Anti-Imperialism/Foreign Policy

What’s the war doing to Russia’s economy?

What’s the war doing to Russia’s economy? Sergei Guriev on the impact of sanctions on everyday life, Putin’s war machine, and the stability of his regime.
Vitolda Klein
The wealthiest countries in the world moved, at the recent G7 summit in Hiroshima, to impose new sanctions on Russia. Their original sanctions, leveled immediately after Russia invaded Ukraine last year, included freezing state assets abroad, cutting off Moscow from the international payment system, and seizing the foreign property of Vladimir Putin’s associates and Russia’s oligarchs.

But the new sanctions show resiliency in the Russian economy since: Moscow has managed to evade them by importing goods through neighboring countries and allies, and also by using deceptive shipping technology to sell oil at prices higher than the limit set by the West. The International Monetary Fund is meanwhile predicting a slight rise in Russia’s GDP this year, and its inflation rate is 2.3 percent—lower than almost every Western country’s. Still, it’s tough to get a clear picture of the Russian economy, because Moscow is making increasingly more data classified, and Russian banks have stopped publishing a lot of financial information. So how do things really stand?

Sergei Guriev is the provost of the Paris Institute of Political Studies (Sciences Po), the former chief economist at the European Bank for Reconstruction and Development (EBRD), and the former rector of the New Economic School in Moscow. Before fleeing to France in 2013, Guriev was a speechwriter and advisor to the former Russian president Dmitry Medvedev. As he sees it, Russia’s economy is battered but not broken. The country is much more isolated than it was before the war in Ukraine, yet it’s still trading with China and other countries. In local stores, people can’t get top-quality Western goods anymore, but the shelves aren’t empty. Still, Guriev says, the sanctions are causing a meaningful shortfall in government revenues. So it’s unclear how Putin will end up balancing spending between the war and priorities at home, and how popular feelings will end up responding—to the war, and to Putin himself.

Michael Bluhm: Many economists saw the sanctions imposed after the invasion as unprecedented and tough, but it’s clear Moscow has been able to dodge some of them. What effect are they having on the Russian economy?

Sergei Guriev: Suppose, in a parallel universe, Putin invaded Ukraine in February 2022, and the West said, We’re busy with other things, so we’ll do the same thing we did in 2008 when Russia invaded Georgia: We won’t level any sanctions. If that’d happened, Putin would have had hundreds of billions of dollars in Russia’s sovereign wealth fund. He’d have no constraints on buying important military equipment. He could import American, French, or German equipment and produce more guns and rockets with the cash in the sovereign wealth fund. The war would have turned out very differently.

The sanctions have significantly limited Putin’s ability to kill Ukrainians; they’ve changed the game; they’ve kept him from winning the war.

At the same time, the Russian economy isn’t in ruins. Putin is still in the Kremlin, and the war continues. Russia has a lot of resources and a lot of borders it can use to evade sanctions. It has a lot of competent policy-makers too. And the world is not united: The West is united, but other countries say, It’s not our war; we’re happy to continue trading with Russia.

As you say, Russia has been able to dodge sanctions, but they’ve still brought a lot of costs for Russia: There’s a cost to buying second-rate technology. There’s a cost to buying European goods through India or China. There’s a cost to going through shadow banks and the informal sector—economic activities that aren’t formally registered. There’s a cost to buying outdated oil tankers and losing oil in transit. All cross-border transactions are more expensive for Russia now.

All that adds to the financial burden of the war—which means Putin has less money to kill Ukrainians. And this is the goal of the sanctions. We know he won’t change his mind, but we can change what resources he has.

In December, the West enacted an embargo on oil imports to Europe and a price cap of $60 a barrel for Russian oil sales worldwide. These sanctions arrived late, but they were as significant as they were unprecedented. They reduced Putin’s oil and gas revenues, and that’s had a major impact, with the Russian budget now facing a huge deficit.

Inflation isn’t out of control. The declines in GDP and living standards have been very limited. But all that’s because Russian policy-makers are more competent than policy-makers in Iran or Venezuela. Yet have sanctions limited Putin’s financial and technological capacity? Yes, they have.

Bluhm: You mention the cap on oil prices set by the West. Russia has long depended on exports of oil and natural gas for a lot of its revenues. The volume of energy exports has fallen since the war began, but higher oil and gas prices have meant only a modest decline in revenue. Still, some have said that cutoffs in gas production could present long-term problems for the industry. What’s the state of Russia’s energy sector right now?

Guriev: At the beginning of the war, Russian oil production went down by about 20 percent, but the rise in oil prices after the invasion compensated for the drop. Global oil prices are lower today than a year ago. That’s bad for Putin.

Now, the goal of oil price cap isn’t to reduce Russia’s oil exports. The West wants to maintain the supply of oil on the global market to avoid an explosion in prices. So the goal is to keep Russian oil on the market—but at a lower price.

And it’s working. In the first quarter of 2023, the Russian state budget’s oil and gas revenues were 40 percent lower than a year ago.

For Russia, gas is much less important than oil. In the year before the war, gas-export revenues were about a third of oil-export revenues in the Russian budget. The main thing is oil.

Gas was, it’s true, an interesting story, because Putin believed he could use gas exports to Europe as a weapon to force the West to give up sanctions. Last summer, Putin reduced gas supplies to the West—but he lost the bet. Europe used to import 40 percent of its gas from Russia; now it’s about 5 percent—and Europe is okay. For example, Germany now imports zero Russian gas, zero Russian coal, and zero Russian oil—and it hasn’t had an economic recession.

Peter Burdon
More from Sergei Guriev at The Signal:

The economy won’t be fully isolated. Whatever happens, China will continue to trade with Russia. But Russians will be driving Chinese cars—and that’s a big disappointment for a lot of Russians. Their country’s automotive industry is in terrible shape. As for everyday life, even if consumption is 10 percent below pre-war levels, it’s not a disaster. There is no famine. There is no real interruption of normal life. The Russian government is now facing a major deficit, so it’ll have to do something serious, like austerity measures—cutting spending, for instance—which’ll have a negative impact on growth. The government might borrow from domestic banks, but that’ll have a crowding-out effect—meaning, there’ll be fewer loans and higher interest rates for the private sector. All that’ll eventually have a negative impact on growth too. Nobody’s happy in Russian business today, except for weapons producers.”

Putin started the war saying, I will not resort to mobilization; only volunteers will fight. But there are no volunteers who want to fight this war without pay. That should be extremely clear. Some people say the war is very popular in Russia, but we haven’t seen anyone who wants to fight in it without being paid a lot of money. In September 2022, Putin said, Actually, I don’t have enough money to pay very much, so I’m mobilizing the Russian population—which is to say, forcing Russians to go to war. This changed how the war is fought, because draftees aren’t very skilled—and they aren’t very motivated. The budget deficit is also affecting Russia’s material capabilities. Yevgeny Prigozhin, the head of the Russian mercenary organization Wagner Group—which has done most of the recent fighting for Russia—just recorded an angry video of himself saying, I lack ammunition. There’s a massive shortage. I call on the minister of defense and all authorities to provide me with more. Wagner is the best-equipped group out there. If he complains, you know Russia is facing real economic constraints. Which is extremely important for the war. Every dollar Putin doesn’t get is one less dollar he can spend producing weapons, buying Iranian drones, buying North Korean rockets, and so on.”

A ‘spin dictator’ like Putin would rely on hidden repression, hidden censorship, and the manipulation of information—but doesn’t engage in open, mass repression. That’s completely changed now. During the first week of the war, he closed all remaining independent media, introduced open censorship, and arrested people for protesting the war—even people who’d just held up empty sheets of paper or laid flowers at the monuments of Ukrainian writers. Putin has shifted to a mode of governance now under which people are scared. Their fear is public. And he’s making this shift very clear; he’s using very different language, talking about going after fifth columns and national traitors, which was Adolf Hitler’s rhetoric. We don’t know whether this regime will ultimately collapse. But we shouldn’t think Russians love this war just because they don’t show up in the streets to protest.”

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