Sonnenfeld and Tian on Why Sanctions Have, In Fact, Crippled the Russian Economy
"Actually, the Russian Economy Is Imploding," Foreign Policy, July 2022
Breaking down Jeffrey Sonnenfeld and Steven Tian in Foreign Policy, who argue that contrary to some headlines, Russia's economy is reeling due to its war in Ukraine and associated sanctions:
P1: Many have argued that international sanctions and voluntary business retreats from Russia have not crippled the Russian economy.
P2: Most analyses of this sort rely on economic data released by the Russian government, which has become increasingly cherry-picked and limited since the war began.
P3: An analysis based on more extensive, accurate data leads to the opposite conclusion.
C1: A lack of accurate data has led many Western policymakers and commentators to mistakenly conclude that sanctions have not crippled the Russian economy. (P1+P2+P3)
P4: Less than 10% of Russia’s gas capacity is liquefied natural gas (LNG) capable of being carried on transport ships, meaning that Russia’s gas exports remain reliant on fixed pipeline infrastructure.
P5: The vast majority of Russia’s pipelines flow to Europe and do not connect with the smaller network of pipelines linking Russia and Asia.
P6: Many of the planned pipeline projects that would better connect Russia with Asia are years away from becoming operational.
C2: Russia cannot simply redirect its gas exports and sell to Asia in lieu of Europe. (P4+P5+P6)
P7: China and India are driving steep discounts on Russian oil because they have many alternative suppliers while Russia has few alternative buyers.
P8: Russian oil tankers take significantly longer to reach East Asia than to reach Europe, cutting further into Russian profits.
P9: Russia is a relatively high-cost producer of oil, with some of the highest break-evens of any producing country, meaning that it doesn’t enjoy particularly high profit margins to begin with.
P10: The Russian oil exploration and production industry is reliant on Western technology that is becoming increasingly unavailable due to export controls and Western companies’ voluntary withdrawals from Russia.
P11: The Russian energy ministry has revised its projections of long-term oil output downward.
C3: Although oil is more fungible than gas, Putin cannot simply sell more to Asia in order to fully replace lost revenues in Europe. (P7+P8+P9+P10+P11)
P12: Imports are important to the Russian economy, consisting of about 20% of GDP. The country continues to need critical inputs, parts, and technology from reluctant trade partners.
P13: Russian imports have collapsed by over 50% in recent months.
P14: China has not moved into the Russian market to the extent many expected. In fact, Russian imports from China plummeted by more than 50% from the start of the year to April.
C4: Russia is not making up for the economic damage of lost Western imports by replacing them with imports from Asia. (P12+P13+P14)
P15: Sectors of the Russian economy that are highly dependent on international supply chains face high inflation.
P16: Data on Russian retail sales, e-commerce, and consumer spending all show steep declines.
C5: Russian domestic consumption has taken a hit. (P15+P16)
P17: Over 1000 foreign businesses representing around 40% of Russia’s GDP have curtailed operations in the country, reversing 3 decades’ worth of foreign investment.
P18: Russia is also seeing significant capital and talent flight as 500,000 individuals, many of whom are highly educated and technically skilled, exit the country.
P19: Even the mayor of Moscow has acknowledged an expected massive loss of jobs as businesses go through the process of fully exiting the country.
C6: Russia is witnessing a significant flight of business, capital, and talent. (P17+P18+P19)
P20: Atop dramatic increases in military spending, Putin is resorting to unsustainable fiscal and monetary intervention, including a laundry list of Kremlin pet projects.
P21: Russia is on pace to run a 2% GDP budget deficit this year, according to its finance minister.
C7: Despite high energy prices, Putin’s spending is putting the Kremlin’s finances under strain. (C2+C3+P20+P21)
P22: Around half of Russia’s $600 billion in foreign exchange reserves are frozen and out of reach in the United States, Europe, and Japan.
P23: Putin’s remaining foreign exchange reserves are decreasing rapidly, down $75 billion since the start of the war.
P24: While some say that nonsanctioned financial institutions like Gazprombank could still accumulate foreign currency reserves, even if the Russian central bank cannot, there is no evidence to suggest that this is happening.
P25: Russia’s finance minister floated the idea of withdrawing one third of the country’s sovereign wealth fund to pay for this year’s budget deficit.
C8: Putin’s hundreds of billions of dollars in rainy day funds are either inaccessible or rapidly depleting. The Kremlin may be running out of money faster than many appreciate. (P22+P23+P24+P25)
P26: The rise in the ruble’s market value relative to other currencies, which Putin cites as a sign of economic strength, is artificial, merely a result of draconian capital controls that prevent Russian citizens and businesses from selling rubles for other currencies.
P27: The official exchange rate does not reflect the fact that the ruble is trading at dramatically lower volumes than before the invasion. Much of this erstwhile trading has moved to black markets.
P28: Even the Bank of Russia has admitted that the exchange rate is a reflection more of government policy than freely tradable liquid foreign exchange markets.
C9: The ruble is not actually the world’s strongest-performing currency as some have claimed. (P26+P27+P28)
C10: Contrary to some headlines, the Russian economy is reeling as a result of its war in Ukraine and associated sanctions. (C1+C2+C3+C4+C5+C6+C7+C8+C9)