One of the subjects that is currently being discussed in certain media outlets whenever the Ukraine War is talked about is the Russian economy. While the opinions span a spectrum that range from the sanctions being a complete failure and/or actually making the Russian economy stronger to a conviction that Russian economic conditions are going to deteriorate to the point that either the Russian people will throw Vladimir Putin out, or he will be forced to negotiate peace before they do. There is a lot of propaganda being broadcast throughout the world on all sides. Russia would like everyone to think that the sanctions were a mistake and have in fact made Russia stronger. Whereas many in the West would like to believe that a Soviet-style economic collapse is just around the corner that will lead to either the overthrow of Putin or at least his withdrawal from some part of Ukraine in exchange for sanctions relief. Although these narratives are comforting for their proponents, there are some serious factors to consider.
1.) Is Russia Really Stronger Than Before?
One thing that is likely true is that in some sense, Russia has more strategic autonomy than it did before. Being cut off (or having reduced access) to the global financial system and certain markets has forced Russia reorient its economic linkages towards China, India, etc., and create alternate suppliers and workarounds to get what it needs. Any leverage that the West had prior to the war due to its economic linkages with Russia has been significantly reduced as a result.
However, the idea that Russia is stronger than before, or that the sanctions have failed, relies in some part on anecdotes, numbers produced by Russia, and the failure of sanctions so far to bring Russia to its knees. The perception of failure on this latter point owes much to the fact that the power of sanctions was oversold to western audiences as a quick way to collapse Russia’s economy and end the war. Assuming that proponents of this vision actually believed in it, then they were ignorant of the poor track record of sanctions to elicit changes in behavior. As for economic numbers produced by Russia, questioning their accuracy is not unreasonable given the Kremlin’s vested interest in selling the narrative of a stronger Russia in spite of sanctions.
However, there are two facts that we have that are serious indications that things are not necessarily well economically in Putin’s Russia. The first is that Russia has lost at least roughly 1 million citizens who have left since the war began. The vast majority of these are likely to be young, innovative, working-age people, many of whom are seeking to avoid being conscripted into the war. In addition, there have been several hundred thousand that have been enticed/coerced into the military or have actually been killed in Ukraine. Both of these factors represent a loss of economic productive capacity to Russia, if not in the short-term, then in the medium/long term. Related to this are indications that Russia is having challenges finding enough labor, which they are attempting to alleviate by hiring migrants from Central Asian (aka “former Soviet”) republics with apparently mixed results.
The second visible factor is that Russia is needing to keep interest rates very high (around 21%) to prevent the ruble from depreciating further and thereby importing inflation into Russia. In addition, the difficulty of finding labor means that firms must pay higher wages which is also increasing inflationary pressure. Of all the economic dangers that exist that are likely to destabilize a regime, hyperinflation is one of the most dangerous. Consequently, the Russian Central Bank is making the correct decision in increasing interest rates to try and prevent this. However, 21% interest rates will make it tougher for ordinary Russians to buy homes, cars, other goods and it will make it tough for them to service certain debts that they already have. Interest rates at this level will create a significant headwind to economic growth and make continuing on this present economic course more difficult than it would otherwise be.
The fact that Russia has to take this step is a strong indication that it is absolutely not stronger than before and that all the happy talk notwithstanding, the sanctions are creating difficulty that will likely reduce Russian economic prospects in the medium and long term as well.
2.) Can Sanctions End The War?
One of the major difficulties with believing that sanctions can change behavior is that historically more often than not they do not. While sanctions and international isolation can credibly be thought of as being a significant factor in the ending of Apartheid in South Africa in the late 1980’s/early 1990’s, its overall track record is mixed at best. Decades of sanctions and a massive collapse in living standards has not cause Cuba’s government to be overthrown as the U.S. has hoped. Sanctions on Saddam Hussein can’t really be said to have changed his behavior. And in spite of sanctions on Venezuela, Maduro is still in power there, to say nothing of the experience with sanctions that North Korea has gone through.
The fact is that sanctions have not isolated Russia to nearly the extent that North Korea or some of the other countries have been isolated and economically punished. Having said that, a large power like China or the Soviet Union could prop up a smaller power such as North Korea or Cuba and help it to weather sanctions. However, even a large power such as China would likely find it impossible to prop up an economically collapsing large power such as Russia if it were to become necessary, simply because Russia is likely too big for such an intervention to succeed.
But would it become necessary?
The fact is that the Russian economy either has been or is in the process of being moved on to a war footing (depending on who you believe). This is a similar process as to what happened in the U.S. during World War II, as many remember that this process ended the Great Depression. The government is spending money on Russian-produced armaments which is creating jobs and higher wages for people. While such a process cannot go on forever and the medium-to-long-term outlook for the Russian economy cannot be said to be good, the uncomfortable fact for the West is that Russia’s Debt/GDP ratio appears to be between 15% to 20% (the U.S. has a ratio of 129%). Having said that, these ratios are not necessarily the indicator that one might think. A stronger economy might have a higher ratio as creditors believe that it can handle more debt, while a weaker economy might have a lower ratio because creditors have less faith and won’t lend as much money. However, Russia’s Debt/GDP ratio, as well as the fact that it has not as of yet had to issue war bonds (like the U.S. did in World War 2) indicates that Russia still has some financial capacity to continue to operate as it is currently doing for some time, whatever its medium-term and long-term challenges might be.
Does that mean that the sanctions are waste and a misguided policy? Not at all. People today don’t remember World War I when the British launched a naval blockade of Germany. In doing this, they were able to seriously restrict the flow of goods into Germany. For the first couple of years, it did not really matter. However, in the 3rd and 4th years of the war, the shortages in Germany started to appear. Food and other items were not as plentiful as before. And while the blockade never completely stopped the Germans ability to wage war, it did restrict it somewhat and did reduce the Germany’s military and political options which ultimately forced the German government to sue for peace
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Are the sanctions reducing options for the Russian military? Undoubtedly. There seems to be strong indications that obtaining sophisticated components for missiles is a challenge for the Russian defense industrial base, even if it has not been completely cut off from sources. But if the Allies in 1918 had not been able to field and supply an army with enough combat power to overwhelm the Germans, the naval blockade would not have mattered. In March of 1918, the Germans came very close to breaking through the Allied lines and ending the war in their favor.
Unless Ukraine can field an army that has enough combat power to overwhelm Russian forces (something that it certainly does not have at this time), the negative impact of the sanctions to Russia’s war effort may not matter in the end.
Only time will tell.
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