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Western sanctions are taking their toll on Russia’s wartime economy

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When Russian President Vladimir Putin last month installed a new council to coordinate supplies to the Russian army, he seemed to recognize the magnitude of the economic woes the country is facing, and his sense of urgency was palpable.

“We need to be quicker in resolving issues related to supplying the military special operation and counteracting the restrictions on the economy, which without exaggeration are truly unprecedented,” he said.

For months, Putin claimed the “economic blitzkrieg” against Russia had failed, but Western sanctions imposed over the invasion of Ukraine are digging ever deeper into Russia’s economy, exacerbating equipment shortages for its army and hampering its ability to launch new ground offensives and build new ones Rockets, said economists and Russian businessmen.

Recent figures show that the situation has deteriorated significantly since the summer, when Russia’s economy seemed to be stabilizing thanks to steady oil and gas revenues. Figures released by the Treasury Department last week show that a key economic indicator – tax revenues from the non-oil and gas sectors – fell 20 percent year-on-year in October, while Russia’s state statistics agency Rosstat reported that retail sales were up Down 10 percent year-on-year in September, and cargo turnover fell 7 percent.

“All objective indicators show a very sharp decline in economic activity,” said Vladimir Milov, a former Russian deputy energy minister who is now a leading opposition politician in exile. “The spiral is escalating and there is now no way out.”

The Western ban on technology imports is affecting most sectors of the economy, while the Kremlin’s forced mobilization of more than 300,000 Russian conscripts for service in Ukraine, combined with the departure of at least as many foreign soldiers fleeing conscription, is another blow transferred. economists said. In addition, Putin’s own restrictions on gas supplies to Europe, followed by the unexplained explosion of the Nord Stream gas pipeline, have caused gas production to fall sharply — down 20 percent in October from a year earlier. Meanwhile, oil sales to Europe are collapsing ahead of the European Union’s embargo, expected to be imposed on December 5.

The Kremlin has forecast a lower-than-expected contraction in GDP, projected by the International Monetary Fund at just 3.5 percent this year, showing the Russian economy can weather the barrage of draconian sanctions.

However, economists and businessmen said that the GDP headlines did not reflect the real state of the Russian economy as the Russian government has effectively ended the convertibility of the ruble since the sanctions were imposed. “GDP no longer matters because, firstly, we don’t know what the real ruble exchange rate is, and secondly, if you produce a tank and send it to the front, where it will be immediately blown up, then it is still considered added value. said Milov, who authored a report for the Wilfried Martens Center for European Studies, published this month, that explained the situation.

Deeper problems also lurked in the Russian banking sector, where most of the accounts were classified. The Central Bank of Russia reported this week that a record $14.7 billion in hard currency was withdrawn from Russia’s banking system in October amid growing concerns about mobilization and the state of the economy.

Still, a November central bank report warned that Russia’s GDP would shrink more sharply, at 7.1 percent, in the fourth quarter of 2022, after falling 4.1 percent and 4 percent year-on-year in the previous two quarters. Last week, as Russia’s economy officially entered recession, Central Bank Chairwoman Elvira Nabiullina told lawmakers the situation could get even darker next year. “We really have to look at the situation very soberly and with open eyes. Things can get worse, we understand that,” she said.

Angry families say Russian conscripts have been thrown to the front unprepared

Putin’s announcement in September of a partial mobilization of troops dealt a huge blow to business sentiment. “The reality of war has set in for many Russian companies,” said Janis Kluge, senior associate at the German Institute for Security and International Politics. “It became clear that this will continue for a long time. Now the expectations are much worse than in the summer.”

Putin’s establishment of the Coordinating Council, headed by Prime Minister Mikhail Mishustin, is a sign that the Russian president is reeling from the mounting impact of sanctions, economists and analysts said. Putin “is concerned that he will have to intervene to ensure supplies are available,” said Sergei Guriev, chancellor of France’s Sciences Po. “He’s concerned that sanctions have really hit the ability to produce goods.”

It also signals that the Russian government is preparing a broader mobilization of Russia’s economy to supply the army amid chronic shortages of basic necessities like food and uniforms. A series of new laws will face hefty fines and potential prison terms for entrepreneurs who refuse to carry out orders for the Russian military, paving the way for entrepreneurs to be pressured into selling goods at bargain prices. The establishment of the council “comes with a lot of pressure on companies and the need to enforce tough dictates to get companies to do what they don’t want to do,” said Nikolai Petrov, senior research fellow for Russia and Eurasia at Chatham House, London.

A Moscow businessman with links to the defense sector said a quiet mobilization of Russia’s economy has been underway for a long time, with many entrepreneurs being forced to produce supplies for the Russian army but fearing to oppose cheap-priced orders.

“This was necessary from the very beginning, when the war started,” the businessman said, speaking on condition of anonymity for fear of reprisals. “The bulk of business is silent. If you say you make supplies or arms for the Russian state, you could have problems abroad.”

As Putin escalates the war, some in Russia’s business elite despair

Anecdotal evidence reported in the Russian press has pointed to enormous problems in supplying Russia’s newly drafted conscripts with equipment. A detailed October report in Russia’s daily newspaper Kommersant detailed a huge shortage of conscript ammunition and uniforms, with manufacturers citing difficulties in obtaining the necessary materials due to sanctions.

Other Russian businessmen said Russia’s military debacle in Ukraine exposed vast inefficiency and corruption in Russia’s military-industrial complex. “There are big questions about where all the trillions of rubles have been spent over the last decade,” said a former senior Russian banker with ties to the Russian state.”

If the new economic council fails to better coordinate the production of supplies and weapons, it could affect Russia’s ability to launch new offensives in Ukraine, Petrov said. “The main problem before the Kremlin is when the army will be ready to start a new military action in Ukraine, and the preparation of weapons and ammunition, etc. will determine these plans.”

The outlook looks to deteriorate when the EU embargo on Russian oil sales comes into effect on December 5, economists said. Combined with a price cap that is expected to apply to all sales of Russian oil outside the EU, the measure could cost the Russian budget at least $120 million a day in lost revenue, Milov said, and it is already expected that the Russian budget deficit will increase by the end of this year.

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