The economic war on Russia

Sanctions pressure Russia’s survival

Some say that sanctions and unity of the world in standing up to Russia are not beneficial and even give “prosperity” to the Russian economy. We must factually disagree. These misunderstandings persist because we are still in the informational war and all involved are trying to manipulate the narrative. How the Russian economy (before the war was not skyrocketing) is actually holding up amidst the exodus of over 1.000 global companies? All these companies employed a local staff of over 1 million individuals. Where are they? It becomes very clear that these business retreats and sanctions are crippling the economy on any given part.

We all know that Russian imports have largely collapsed, and the country faces stark challenges in securing crucial technological inputs. Domestic production has come to a complete standstill with no capacity to replace products and especially talent. More highly skilled professionals have run out of Russia trying new challenges in different countries. (most of them in Asia) Almost a mass exodus of skilled Russian natives and high-net-worth foreigners. Most estimates peg the number as no less than five hundred thousand people have left the country. With them also a big amount of capital. We know this by the presence of Russian capital inflows in Dubai. Those companies' retreats represent ~40% of Russia's GDP reversing nearly three decades of foreign investment and strategic developments. Russian financial markets, as an indicator of both present conditions and future outlook, are the worst-performing markets in the entire world this year. Even if the government will dramatically intervenes in the monetary system the deficit will be huge. By any metric and on any level, the Russian economy is going down in a long term.

Ok probably they will get some money from energy exports but many alarming forecasts projecting strong revenue were based on the last available official statement dated back in March. Bloomberg Economics study estimates based on March projection oil-and-gas revenue to be around $285 billion exceeding the 2021 figure by more than one-fifth. We would say hell no! Because even Russia admitted that its energy export revenues in May and June have diminished significantly. This lack of current reliable pieces of information trick experts into making non-accurate economic forecasting. So it’s not advisable to believe that Russia has a strong economic position. Many have long argued that Europe’s inability to stop the pipelines dilutes the efficacy of sanctions. Others were saying that oil exports provided the Kremlin with $1 billion every day. No doubt that gaps are in place in this sector but the reality under the surface is that exports are already under severe strain including energy revenues. Even companies like Boeing which relied heavily on Russian titanium have been able to suspend purchases and found new supplies. And across the entire economic view prices have fallen even in wheat, oil, and metals markets. If we might say from an asymmetric perspective Russia needs world markets especially European ones as an outlet for its exports far more than the world needs Russian supplies. The well-known Falin-Kvitsinky doctrine no longer substitutes military influence with economic pressure in the event of non-compliance countries. Europeans have taken steps in this direction and decreased this vulnerability. They added to the gas pipelines new LNG terminals and interconnectors. (ex: in June, Russia piped just 4.5bcm to Europe, a third of what it did in early 2021, while US LNG to Europe represented 5.5bcm in the same period) Despite this progress, everything is still incomplete and leverage is still there questioning and making future West political elections very crunchy. Even though Russian gas was intended to be the transitory means to a clean energy future in the shorter term, many experts took it as an excuse for inaction against “mighty Russia”. (Energiewende)

Furthermore, we all know that these challenges are largely solvable in Europe. But in Russia are not. Contrary to their leadership illusions a return to a Soviet-era state of economic self-sufficiency is not possible. The post-soviet economic framework relies heavily on raw commodity exports and is dependent on western technology and know-how. The myth of “power vertical” (dysfunctional bureaucracy and kleptocracy) naturally was a concentration of economic power based on oil and gas. (half of the budget revenues each year) Such a power displacement made an economy without diversification contributing to insolvable problems ahead. It is painfully clear that predictions to change West with East or the so-called “pivot to China” are so unrealistic. From a technical standpoint now and short time is almost impossible to ship gas to China or India without the costly construction of a Trans-Siberian pipeline. Therefore each instance of energy weaponization tarnishes Russia’s reputation as a commodities provider. Once more and a top of this Russia doesn’t want to join the countries of the world in the green energy transition. They even argued that “climate alarmism” and energy transition are a means of attacking his economic foundation.

Probably all of this coupled with more sanctions will turn Russia into a shadow of its former self. Sanctions rarely make instant hits. They tend to be longer-duration tools designed to structurally weaken economies. So this inflated level of spending on war and strengthening their currency is absolutely unsustainable. Given these financing constraints, Russia has stepped into a position of weakness draining its foreign reserves.

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