Sanctions on Russia: short-term survival, long-term destitution

Albrecht Rothacher assesses the impact of sanctions on the Russian economy. He argues that, in the short-term, sanctions will have little impact – except on the peoples of Europe whose governments are imposing them. Yet, the long-term implications for the Russian economy could be more far-reaching, if not devastating

Ineffectual sanctions

When military laymen like Putin plan blitzkriegs, things rarely go as planned. Yet, nor do they when other world leaders improvise an economic war in the form of sanctions.

There are those in the West who regard ever-tightened sanctions as the way to end Putin’s regime. However, these people tend to underestimate how long this could take, and the suffering it will inflict on Russia’s European neighbours.

The supermarkets of Moscow and St Petersburg show little sign that the country has been at war for eight months. Shelves are well stocked with imports from Turkey, Serbia, Armenia and Kazakhstan. With 18% inflation, prices are, proportionately, not much worse than in the Eurozone, the US or the UK.

Well stocked supermarket shelves in Moscow and St Petersburg bear little evidence that the country has been at war since February

Russia got an initial shock when the West froze half its foreign currency assets which, given the multiplication of oil and gas prices, amounted to US$300 billion. Yet since then, the rouble has recovered well. It has achieved this recovery despite reduced export volume and, since the beginning of the war, amassed a current account surplus of US$265 billion.

With an export price of at least US$40 per barrel of Ural oil, the budget of the Russian petro-state has always balanced out. This despite dealing with an expensive invasion of Ukraine, which has increased the official armaments budget by US$11 billion.

Russia is exporting huge quantities of crude oil to India at $80 a barrel – a discount of 25%. India refines it into gasoline, kerosene and heating oil, and re-exports it to Europe. All parties involved, including Greek and Maltese oil shipowners, benefit.

The Russian economy adjusted to war

Only European consumers are (already) footing the bill for the pipeline oil boycott, which will not come into force until January 2023. After the Kremlin cut Gazprom's Nordstream I exports to 20%, Russia could no longer store the extracted gas. Reopening closed natural gas wells is an expensive and risky business, so it simply lets the excess gas burn.

Putin wants to show that he is not dependent on his most important energy customer, the EU. The EU buys 61% of Russian gas, and has paid Russia €57 billion since the beginning of the war. This is allegedly because more than 100 countries (from China and India to South Africa and Indonesia, and even the Saudis) are queuing up to buy his cheap oil and gas.

Economic sanctions never have an immediate effect when elites – who are indifferent to the economic misery of ordinary people – can circumvent them

Russia is subject to a broad array of financial sanctions. These include exclusion from the SWIFT international payment system, the blocking of Western credit cards and a ban on financial transactions with most Russian state and commercial banks. Yet these sanctions failed to effect the desired collapse of the Russian financial system and export business.

According to Russian propaganda, then, western sanctions are in vain. And, in any case, economic sanctions never have an immediate effect when elites – who are indifferent to the economic misery of ordinary people – can circumvent them.

Mass exodus

Long term, however, the implications for the Russian economy are grim. The biggest impact will be felt from the exodus of more than 1,000 foreign companies which, since 1990, have helped modernise the Russian economy.

Perhaps the most spectacular of these is McDonalds, with its 800 restaurants. But other major players include the large consumer brands Coca-Cola (now Cool-Cola), Starbucks, Ikea, H&M, Adidas, Allianz, BMW, Deutsche Telekom, Honda, Apple, Google, most foreign banks and Mobility, the railway business of Siemens.

Expropriation

In the former Renault plant near Moscow, Moskvitch automobiles will once again roll off the production line. The Kremlin is threatening foreign investments with expropriations. In the case of the British-Japanese liquid gas project on Sakhalin, this has already happened by decree and as 'revenge for the sanctions'. Gazprom has not yet mastered liquid gas technology. Prospects for the planned expansion, therefore, as well as an undersea pipeline in an earthquake zone to China, look bleak.

Since the start of the war, more than 1,000 foreign companies have left Russia. It will take a long time, even after Putin's departure, for foreign capital to return

Following the introduction of strict capital controls, foreign companies are banned from paying dividends or transferring sales proceeds to their owners. The billions invested in the last three decades must therefore simply be written off. And once driven out without legal protection, it will take a long time, even after Putin's departure, for foreign capital to return. Foreign capital accounted for 40% of the most productive part of Russia's GDP, and created five million jobs.

All this constitutes a miserable failure of Putin’s self-sufficiency policy. It leaves Russia as little more than a raw material supplier to the world economy. In 2022 Russia is, as Helmut Schmidt once described Brezhnev's Soviet Union, an 'Upper Volta with nuclear missiles'.

Economic and social destitution

Economic decline, increasing repression and growing fear of military draft orders has led to 300,000 young, mostly well-educated Russians leaving the country permanently since the beginning of the war. Many are IT specialists who can no longer work for foreign customers in Russia. They have benefited from the traditionally better scientific and mathematical education at Russian high schools and universities. These people are unwelcome in the EU due to a lack of flight connections and work permits. Most, therefore, have emigrated to Armenia, Georgia, Serbia, Israel, Central Asia and Dubai. The US is also trying to recruit them.

In addition to 35,000 dead and thousands more wounded and traumatised young men, this exodus of the best is exacerbating Russia's demographic problem. During the Covid pandemic, the country's ailing health system had already been hit by an excess mortality of 965,000.

Putin may be smiling at how he is managing the war economy in the short term. But Russians will feel the impact of this war long after he has been replaced.

This article presents the views of the author(s) and not necessarily those of the ECPR or the Editors of The Loop.

Author

photograph of Albrecht Rothacher
Albrecht Rothacher
Independent Researcher

Albrecht gained his MA in sociology from the University of Bridgeport in 1978, and a PhD in international relations from LSE in 1982.

A stint at Deutsche Bank in the EU’s diplomatic service followed from 1984–2020, with postings in Vienna, Singapore, Paris and Tokyo, lastly as Minister Councillor, mostly dealing with economic and trade issues.

He then worked in Brussels as a policy officer, mostly concerned with economic relations with countries 'East of Berlin and Vienna'; lastly with Russia mainly.

He has published 24 books mostly on Asian affairs, economic and military history, but most recently a biography on the French presidents of the 5th Republic.

Current research work includes a collective biography of the Austrian chancellors of the 2nd Republic, and French colonial wars 1945–1962 (Indochina and Algeria).

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