Western sanctions against the warmonger are working, but not as severely as initially hoped. The big question remains: will the damage continue to increase or can Russia adapt?
In order to obtain spare parts for its fleet, here an Airbus A350-900, the Russian airline Aeroflot has apparently started gutting its own planes.
The Western sanctions against Russia still seem to be having an effect: According to the Russian statistics agency Rosstat, the Russian economy shrank by 4.0 percent in the second quarter compared to the previous year. The contraction reflects weaker consumer demand in Russia itself, but more importantly the economic sanctions the West has imposed on the country.
These sanctions were introduced after February 24 to punish Russia for its brutal war of aggression against Ukraine and to change the aggressor’s mind. This has not been successful so far: Russia is continuing its war against the neighboring country with the same severity. Neither the attacker nor Ukraine have recently been able to gain large territory. Vladimir Putin’s autocratic regime remains firmly in the saddle. An early end to the war is not foreseeable.
“Is that enough?” Western observers ask themselves, not for the first time. “Have we enough and imposed the right sanctions?”
Russian economy: the glass is half full
The interim conclusion from a western point of view is ambiguous. The new figures show that the measures against Russia are having an effect. In the first quarter of 2022, the Russian economy grew by 3.5 percent year-on-year; the figures also included the pre-war months of January and February.
The western sanctions against Russia were unprecedented: a large part of the Russian banks were cut off from international payment transactions and the export of important goods to Russia was prevented. The foreign trade statistics of important trading partners of Russia show how deep this cut was: After the beginning of the war, the exports of Germany, France or the USA to Russia fell by two thirds to three quarters within a short time.
Because Russian imports fell more than exports, this didn’t hurt Russia much at first; In terms of value, the West bought even more energy products from Russia than before the war, because oil and gas prices rose sharply after the invasion began. Accordingly, the Russian ruble, after a brief period of weakness at the beginning of the war, quickly regained strength and is quoted at a higher level than in January 2022.
Now, however, Russia mainly exports weapons and raw materials, and imports technology from the West for them. It was clear from the start that their absence from the Russian factories would not lead to the collapse of the Russian economy on the very first day. But the costs would increase every month.
And indeed: Most car factories in Russia are now at a standstill, and aircraft maintenance is also causing problems because spare parts are increasingly lacking. The Reuters news agency reported a few days agothat the Russian state airline Aeroflot has begun dismantling new passenger planes in order to get spare parts for the rest of its fleet.
Western companies are leaving Russia
In addition, more and more Western companies have announced that they are not only temporarily but permanently giving up their presence in Russia: McDonald’s, H&M, Ikea and the oil company Shell have ceased their business in Russia after investing in developing the market for decades.
Part of the local business went to Russian companies: the McDonald’s branches were bought by a Russian entrepreneur and reopened under a new name. The major French bank Société Générale, long one of the most important foreign banks in Russian small and corporate customer business, sold its network to the oligarch Vladimir Potanin in May for 3.2 billion euros. But Russia will lack foreign investment and Western know-how.
The situation in the energy sector, Russia’s most important export sector and a source of valuable foreign exchange reserves, is somewhat different: the Europeans, above all Germany, Italy and Hungary, have long resisted an import ban for Russian energy sources. A compromise was reached. The EU countries no longer import coal from Russia. Like the USA or Australia, they have now also decided on an oil embargo, albeit with exceptions for Hungary and Slovakia, which are heavily dependent on oil imports from Russia.
However, gas imports from Russia were never stopped. On the contrary, Putin is now using these exports as a bargaining chip to fuel insecurity and discord in Europe.
Is Russia near the bottom?
The economic downturn of 4 percent that has now been reported is likely to disappoint some in the west. Analysts had expected Russia’s economy to contract by around 7 percent. Certain industries stabilized at a low level in June, an analyst at Sinara Investment Bank told Reuters news agency.
The Russian central bank had expected a contraction of 4.3 percent for the second quarter and 7 percent for the third quarter. In the first half of 2023, the low point of the sharp recession should be reached and the country should experience positive growth rates again.
Shortly after the war began, the Russian central bank was even more pessimistic than it is today. The economy is coping better with the sanctions than feared. In July, it again significantly reduced its key interest rate from 9.5 to 8 percent.
Discussion about sanctions continues
Some observers, meanwhile, are advising patience: the sanctions would increasingly leave the Russian economy with a slowdown over time. Stocks of critical primary products are becoming increasingly empty. It is extremely difficult for Russia to find alternative suppliers, for example for high-tech products.
Whether time is playing for or against Russia is debatable. On the one hand, Western countries are currently working at full speed to become independent of Russian oil and gas supplies: liquid gas terminals are currently being built all over Europe, old coal-fired power plants are being repaired, renewable energies are being expanded and energy-saving measures are being implemented. The enormously high prices for gas and electricity, which are currently making life difficult for Europeans, act as a powerful catalyst.
The Russian energy weapon will therefore be deadened. As early as winter 2023/24, Russia should find it much more difficult to hit Europe economically and politically by curbing its gas exports.
The Russian economy is not easy to rebuild
On the other hand, Russia will also try to adapt its economy to the sanctions. Energy exports, which generate more than a third of the Russian state’s income, are also of great importance here: it uses them in a targeted manner to mitigate the shock caused by western sanctions. Many Russians, especially in the big cities of Moscow and St. Petersburg, are not yet feeling the effects of the war in their wallets as much as the architects of the sanctions had initially hoped.
The substitution efforts in the West are therefore relevant. For a short time, Russia can do without energy exports to Europe and live off its reserves, but in the long term it will need new customers if the West fails.
Finding other customers for your oil deliveries, for example in China or India, is entirely feasible from a logistical point of view. Diverting the natural gas originally intended for Europe to Asia is becoming somewhat more difficult: a lot of Russian gas is now transported to the West by pipeline at low cost. Building new pipelines to China is expensive and takes a long time; Switching to exporting liquefied gas will also not be easy for Russia.
It will also be difficult to replace the missing Western imports, since Asian countries such as Japan, South Korea and Taiwan are also participating in the sanctions. For example, it will be extremely difficult for Russia to import important high-tech goods such as the most modern microprocessors or to produce them itself, because these are largely manufactured by the Taiwanese manufacturer TSMC.
The Russian car industry collapsed particularly quickly because it is heavily dependent on Western suppliers and because of its “just-in-time” production it had stored rather few primary products. Other industries are a little better able to switch to domestic suppliers or have larger stocks of primary products. However, they are likely to be increasingly struggling with the same problems as the car manufacturers.