Behind Moscow’s clamor, sanctions are making Russia suffer | economics

so afraid Russia Navigating his way around the sanctions is baseless, according to experts who say Moscow is suffering a bigger blow than institutions like the World Bank have predicted.

Some analysts have interpreted the strength of the ruble, the amount of cash available to Vladimir Putin, and the Kremlin’s ability to redirect exports to Europe to signal the willingness of its southern neighbors as a sign that its arsenal is Sanctions imposed on Moscow failed to have an effect.

But economist Mikhail Mamonov thinks otherwise. He was part of a team that modeled the Russian economy in 2014. He measured the impact of sanctions in the wake of Putin’s annexation of Crimea, revealing that even a minimal financial and commercial blockade imposed at the time had an effect.

High-tech exports to the Russian oil industry were banned. The military was unable to obtain spare parts from the West and state-owned banks were prevented from conducting some transactions. The effect of these measures has been judged to have reduced GDP growth by about 1%, private consumption by 2%, and investment by 3.5%.

Financial revenge is over Ukraine on a different scale. All high-tech exports were banned, and Russia was completely excluded from the international financial system.

Mamonov used his 2014 model as a baseline to measure the impact on businesses, households, and the overall economy. He says it will be much deeper this time. The International Monetary Fund said earlier this year that the Russian economy will contract by 6% in 2022; “With the additive effect of sanctions, our model shows that they will be more than 10%,” Mamonov says. He believes that consumption by households and businesses will shrink by 10% to 15%, and investment will fall by 17% in 2022. “It takes time for the sanctions to have their effect, especially when the goal is a country run by an authoritarian leader who can mobilize significant resources to compensate Effects in the first six months.

Early on, Putin increased pensions and the minimum wage by 10% to support poor families that are his primary support from rising inflation to 18%. The massive increases in gas and oil prices seen this year more than offset the decline in export volumes. In the second quarter of 2022, Russia recorded Highest current account surplus ever, thanks to the record-breaking trade surplus in the first place. But while this partly reflects higher returns from fossil fuels, the collapse in imports is another factor.

Putin is about to sit at a desk with different flags behind him
Putin took huge steps to try to mitigate the impact of sanctions on his core supporters in the early stages of the invasion. Photo: Alexei Danichev / AP

“It is a mistake to think of Russian energy profits paying for the war in Ukraine,” says Mark Harrison, an expert on sanctions and emeritus professor of economics at the University of Warwick. “They are not because Putin cannot buy what he wants for the war effort.” He says the ruble has regained strength “largely because it is a managed currency with capital controls that prevent Russians from spending their money outside the country”.

Katharina Martins, an economist at Bruegel Research Center in Brussels, and her colleague Zsolt Darvas examine 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 have fallen by half this year on 75% of all trade, indicating that state-run companies and agencies are likely to start shutting down equipment and downgrading manufacturing due to a shortage of spare parts.

The sanctions included the bans imposed by the United Kingdom, the European Union and the United States on the export of strategic goods, including high-tech equipment and components for use in electronics, communications, 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 Russia’s imports since March 2022, even from countries that have not implemented the sanctions.

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 a penalty for accepting ruble transactions.

“When we talk about having a trade war alongside a military one, all the work is on the import side,” Harrison says.

Tim Ash, a Russia expert at think tank Chatham House, says Putin agreed that tougher sanctions were the price of the invasion of Ukraine, and prepared his economy for the initial shock. “But in the medium term, sanctions are disastrous for Russia,” says Asch.

Russia relies on pipelines to export its gas, and most of those pipelines lead to Europe. An 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 off gas from Europe, but he cannot divert gas for sale to other countries because he would need LNG terminals to store the gas. “He doesn’t have the time, the technology, or the equipment to do that, so he has to stay in the ground,” Ash says.

Yakov Vigin, a Russia expert at the Bergeruen Institute in Los Angeles, says food prices are rising in Russia and shortages of basic commodities are starting to emerge.

“Despite the rosy picture that Putin has painted, there are real problems with physical production that mean factories have to reduce the quality of the things they make,” he says.

Ashe visited Ukraine for 35 years and is convinced that the country can sustain the defeat of Russian forces with financial and military support from the West. “NATO is an economic bloc worth $40 trillion, while Russia’s is $1.7 trillion,” he says. “NATO spends 2% of its income on the military, which means that whatever Russia spends, Putin doesn’t stand a chance.”

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