Sanctions – how they affected the economy of Russia. The expert explains

The opinion that Western retaliation is not effective is based on macroeconomic indicators that are not adequate to fully assess the condition of the Russian economy, and partly are simply untrue. Some critics of the sanctions also emphasize that they did not achieve the most desired effect, i.e. they did not force the Kremlin to stop war in Ukraine – writes Milov, who is a former Russian deputy energy minister.

Such critical assessments of the effectiveness of the sanctions are misguided, as it should be remembered that the Kremlin has prepared Russia war and Western sanctions with much prejudice. Russia has been accumulating financial reserves for a long time, and since 2014 it has significantly increased its trade with Asia, which allowed it to better cope with the restriction of trade with the West, the author argues.

It is also particularly significant that Putin has invested significant resources in a disinformation campaign designed to create a false belief in the West that the sanctions are not effective. But retaliation is effective, and promoting the opinion that it does not bring results is throwing Putin a “lifebuoy” – emphasizes Milow.

Critics of the sanctions point to, for example, the strengthening of the ruble, a relatively small decline in economic growth in Russia, and low unemployment. But these figures do not reflect the situation in the real economy of Russia, the expert writes.

The first example of falsification of its true condition by shared statistical data or indicators may be unemployment, which officially stands at 3.7 percent and seems to be a record low. In fact, however, not 2.7 million people are unemployed, according to government sources, but close to five million. These people found themselves in “hidden unemployment”, because what else to call such practices as sending people on unpaid leave, on which 70 percent of the unemployed found themselves – the author explains.

In fact, 10 percent of working-age Russians are out of work, which is slightly less than in the 1990s, when the economy collapsed and unemployment reached 10-13 percent.

Another misleading indicator is the ruble quote. It is true that the Russian currency strengthened, but that was because the government introduced draconian capital controls and imports collapsed. In addition, it has made it very difficult for Russians and domestic companies to withdraw cash from the bank and convert it into foreign currencies, enumerates Milow. Such a policy leads to a crisis in many sectors of the economy that depend on imports. For example, steel production decreased by 7 percent in 2022.

The Russian Finance Ministry has published a forecast that the country’s GDP will shrink by only 2.7 percent, which would mean that the economy is far from collapsing. It should be noted, however, that the forecast includes the growing production for the needs of the armed forces in the economic calculation. “A newly manufactured tank, sent immediately to the front and hit by a Ukrainian Javelin missile, is still counted as a contribution to Russian GDP,” the author writes.

Other indicators show a much more significant decline in economic growth than official GDP data, emphasizes Milow. Particularly important in this context is the information on Russia’s income from sources other than the sale of oil and gas, which in October 2022 were 20 percent lower than in the same period a year earlier.

The sanctions hit the manufacturing sectors of the Russian economy that depend on Western technologies or components the hardest. Production in the automotive sector, which directly or indirectly employs 3.5 million people, fell by two-thirds in 2022.

Russian level data inflation are also misleading and even the central bank of Russia admits that the so-called observed inflation – how people perceive price increases – is 16 percent, well above the official figure of nearly 12 percent. This difference indicates the perception of Russians that their standard of living is deteriorating rapidly, the author explains.

According to poll conducted in October 2022 by the private center Romir, 68 percent of Russians drew attention to the deteriorating supply of goods to stores. 35 percent of those surveyed had to cut back on food spending.

Thus, the sanctions have a real impact on the Russian economy. Putin is trying to prevent further problems by limiting imports and looking for substitutes for goods bought abroad. In addition, it redirects exports to Asian countries. Restrictions are also circumvented through third countries, and above all Turkey. However, none of these maneuvers will solve the long-term problems arising from the sanctions, emphasizes Milow.

It is also not without significance that Russia’s trading partners, such as China and India, are primarily interested in buying oil, gas, coal and other raw materials from it at a large discount. However, the governments of these countries are not focused on investing in the development of Russian manufacturing sectors.

Moscow has been quite successful in circumventing some import restrictions thanks to Ankara’s help. In the third quarter of 2022, Russian imports from Turkey reached the value of over two billion dollars and were almost twice as large as a year earlier, the author points out, but emphasizes that this can be remedied by increasing diplomatic pressure on the Turkish government.

The Kremlin cannot count on foreign investment to support its economy, as the central bank of Russia estimates that in 2022, capital worth $251 billion fled the country.

Politicians “must give sanctions time to take effect. Expecting immediate results is unrealistic and even counter-productive (…) And above all, they must be patient,” Milow concludes.