Forecasts said that Russia’s economy would collapse following the imposition of unprecedented sanctions against Moscow due to the Ukraine War. But this week, Russian statistics office Rosstat said that Russian GDP (Gross Domestic Product) in the first six months of the year fell by just 0.4%.
Capital investment rose, the ruble recovered and inflation – which soared when the war began – began to fall, according to official figures. This week, a top Russian government official predicted that GDP for the whole of 2022 would be just 3% lower and not shrink by a third, as some experts said.
So, what is happening? As expected, oil and gas revenues, mainly from the European Union, continue to bolster the country’s finances, despite nations such as Germany and Italy having reduced their dependence on Russian energy. State-owned energy giant Gazprom has just announced a record first-half profit of 2.5 trillion rubles (US$41.36 billion), triggering a 30% increase in its share price.
“Even if the Russian economy performs worse than it did six months ago, this is not enough to stop [o presidente russo Vladimir] Putin to finance the war,” Maxim Mironov, a finance professor at the IE Business School in Madrid, tells DW.
There is no doubt that Western sanctions have begun to take effect. Last month, a study by Yale University found that imports into Russia have collapsed and that manufacturers are struggling to source components, including semiconductors and other high-tech parts.
Russia’s position as a commodity exporter has been irreversibly eroded, the report said, as Moscow has to sell more oil and gas to Asia at a deep discount.
Economic collapse in ‘two years’
One of the report’s co-authors, management professor Jeffrey Sonnenfeld, recently told Britain’s Times Radio that Russia’s economy could only “survive tremendous difficulties for two years or so” as long as the West remains firm on sanctions. Other trade experts believe that a full-blown economic meltdown will take much longer.
“In the long term, Russia will be nothing more than a gas station for China,” Rolf J. Langhammer, a German trade expert and former vice president of the Kiel-based Institute for the World Economy (IfW), tells DW. “But I don’t buy this argument that the economy will collapse in two years,” he points out. He explains that Russia has spent several years building its war economies and that international finance experts believe the country is well prepared for any economic decoupling from the West.
“The International Monetary Fund (IMF) wrote last year that Russia had accumulated money since the 2014 conflict in eastern Ukraine and the annexation of Crimea and was prepared for a war of attrition,” he said.
Langhammer notes that Germany paid 20 billion euros to Russia for energy imports in the first half of 2022 — a 50% increase from the same period last year. “Even if volumes fall, with prices rising, we will still pay around €3 billion a month,” he points out. Or 15 billion euros every six months.
But despite the better-than-expected economic picture, the Kremlin stopped publishing a series of economic data shortly after Russian tanks entered Ukraine.
Putin burning reserves
The Yale researchers watched as Russia was cashing in on the $600 billion in foreign currency reserves that served as a buffer for Putin in the early months of the war. They said $80 billion had already been used, while another half of the reserves had been frozen by the West.
Alexander Mihailov, an associate professor of economics at the University of Reading in the UK, believes Putin will only run out of money for war when the West can fully cut its dependence on Russian energy, which he says will likely take another two or three years. years old.
If Putin’s options become limited, Russia could effectively start printing money to cover the skyrocketing military costs, which, for Mihailov, would be “madness” as it “would lead to massive ruble depreciation, hyperinflation and social unrest.” .
Mironov recalls that Russians experienced severe hardship under communism and in the 1990s, after the collapse of the Soviet Union, and warns against overestimating the willingness of the Russian population to rise up against Putin.
“In the West, you have 10% inflation, and people are really scared and demand that politicians do something. Russian society doesn’t work like that. So Putin has more leeway to get the standard of living down between 20% and 30% without the risk of great resistance”, underlines the economist.
Secondary sanctions would further isolate Putin
Many countries in Asia, Latin America and Africa have not imposed sanctions on Russia, with some benefiting from the West’s pullback. Reports suggest China is quietly selling its surplus Russian gas back to Europe.
Pressure is now mounting for the West to impose so-called secondary sanctions, whereby foreigners can be cut off from the international financial system if they do business with Russia. Such measures have been used to great effect by Washington against third parties to insulate Iran’s oil exports and nuclear ambitions.
“China is the main country for those ignoring Western sanctions, along with Turkey and India,” says Langhammer. “A Chinese Withdrawal of Support for Putin [como resultado de sanções secundárias] would be a big wind in favor of the effectiveness of sanctions.”
Washington has already said that secondary sanctions are an option, but experts urge patience as, if introduced now, they could further increase demand for oil and gas, and prices would rise further.