Sanctions against Russia: what is the state of the country’s economy really?

“Delicious cuisine”, “cheap gas”, “fertile soil”: polished pictures and laudatory comments in English with a Russian accent replace each other. Before the final bouquet: “An economy that can withstand thousands of sanctions. It’s time to go to Russia! Don’t delay… Winter is coming.” In the middle of the summer, this video, similar to a commercial, could not but cause a reaction from Internet users. A parody of Moscow speech? Not! This montage was posted by a pro-Russian group and broadcast by some Kremlin embassies on social media.

One of the many examples of propaganda that has circulated in recent months. Sanctions imposed by the West for six months? It doesn’t even hurt! A speech supported by some politicians, including Marine Le Pen: “Contrary to the rantings of our government, the Russian economy is not on its knees (…). We are much more victims of energy sanctions than Russia.” A refrain that irritates in Brussels. “We have imposed historic sanctions and they are working,” the European Commission replies.

It is true that Russia resisted the Western economic response better than expected after the invasion of Ukraine. In its latest economic forecasts, the IMF has softened its estimate of a recession that Moscow should experience this year (-6% vs. -8.5% expected in April). At the same time, a number of economic indicators have not deteriorated: the ruble is the currency that shows the best performance this year, the trade surplus is at historical levels, the unemployment rate remains low…

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Economy in the process of “paralysis”

“Positive” signals that should still be taken with a grain of salt. Firstly, because today there is a certain distrust in the veracity of Russian statistics – some of them simply have not been published since the beginning of the conflict. Moreover, some of these indicators do not necessarily reflect good fundamentals. “The ruble has appreciated because it simply can’t be sold anymore, and a positive trade balance is not a sign of a healthy economy: it is due to a collapse in imports,” analyzes Agatha Desmarais, director of global forecasts at the Economist. Intelligence division.

The slide into hell has been tempered by hydrocarbon exports that are “holding up better than expected,” says the IMF, and prices have skyrocketed, as well as a counterattack by Russian authorities to avoid a carnage. Currency controls, support for the banking sector, aid to enterprises, part-time work, public investment… “The actions of the Central Bank and the budgetary response of the state explain the relative resistance of the economy,” explains Julien Vercuy. professor of economics at Inalco.

If these shock absorbers have softened the shock, then the Russian economy is still in the process of cracking on all sides, and the horizon is darkening: the prospect of an exit from the recession remains far away, household buying opportunities have fallen with inflation, their consumption has collapsed, business inventories are evaporating, the “brain drain” has begun and a sharp increase in fiscal spending is forcing the government to extract more than expected from its sovereign wealth fund to support the economy. In a note published this summer, Yale economists say it’s “paralyzing.” First of all, Moscow suffers from sanctions much more than the European Union, contrary to what Russian propaganda insists. “The war and its consequences will lead to a loss for Russia this year of about 10 points of GDP, and for the EU – just one point,” says Julien Vercuy.

Russia probably did not expect such harsh sanctions. “The turning point will come at the end of the year, when Europe will introduce a severe oil embargo: the consequences will be very strong,” estimates Sergey Guriev, professor of the Russian Academy of Sciences. However, perhaps the most unpleasant surprise for Russia was that it found itself so isolated in the East. Days after the invasion of Ukraine, Moscow declared that its friendship with Beijing was “strong as a rock, and the prospects for future cooperation (…) are enormous.” And Putin has galvanized public opinion by saying that Russia just needs to “turn east” to find new “high-growth” markets to replace these fastidious Western clients.

“For airlines, this is the Berezina”

In reality, it hardly works. Russia’s pipeline network is mainly focused on Europe, and building new ones will take a lot of time and money. Russia is also a very secondary market for China: it only ranks 11th in terms of exports, well behind the US, South Korea and even Germany. Finally, the Celestial Empire is in dire need of certain Western technologies to implement its ambitious projects in advanced fields (AI, autonomous car, robots, etc.). Therefore, Beijing was in no hurry to help its good “friend”. He, of course, buys more oil from him, but his position of power allows him to negotiate large discounts (from -30 to -35%) that are disadvantageous for the Russians. Even more revealing, notes Julien Nochetti, a junior fellow at the French Institute of International Relations (Ifri), “China has not invested any more in Russia this semester with its new Silk Roads.”

If you look sector by sector, the picture is not very good. “For airlines, this is the Berezina,” says Arnaud Aimé, Aviation Sector Specialist at Sia Conseil. Most of the Russian fleet is made up of leased foreign aircraft that Vladimir Putin commandeered at the start of the war. But rental companies no longer send the parts needed to keep them in good condition. Results ? “30% of the Russian air fleet is blocked on the airfield, and it will only get worse,” the expert says.

In the automotive sector, things are not much better. “In July, the market fell by 70% compared to July 2021,” says economist Igor Yurgens. Not only are factories idling, but the new cars coming out of them are “degraded” cars that don’t have ABS braking systems, airbags, or traction control systems. And these problems are occurring in many industries: battery and textile production has fallen by more than 20%, and household appliances by 50%.

After the next few months, the impact of Russian sanctions will likely be felt in the long term. “The prospects were already not very good, and the sanctions will have a cumulative and gradual effect that will worsen them even more,” said Agatha Desmarais. They will also weaken critical industries for Russia, such as energy. Since it is not enough to have raw materials in abundance, you still need the right equipment to use them effectively. However, “Russia depends on certain Western technologies for the implementation of a number of projects, in particular, offshore gas exploration,” emphasizes Julien Nochetti.

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The fact that the United States and the European Union no longer provide Russia with technology that can be used by its military will also weaken it in the long run. “Missile defense systems, autonomous tanks, submarines… Many Russian weapons require Western components to operate,” says Ifri, a researcher. Of course, the Kremlin has accumulated reserves that will allow it to hold out for some time. But in a year or two, the situation can turn into a headache. Despite his bold stance, Vladimir Putin himself acknowledged in July that technological sanctions had created “tremendous difficulties” for the country. The Potemkin village is cracking.


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