When Tucker Carlson posted a short video clip earlier this month in which he visited a Russian supermarket and raved about how great the bread was and how low the prices were, as well as another clip from his trip to a mock McDonald's restaurant in Moscow he a lot of well-deserved ridicule. Carlson seemed both willfully ignorant, pretending not to know that prices in Russia are lower than in the US because Russia is much poorer than the US, and strangely gullible (is it really worth it, about a fast food -Restaurant with garden variety to rave about?) ).
Still, amid the strangely pro-Russian and anti-American rhetoric, Carlson's travelogue pointed out something worth noting: the sanctions that the United States, Europe and other industrialized democracies have imposed on Russia in the two years since its invasion of Russia Ukraine did not destroy the Russian economy. Although the initial announcement of sanctions led to a crash in the ruble and bank runs, the economy soon stabilized. After falling by a less-than-expected 2.1 percent in 2022, Russia's GDP actually grew last year and appears on track to do so again in 2024.
The sanctions have reshaped the Russian economy, making it worse for consumers and more dependent on government spending, while significantly hurting its long-term prospects. But they have neither crippled the economy nor put any real pressure on Russia to end its war in Ukraine. Although the Biden administration just announced an entirely new round of sanctions aimed at punishing Russian President Vladimir Putin for the prison death of opposition politician Alexei Navalny, they are unlikely to rein in Putin more effectively than previous ones.
If the sanctions against Russia had limited impact, it is partly because they were limited in scope. They included serious measures: these included freezing $300 billion in assets of the Russian Central Bank, a ban on the transportation of Russian crude oil through Western services (including shipping and insurance) unless the oil is sold for $60 -dollars sold per barrel or less, and restrictions on technology exports to Russia and targeted sanctions on thousands of Russian individuals, companies and ships.
Even when the price of Russian oil was capped, Europe did not stop buying it or natural gas (although imports of Russian gas fell sharply) – because it could not afford it. Some Russian banks were denied access to the SWIFT banking network, but unlike the conditions imposed on Iran in 2012, the ban was not complete: some of Russia's largest banks were exempt. And the West is still doing business with Russia: slightly less than half of European exports to Russia, for example, are under sanctions.
Furthermore, the effectiveness of the sanctions regime was necessarily limited by its nature. To be truly effective, sanctions must be global (or as close to it as possible). However, in the case of Russia, the second largest player in the global economy, China, not only does not participate in the sanctions, but even helps to mitigate their impact. China was already Russia's largest trading partner before the war in Ukraine, and over the past two years trade between the two countries has surged as China imports more and more Russian oil and gas.
Countries such as Turkey, India and the United Arab Emirates have also helped Russia evade sanctions by acting as trade intermediaries, allowing the transshipment of Russian oil and the import of key technology products such as microchips. These channels have allowed Russia to avoid the full impact of the $60 per barrel oil price cap, which was a key part of the sanctions package, and to maintain the inflow of imports.
Furthermore, the Russian economy was reasonably well prepared to absorb the costs of sanctions, perhaps in part because it had faced them before. (The U.S. and Europe imposed sanctions on Russia in 2014 after its invasion and annexation of Crimea.) Russia had a low national debt, meaning it had little reliance on foreign lenders to pay its bills. It had a large current account surplus (suggesting that it exported many more goods than it imported) and it had built up a large national wealth fund. Russia also responded to the sanctions by imposing strict capital controls that limited Russians' ability to transfer money out of the country. This helped support the value of the ruble and stabilize the financial system.
Oddly enough, Russia has also been helped by the fact that its economy lacks a key manufacturing sector and does not produce much of what people in the West want to buy. Since Russian exports of manufactured goods are not that important to the economy, it is not a big deal to deny these goods access to Western markets. For a country whose economy relies heavily on the export of such goods – like Vietnam, which relies heavily on sales of goods such as phones, textiles and shoes abroad – Western sanctions could be far more damaging.
Finally, the Russian economy has received a major boost from a sharp increase in government spending. A few months after the start of the war in Ukraine, Russia implemented an increase in state pensions and subsidies and increased payments to soldiers and their families. Last year, public sector employees also received significant salary increases. And most importantly, Russia has increased military spending. The result is that government spending now accounts for more than a third of Russia's GDP. Military Keynesianism helped keep the economy afloat and wages rise sharply.
Putin has thus succeeded in mitigating the costs of sanctions and minimizing public dissatisfaction with the economy. But that comes at a price. This makes the modern Russian economy look strangely like the old Soviet economy – heavily dependent on exports of raw materials and military spending, technologically limited and generally unfriendly to consumers. One lesson from the Gorbachev era of the 1980s was that an economy that looks like this ends up being a lumbering giant of inefficiency and stagnation.
This is where the sanctions hit hardest, limiting Russian access to advanced technologies in transportation and communications, not to mention digital innovations like artificial intelligence. Sanctions have also made it harder for Russia to expand its energy infrastructure. Western companies and investors have left the country. And capital controls and the economy's reliance on government spending result in the government playing a larger and more cumbersome role in the economy.
If Putin were a different kind of leader, this might matter to him. But its ambitions are territorial and imperial, not economic. The fact that the sanctions are making the Russian economy less consumer-friendly is unlikely to persuade him to reconsider his approach to Ukraine. If anything, the impact of sanctions has strengthened, not weakened, its own grip on the economy. In his statement yesterday on the new round of sanctions against Russia, President Joe Biden said they would “ensure that Putin pays an even higher price for his aggression abroad and his repression at home.” If so, it is a price that Putin appears happy to pay.
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