Have the sanctions against Russia failed? Putin says Russia’s economy has exceeded expectations.
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As the global glitterati chatter away in Davos, Switzerland, there is one country whose absence is notable, if not surprising. Russian officials are persona non grata at the World Economic Forum in the Swiss mountain town, while Ukrainian figures like First Lady Olena Zelenska address packed houses.
The symbolism is clear. Russia’s invasion of Ukraine nearly 11 months ago made President Vladimir Putin and his allies toxic to this global elite. Russia has been heaped with sanctions and export controls aimed at cutting it off from the global economy, using a sort of systematic power to stymie the Kremlin’s war effort and punish Putin’s allies.
But did it actually work in the real world? Away from the parties in Davos, Putin painted a surprisingly rosy picture of Russia’s economy on Tuesday, based on new government data. “The actual momentum of the economy turned out to be better than many expert forecasts,” he said, staring at the screen during a virtual business meeting.
Citing data from the Ministry of Economic Development, Putin said Russia’s gross domestic product fell between January and November 2022 – albeit by just 2.1 percent. He noted that “some of our experts, not to mention foreign experts, have been predicting a 10 percent, 15 percent, even 20 percent decline.”
Initial calculations suggested that Russia’s economy shrank by 2.5 percent for all of 2022, the Russian president said — significantly better than the 33 percent contraction in Ukraine’s economy last year. “Our task is to support and consolidate this positive trend,” Putin added.
For many outside of Russia, these numbers are confusing. The level of economic firepower directed against Russia since February 24 was unprecedented for a large country, as the country’s banks were banned from the Belgium-based SWIFT messaging system used in international transactions and sanctions imposed on its central bank were banished.
However, Russian data seems to indicate that the magnitude of the impact was less than many expected. While Putin may not be in Davos, Russia is not completely cut off from the world either. The country’s current account balance – effectively a record of its trade with the rest of the world – has risen over the past year in a way that would have spelled a boom year at any normal time.
Imagine if all you knew about 2022 was this chart and someone asked you to explain what caused it. You could speculate that the price of Russian exports has increased by a ton, but I doubt you would believe this is an economy under major sanctions. pic.twitter.com/O9cqQqrLGw
— Gerard DiPippo (@gdp1985) January 16, 2023
It is of course possible that Russian data is inaccurate. But many living or visiting Russia have pointed out that life has gone on about as normal, even as the defunct McDonald’s has been replaced by a local burger chain (“Tasty — and that’s it”) and Western luxury goods purchases by a network of Foreigners require buyers.
“If this is a crisis for Russia – which it is – then it cannot be compared to the turmoil of the early 1990s, when the state, society and economy collapsed simultaneously,” says Alexander Titov, a Russian émigré and lecturer at Queen’s University Belfast , wrote for the conversation after a recent return home.
There were disruptions, Titov wrote, but they were mild even compared to what was seen at the beginning of the pandemic. “There is no shortage, even of Western goods like whiskey – supermarket shelves are stocked,” he wrote.
Does this mean sanctions haven’t worked? The short answer is no – but it’s more complicated than that.
Most importantly, keep in mind that Western sanctions and export controls aren’t primarily designed to keep Johnnie Walker bottles off a St. Petersburg shelf (although that might be a welcome side effect): they’re designed to hamper Russia’s war effort in Ukraine.
As The Post’s Catherine Belton and Robyn Dixon reported late last year, scratch the surface of Russia’s economy and you’ll find that sanctions and other measures hit Russia where it hurt, “exacerbating the lack of equipment for its army and its capability.” prevented from launching such a new ground offensive or building new missiles, economists and Russian businessmen said.”
It is true that much of the sanctions burden has been cushioned by Russia’s still huge energy exports, hence the positive balance. But when Putin tried to use these exports to pressure and punish Europe, their power was blunted. A new price cap coming into force soon is likely to further hamper Russian exports.
“Russia is still an energy power, but its role has changed dramatically,” Vladimir Milov, a former deputy energy minister of Russia who now lives abroad, told The Wall Street Journal recently. “Russia will have a smaller market share in oil and gas, it will make less profit and it has also lost some of its geopolitical clout.”
That means less revenue for the Russian state, even as its spending skyrockets due to the invasion of Ukraine. According to official figures, Moscow recorded a budget deficit of around 47.3 billion dollars in 2022 – at around 2.3 percent of GDP, this is one of the worst financial years in the country’s history.
Yes, that’s a lower deficit than the United States. But Russia doesn’t have a coveted global currency like the US dollar, so it can’t just print more money without repercussions. As its own sanctions against US citizens have shown, Russia doesn’t have much influence over the world economy – apart from the declining power of oil and gas.
In the long term, things are not looking rosy for Russia’s economy. Putin is right that many things predicted would get much worse in 2022 – some economists told Today’s WorldView in March that they feared the Russian economy could collapse, leading to misery for ordinary civilians far outside the Kremlin walls and unknown global consequences would lead.
But Putin is wrong when he assumes that a “positive trend” can easily continue in the coming year. The trajectory goes in the opposite direction. It’s very possible that sanctions will tighten, oil and gas revenues will continue to fall, the deficit will deepen, and Russia’s battlefield resources will be stretched to the breaking point.
How quickly that happens will depend on persistence in the West, where lax enforcement and deliberate evasion have helped Russia over the past year. That is perhaps why Ukrainian officials and their supporters are at the World Economic Forum in Davos, where they are addressing fatigue and apathy among allies. The fate of Russia’s economy may not be decided in Putin’s embattled Moscow, not even on the Donbass battlefield, but over appetizers and cocktails in Davos.
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