Darvas have been examining import and export data with Russia’s major trading partners after Putin banned the publication of official figures. In a report this month, they said imports had dropped by half this year on 75% of all trade, indicating that businesses and state-run agencies are likely to begin mothballing equipment and downgrading manufacturing due to lack of spare parts.
Sanctions have included prohibitions by the UK, EU and US of exporting strategic goods, including hi-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 generalised drop in Russia’s imports since March 2022, even from countries that have not applied sanctions,” it adds.
Last month, two of Turkey’s largest banks suspended acceptance of Russia’s Mir payments system – an alternative to Visa and Mastercard – after the US warned of punishment for accepting transactions in roubles.
Harrison says: “When we talk about waging a trade war alongside a military one, all the action is on the import side.”
Tim Ash, a Russia expert at the Chatham House thinktank, says Putin had accepted that harsher sanctions were the price of invading Ukraine, and had prepared his economy for the initial shock. “But in the medium term, sanctions are disastrous for Russia,” Ash says.
Russia depends on pipelines to export its gas, and most of those pipelines lead to Europe. The alternative is cooling 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 this. “Putin can switch off gas to Europe, but he cannot divert the gas for sale to other countries because he would need LNG terminals to store the gas. He doesn’t have the time, technology or equipment to do that, so it must 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 goods have begun to emerge.
“Despite the rosy picture painted by Putin, there are real, material production problems that mean factories must downgrade the quality of the things they make,” he says.
Ash has visited Ukraine for 35 years and is convinced the country can maintain its rout of Russian forces with the financial and military support of the west. “Nato is a $40tn economic bloc while Russia is a $1.7tn economy,” he says. “Nato is spending 2% of its income on the military, which means whatever Russia spends, Putin doesn’t stand a chance.”
