Google “Russian sanctions failing”, and you’ll get a screenful of skepticism about the effectiveness of the West’s economic warfare against the Putin regime. A new article in Foreign Policy asserts that the naysaying is based on myth, indeed, on a congeries of myths. According to two Yale academics (who don’t even include their preferred pronouns in their bylines, so maybe they aren’t crazy), “Actually, the Russian Economy Is Imploding”. (The article summarizes an academic paper that can be downloaded from SSRN. For those who like such things, a deck of PowerPoint slides is also available).
Their conclusions are based on data gathered from various unofficial sources, a necessity owing to the cessation of large swathes of formerly available government statistics.
The Russian government has progressively withheld an increasing number of key statistics that, prior to the war, were updated on a monthly basis, including all foreign trade data. Among these are statistics relating to exports and imports, particularly with Europe; oil and gas monthly output data; commodity export quantities; capital inflows and outflows; financial statements of major companies, which used to be released on a mandatory basis by companies themselves; central bank monetary base data; foreign direct investment data; lending and loan origination data; and other data related to the availability of credit. Even Rosaviatsiya, the federal air transport agency, abruptly ceased publishing data on airline and airport passenger volumes. . . .
Mindful of the dangers of accepting Kremlin statistics at face value, our team of experts, using private Russian-language and direct data sources including high-frequency consumer data, cross-channel checks, releases from Russia’s international trade partners, and data mining of complex shipping data, have released one of the first comprehensive economic analyses measuring Russian current economic activity five months into the invasion, with contributions from Franek Sokolowski, Michal Wyrebkowski, Mateusz Kasprowicz, Michal Boron, Yash Bhansali, and Ryan Vakil. From our analysis, it becomes clear: Business retreats and sanctions are crushing the Russian economy in the short term and the long term.
The article makes these key points:
- Russia lacks the infrastructure needed to replace European natural gas sales with sales to Asia. “Less than 10 percent of Russia’s gas capacity is liquefied natural gas, so Russian gas exports remain reliant on a system of fixed pipelines carrying piped gas. The vast majority of Russia’s pipelines flow toward Europe; those pipelines, which originate in western Russia, are not connectable to a separate nascent network of pipelines that link Eastern Siberia to Asia, which contains only 10 percent of the capacity of the European pipeline network.”
- Russian oil exports to Asia likewise cannot replace the loss of European sales. “Recognizing that Russia has nowhere else to turn, and mindful that they have more purchasing options than Russia has buyers, China and India are driving an unprecedented approximately $35 discount on Russian Urals oil purchases.” Further impediments are distance – “it takes Russian oil tankers an average of 35 days to reach East Asia, versus two to seven days to reach Europe” – and declining projections of oil production by Russia’s own energy ministry.
- Russia isn’t substituting Chinese imports for goods no longer available from the West; “in fact, according to the most recent monthly releases from the Chinese General Administration of Customs, Chinese exports to Russia plummeted by more than 50 percent from the start of the year to April, falling from over $8.1 billion monthly to $3.8 billion” (though figures for imports from China since the start of the war would be more pertinent).
- Despite Kremlin claims to the contrary, the Russian Purchasing Managers Index and “high-frequency data such as e-commerce sales within Yandex and same-store traffic at retail sites across Moscow reinforce steep declines in consumer spending and sales”.
- Russia’s finance minister anticipates “a budget deficit this year equivalent to 2 percent of GDP”, and the money supply has nearly doubled since the beginning of the war.
- On paper, Russia has $600 billion or so of foreign exchange reserves, but half of that is frozen in Western institutions, and reserves have decreased by about $75 billion since the war began, “an alarming rate”.
- The strong ruble is a favorite Putin talking point (and the one most often presented, in my experience, as prime evidence that sanctions have accomplished nothing), but “the appreciation of the ruble is an artificial reflection of unprecedented, draconian capital control [sic] – which rank among the most restrictive of any in the world. The restrictions make it effectively impossible for any Russian to legally purchase dollars or even access a majority of their dollar deposits, while artificially inflating demand through forced purchases by major exporters.”
At least at first reading, the case is pretty strong, although the lack of data leaves room for doubt. The authors seem to have a salmon of doubt themselves, for they end with a plea for more and tougher sanctions. If the Russian economy is truly imploding, is that course necessary, or even wise? Someday the war in Ukraine will end, perhaps in the less than distant future, as each side’s resources are badly strained. It’s not in our long-term interest for Russia to become a wounded pariah. The victors in the Great War made impoverished outcasts of the defeated nations. How well did that work out?
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