Alan Cullison and Georgi Kantchev
Economists expect sanctions to cause Russia to stagnate in the years ahead. PHOTO: SOFYA SANDURSKAYA/TASS/ZUMA PRESS
Weeks after Russia invaded Ukraine last year, a White House official warned Moscow that a raft of U.S.-led sanctions could cut Russia’s economy in half.
Last week the International Monetary Fund gave some upbeat news for the Kremlin, saying it now expects Russia’s economy to grow 1.5% this year, supported by extensive state spending. That follows a shrinkage of 2.1% the year before, when Russia became the most sanctioned major economy in the world.
Economists expect the sanctions to cause Russia to stagnate in the years ahead and the fault lines are already emerging. But the West’s failure to quickly bring the Russian economy to its knees for its invasion of Ukraine mirrors a larger stalemate on the battlefield there, despite a raft of Western lethal aid to Kyiv and economic support for the Ukrainian cause.
Russia’s real GDP, change from a year earlier, with projections for 2023 and 2024
When they were unveiled, the sanctions were described by Biden administration officials as the most consequential in history, and the initial shock and awe roiled Moscow’s financial markets. But today the economy has muddled through enough for the Kremlin to support an attritional war that the U.S. had hoped to avoid.
Sanctions initially starved Russia of microchips and high-tech components last year, crimping its ability to produce precision-guided missiles. But since then Moscow has found loopholes through neighboring countries, and is bombing Ukraine daily with precision weaponry.
Russia’s crude oil continues to flow, even if the lower prices it fetches have hit state coffers. Analysts say that the main effect of sanctions—technological backwardness and an inability to modernize—will hamper its economic growth in the longer term.
“Sanctions have not destroyed the Russian economy just yet,” said Sergei Guriev, a professor at Sciences Po in Paris and a former Russian government adviser. “They have started to constrain but not stop Putin’s ability to finance this war.”
Sanctions became an often-used foreign policy tool of the U.S. after it became an economic powerhouse in the previous century. They have had a mixed record, often falling short of causing a dramatic change in behavior, particularly in authoritarian states such as Russia, according to analysts who study them.
Moscow’s quick pivot to Asia from Europe as a trading partner could be to Russia’s advantage.
How Russia has managed to avoid collapse and eke out some growth within a year despite a Western economic blockade will be a case study for analysts pondering where sanctions make sense as a policy tool in the future.
Behind Russia’s economic resilience has been a significant government stimulus, a shift to a war economy and an unprecedented rerouting of its trade to Asian partners, primarily China and India, analysts say.
The Biden administration defends the sanctions as vital to driving up the price that Russia pays for its war in Ukraine. The latest growth statistics mask the real pain being felt by the economy, a senior administration official said.
“We are making Russia’s economy less resilient and less capable of sustaining itself over time,” the official said. “It’s more difficult for them to run their war on Ukraine.”
Government spending as part of gross domestic product has jumped by 13.5% in the first quarter compared with the same period last year, the highest growth rate in data going back to 1996.
Economists attribute much of the growth in Russian industrial production this year to weapons and materiel. President Vladimir Putin has ordered the government to provide unlimited funding for the war machine.
The output of “finished metal goods”—a line that analysts say includes weapons and ammunition—rose by 30% in the first half of the year compared with last. Other lines associated with military output have also increased: Production of computers, electronic and optical products also rose by 30%, while the output of special clothing has jumped by 76%. By contrast, auto output is down over 10% year-over-year.
“What we’re seeing now is a massive boost in demand distribution via military-industrial complex and war beneficiaries, we can call it military Keynesianism,” said Alexandra Prokopenko, a former Russian central-bank official who is now a nonresident scholar at the Berlin-based Carnegie Russia Eurasia Center.
Russia launched missile attacks on Odesa early Tuesday hours after quitting an agreement that had ensured the safe passage of Ukraine’s exports through the Black Sea. WSJ’s Matthew Luxmoore reports from the port city. Photo: Igor Tkachenko/Zuma Press
Continued global demand for Russian commodities has also bolstered the economy. Last year, Russia registered a record current-account surplus, a broad measure of funds flowing into the economy.
This year, an EU ban on most Russian oil imports has undermined its price. Researchers at Capital Economics expect Russia’s energy export revenues to decline from $340 billion in 2022 to $200 billion this year and stabilize at around that level in 2024.
At the same time, Russian oil production has declined only slightly. That is because Moscow has found ways to sell its oil to Asia by creating a shadow fleet of tankers owned, insured and chartered outside the West. In recent weeks, that has also helped reduce the discount that Russian oil sells at relative to global benchmarks.
“Russia continues to sell to nonmembers of the sanctioning coalition and, in that sense, the impact of the oil sanctions, while substantial, is still not decisive,” Guriev said.
In the U.S., officials say that for sanctions to be effective, governments must enforce them constantly and halt workarounds as the Russians find them. The EU has recently taken action to enforce sanctions harder, potentially choking off some of the evasion routes.
Russia’s homegrown drive for import substitution has shown mixed results so far. Some 65% of industrial enterprises in Russia are dependent on imported equipment, according to a poll by Moscow’s Higher School of Economics published in June.
Russia’s crude oil continues to flow, but the lower prices it fetches have hit state coffers.
Nicholas Mulder, a professor of history at Cornell University who has specialized in sanctions, said the West’s attempt to sanction a country as large as Russia could emerge as a cautionary tale in the long run. Russia’s sheer size makes it impossible to cut it off from the world economy, he said. It remains a major source of raw materials for advanced economies, while for the developing world it is a crucial supplier of food and fertilizer.
Moscow’s quick pivot to Asia from Europe as a trading partner could be to Russia’s advantage, he said. “Russia has in fact hitched itself to the fastest-growing region in the world,” said Mulder, noting that three-quarters of global economic growth this year will be in Asia. “Without Asia’s cooperation, you can’t cripple Russia’s economy.”
Mulder believes Russia’s weak point is a growing shortage of labor, the one resource that Moscow can’t replace with a trade reshuffle. Russia is suffering its worst deficit since the 1990s as emigration and wartime mobilization sap workers from companies—a trend only expected to worsen due to the country’s poor demographic outlook.
Last month, Russia’s central bank raised interest rates by a larger-than-expected 1%, with more increases expected later this year, and it signaled that the labor shortage was fueling inflation.
“Labor market crunch, bubbling inflation, the impact of technology sanctions—these things matter and they matter a lot,” Guriev said. “They slow down Russian economic growth, its ability to innovate and upgrade itself. Russia will stagnate and its capacity to catch up with developed countries will be limited.”
Prokopenko said that while state spending on the war is currently boosting the economy, “that’s not productive growth.”
“The Russian economy is not sustainable in the long term. It all reminds of the Soviet times and we know how the Soviet economy went,” she said.
Write to Alan Cullison at alan.cullison@wsj.com and Georgi Kantchev at georgi.kantchev@wsj.com
Russia is suffering its worst deficit since the 1990s as emigration and wartime mobilization sap workers from companies. PHOTO: DMITRY SEREBRYAKOV/ASSOCIATED PRESS
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