[Economics] The suspicious resilience of the Russian economy despite world sanctions for attacking Ukraine: how does it manage to resist?

[Draeno]

 

When the first economic sanctions against Putin were announced, politicians and analysts expected a devastating effect on the Russian economy. After six months of conflict, the exact impact of these measures is still unknown. In fact, in the Western media there are headlines about the country's economic performance that defy expectations, which has raised suspicions about the veracity of the data.

Even during seemingly peaceful years, the transparency of the Russian economy could be compared to a blizzard in Siberia, but since the invasion, national agencies have stopped publishing various time series. For example, the Kremlin no longer publishes monthly data on international trade, the Central Bank of Russia hides data on the monetary base and the origin of liabilities, and even the Federal Air Transport Agency stopped providing information on the evolution of passengers.

On the other hand, since May of this year the Russian national statistical institute, Rosstat, has been under the direction of Sergei Galkin, who previously worked for Maxim Oreshkin, Putin's economic adviser during the Western financial siege.

Based on the available data, it seems reasonable to argue that the sanctions have hurt the Russian economy, but not killed it. One of the undoubted reasons is the escalation in hydrocarbon prices, which in 2021 represented half of exports and 40% of tax revenue. According to the Center for Research on Energy and Clean Air (CREA), Russia has gained almost 160 billion euros from the export of fossil fuels (of which 88 billion come from the EU) since February 24. In the first hundred days since the start of the attacks on Ukraine, it has captured 20% more income from this concept than in the same period of 2021. Russian military expenditures are estimated at 100 billion euros since the beginning of the conflict.

Additionally, the Russian ruble has strengthened considerably due to the intervention of the authorities. The Central Bank of Russia announced on February 28 the rise in interest rates from 9.5% to 20% to curb consumption and encourage savings. In addition, the authorities imposed strong capital controls to prevent investment flight. This combination of economic policies, together with the hydrocarbon boom, have stabilized the currency and have tripled the country's current account balance.

A stronger ruble makes imports cheaper and abundant energy sources avoid inflationary pressures in the Western European energy market. Consequently, inflation dropped from 18% to 15% between April and July.

As for unemployment, it is suspicious that it has been at a minimum since the invasion, since numerous international companies have carried out ERTE by temporarily stopping their activities in the country. However, there has been no explosion of jobless people. In fact, employability and lower inflation have allowed Russians to continue consuming.

However, the real damage from sanctions is expected in the longer term. According to The Economist, the most powerful sanction resides in the limitation of Western exports to Russia. These exports include goods such as software, semiconductors and other intermediate products, key to the Russian mechanical and military industry. In fact, Russian military equipment already suffers from shortages of semiconductors, connectors, transistors and components that were previously imported from the US, Germany, the Netherlands, Taiwan or Japan, and is forced to dust off old Soviet-era equipment. They cannot even replace them with Chinese components, since the Asian giant does not produce the most sophisticated microchips either and has to import them from Taiwan or South Korea.

Given the lack of publication of official data on the evolution of GDP, the International Monetary Fund predicts a drop in Russian GDP of 6% in 2022 and 3.5% in 2023. The World Bank expects a contraction of 8.9% in 2022 and 2.2% in 2023. Even the Central Bank of Russia warned that the second half of the year will be tougher and forecasts a recession of between 4% and 6% in 2022 and between 1% and 4% in 2023.

Ultimately, Russia will suffer a recession, but it will not be a calamity, compared to the turbulent evolution of its economy since the fall of the USSR. And nothing, compared to the expected fall of between 35% and 45% of the Ukrainian economy.

By: Eszter Wirth

 

https://www.semana.com/economia/macroeconomia/articulo/la-sospechosa-resiliencia-de-la-economia-rusa-pese-a-las-sanciones-del-mundo-por-atacar-a-ucrania-como-logra-resistir/202329/