With Russian economy far from collapse, U.S. opts for tougher punishment
Putin has put Russian economy on war footing and survived thanks to China, as U.S. launches a new round of sanctions
Russian President Vladimir Putin has survived U.S. and European efforts to cripple his economy so far by ramping up defense spending and by finding customers and suppliers in Asia to replace the trading partners he lost in the West.
As the war settled into a grinding stalemate, China, which abstained from U.S.-led sanctions on Russia, emerged as Putin’s savior. Chinese officials stepped up purchases of discounted Russian oil while shipping to Russia large quantities of industrial parts, luxury goods and technology products. India also has become an enthusiastic oil buyer.
“This is the first geopolitical crisis without all of the major Asian economies on board. The West does not have decisive economic power anymore. India and China are enough to keep Russia afloat,” said historian Nicholas Mulder of Cornell University, a sanctions expert.
The Biden administration sought Friday to change that, unveiling a round of sanctions in response to the death in prison of Alexei Navalny, the Russian opposition leader. U.S. officials say the Russian economy already has been weakened by their initial actions and will feel further pain from the new measures, which target more than 500 individuals and companies.
Among them are critical nodes in the Russian military’s supply chain, including two of the country’s 50 largest companies — Suek, an energy producer, and Mechel, a mining operation — as well as more than two dozen entities outside Russia that helped the Kremlin dodge sanctions, and Gazprom Space Systems, which operates a satellite network used by the Russian armed forces.
U.S. authorities also tightened the dragnet on the Russian oil industry by blacklisting Sovcomflot, the state-owned shipping company.
The U.S.-led financial sanctions and export bans previously imposed in response to Russia’s invasion of Ukraine have made it harder and more expensive for Putin to wage war. In the long run, they will leave Russia poorer, more backward technologically and more dependent upon the state to drive the economy, according to U.S. officials and independent economists.
But the financial and trade restrictions have not precipitated an economic collapse, let alone persuaded the Kremlin to abandon its plans for conquest.
“People overestimated the power of sanctions. Russia has not suffered nearly as much of a hit as the optimists expected,” said Henry Farrell, author of “Underground Empire: How America Weaponized the World.”
As the West applied pressure over the past two years, Putin turned Russia into a garrison state, reorienting the economy to serve the military, even as Russian civilians struggled with high prices.
“To pay for this brutal war, the Kremlin is mortgaging the future of the Russian people,” U.S. Deputy Treasury Secretary Wally Adeyemo said Friday in a speech at the Council on Foreign Relations in New York.
Still, the current situation is not what the White House or its European allies expected.
Within days of the initial Russian attacks on Kyiv, the U.S. and its European allies cut links between Russian banks and the global financial system, blocked the country’s access to advanced technologies and blacklisted the oligarchs who backed Putin’s rule. Western authorities froze more than $300 billion in Russian central bank reserves that were held in accounts outside the country.
The impact was swift and severe. The ruble plunged against the dollar and Russia defaulted on its foreign debt for the first time since 1918. Hundreds of global corporations, such as BlackRock, McDonald’s and Stanley Black & Decker, announced plans to abandon Russia as a pariah state.
Panicked Russians lined up at ATMs to withdraw cash while Putin assailed the allied actions as “illegitimate” and briefly moved his nuclear forces to a higher state of alert.
On the first day of the war, Biden said he was confident that the measures would be as devastating as “Russian bullets, missiles and tanks.”
They weren’t.
Russia’s gross domestic product shrank in 2022 by 1.2 percent, far short of the 15 percent decline predicted by the Institute of International Finance, an industry group in Washington. And last year, Russia rebounded, growing faster than the United States.
“The shock was severe, but it faded away over time,” said Mulder, author of “The Economic Weapon: The Rise of Sanctions as a Tool of Modern War.”
Russia this year is expected to grow at an annual rate of 2.6 percent, up significantly from earlier forecasts, compared with 2.1 percent for the United States, the International Monetary Fund said last month.
The war has reshaped several hundred billion dollars’ worth of Russia’s trade with the outside world, particularly for energy and technology products. Before the conflict, Russia provided half of the European Union’s coal, 40 percent of its natural gas and about one-quarter of its crude oil. Most of that trade has evaporated.
The Biden administration at the end of 2022 crafted a price cap designed to limit Russian oil revenue without incurring the increase in U.S. gasoline prices that would result from a full embargo. Under the plan, oil shipped using Western oil tankers or insured by Western firms could not be sold for more than $60 per barrel, a below-market rate.
Though enforcement has been spotty, the mechanism may have cost Russia around $50 billion over the past two years in lost oil revenue, according to a new report by Chris Miller, Nick Kumleben and Caroline Nowak of the American Enterprise Institute.
Likewise, Russia’s traditional sources of imported goods, especially high-tech products with military applications, have dried up. But some sanctioned products from Europe are still reaching Russian buyers, taking a more circuitous route through Central Asia.
E.U. exports to Russia plummeted after sanctions were imposed in the spring of 2022. But shipments to smaller nearby nations such as Kazakhstan and Kyrgyzstan rose at the same time, according to trade figures analyzed by Robin Brooks, former chief economist for the Institute of International Finance.
“Almost every single E.U. country’s exports to Central Asia have gone through the roof,” he said.
Over the first 10 months of 2023, the most recent data available, the E.U. exported $32 billion in goods to Russia, down from more than $82 billion in the same period in 2021, before the war. E.U. shipments to Central Asian nations over the same period rose sharply, to almost $31 billion from about $18 billion.
If those European goods continue through Central Asia to Russia, as many economists believe they do, they would make up for about one-quarter of what sanctions cost the Russian economy.
But Russia’s most important help comes from China. Two-way trade between the countries last year topped $240 billion, a record high, up from $147 billion before the war, according to Chinese customs data.
Chinese companies are filling the gaps left in Russian supply lines with shipments of lathes, self-propelled mechanical shovels and machines that manufacture semiconductors, according to economist Heli Simola of the Bank of Finland Institute for Emerging Economies.
But the Russians are not getting any bargains. Compared with the first half of 2021, Russian customers last year paid 78 percent more for Chinese products such as machine tools while other customers paid 12 percent higher prices, the Bank of Finland said.
Turkey, Malaysia and the United Arab Emirates also have supplied Russia with needed goods.
In many cases, Russia is paying more for goods of lower quality. Moscow also has been unable to find new suppliers for everything its military needs. Navigational instruments, data transmission base stations and voltage meters remain scarce, the Bank of Finland said.
The key to Russia’s surprising economic endurance has been large sums of defense spending, what some economists call “military Keynesianism,” in a nod to British economist John Maynard Keynes’s support for using public spending to lift growth.
As the war in Ukraine rages, Russia’s defense spending this year is expected to consume 28 percent of the government budget, according to the Bank of Finland. That’s more than twice the share of government spending that the United States devotes to the military.
Those funds are boosting production of bullets, bombs and shells for the Russian military and also providing paychecks for millions of Russians, who buy clothes, eat at restaurants, purchase automobiles and otherwise fuel the economy.
This month, Putin said more than 520,000 weapons plant jobs were created in the past 18 months. Unemployment in Russia is at a record low.
Russia’s turn toward a war economy has not been without costs. The jobless rate is so low because the war has siphoned off hundreds of thousands of young men for military service, leaving Russian industry short of workers.
Inflation jumped last year above 7 percent, causing the central bank to hike its main interest rate to 16 percent to cool off demand. Nearly 1 million young Russians have fled the country, a brain drain that will weigh on the country’s future growth.
For now, Putin can afford to splurge on the armed forces, thanks in part to Russia’s success at circumventing restrictions on its oil sales. The government is running a modest budget deficit that it has financed by selling government bonds to domestic investors and by drawing on Russia’s sovereign wealth fund.
Revenue from oil and gas sales last year topped $99 billion, down roughly one-quarter from the year before, when oil prices and production were both higher, according to S&P Global.
India is now buying 1.9 million barrels per day from Russia, up from almost nothing in 2021, according to the International Energy Agency. China is buying more, 2.3 million barrels, but was a significant customer before the war.
“He has enough money to support the economy and to support the military,” said economist Elina Ribakova, vice president for foreign policy at the Kyiv School of Economics. “This can continue for a long time.”
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