When the International Monetary Fund published its economic forecasts in April, it caused a stir that Russia would grow faster than Germany and the United Kingdom. This was taken as confirmation that the sanctions imposed by the West in response to the invasion of Ukraine are not working, or at least not working as expected. However, a new study has refuted this hypothesis, arguing that closer analysis of several economic indicators would show that the punitive measures are instead “working” and will soon have “devastating effects”. Yesterday, on the very day that the European Union gave the green light to its 11th package of sanctions, the Wilfried Martens Center for European Studies released its report entitled From Bad to Worse: The Continued Impact of Sanctions on Russia.
“The IMF only considers macro indicators such as GDP and there the declines in the economy are mild, but if we look at certain sectors we see that those related to the war are performing excellently but the others are struggling “The production of bombs, which are then dropped in Ukraine, does not generate profits like other goods and, moreover, the defense industry is supported by public funds, which are now running out, also thanks to the sanctions,” explains the author of the book Studio , Vladimir Milov, who in the past was also deputy energy minister in Vladimir Putin’s Russia (in 2002) before leaving the presidency and becoming one of the opposition leaders.
Because Berlin wants to sanction companies and not states that export to Russia
As the PPE-affiliated tink tank study explains, the start of this year was marked by two major trends in government finances. First, oil and gas revenues have fallen sharply, mainly due to the EU oil embargo. Second, Moscow has pre-funded military spending at unprecedented levels. According to estimates based on data from the Ministry of Finance, in January-April 2023 more than 3 trillion rubles (32.72 billion euros) were transferred to the Ministry of Defense, which is more than half of the total annual budget for 2023 (that’s 5). trillion rubles in total). As a result, the Ministry of Finance of Russia reported that the total budget deficit in January-April 2023 reached 3.4 trillion rubles, which is 17% higher than the planned deficit for the full year approved under the Budget Law.
The country also suffers from a lack of investment, especially abroad. With Western capitals fleeing, China, India and Asian nations are no longer interested in investing heavily in technology and skills in the Federation like the West has done for the last 30 to 40 years. As of early 2022, cumulative Asian foreign direct investment (FDI) in Russia was exceptionally low: $3.3 billion from China, $2.4 billion from Hong Kong and $0.6 billion from India, according to the Central Bank of Russia . There have been no major new investments since the beginning of the war.
The EU wants to close the loopholes for sanctions against Moscow (but without touching China and Turkey)
The Russian government reported a fairly positive number on fixed investment growth in 2022: 4.6%, which is excellent. But in reality, the 4.6% figure would be a bias, the report says. Investment grew 13.8% year-on-year in the first quarter of 2022 (before sanctions even started to take effect), before slowing to 2-3% growth in the remaining three quarters of 2022 and just 0% year-on-year .7% declined in the first quarter of 2023. As with GDP, a breakdown between war-related industries and the rest of the civilian economy reveals that in areas related to war and related government-funded efforts (transport, (construction, public administration and military security, warehouses) investment often increases by tens of percentage points, while in key areas of the real private economy it falls significantly.
However, the study recognizes that Putin has so far been able to circumvent most of the sanctions with more or less deliberate help from third countries. Moscow has managed to secure not only trade in various sanctioned goods, but also imports of industrial and consumer goods that are not sanctioned, but have been lost due to the withdrawal of Western companies from the Russian market. Parallel imports of these goods, for example, amounted to over 20 billion US dollars in 2022.
Russia has replaced many of the direct western imports lost by buying the same goods in countries like Turkey, whose exports to the federation increased by 62% (to $9.3 billion) in 2022 and January-April 2023 On the other hand, Russian exports to the UAE grew by as much as 71% in 2022, reaching $8.5 billion, according to Russian Deputy Prime Minister Denis Manturov As the report points out, there appears to be no such additional demand for Russian goods in the UAE, and the rise in Russian exports largely reflects trade plans aimed at circumventing sanctions and reselling these goods where otherwise would be prohibited .
And the eleventh package of sanctions, which the European Union approved yesterday after lengthy negotiations lasting around a month and a half, focused on closing these loopholes. The package essentially concerns the circumvention of the measures against Moscow with the complicity of third countries such as Turkey and former Soviet states such as Armenia, but also China and the Emirates as well as third-party companies in the host countries and affects the trade, transport and energy sectors. In particular, with regard to trade, the new anti-tax avoidance tool will allow the EU to restrict the sale, supply, transfer or export of certain sanctioned goods and technology to certain third countries when it is deemed to be in fact the case is acting as a gateway for these goods to Russia.
How finances are gaining thanks to sanctions against Russia
They are subject to stricter export restrictions than dual-use items and advanced technology, for example some coolers containing chips that Russia could mine and then use them for other purposes, including military ones. In addition to the Russian and Iranian companies already listed, the sanctions also apply to companies based in China (three in Hong Kong), Uzbekistan, the United Arab Emirates, Syria, Armenia and Iran. The transport measures include a total ban on Russian trucks with trailers and semi-trailers transporting goods to the EU. There is also an entry ban for ships in EU ports that are suspected of transporting Russian oil from ship to ship and thus actually smuggling it, or for so-called “ghost ships”, i.e. those who manipulate or deactivate their navigation system during transport russian oil.
In addition to this ruse, which has only limited effects, Russia has for some time been compensating for the oil sales ban in Europe and the price cap in the West, again thanks to the complicity of third countries. Moscow has ramped up crude oil exports to countries including India, China and Pakistan in recent months, while data shows the EU is importing large quantities of refined fuel from those countries. In New Delhi, for example, shipments of Russian crude rose from around 1 million barrels a month to 63 million a month in April alone. Meanwhile, diesel exports to the EU have increased tenfold and kerosene deliveries have increased by more than 250%. However, this practice does not violate the sanctions as the G7 wanted to limit Russia’s gains without destabilizing global oil markets.
As a result, the International Energy Agency reported in May that despite price controls, Moscow’s crude oil supply volume rose 50,000 bpd to 8.3 million barrels, the highest since the invasion of Ukraine. According to the Wilfried Martens Center for European Studies report, the economic losses in this sector would still be huge for the Russian Federation, as buyers in saturated Asian markets bought Russian oil at huge discounts. “In addition, deliveries to new markets that do not have pipelines like in Europe are expensive and require longer times. A ship delivery to India takes more than a month, and in general Russia loses about $10,” says Milov.
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