The Russian economy was predicted to collapse after Western countries imposed unprecedented sanctions on Moscow over the war in Ukraine. But this week, Russia’s Rosstat statistics agency said gross domestic product (GDP) fell by just 0.4% in the first six months of the year.
Capital investment has risen, the ruble has recovered and inflation – which rose when the war started – has begun to decline, according to official data. This week, a senior Russian government official forecast that full-year GDP would be just 3% lower and not shrink by a third. So what’s going on?
As expected, oil and gas revenues, particularly from the European Union, continue to support the country’s finances, despite Germany and Italy reducing their reliance on Russian energy. State-owned energy giant Gazprom just announced a record first-half profit of 2.5 trillion rubles ($41.36 billion, €41.41 billion), leading to a 30% rise in its share price.
“Even if the Russian economy is underperforming than six months ago, it is not enough to stop” [Russian President Vladimir] Putin of financing the war,” Maxim Mironov, a professor of finance at the IE Business School in Madrid, told TBEN.
There is no doubt that Western sanctions have started to bite. Last month, a Yale University study found that imports to Russia have collapsed and manufacturers are struggling to source components, including semiconductors and other high-tech parts.
Russia’s position as a commodity exporter has been irreversibly eroded, the report said, as Moscow has been forced to sell more of its oil and gas to Asia at a steep discount.
Nearly a thousand Western companies have shut down or curtailed their operations, resulting in disruptions and layoffs
Economic collapse in ‘two years’
One of the co-authors of the report, management professor Jeffrey Sonnenfeld, recently told Britain’s Times Radio that the Russian economy can only survive “under enormous hardship for about two years” as long as the West sticks to sanctions. Other trading experts believe that a complete economic collapse will take much longer.
“In the long run, Russia will be little more than a gas station for China…but I don’t believe in this argument that the economy will collapse in two years,” Rolf J. Langhammer, a German trade expert and former vice president of the Kiel Institute of the World Economy (IfW-Kiel), TBEN told. He said Russia had spent several years building its war chest and noted how international financial experts believe the country is well prepared for an eventual economic decoupling from the West.
“The International Monetary Fund (IMF) wrote last year that since the conflict in eastern Ukraine in 2014 and the annexation of Crimea, Russia had been hoarding cash and prepared for a war of attrition.”
Langhammer noted how Germany paid Russia €20 billion ($19.97 billion) for energy imports in the first half of 2022 — a 50% increase from the same period last year. “Even if the volumes go down, with prices rising we will still pay them about $3 billion a month,” or $15 billion every six months.
But despite the better-than-expected economic picture, the Kremlin stopped publishing a series of economic data shortly after Russian tanks entered Ukraine.
Putin burns through reserves
Yale researchers noted how Russia was absorbing the $600 billion in foreign exchange reserves that had served as a buffer for Putin in the early months of the war. They said $80 billion has already been used, while the other half of the reserves have been frozen by the West.
Alexander Mihailov, an associate professor of economics at Britain’s University of Reading, believes Putin will only be short of money for the war if the West can completely reduce its dependence on Russian energy, which he says will likely take another 2-3 years.
If Putin’s options are limited, Russia could effectively start printing money to cover skyrocketing military costs, which Mihailov says would be “madness” because it would “lead to massive depreciation of the ruble, hyperinflation and social unrest”.
Mironov, meanwhile, told TBEN that the Russians had endured severe hardship under communism and in the 1990s, after the collapse of the Soviet Union, and warned against overestimation when the public would revolt against Putin.
“In the West you have 10% inflation and people are really scared and demanding that politicians do something. That’s not how Russian society works, so Putin has more leeway to lower the standard of living by 20-30% without the risk of great resistance.”
Secondary sanctions would further isolate Putin
Many countries in Asia, Latin America and Africa have not imposed sanctions on Russia, and some have benefited from the West’s withdrawal. Reports this week suggest China is quietly selling its surplus Russian gas back to Europe.
Pressure is now being put on the West to impose so-called secondary sanctions where foreigners can be cut off from the international financial system if they do business with Russia. The measures were used to great effect by Washington against third parties to isolate Iran’s oil exports and nuclear ambitions.
“China is the main country ignoring Western sanctions, along with Turkey and India.” Langhammer told TBEN. “A Chinese Withdrawal From Supporting Putin [as a result of secondary sanctions] would be a major tailwind for the effectiveness of sanctions.”
Washington has previously said secondary sanctions are an option, but experts are urging patience because if introduced now, they could further increase demand for oil and gas and raise prices even more.
Edited by: Uwe Hessler