Russia, Sanctions, The War, and Sifting for Truth

Given that I’m but a humble news aggregator-blogger, sifting for truth in the reams and sheafs of claims and counterclaims about the Ukraine War is a never-ending chore:

> Ukraine is winning! Nope-Russia is winning.

> Putin will use nukes any minute! Relax; he wouldn’t dare.

> The Ukraine war is really helping China. Fuggedit — the war is hurting  China.

Etc.

My apologies, but I have no answers for these. The questions don’t away, and  maybe some clarity will come in time. As telephone operators said when I was a kid looking for a phone number (YES, there were such persons, and they really did that), “Still checking. . . .”

Today’s query is maybe second-tier in the continuing parade of headlines, but it’s important enough: Are the sanctions on Russia really crippling its economy and strangling the invasion war effort?

It’s easy to find overblown rhetoric about them:

Forbes: “the worst-ever sanctions against the country. . . ”

Bloomberg: “Russia Sanctions Deal Economy Worst Hit Since Covid Pandemic”

CSMonitor: Russia may be the most sanctioned country ever.

And so on.

And so it also is with gauging the effect of sanctions, which were sold to the publics in the U.S. and Europe as a meaningful, potent alternative to an actual land war with Russia there. Is it so? Has it been?

The bad news first, from across the pond:

The Guardian — The rouble is soaring and Putin is stronger than ever – our sanctions have backfired

Energy prices are rocketing, inflation is soaring and millions are being starved of grain. . . .

Western sanctions against Russia are the most ill-conceived and counterproductive policy in recent international history.

Military aid to Ukraine is justified, but the economic war is ineffective against the regime in Moscow, and devastating for its unintended targets. World energy prices are rocketing, inflation is soaring, supply chains are chaotic and millions are being starved of gas, grain and fertiliser. Yet Vladimir Putin’s barbarity only escalates – as does his hold over his own people.

To criticise western sanctions is close to anathema. Defence analysts are dumb on the subject. Strategy thinktanks are silent. Britain’s putative leaders, Liz Truss and Rishi Sunak, compete in belligerent rhetoric, promising ever tougher sanctions without a word of purpose. Yet, hint at scepticism on the subject and you will be excoriated as “pro-Putin” and anti-Ukraine. Sanctions are the war cry of the west’s crusade.

The reality of sanctions on Russia is that they invite retaliation. Putin is free to freeze Europe this winter. He has slashed supply from major pipelines such as Nord Stream 1 by up to 80%. World oil prices have surged and eastern Europe’s flow of wheat and other foodstuffs to Africa and Asia has been all but suspended.

Britain’s domestic gas bills face tripling inside a year. The chief beneficiary is none other than Russia, whose energy exports to Asia have soared, driving its balance of payments into unprecedented surplus.

The rouble is one of the world’s strongest currencies this year, having strengthened since January by nearly 50%. Moscow’s overseas assets have been frozen and its oligarchs have relocated their yachts, but there is no sign that Putin cares. He has no electorate to worry him.

The interdependence of the world’s economies, so long seen as an instrument of peace, has been made a weapon of war. Politicians around the Nato table have been wisely cautious about escalating military aid to Ukraine. They understand military deterrence. Yet they appear total ingenues on economics. Here they all parrot Dr Strangelove. They want to bomb Russia’s economy “back to the stone age”.

I would be intrigued to know if any paper was ever submitted to Boris Johnson’s cabinet forecasting the likely outcome for Britain of Russian sanctions. The assumption seems to be that if trade embargos hurt they are working. As they do not directly kill people, they are somehow an acceptable form of aggression.

They are based on a neo-imperial assumption that western countries are entitled to order the world as they wish. They are enforced, if not through gunboats, then through capitalist muscle in a globalised economy. Since they are mostly imposed on small, weak states soon out of the headlines, their purpose has largely been of “feelgood” symbolism.

A rare student of this subject is the American economic historian Nicholas Mulder, who points out that more than 30 sanctions “wars” in the past 50 years have had minimal if not counterproductive impact. They are meant to “intimidate peoples into restraining their princes”. If anything they have had the opposite effect.

From Cuba to Korea, Myanmar to Iran, Venezuela to Russia, autocratic regimes have been entrenched, elites strengthened and freedoms crushed. Sanctions seem to instil stability and self-reliance on even their weakest victim. Almost all the world’s oldest dictatorships have benefited from western sanctions.

Moscow is neither small nor weak. Another observer, the Royal United Services Institute’s Russia expert Richard Connolly, has charted Putin’s response to the sanctions imposed on him since his 2014 seizure of Crimea and Donbas. Their objective was to change Russia’s course in those regions and deter further aggression. Their failure could hardly be more glaring.

Apologists excuse this as due to the embargos being too weak. The present ones, perhaps the toughest ever imposed on a major world power, may not be working yet, but will apparently work in time. They are said to be starving Russia of microchips and drone spares. They will soon have Putin begging for peace.

If Putin begs, it will be on the battlefield. At home, Connolly illustrates how Russia is “slowly adjusting to its new circumstances”. Sanctions have promoted trade with China, Iran and India. They have benefited “insiders connected to Putin and the ruling entourage, making huge profits from import substitution”.

McDonald’s locations across the country have been replaced by a Russian-owned chain called Vkusno & tochka (“Tasty and that’s it”). Of course the economy is weaker, but Putin is, if anything, stronger while sanctions are cohering a new economic realm across Asia, embracing an ever enhanced role for China. Was this forecast?

Meanwhile, the west and its peoples have been plunged into recession. Leadership has been shaken and insecurity spread in Britain, France, Italy and the US. Gas-starved Germany and Hungary are close to dancing to Putin’s tune. Living costs are escalating everywhere.

Yet still no one dares question sanctions. It is sacrilege to admit their failure or conceive retreat. The west has been enticed into the timeless irony of aggression. Eventually its most conspicuous victim is the aggressor. Perhaps, after all, we should stick to war.

  • Simon Jenkins is a Guardian columnist

Hmmm. Haven’t worked; never worked anyway?
We’ll leave the past sanctions in the past. But some heavyweights in Foreign Policy magazine say, “rubbish and fiddlesticks” to Jenkins and his ilk. Rather, i these excerpts they insist:

Actually, the Russian Economy Is Imploding: Nine myths about the effects of sanctions and business retreats, debunked:

By , the Lester Crown professor in management practice and a senior associate dean at the Yale School of Management, and , the director of research at the Yale Chief Executive Leadership Institute.

JULY 22, 2022
Five months into the Russian invasion of Ukraine, there remains a startling lack of understanding by many Western policymakers and commentators of the economic dimensions of President Vladimir Putin’s invasion and what it has meant for Russia’s economic positioning both domestically and globally.

Far from being ineffective or disappointing, as many have argued, international sanctions and voluntary business retreats have exerted a devastating effect over Russia’s economy. The deteriorating economy has served as a powerful if underappreciated complement to the deteriorating political landscape facing Putin.

That these misunderstandings persist is not entirely surprising given the lack of available economic data. In fact, many of the excessively sanguine Russian economic analyses, forecasts, and projections that have proliferated in recent months share a crucial methodological flaw: These analyses draw most, if not all, of their underlying evidence from periodic economic releases by the Russian government itself. Numbers released by the Kremlin have long been held to be largely if not always credible, but there are certain problems.

First, the Kremlin’s economic releases are becoming increasingly cherry-picked—partial and incomplete, selectively tossing out unfavorable metrics. The Russian government has progressively withheld an increasing number of key statistics that, prior to the war, were updated on a monthly basis, including all foreign trade data. . . particularly with Europe; oil and gas monthly output data; commodity export quantities; capital inflows and outflows . . .[and much more].

Since the Kremlin stopped releasing updated numbers, constraining the availability of economic data . . . , many excessively rosy economic forecasts have irrationally extrapolated economic releases from the early days of the invasion, when sanctions. . .  had not taken full effect. Even those favorable statistics that have been released are dubious, given the political pressure the Kremlin has exerted to corrupt statistical integrity.

Mindful of the dangers of accepting Kremlin statistics at face value, our team of experts, using private Russian-language and direct data sources. . . have released one of the first comprehensive economic analyses measuring Russian current economic activity five months into the invasion. . . .

From our analysis, it becomes clear: Business retreats and sanctions are crushing the Russian economy in the short term and the long term. Based on our research, we are able to challenge nine widely held but misleading myths about Russia’s supposed economic resilience.

Myth 1: Russia can redirect its gas exports and sell to Asia in lieu of Europe.

This is one of Putin’s favorite and most misleading talking points, doubling down on a much-hyped pivot to the east. But natural gas is not a fungible export for Russia. Less than 10 percent of Russia’s gas capacity is liquefied natural gas, so Russian gas exports remain reliant on a system of fixed pipelines carrying piped gas.

The vast majority of Russia’s pipelines flow toward Europe; those pipelines, which originate in western Russia, are not connectable to a separate nascent network of pipelines that link Eastern Siberia to Asia. . . . Indeed, the 16.5 billion cubic meters of gas exported by Russia to China last year represented less than 10 percent of the 170 billion cubic meters of natural gas sent by Russia to Europe.

Long-planned Asian pipeline projects currently under construction are still years away from becoming operational, much less hastily initiated new projects, and financing of these costly gas pipeline projects also now puts Russia at a significant disadvantage.

Overall, Russia needs world markets far more than the world needs Russian supplies. . . . Indeed, the Russian state energy company Gazprom’s published data shows production is already down more than 35 percent year-on-year this month. For all Putin’s energy blackmail of Europe, he is doing so at significant financial cost to his own coffers.

Myth 2: Since oil is more fungible than gas, Putin can just sell more to Asia.

Russian oil exports now also reflect Putin’s diminished economic and geopolitical clout. Recognizing that Russia has nowhere else to turn, and mindful that they have more purchasing options than Russia has buyers, China and India are driving an unprecedented approximately $35 discount on Russian Urals oil purchases, even though the historical spread has never ranged beyond $5. . . . Furthermore, it takes Russian oil tankers an average of 35 days to reach East Asia, versus two to seven days to reach Europe, which is why historically only 39 percent of Russian oil has gone to Asia . . . .

This margin pressure is felt keenly by Russia, as it remains a relatively high-cost producer . . . with some of the highest break-evens of any producing country. . . . There is no doubt that, as many energy experts predicted, Russia is losing its status as an energy superpower, with an irrevocable deterioration in its strategic economic positioning as an erstwhile reliable supplier of commodities.

Myth 3: Russia is making up for lost Western businesses and imports by replacing them with imports from Asia.

Imports play an important role within Russia’s domestic economy, consisting of about 20 percent of Russian GDP, and, despite Putin’s bellicose delusions of total self-sufficiency, the country needs crucial inputs, parts, and technology from hesitant trade partners. Despite some lingering supply chain leakiness, Russian imports have collapsed by over 50 percent in recent months.

China has not moved into the Russian market to the extent that many feared; in fact. . . Chinese exports to Russia plummeted by more than 50 percent from the start of the year to April, falling from over $8.1 billion monthly to $3.8 billion. Considering China exports seven times as much to the United States than Russia, it appears that even Chinese companies are more concerned about running afoul of U.S. sanctions . . . reflecting Russia’s weak economic hand with its global trade partners.

Myth 4: Russian domestic consumption and consumer health remain strong.

Some of the sectors most dependent on international supply chains have been hit with debilitating inflation around 40-60 percent—on extremely low sales volumes. For example, foreign car sales in Russia fell by an average of 95 percent across major car companies, with sales ground to a complete halt.

Amid supply shortages, soaring prices, and fading consumer sentiment, it is hardly surprising that Russian Purchasing Managers’ Index readings—which capture how purchasing managers are viewing the economy—have plunged, particularly for new orders, alongside plunges in consumer spending and retail sales data by around 20 percent year-over-year. Other readings of high-frequency data such as e-commerce sales within Yandex and same-store traffic at retail sites across Moscow reinforce steep declines in consumer spending and sales, no matter what the Kremlin says.

Myth 5: Global businesses have not really pulled out of Russia, and business, capital, and talent flight from Russia are overstated.

Global businesses represent around 12 percent of Russia’s workforce (5 million workers), and. . . over 1,000 companies representing around 40 percent of Russia’s GDP have curtailed operations in the country, reversing three decades’ worth of foreign investment and buttressing unprecedented simultaneous capital and talent flight in a mass exodus of 500,000 individuals, many of whom are exactly the highly educated, technically skilled workers Russia cannot afford to lose. . . .

Myth 6: Putin is running a budget surplus thanks to high energy prices.

Russia is actually on pace to run a budget deficit this year equivalent to 2 percent of GDP, according to its own finance minister. . .thanks to Putin’s unsustainable spending spree; on top of dramatic increases in military spending, Putin is resorting to patently unsustainable, dramatic fiscal and monetary intervention, including a laundry list of Kremlin pet projects, all of which have contributed to the money supply nearly doubling in Russia since the invasion began. Putin’s reckless spending is clearly putting Kremlin finances under strain.

Myth 7: Putin has hundreds of billions of dollars in rainy day funds, so the Kremlin’s finances are unlikely to be strained anytime soon.

The most obvious challenge facing Putin’s rainy day funds is the fact that of his around $600 billion in foreign exchange reserves. . .  $300 billion is frozen and out of reach with allied countries across the United States, Europe, and Japan restricting access. There have been some calls to seize this $300 billion to finance the reconstruction of Ukraine.

Putin’s remaining foreign exchange reserves are decreasing at an alarming rate, by around $75 billion since the start of the war. . . .

Furthermore, although the finance ministry had planned to reinstate a long-standing Russian budgetary rule that surplus revenue from oil and gas sales should be channeled into the sovereign wealth fund, Putin axed this proposal . . . as Finance Minister Anton Siluanov floated the idea of withdrawing funds from the National Wealth Fund equivalent to a third of the entire fund to pay for this deficit this year. If Russia is running a budget deficit requiring the drawdown of a third of its sovereign wealth fund when oil and gas revenues are still relatively strong, all signs indicate a Kremlin that may be running out of money much faster than conventionally appreciated.

Myth 8: The ruble is the world’s strongest-performing currency this year.

One of Putin’s favorite propaganda talking points, the appreciation of the ruble is an artificial reflection of unprecedented, draconian capital control—which rank among the most restrictive of any in the world. The restrictions make it effectively impossible for any Russian to legally purchase dollars or even access a majority of their dollar deposits, while artificially inflating demand through forced purchases by major exporters—all of which remain largely in place today.

The official exchange rate is misleading, anyhow, as the ruble is, unsurprisingly, trading at dramatically diminished volumes compared to before the invasion on low liquidity. By many reports, much of this erstwhile trading has migrated to unofficial ruble black markets. Even the Bank of Russia has admitted that the exchange rate is a reflection more of government policies and a blunt expression of the country’s trade balance rather than freely tradeable liquid foreign exchange markets.

Myth 9: The implementation of sanctions and business retreats are now largely done, and no more economic pressure is needed.

Russia’s economy has been severely damaged, but the business retreats and sanctions applied against Russia are incomplete. Even with the deterioration in Russia’s exports positioning, it continues to draw too much oil and gas revenue from the sanctions carveout, which sustains Putin’s extravagant domestic spending and obfuscates structural economic weaknesses.

The Kyiv School of Economics and Yermak-McFaul International Working Group have led the way in proposing additional sanctions measures across individual sanctions, energy sanctions . . . . Looking ahead, there is no path out of economic oblivion for Russia as long as the allied countries remain unified in maintaining and increasing sanctions pressure against Russia.

Defeatist headlines arguing that Russia’s economy has bounced back are simply not factual—the facts are that, by any metric and on any level, the Russian economy is reeling, and now is not the time to step on the brakes.

So — which is right? Sanctions are a boomerang failure, hurting the West and U.S. as much as or more than Putin’s Russia? Or behind a propaganda smokescreen, they’re taking him and “his” economy down rapidly?

I hope it’s the latter, but the work of following the war’s impact within Russia and in the rest of the world is up to those of us who are trying to make sense of this turbulent, dangerous scene.

And what should we look for from  our own policymakers?

Maybe the wisest summary was this offhand remark by a supposedly canny business journal:

Forbes: What comes next is anybody’s guess.

 

 

One thought on “Russia, Sanctions, The War, and Sifting for Truth”

  1. Thankyou for this even more alarming analysis of what’s happening now and what might be next.
    Apart from all the destruction and horror, a different world economic may be forming – marginalising Europe and the US and favouring unimaginable economic power in the single great continent of the planet. Does this link into China’s emerging economic interest in the Solomons? Then PNG? Then Australia?

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