Some naysayers have denounced the sanctions against Russia since the Russian invasion began, saying they have had no practical effect.
That’s a narrow view. The Russian economy was hit by the sanctions and was only stabilized by exceptional measures. It is true that the ruble is trading as high or higher than when the invasion began, but tell me – how many people are actually trading the ruble these days? Russian foreign exchange reserves are severely depleted as Russian companies are forced to exchange their foreign currency for rubles to support the Russian currency.
Meanwhile, foreign companies have gone on an exodus, leaving gaps in the Russian economy that are not being filled, or not well filled. Yes, there are still many companies doing business in or with Russia. This does not mean that the brain drain of foreign companies and foreign workers has not weighed on the Russian economy. Yes, some enterprising Russians have tried to fill these holes, but this doesn’t usually happen overnight and doesn’t always go well.
Closed Russian McDonald’s as of March 2022. A “new” Russian version has since emerged, but it’s, uh… well, it’s something, from reports.
And the sanctions have clearly hurt the Russian war effort. Russia has lost access to MANY technologies as a result of the sanctions. Russia’s only major tank manufacturer and at least one missile manufacturer announced relatively early on that they would completely stop production because computer chips and other high-tech components, for example for optical devices, were no longer available.
So please don’t try to tell me that the sanctions aren’t working.
But now Putin has announced a huge and disruptive partial mobilization. Officially it’s for 300,000 men with prior military experience, but reports suggest this actual figure could be much higher and that some men included in the draft have no military experience.
Since the announcement, Russia’s mobilization has been chaotic. Now there are reports that, at least officially, some of the men drafted into the military service are being released because they did not meet the official criteria. There have been major protests (for Russia) against the draft, and since the conscription announcement at least a dozen conscription offices and enlistment centers have been attacked in a variety of ways, from arson and vandalism to a young man shooting the center’s commander to death.
And where do these men come from? Sure, many are hauled up from more remote areas, but what’s a small Russian company supposed to do when a couple of their five employees are suddenly fired to report for duty? There are costs involved in finding new employees, training them and losing business in the meantime.
And that ignores those who fled Russia or otherwise went into hiding now to hide from conscription. Someone who desperately avoids drafts by hiding in his sister’s basement will not show up at work.
So an already strained economy is now being served up a hit, thanks to Putin’s draft announcement and the ensuing whirlwind of implementation confusion. Even people who are ultimately dismissed from service will have missed their jobs, even if this disruption to business and everyday life in Russia is only temporary.
And then there’s the lifeblood of the Russian economy: fossil fuels. A big part of what supported Russia’s economy over the summer was high oil prices, because so many countries couldn’t wean themselves off Russian oil quickly, even as they opposed a Russian invasion and imposed heavy sanctions on Russia in other areas of the economy.
But now oil prices have fallen and are trading at around 2/3 of their high per barrel in June. That means, of course, that Russian oil profits have suffered as well. Less oil money is coming in to prop up the Russian economy, even as these other disruptions from sanctions continue to have an impact, plus the new disruptions caused by mobilization.
Oh, did I mention that this mobilization will probably be a bit expensive? Russia is increasing the size of its existing active military in one fell swoop. Yes, a lot of it involves sweeping up Korean War (or even WWII) era mothballs and handing them out to 60-year-old grandpas who served a few years in Afghanistan by the time they were 20. But you still have to transport these guys, feed them, and at least some of the equipment has to come from somewhere other than a half-abandoned military camp. Oh, and they have to be paid for. At least somehow paid, even if it’s late and not as much as promised.
And Russian households, fearing a breadwinner could be drafted into Ukraine to an unknown fate, are likely to tighten their belts and not be nearly as economically optimistic as they were a month ago. Who buys a house or luxury items when you don’t know if your husband will be alive and whole in six months (or even next month)?
Russia’s year-end budget surplus is now expected to be only about ¼ of what was forecast before the invasion. That still sounds good to have a surplus. Secure. Except that the Russian government has already committed to running a deficit for next year. The budget surplus will quickly dry up, especially with more sanctions underway thanks to Putin’s saber-rattling annexation speech (and illegal annexation of Ukrainian territory) and that messy conscription.
And it is estimated that Russia’s oil exports in 2023 will fall to about half of 2022 levels as countries replenish their reserves and also find alternative sources of energy and oil.
Is it likely that the Russian economy will simply collapse in the foreseeable future? Well maybe not. But Russia is running out of tricks to artificially prop up its economy, and these policies cannot sustain it in the long term. And with the war-induced brain drain as men are drafted into the front lines or fleeing the country, and the loss of consumer confidence, Russia’s already shaky economy is definitely not going to improve anytime soon. And every new sanction, every loss of a worker by fleeing or donning uniform, is another blow to an already weakened economy. Thus, falling oil prices combined with mobilization could be a double whammy for the Russian economy, eventually pushing it beyond the ability of Russia’s artificial measures to further support it.
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