Both the $60 per barrel price cap on Russian oil agreed by the G7, the US, the European Union and Australia and the EU embargo on Russian crude shipped by sea come into effect, and the debate over the Limits of sanctions and their outcome. “War and sanctions threaten to throw the Russian economy back in time,” reads the New York Times, for example. “Though Russia’s economy has not collapsed, an exodus of Western companies is eroding hard-won profits and experts say the worst may be yet to come.”
Specifically, Vladislav Inozemtsev, director of a Washington-based Center for Post-Industrial Studies, told the NYT that Russia’s hesitant attempts to modernize its economy along Western lines and match European living standards after the fall of the Soviet Union have been hampered by the sanctions were Union, which dampened hopes that the country could become a modern and prosperous nation in the near future. “The slogan is now ‘prevent worse’, and that’s a big change,” explains Inozemtsev. “Even the government has stopped betting on national development.” In his analysis, the model increasingly risks being Iran, where political legitimacy rests on providing necessities to citizens rather than stimulating transformative growth.
Over a thousand multinationals have reduced or even eliminated their presence in Russia since the invasion of Ukraine, particularly in the manufacturing sector, which employs tens of millions of Russians and has been at the core of Putin’s ambitious program to diversify away from dependence on oil and gas exports. The automotive industry represents a large percentage of these workers: at least three hundred thousand workers, which with related industries becomes 3.5 million. In September, auto industry output fell 77 percent year-on-year, while auto sales fell 60 percent over the same period in 2021. Even the Interior Ministry did not find 2,800 new vehicles serving the traffic police. One of the main reasons is that Russian industry is heavily dependent on Western components, with imported components accounting for up to 90 percent in some sectors.
According to the NYT, a combination of high oil revenues, large foreign exchange reserves and a veteran team of economic officials has allowed Putin to soften the blow. But the loss of investment, technology and skills caused by the sanctions may reverberate from generation to generation, depriving many Russians of a brighter economic future. In Inozemtsev’s analysis, “modern history offers few examples of successful attempts to substitute local substitutes for imported Western technology.” Relying on domestic substitutes will lead to ‘primitivization’». “Production will not go away, it will gradually deteriorate, resulting in lower quality and quantity of products, which will progressively lower Russians’ living standards.”
Other testimonies refer to the crisis in the real estate sector, due to the difficulty of making long-term forecasts. And that the banks stopped lending after the mobilization because customers could be recalled. “Let’s hope for the new year, but after that we might be screwed,” reads the raw end of the analysis, by the outburst of the owner of an already successful bar.
“The sanctions against Russia are working,” agrees Agathe Demarais, director of global forecasts at the Economist Intelligence Unit, in Foreign Policy. “The Kremlin’s ability to wage war is already limited, but the worst is yet to come.” “There have been incessant debates about the effectiveness of sanctions against Russia,” he notes. “The far-right and far-left politicians who traditionally channel Moscow’s views say they are ineffective and only harm Europeans. French far-right leader Marine Le Pen called the sanctions “entirely useless if not to make Europeans suffer”. In Germany, his views are not only shared by the right-wing Alternative for Germany, but also by prominent left-wing politicians such as Sahra Wagenknecht. “Sanctions do not harm Russia, only us,” he said recently. According to these pro-Kremlin voices, the sanctions have done little to no harm to Russia’s economy, which they say is thriving amid skyrocketing energy prices.
Others with softer views point out that sanctions have not stopped Putin from escalating his attacks on Ukraine. A narrative that Putin relies on to tire the West. But, explains Agathe Demarais, “the sanctions against Russia are more of a marathon than a sprint, and the effectiveness of the sanctions will increase over time.” More than anything else in this analysis, “confusion about the effectiveness of sanctions stems from a lack of clarity about their objectives. Western countries never intended to use sanctions to force Putin to give in and withdraw from Ukraine; they know that Putin believes he is waging a war for Russia’s survival against a decadent West. Nor is the aim to provoke regime change in Moscow: sanctions on Cuba, North Korea and Syria show that this never works, and there is no reason to believe that Putin’s hypothetical successor in Ukraine would change course. Provoking a Venezuelan-style collapse of the Russian economy isn’t even the goal: that’s impossible when the goal is the world’s 11th-largest economy. In addition, the collapse of Russia would likely plunge the global economy into recession as Russian exports of many commodities, including grains, fertilizers, energy and metals would be abruptly halted. The problem is that a relatively high price cap was set for oil at the time.
In fact, the goals of the sanctions were never explicitly stated, but according to this analysis, a careful look at the sanctions packages implemented by the United States, the European Union and their allies shows that they have three goals. First: to send a strong signal of determination and unity to the Kremlin. Second, reduce Russia’s ability to wage war. Third, Western democracies are betting that sanctions will slowly choke Russia’s economy, and particularly the country’s energy sector.
The first goal was a complete success. The second is also progressing. “Despite claims to the contrary by the Kremlin, the sanctions have plunged the Russian economy into a deep recession. This impact is notable because sanctions are not yet targeting the country’s energy exports; In fact, Russia’s oil revenues have increased this year due to the post-war surge in oil prices. It would be far worse for the Kremlin if energy prices were at their historical averages.” That gun is firing now.
Precisely to deny the West transparency about the success of the sanctions, the Kremlin has reduced the publication of economic statistics. But it is still known that Russia’s GDP in October was 4.4 percent lower than the same month in 2021. Industrial production, including oil and gas production, was down almost 3 percent compared to 2021. Retail has slumped nearly 10 percent a year. in the year. Even FP like the NYT emphasize the collapse of the auto sector with production reduced by 64 percent.
The poor economy means Russia’s budget is firmly in the red; unusual for an energy exporter when commodity prices soar to record highs. Therefore, “Moscow must solve an impossible equation in the coming months to fund the war in Ukraine while keeping welfare payments high enough to avoid unrest. (It will be no small matter if a second mobilization takes place). The Kremlin still has reserves, mainly from its sovereign wealth fund. But without refueling, they will eventually run out. The Russian government is already living off reservations.’
But the Western trump card is primarily at the technological level. Almost all advanced semiconductors used in electronics and military equipment are actually manufactured with the know-how of US companies. Since the invasion, Washington has imposed export controls restricting Russian access to microchips. A pressing problem for Moscow, not least because Russian missiles are crammed full of semiconductors that the country cannot manufacture itself. Faced with a 90 percent drop in microchip imports, the Kremlin is desperate to set up semiconductor smuggling networks. “Sanctions are almost never airtight, but losses are unlikely to be enough for Russia to replenish its missile stockpiles, especially if the war continues unabated in the coming months.”
Finally, the third and final goal of the sanctions is to slowly and long-term stifle Russia’s economy by depriving Russian oil and gas companies of Western financing and technology. «For Moscow, this is another existential threat: Russia’s oil and gas fields are running out and new reserves to be exploited are located on or in the Arctic Sea. Developing these fields requires sophisticated Western technology (which is not provided) and vast amounts of money (which are scarce). Sanctions on Russian energy production date back to 2014, when Russia illegally annexed Crimea, and could take decades to take effect. If they do, they will be the most painful of all sanctions for Russia because both the economy and tax revenues depend on oil and gas production.”
Conclusion: Things will only get worse for Moscow. Energy prices are falling and oil prices are now below where the war started. Further declines are likely in 2023 as the global economy slows. From next year, the EU will stop importing Russian oil. Moreover, Russia has shot itself in the foot by cutting off most gas supplies to Europe, cutting the Kremlin’s financial lifeline. Diverting gas exports to China will take many years and huge investments in new infrastructure, as most Russian pipelines are routed to Europe. Building new gas pipelines to China would solve this problem, but Beijing is in no hurry. Time is on Beijing’s side; the country knows it will be able to wring major financial concessions from an increasingly desperate Kremlin.
And the possible sanctions are not over yet. The analysis recalls that there are still three measures taken with Iran that have not yet been taken with Russia: banning all Russian banks from SWIFT, which would send the country into financial isolation; ban Russia from using the US dollar; force all companies at home and abroad to choose between the Russian and the US market. Therefore, “not only are the sanctions against Russia working, but the worst is still to come for the Kremlin.”