Western sanctions affect Russia’s war economy
Putin has claimed for months that the “economic blitzkrieg” against Russia has failed, but Western sanctions imposed over the invasion of Ukraine are digging deeper into Russia’s economy, exacerbating equipment shortages for its military and hampering its ability to launch any new ground offensive or build new missiles. said economists and Russian businessmen.
Recent data show that the situation has worsened significantly since the summer when Russia’s economy appeared to have stabilized, buoyed by a steady flow of oil and gas revenues. Figures released by the Finance Ministry last week showed a key economic indicator — tax revenue from the non-oil and gas sector — fell 20 percent annually in October from a year earlier, while Russia’s state statistics agency Rosstat reported that retail sales fell by 10 percent year-on-year in September, and merchandise turnover fell 7 percent.
“All objective indicators show that there is a very strong 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 no way out of this now.”
A 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 to serve in Ukraine, combined with at least as many fleeing conscription abroad, dealt another blow, economists said. In addition, Putin’s own restrictions on gas supplies to Europe, followed by the inexplicable explosion of the Nord Stream pipeline, led to a sharp drop in gas production — down 20 percent in October from a year earlier. Meanwhile, oil sales in Europe are falling sharply ahead of a European Union embargo expected to be imposed on December 5.
The Kremlin trumpeted a lower-than-expected fall in GDP, forecast by the International Monetary Fund of just 3.5 percent this year, showing the Russian economy can withstand a series of draconian sanctions.
But economists and businessmen said the headline GDP figures did not reflect the real state of the Russian economy because the Russian government has effectively ended the ruble’s convertibility since the sanctions were imposed. “GDP has ceased to have any meaning because, firstly, we don’t know what the real ruble rate is, and secondly, if you produce a tank and send it to the front where it is immediately blown up, then it is still considered added value,” said Milov, who this month wrote a report explaining the situation for the Wilfried Martens Center for European Studies.
Deeper problems also lurk in the Russian banking sector, where most accounting is classified. Russia’s central bank reported this week that a record $14.7 billion in hard currency was withdrawn from the Russian banking system in October, amid growing concerns about mobilization and the state of the economy.
Even so, a November Central Bank report warned that Russia’s GDP would face a sharper contraction of 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 the Russian economy officially entered recession, Central Bank President Elvira Nabiullina told lawmakers that next year the situation could get even bleaker. “We really have to look at the situation very soberly and with open eyes. Things can get worse, we understand that,” she said.
Putin’s announcement in September of a partial mobilization of troops dealt a huge blow to business sentiment. “For many Russian companies, the reality of war has sunk in,” said Janis Kluge, a senior fellow at the German Institute for Security and International Affairs. “It has become clear that this will continue for a long time. Now the expectations are much worse than they were during the summer.”
Putin’s creation of a coordination council, headed by Prime Minister Mikhail Mishustin, was a sign that the Russian president is troubled by the growing impact of sanctions, economists and analysts said. Putin is “concerned that he needs to intervene to make sure supplies are available,” said Sergei Guriev, vice-chancellor of France’s Sciences Po. “He’s concerned that the sanctions have really hit the ability to produce goods.”
It also signals that the Russian government is preparing a wider mobilization of the Russian economy to supply the military amid chronic shortages of basic goods such as food and uniforms. A series of new laws will impose heavy fines on businessmen who refuse to carry out orders for the Russian military, as well as potential jail terms, paving the way for entrepreneurs to be pressured to deliver goods at rock-bottom prices. The creation of the council “is linked to a lot of pressure on business and the need to impose strict dictates to force business to do what it does not want to do,” said Nikolai Petrov, senior research fellow for Russia and Eurasia at Chatham House in London.
A Moscow businessman with ties to the defense sector said a quiet mobilization of the Russian economy had long been underway, with many entrepreneurs forced to produce supplies for the Russian military but afraid to speak out against cut-price orders.
“It became necessary from the very beginning when the war started,” said the businessman, speaking on condition of anonymity for fear of reprisals. “The main mass of business is silent. If you say you are producing supplies or weapons for the Russian state, then you could have problems abroad.”
Anecdotal evidence published in the Russian press points to enormous problems in supplying equipment to newly recruited Russian conscripts. A detailed October report by the Russian daily Kommersant described huge shortages of ammunition and uniforms for conscripts, with manufacturers citing difficulties in securing the necessary materials due to sanctions.
Other Russian businessmen said the Russian military debacle in Ukraine exposed massive inefficiency and corruption in Russia’s military-industrial complex. “There are huge questions about where all the trillions of rubles have been spent over the past decade,” said one 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 threaten Russia’s ability to launch new offensives in Ukraine, Petrov said. “The main problem facing the Kremlin is the question of when the army will be ready to start a new military operation in Ukraine, and the preparation of weapons and ammunition and so on will determine these plans.”
The outlook looks set to worsen when an EU embargo on Russian oil sales takes effect on December 5, economists said. Combined with a price cap expected to be imposed on all Russian oil sales outside the EU, the measure could cost the Russian budget at least $120 million in lost revenue per day, Milov said, and the Russian budget is already expected to grow . deficit by the end of this year.
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