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Is Russia's economy really hurting?

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Moscow, Sep 06: Russia's economy was predicted to collapse after Western countries imposed unprecented sanctions on Moscow over the war in Ukraine. But this week, the Russian statistics bureau Rosstat said gross domestic product (GDP) in the first six months of the year had fallen by just 0.4%.

Capital investment is up, the ruble has rebounded and inflation — which soared when the war began — has started to subside, according to official data. This week, a top Russian government official predicted that GDP for the whole year would be just 3% lower and not contract by a third. So what is going on?

Is Russias economy really hurting?

As expected, oil and gas revenues, particularly from the European Union, are continuing to shore up the country's finances, despite the likes of Germany and Italy cutting their reliance on Russian energy. The state-owned energy giant Gazprom just announced a record first-half profit of 2.5 trillion rubles ($41.36 billion, €41.41 billion), sparking a 30% rise in its share price.

"Even if the Russian economy is performing worse than six months ago, it's not enough to stop [Russian President Vladimir] Putin from financing the war," Maxim Mironov, a professor of finance at the IE Business School in Madrid, told DW.

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There's no doubt that Western sanctions have started to bite. Last month, a study by Yale University found that imports to Russia have collapsed and manufacturers are struggling to obtain components, including semiconductors and other high-tech parts.

Russia's position as a commodities exporter has been irreversibly eroded, the report said, as Moscow has been forced to sell more of its oil and gas to Asia at a steep discount.

Economic collapse in 'two years'

One of the report's co-authors, management professor Jeffrey Sonnenfeld, recently told Britain's Times Radio that Russia's economy could only "survive with tremendous hardships for two years or so," as long as the West remains firm on sanctions. Other trade experts think a full economic collapse will take much longer.

"In the long run, Russia will be no more than a gas station for China...but I don't buy this argument that the economy will collapse in two years," Rolf J. Langhammer, a German trade expert and former vice president of the Kiel Insitute for the World Economy (IfW-Kiel), told DW. He said Russia had spent several years building its war chest and noted how international finance experts think the country is well prepared for any economic decoupling from the West.

Is Russias economy really hurting?

"The International Monetary Fund (IMF) wrote last year that Russia had hoarded cash since the 2014 conflict in eastern Ukraine and the annexation of Crimea and was prepared for a war of attrition."

Langhammer noted how Germany had paid €20 billion ($19.97 billion) to Russia for energy imports in the first half of 2022 — a 50% rise from the same period last year. "Even if volumes fall, with soaring prices we will still pay them roughly €3 billion every month," or €15 billion every six months.

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But despite the better-than-expected economic picture, the Kremlin has stopped publishing a raft of economic data shortly after Russian tanks rolled into Ukraine.

Putin burning through reserves

The Yale researchers noted how Russia was drawing down the $600 billion in foreign currency reserves that have acted as a cushion for Putin in the first months of the war. They said $80 billion has already been utilized, while another half of the reserves has been frozen by the West.

Alexander Mihailov, associate profesor in economics at the UK's University of Reading, believes that Putin will only run short of cash for the war when the West can fully cut its reliance on Russian energy, which he said would likely take another 2-3 years.

If Putin's options become limited, Russia may effectively start printing money to meet skyrocketing military costs, which Mihailov said would be "madness" as it would "lead to huge rouble depreciation, hyperinflation and social unrest."

Mironov, meanwhile, told DW that Russians had experienced severe hardships under communism and in the 1990s, following the collapse of the Soviet Union and cautioned against overestimating when the public would rise up against Putin.

"In the West, you have inflation of 10% and people are really scared and demand that politicians do something. Russian society doesn't work like that, so Putin has more leeway for the standard of living to decline by 20-30% without the risk of major resistance."

Secondary sanctions would further isolate Putin

Many countries in Asia, Latin America and Africa have not imposed sanctions on Russia, with some benefiting from the West's retreat. Reports this week suggest that China is quietly selling its surplus Russian gas back to Europe.

Pressure is now building for the West to impose so-called secondary sanctions where foreign nationals can be cut off from the international financial system if they do business with Russia. The measures were used to great effect by Washington against third parties to isolate Iran's oil exports and nuclear ambitions.

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"China is the main country that ignores Western sanctions, along with Turkey and India." Langhammer told DW. "A Chinese retreat from supporting Putin [as a result of secondary sanctions] would be a major tailwind for the effectiveness of sanctions."

Washington has previously said that secondary sanctions are an option, but experts urge patience because if they were introduced now they could further spike demand for oil and gas and prices would rise even more.

Source: DW

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