Two years after President Biden spoke of dealing a “devastating blow” to the Russian economy following the invasion of Ukraine, Russia is expected to grow faster this year than the United States, Germany, France or the United Kingdom.
The new US sanctions announced on Friday are unlikely to change this reality, given Russia's resilience in the face of escalating conflicts on the battlefields of global trade and finance.
Russian President Vladimir Putin has so far weathered U.S. and European attempts to weaken his economy by increasing defense spending and finding customers and suppliers in Asia to replace trading partners he lost in the West.
As the war descended into a serious stalemate, China, which had backed away from U.S. sanctions against Russia, emerged as Putin's savior. Chinese officials increased purchases of discounted Russian oil while also shipping large quantities of industrial parts, luxury goods and technology products to Russia. India has also become an enthusiastic oil buyer.
“This is the first geopolitical crisis that does not involve all major Asian economies. The West no longer has decisive economic power. “India and China are enough to keep Russia afloat,” said Cornell University historian and sanctions expert Nicholas Mulder.
The Biden administration tried to change that on Friday by introducing a series of sanctions in response to the prison death of Russian opposition leader Alexei Navalny. U.S. officials say the Russian economy has already been weakened by its initial measures and will be further hurt by the new measures, which target more than 500 individuals and companies.
These include critical nodes in the Russian military's supply chain, including two of the country's 50 largest companies – Suek, an energy producer, and Mechel, a mining company – as well as more than two dozen companies outside Russia that have helped the Kremlin evade sanctions , and Gazprom Space Systems, which operates a satellite network used by the Russian armed forces.
US authorities also increased pressure on the Russian oil industry by blacklisting Sovcomflot, the state-owned shipping company.
The U.S.-led financial sanctions and export bans previously imposed in response to Russia's invasion of Ukraine have made it harder and more expensive for Putin to wage war. In the long run, they will make Russia poorer, more technologically backward and more dependent on the state to drive the economy, U.S. officials and independent economists say.
But the financial and trade restrictions have not brought about economic collapse, let alone convinced the Kremlin to abandon its plans for conquest.
“People have overestimated the power of sanctions. “Russia did not suffer nearly as much damage as the optimists had expected,” said Henry Farrell, author of “Underground Empire: How America Weaponized The World.”
As the West applied pressure over the past two years, Putin turned Russia into a garrison state and reoriented the economy to serve the military, even as Russian civilians faced high prices.
“To pay for this brutal war, the Kremlin is placing a burden on the future of the Russian people,” Wally Adeyemo, deputy treasury secretary, said Friday in a speech at the Council on Foreign Relations in New York.
Nevertheless, the current situation does not meet the expectations of the White House or its European allies.
Just days after the first Russian attacks on Kiev, the United States and its European allies cut ties between Russian banks and the global financial system, blocked the country's access to advanced technologies and blacklisted the oligarchs who supported Putin's rule. Western authorities have frozen more than $300 billion in Russian central bank reserves held in accounts outside the country.
The impact was quick and severe. The ruble plummeted against the dollar and Russia defaulted on its payments for the first time since 1918. Hundreds of global corporations such as BlackRock, McDonald's and Stanley Black & Decker announced plans to abandon Russia as a pariah state.
Panicked Russians lined up at ATMs to withdraw cash while Putin condemned the allies' actions as “illegitimate” and briefly placed his nuclear forces on a higher alert.
On the first day of the war, Biden said he was confident the measures would be as devastating as “Russian bullets, missiles and tanks.”
Russia's gross domestic product shrank 1.2 percent in 2022, well below the 15 percent decline predicted by the Institute of International Finance, an industry group in Washington, DC. And last year, Russia recovered and grew faster than the United States.
“The shock was severe, but it wore off over time,” said Mulder, author of “The Economic Weapon: The Rise of Sanctions As A Tool Of Modern War.”
Russia is expected to grow at an annual rate of 2.6 percent this year, significantly higher than previous forecasts, compared with 2.1 percent for the United States, the International Monetary Fund said last month.
The war transformed Russia's trade with the outside world worth hundreds of billions of dollars, particularly in energy and technology products. Before the conflict, Russia supplied half of the European Union's coal, 40 percent of its natural gas and about a quarter of its crude oil. Most of that trade has evaporated.
The Biden administration has drawn up a price cap in late 2022 that aims to limit Russia's oil revenues without causing the spike in U.S. gasoline prices that would result from a full embargo. Under the plan, oil shipped on Western oil tankers or insured by Western companies could not be sold for more than $60 a barrel, which is below the market price.
According to a new report by Chris Miller, Nick Kumleben and Caroline Nowak of the American Enterprise Institute, the mechanism may have cost Russia around $50 billion in lost oil revenue over the past two years, although enforcement has been spotty.
Likewise, Russia's traditional sources of imported goods, particularly high-tech products with military use, have dried up. However, some sanctioned products from Europe still reach Russian buyers via Central Asia.
EU exports to Russia collapsed after sanctions were imposed in spring 2022. But at the same time, shipments to smaller neighboring countries such as Kazakhstan and Kyrgyzstan also rose, according to trade figures analyzed by Robin Brooks, former chief economist at the Institute of International Finance.
“Exports from almost all EU countries to Central Asia have gone through the roof,” he said.
According to the latest available data, the EU exported $32 billion worth of goods to Russia in the first ten months of 2023, compared to more than $82 billion in the same period of 2021, before the war. EU shipments to Central Asian countries rose sharply from around $18 billion to almost $31 billion over the same period.
If these European goods reach Russia via Central Asia, as many economists believe, they would offset about a quarter of the sanctions costing the Russian economy.
But Russia's most important aid comes from China. According to Chinese customs data, two-way trade between the countries reached a record high of $147 billion before the war last year, reaching a record $240 billion.
According to economist Heli Simola of the Bank of Finland Institute for Emerging Economies, Chinese companies are filling gaps in Russian supply chains by supplying lathes, self-propelled shovels and semiconductor manufacturing machines.
But the Russians are not making bargains. Compared to the first half of 2021, Russian customers paid 78 percent more for Chinese products such as machine tools last year, while other customers paid 12 percent higher prices, the Bank of Finland said.
Turkey, Malaysia and the United Arab Emirates have also supplied Russia with the goods it needs.
In many cases, Russia pays more for lower quality goods. Moscow was also unable to find new suppliers for everything its military needs. Navigation instruments, base stations for data transmission and voltage meters remain in short supply, the Bank of Finland said.
The key to Russia's surprising economic endurance has been high defense spending, what some economists call “military Keynesianism,” a reference to British economist John Maynard Keynes' support for using public spending to boost growth.
As war rages in Ukraine, Russia's defense spending is expected to consume 28 percent of the national budget this year, according to the Bank of Finland. That's more than double the share of government spending that the United States devotes to the military.
These funds will boost production of bullets, bombs and grenades for the Russian military and provide paychecks to millions of Russians who buy clothes, eat at restaurants, buy cars and otherwise stimulate the economy.
This month Putin said more than 520,000 jobs had been created in weapons factories in the last 18 months. Unemployment in Russia is at a record low.
Russia's shift to a war economy was not without costs. The unemployment rate is so low because the war has drawn hundreds of thousands of young men into military service and Russian industry is lacking workers.
Inflation rose above 7 percent last year, prompting the central bank to raise its key interest rate to 16 percent to cool demand. Nearly a million young Russians have fled the country, a brain drain that will weigh on the country's future growth.
For now, Russia can afford to invest in the armed forces, thanks in part to the country's success in circumventing restrictions on its oil sales. The government is running a modest budget deficit, which it has financed by selling government bonds to domestic investors and drawing on Russia's sovereign wealth fund.
According to S&P Global, revenue from oil and gas sales totaled more than $99 billion last year, about a quarter less than the previous year, when both oil prices and production were higher.
According to the International Energy Agency, India currently buys 1.9 million barrels per day from Russia, up from almost nothing in 2021. China buys more, 2.3 million barrels, but was a significant buyer before the war.
“He has enough money to support the economy and the military,” said economist Elina Ribakova, vice president for foreign policy at the Kyiv School of Economics. “This can go on for a long time.”
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