After ten sets of EU sanctions, the Russian economy is far from the “collapse” that many of those financing the invasion of Ukraine predicted. But in a battle involving the information domain, “we have to be a little skeptical” and see what the numbers can hide.
The Russian economy is resisting. Not the “collapse” expected by some Western leaders, after sanctions were imposed by some of the world’s largest economies. The contraction is inescapable: according to the Russian statistics agency Rosstat, Russian GDP will fall by 2.1% in 2022 and the International Monetary Fund points to modest growth of 0.3% for 2023. But experts caution that the numbers aren’t always what they say. Reality and the Russian economy may be weaker now than the Kremlin would like to make it out to be.
Financial analysts should be cautious when analyzing official data from a country at war and where one of the battlefields is located. This is one of the main Russian weapons against the wider West: arguing that sanctions don’t work and that they only harm the West and its citizens, it is being asked to try to support the Ukrainian cause.
“Take into account the reliability of the data. We have to be a little skeptical. There is information and counter-information, which is completely acceptable. The numbers may not tell everything, the Russian economy is not a healthy economy. For now, the situation is stable, but [a guerra] The longer it takes, the worse it will deteriorate,” says Philip Garcia, head of financial market intelligence.
This stability is mainly due to oil and gas prices in 2022, which offset the decline in export volumes. To curb its ability to finance a Russian invasion, the EU cut imports of natural gas and petroleum products, which provide 50% of its energy needs. Member States spent €100 billion a year on Russian fossil fuels alone and reduced this dependence throughout the year. Currently, that figure is closer to 12% and is on a downward trend.
To offset this decline, Russia shifted its oil sales to China and India. But this does not apply to natural gas sales, which require very expensive infrastructure and take a long time to set up by liquefying or transporting the gas through pipelines. This will be one of the topics discussed by Xi Jinping and Vladimir Putin in Moscow at the end of March. The deal will lead to the construction of a huge gas pipeline through Mongolia, 2,600 kilometers long and capable of supplying 50 billion cubic meters of gas a year. But the Nord Stream 1 connecting Russia to Germany is less than the amount provided and the project running on schedule will be ready only in 2030.
Russia seems to be finding more and more original ways to get around Western sanctions. One of them is the creation of a “shadow fleet” that already has more than 600 ships to transport Russian oil “under the radar”.
“They can sell gas and oil at a higher price, so they lose money. So, we have to ask ourselves whether this is making the Russian economy worse, better or the same. It is getting worse,” he said, adding that expectations of a “severe downturn” in the Russian economy are “a far-fetched hypothesis.” Philip Garcia also underlines that it is difficult to implement.
But barriers do work. In the first two months of 2023, Russia reached 88% of the projected total deficit for this year. Experts attribute this to the late application of sanctions. Natural gas exports to Europe were halted only in the summer and a ceiling on Russian crude oil exchange prices only came into effect in December. And the effects are already being felt. In January and February of this year, revenues from oil and gas taxes, which account for nearly half of Russia’s annual budget, fell 46% from a year earlier.
Based on these expectations of the collapse of the Russian economy, the data is better than expected, but the reality is not as pretty as the Kremlin paints it. This is what Evan Gershkovich from the Wall Street Journal pointed out in an article he published on March 28, arguing that the Russian economy is beginning to “unwind.” Hours later, an American journalist, a descendant of a Jewish family that fled the Soviet Union, was arrested in Russia on espionage charges.
In some sectors, it is very difficult to replace components from exports. Russia is trying to do everything on its own, but it is running into problems. Since 1993, the country is experiencing the biggest manpower shortage. Thousands of people. Russian experts at the central bank call this process “reverse industrialization,” a state-led process.
“Russia sees itself as a great world power, which is no longer true. It remains a nuclear power, but its economy is weak, the size of Spain’s,” says Major General Isidro Morais Pereira.
Even the number of industrial production reports is positive, but this is due to the Russian war effort. Almost all military production plants underwent many changes and expanded the number of production lines, but this sector is not representative of the real Russian economy. All of this production, calculated as part of the country’s GDP, is quickly consumed and destroyed on the battlefield, adding no value to the lives of Russian citizens.
One of Russia’s top oligarchs, businessman Oleg Deripaska, sanctioned by the United States in 2018 for his ties to the Kremlin, has warned that foreign capital is urgently needed to keep the Russian economy functioning and that if the situation doesn’t change, Russia could. Severe cash flow problems as early as 2024. “There will be no money next year, we need foreign investors,” oligarch Oleg Deripaska told an economic conference in Siberia.
“The inability to import technology makes it difficult for many companies to modernize. The financing of the economy, which is done in any way other than the purchase of goods, is closed”, explains Felipe García.
According to the European Commission, since February 2022, member states have banned exports of goods to Russia worth 43.9 billion euros and stopped imports of Russian goods worth 91.2 billion dollars. Sales restrictions include technical systems, semiconductors and electronic systems, as well as various types of industrial equipment used by Russian industry.
The Russian solution is to purchase equipment sanctioned by third countries such as Kyrgyzstan, Turkey, Armenia or Georgia. “Russia is avoiding sanctions by other countries as a fallback solution, but that doesn’t mean it’s a good solution. It’s causing them to lose money, increasing costs and deteriorating quality,” the expert notes.
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