Five months into the Russian invasion of Ukraine, there remains a startling lack of understanding by many Western policymakers and commentators of the economic dimensions of President Vladimir Putin’s invasion and what it has meant for Russia’s economic positioning both domestically and globally.
Far from being ineffective or disappointing, as many have argued, international sanctions and voluntary business retreats have exerted a devastating effect on Russia’s economy. The deteriorating economy has served as a powerful if underappreciated complement to the deteriorating political landscape facing Putin.
That these misunderstandings persist is not entirely surprising given the lack of available economic data. In fact, many of the excessively sanguine Russian economic analyses, forecasts and projections that have proliferated in recent months share a crucial methodological flaw: these analyses draw most, if not all, of their underlying evidence from periodic economic releases by the Russian government itself. Numbers released by the Kremlin have long been held to be largely if not always credible, but there are certain problems.
First, the Kremlin’s economic releases are becoming increasingly cherry-picked — partial and incomplete, selectively tossing out unfavourable metrics. The Russian government has progressively withheld an increasing number of key statistics that, prior to the war, were updated on a monthly basis, including all foreign trade data. Among these are statistics relating to exports and imports, particularly with Europe; oil and gas monthly output data; commodity export quantities; capital inflows and outflows; financial statements of major companies, which used to be released on a mandatory basis by companies themselves; central bank monetary base data; foreign direct investment data; lending and loan origination data; and other data related to the availability of credit. Even Rosaviatsiya, the federal air transport agency, abruptly ceased publishing data on airline and airport passenger volumes.
Since the Kremlin stopped releasing updated numbers, constraining the availability of economic data for researchers to draw upon, many excessively rosy economic forecasts have irrationally extrapolated economic releases from the early days of the invasion, when sanctions and the business retreat had not taken full effect. Even those favourable statistics that have been released are dubious, given the political pressure the Kremlin has exerted to corrupt statistical integrity.
Mindful of the dangers of accepting Kremlin statistics at face value, Foreign Policy’s team of experts, using private Russian-language and direct data sources including high-frequency consumer data, cross-channel checks, releases from Russia’s international trade partners, and data mining of complex shipping data, has released one of the first comprehensive economic analyses measuring Russian current economic activity five months into the invasion, with contributions from Franek Sokolowski, Michal Wyrebkowski, Mateusz Kasprowicz, Michal Boron, Yash Bhansali and Ryan Vakil. From Foreign Policy’s analysis, it becomes clear: business retreats and sanctions are crushing the Russian economy in the short term and the long term. Based on Foreign Policy’s research, it is able to challenge nine widely held but misleading myths about Russia’s supposed economic resilience.
Myth 1: Russia can redirect its gas exports and sell to Asia in lieu of Europe
This is one of Putin’s favourite and most misleading talking points, doubling down on a much-hyped pivot to the east. But natural gas is not a fungible export for Russia. Less than 10% of Russia’s gas capacity is liquefied natural gas, so Russian gas exports remain reliant on a system of fixed pipelines carrying piped gas. The vast majority of Russia’s pipelines flow toward Europe; those pipelines, which originate in western Russia, are not connectable to a separate nascent network of pipelines that link Eastern Siberia to Asia, which contains only 10% of the capacity of the European pipeline network. Indeed, the 16.5 billion cubic meters of gas exported by Russia to China last year represented less than 10% of the 170 billion cubic meters of natural gas sent by Russia to Europe.
Long-planned Asian pipeline projects currently under construction are still years away from becoming operational, much less hastily initiated new projects, and financing of these costly gas pipeline projects also now puts Russia at a significant disadvantage.
Overall, Russia needs world markets far more than the world needs Russian supplies; Europe received 83% of Russian gas exports but drew only 46% of its own supply from Russia in 2021. With limited pipeline connectivity to Asia, more Russian gas stays in the ground; indeed, the Russian state energy company Gazprom’s published data shows production is already down more than 35% year-on-year this month. For all Putin’s energy blackmail of Europe, he is doing so at significant financial cost to his own coffers.
Myth 2: Since oil is more fungible than gas, Putin can just sell more to Asia
Russian oil exports now also reflect Putin’s diminished economic and geopolitical clout. Recognising that Russia has nowhere else to turn, and mindful that they have more purchasing options than Russia has buyers, China and India are driving an unprecedented approximately $35 discount on Russian Urals oil purchases, even though the historical spread has never ranged beyond $5 — not even during the 2014 Crimean crisis — and at times Russian oil has actually sold at a premium to Brent and WTI oil. Furthermore, it takes Russian oil tankers an average of 35 days to reach East Asia, versus two to seven days to reach Europe, which is why historically only 39% of Russian oil has gone to Asia versus the 53% destined for Europe.
This margin pressure is felt keenly by Russia, as it remains a relatively high-cost producer relative to the other major oil producers, with some of the highest break-evens of any producing country. The Russian upstream industry has also long been reliant on Western technology, which combined with the loss of both Russia’s erstwhile primary market and Russia’s diminished economic clout leads to even the Russian energy ministry revising its projections of long-term oil output downward. There is no doubt that, as many energy experts predicted, Russia is losing its status as an energy superpower, with an irrevocable deterioration in its strategic economic positioning as an erstwhile reliable supplier of commodities.
Myth 3: Russia is making up for lost Western businesses and imports by replacing them with imports from Asia
Imports play an important role within Russia’s domestic economy, consisting of about 20% of Russian GDP, and, despite Putin’s bellicose delusions of total self-sufficiency, the country needs crucial inputs, parts, and technology from hesitant trade partners. Despite some lingering supply chain leakiness, Russian imports have collapsed by more than 50% in recent months.
China has not moved into the Russian market to the extent that many feared; in fact, according to the most recent monthly releases from the Chinese General Administration of Customs, Chinese exports to Russia plummeted by more than 50% from the start of the year to April, falling from over US$8.1 billion monthly to US$3.8 billion. Considering China exports seven times as much to the United States than Russia, it appears that even Chinese companies are more concerned about running afoul of US sanctions than of losing marginal positions in the Russian market, reflecting Russia’s weak economic hand with its global trade partners.
Myth 4: Russian domestic consumption and consumer health remain strong
Some of the sectors most dependent on international supply chains have been hit with debilitating inflation around 40%-60% — on extremely low sales volumes. For example, foreign car sales in Russia fell by an average of 95% across major car companies, with sales ground to a complete halt.
Amid supply shortages, soaring prices and fading consumer sentiment, it is hardly surprising that Russian Purchasing Managers’ Index readings — which capture how purchasing managers are viewing the economy — have plunged, particularly for new orders, alongside plunges in consumer spending and retail sales data by around 20% year-over-year. Other readings of high-frequency data such as e-commerce sales within Yandex and same-store traffic at retail sites across Moscow reinforce steep declines in consumer spending and sales, no matter what the Kremlin says.
Myth 5: Global businesses have not really pulled out of Russia, and business, capital and talent flight from Russia are overstated
Global businesses represent around 12% of Russia’s workforce (5 million workers), and, as a result of the business retreat, more than 1000 companies representing around 40% of Russia’s GDP have curtailed operations in the country, reversing three decades’ worth of foreign investment and buttressing unprecedented simultaneous capital and talent flight in a mass exodus of 500,000 individuals, many of whom are exactly the highly educated, technically skilled workers Russia cannot afford to lose. Even the mayor of Moscow has acknowledged an expected massive loss of jobs as businesses go through the process of fully exiting.
Myth 6: Putin is running a budget surplus thanks to high energy prices
Russia is actually on pace to run a budget deficit this year equivalent to 2% of GDP, according to its own finance minister — one of the only times the budget has been in deficit in years, despite high energy prices — thanks to Putin’s unsustainable spending spree; on top of dramatic increases in military spending, Putin is resorting to patently unsustainable, dramatic fiscal and monetary intervention, including a laundry list of Kremlin pet projects, all of which have contributed to the money supply nearly doubling in Russia since the invasion began. Putin’s reckless spending is clearly putting Kremlin finances under strain.
Myth 7: Putin has hundreds of billions of dollars in rainy day funds, so the Kremlin’s finances are unlikely to be strained anytime soon
The most obvious challenge facing Putin’s rainy day funds is the fact that of his around US$600 billion (A$868 billion) in foreign exchange reserves, accumulated from years’ worth of oil and gas revenues, US$300 billion is frozen and out of reach with allied countries across the United States, Europe and Japan restricting access. There have been some calls to seize this US$300 billion to finance the reconstruction of Ukraine.
Putin’s remaining foreign exchange reserves are decreasing at an alarming rate, by around US$75 billion since the start of the war. Critics point out that official foreign exchange reserves of the central bank technically can only decrease due to international sanctions placed on the central bank, and they suggest that nonsanctioned financial institutions such as Gazprombank could still accumulate such reserves in place of the central bank. While this may be technically true, there is simultaneously no evidence to suggest that Gazprombank is actually accumulating any reserves given the sizable strain on its own loan book.
Furthermore, although the finance ministry had planned to reinstate a long-standing Russian budgetary rule that surplus revenue from oil and gas sales should be channelled into the sovereign wealth fund, Putin axed this proposal as well as accompanying guidelines directing how and where the National Wealth Fund can be spent — as Finance Minister Anton Siluanov floated the idea of withdrawing funds from the National Wealth Fund equivalent to a third of the entire fund to pay for this deficit this year. If Russia is running a budget deficit requiring the drawdown of a third of its sovereign wealth fund when oil and gas revenues are still relatively strong, all signs indicate a Kremlin that may be running out of money much faster than conventionally appreciated.
Myth 8: The ruble is the world’s strongest-performing currency this year
One of Putin’s favourite propaganda talking points, the appreciation of the ruble is an artificial reflection of unprecedented, draconian capital control — which ranks among the most restrictive of any in the world. The restrictions make it effectively impossible for any Russian to legally purchase dollars or even access a majority of their dollar deposits, while artificially inflating demand through forced purchases by major exporters — all of which remain largely in place today.
The official exchange rate is misleading, anyhow, as the ruble is, unsurprisingly, trading at dramatically diminished volumes compared to before the invasion on low liquidity. By many reports, much of this erstwhile trading has migrated to unofficial ruble black markets. Even the Bank of Russia has admitted that the exchange rate is a reflection more of government policies and a blunt expression of the country’s trade balance rather than freely tradeable liquid foreign exchange markets.
Myth 9: The implementation of sanctions and business retreats are now largely done, and no more economic pressure is needed
Russia’s economy has been severely damaged, but the business retreats and sanctions applied against Russia are incomplete. Even with the deterioration in Russia’s exports positioning, it continues to draw too much oil and gas revenue from the sanctions carveout, which sustains Putin’s extravagant domestic spending and obfuscates structural economic weaknesses.
The Kyiv School of Economics and Yermak-McFaul International Working Group have led the way in proposing additional sanctions measures across individual sanctions, energy sanctions, and financial sanctions, led by former US ambassador to Russia Michael McFaul and the experts Tymofiy Mylovanov, Nataliia Shapoval and Andriy Boytsun. Looking ahead, there is no path out of economic oblivion for Russia as long as the allied countries remain unified in maintaining and increasing sanctions pressure against Russia.
Defeatist headlines arguing that Russia’s economy has bounced back are simply not factual — the facts are that, by any metric and on any level, the Russian economy is reeling, and now is not the time to step on the brakes.
A lot of this article may well be true, but the reality is still the same:
The sanctions that have been placed on Russia are actually hurting the Countries who have imposed them, perhaps even more so that Russia.
The above authors must have missed this interview because they are tied up in their own inconsequential hubris. Opinion | Why Russia Believes It Cannot Lose the War in Ukraine – The New York Times (nytimes.com)
I read that interview at the time and again just now. I am genuinely stumped as to how anyone could think it rebuts any of the nine points made in the above article.
The thing is, with an economy only slightly larger than Mexico’s, and shrinking rapidly, Russia can’t afford to suffer as much as the others do anyway. It’s true that Russia is largely self-sufficient in many things, but only really in primary industries. That’s fine for a nation fighting in the Napoleonic era, but for one intent on fighting in the 21stC against technological peers it’s a disaster.
You’re using the corrupt GDP method instead of PPP using the international dollar. So where does Russia sit on that list?
You’ve obviously never been to Russia, where even the smallest corner store has a device to identify forged Roubles, of which there are extraordinary quantities,
Been there twice buddy because my wife is Russian / Ukrainian and we have children and grandchildren living there. We have hundreds of branded tools that ecommerce merchants can turn to for help in catching fraudulent credit card orders.
I don’t know. Could you fill in the blanks for me?
Rather than just whistling in the dark, Europe is soon going to be whistling in the snow, waiting for that LNG from the USA.
Lotsa luck to its poodles.
Silly me. I didn’t realise this wasn’t a Crikey written story until I got to the final page.
Yeah. Now convinced they have linked up with the Right Wing Foreign Policy. I wonder how much FP are paying them?
Their tedious conformity on so many issues suggests that even a peppercorn payment would be unnecessary – it is done gleefully, no thought required.
Much cheaper than paying for real journalists (Hardaker being an exception), just set up a sheltered workshop for unpaid, subliterate interns who will copy whatever they see in the MSM as long as the words aren’t too big or the ideas too complex.
By the end of the 2nd paragraph the source was obvious. Like the forged rubles – made in the USofA…holes.
Is this the USA that invaded Iraq in 2003?
Or the USA where millions of ordinary people protested in the streets to stop that same invasion?
Maybe reality is a bit more complicated than “USA = BAD”?
Protests mean SFA. Where were the Sanctions against the US? Where was the removal from SWIFT? When did the rest of “the West” pile on to punish the Invasion of a Sovereign nation?
They didn’t is the answer. Complete and utter hypocrisy.
Try reading Jeffrey Sachs “A New Foreign Policy”.
Crikey has taken an uncritical pro Ukrainian viewpoint. Amber Schultz is a case in point. There an interesting clip of Noam Chomsky saying that in Soviet times Russians could listen to BBC, Voice of America, DW radio. Nowadays we can’t even get a Russian perspective ( for what it’s worth) anywhere in the Western media. People like Chris Hedges, Chomsky, Aaron Mate, Glenn Greenwald, etc, are de platformed and shut out. To get anything from the Russian perspective, one needs to look to Indian, Chinese, Latin American sources. I’d like to see an article that takes issue with these tendentious points. It’s a given that all major outlets, including the BBC, NPR let alone WaPo, NYT, Reuters, etc are all on the same page and none, repeat none , are in Russian occupied Donbass to report what the locals there think. It’s really opened my eyes about how badly we are served by our media.
Basically the reason people have taken a pro Ukrainian viewpoint is because we don’t have pictures of flattened Russian towns and Russian mass graves only mass graves of Ukranians by Russians.
It is like asking why the Crikey would have taken an uncritical pro Polish view in 1939 and excluded the German perspective [a Mr. Hitler was the German Chancellor at the time]. Peculiarly all the news outlets at the time were all on the same page – none, repeat none, were in German occupied Poland to report what the locals thought, funny that! We were equally badly served by our media – weren’t we?
We are not allowed to see the damage to the Donetsk regions nor read about the deaths of civilians in those areas at the hands of the Ukrainian military since 2014. Plenty of reports if you look hard enough.
Not true about Soviet times – Paul Robeson gave a Russian perspective (of Potemkin villages). And during WW2 we had Tokyo Rose and Lord Haw Haw to give a “balanced” view.
If you are interested in what locals think, there are many Ukrainains who have been tortured or raped or bombed or had their children killed by Russians and their long range bombs. Some of them are able to speak about their experiences. Or don’t those Ukrainians count as “locals”?
And why do you seem to identify only Putin and his appeasers as having a “Russian perspective”? Far more Russians – millions – have protested against Putin – like Marina Ovsyannikova or that 10 year old boy who was taken away by Putin’s men – just for protesting! He was “de-platformed”!
But if you really want Putin’s messaging direct – here it is – in English:
https://twitter.com/JuliaDavisNews/status/1551229056586244100
In 1997, while employed as a professor at Emory University, Sonnenfeld was informed by campus police that they possessed video footage of him vandalizing school property. Sonnenfeld resigned and subsequently sued Emory University
If you want a different perspective, try this, http://thesaker.is/five-months-into-the-special-military-operation-a-summary/
Written by an ex Military Intelligence officer with NATO in Brussels, it describes where we are at in the West and where the Russian/Chinese/non Western World place us. A long read but worth it.
Great read and accurate.
He sort of lost me at the continual mentions of Ukronazis and the Jews and Anglo-Zionist empire. A sort of fevered rant where bits of reality meet fantasy through a sort of low level Trotskyist conspiracy joined with a bit of that German fella who wrote about his struggle. Can see it might appeal to some but a waste of time as a serious critical view. Might as well take an ice pick to your head.
Looks like Russia is just going to disappear.
If you believe everything you read.
Remember about a Month ago, Putin was very sick and would most likely die in days or weeks.
What happened?
Since this conflict began I have heard Putin has dementia, Putin’s yacht has been seized, Putin is facing a coup, Putin is sacking all his generals, Putin is losing the war because it isn’t over in three weeks, Russian economy is collapsing, Russian unemployment is going through the roof, Russians are going to starve to death. All of the above are incorrect, for each of these Reich Wing analysts that abound in the US there are two others who have an opposite opinion/view. Those same doom and gloom prophecies were rolled out in 2014 when Russia faced sanctions over Crimea. It’s like a planned diversion tactic to take the light off the problems the west is facing. Meanwhile in Europe governments and leaders are falling or about to fall and what can you say about Sleepy Joe, plenty of Americans say he surrounded by the most talentless wokes* in US history.
Before the leaves begin to drop in Europe it will be a case of “War? What war?”