For a while, it seemed like the economic sanctions imposed by the US and the EU towards Russia failed to debilitate its economy. In fact, Russia appeared to be getting stronger while Europe’s economy flagged. But tides have turned and the sanctions are beginning to bite. Russia is weakening with each passing day.
It will be recalled that the US and Europe joined forces to impose stiff economic sanctions meant to cripple the Russian economy following its invasion of the Ukraine. With its economy impaired, it was expected that Russia would retreat from its bloody Ukrainian crusade.
In rapid succession, trade with Russia for essential goods and technologies were restricted among NATO-associated countries. Multinational companies like IBM, Google and McDonalds withdrew from the Russian market, causing an exodus of capital and jobs. Exports of gold to Russia were banned. Assets of oligarchs were frozen, as were the forex reserves of the Russian government amounting to some $300 billion. The country was banned from the global SWIFT network, cutting it off from the world financial system.
Putin retaliated with three strategic moves. First, he cut off food exports to NATO-associated countries. For those unaware, Russia and the Ukraine account for 29 percent of the world’s supply of wheat, 20 percent of corn and 80 percent of sunflower oil. Restricting exports of these commodities caused food prices to soar, especially in Europe.
The second act was to cut oil and gas supply to Europe by 60 percent. Most European countries depend on Russian gas to generate heat. Finland is 94 percent dependent, Bulgaria is 77 percent dependent, Slovakia is 70 percent dependent, Germany is 49 percent dependent, Italy is 46 percent dependent and Poland is 40 percent dependent.
Meanwhile, cutting oil supply induced scarcity, which led to hoarding. This resulted to fuel prices skyrocketing by 37 percent in the US and 144 percent in Europe. Elevated prices gave Russia windfall revenues for less fuel sold. Russia generated $100 billion in the first one hundred days of the war solely from the sale of oil. This was 60 percent more than in normal circumstance. The oil bonanza helped Putin finance his war despite the drag of the economic sanctions.
Third, Putin decreed that purchases of gas and oil from Russia can only be transacted in Russian rubles. This made the Russian currency appreciate sharply which, in turn, made Russian imports cheaper.
Contrary to common belief, Russia was never cut off from world trade. She still had her “friends” in this war, notably China and India. Trade between these countries never ceased, allowing Russia to import basic essentials like food and medicines. Conversely, the Chinese and Indians continued to purchase Russian agricultural and industrial products as well as oil and gas, albeit at a discount. This provided Russia with a steady source of foreign exchange.
The impact of the economic sanctions was minimal as a result of Russia’s three counter measures. Experts originally estimated that sanctions would cause the Russian economy to contract by 15 percent. In reality, it contracted by only four percent. So up until the third quarter, Russia stood on solid financial ground and could comfortably finance its war.
But the tides have turned. The hysteria over oil scarcity has died down and hoarding has stopped. European countries have weaned themselves away from Russian oil dependence and have established purchase agreements with other OPEC-Plus countries. Simultaneously, alternative gas pipelines continue to be built, allowing Europe to source more and more of their gas requirements from alternative providers like Qatar. In just nine months, Russia sales of oil and gas dropped by 20 percent while prices continue to decline.
Exacerbating matters is the UK-proposed price cap on Russian oil. The price cap calls for European countries to buy oil from OPEC-Plus countries (including Russia) only at a pre-determined price. The UK’s leverage is that 95 percent of all marine insurance companies are based in London. If Russia refuses to accede to the pre-determined price, British insurers can elect not to insure their oil shipments. As we are all aware, insurance coverage for oil shipments is mandated by law and a requirement for oil vessels to dock in ports.
As far as Russia’s manufacturing sector goes, trade sanctions have deprived them of microchips and this paralyzed their entire industrial sector. Russia is unable to produce cars, aerospace products, electronic equipment and critically, electronic weapons and armaments.
The Central Bank of the Russian Federation recently admitted that it expects a deep recession beginning the fourth quarter of this year. Unemployment is up, inflation is at 12.6 percent and foreign reserves are running low. In fact, scores of soldiers are protesting for not been paid their wages despite being in the frontline of battle.
More alarming for Russia is the exodus of some 360,000 men of fighting age (650,000 men since the start of the war) who fled the country following Putin’s Sept. 21 announcement that citizens will be mobilized for the war effort. These young men are critical to the workforce and the economy as a whole.
The economic sanctions of the US and EU have gained traction and the Russian economy is waning. The probability of a Russian retreat is now greater than ever.
Although far away from us, Russia’s invasion of Ukraine has affected the Philippines in profound ways. It is responsible for sharp price increases in energy, fuel and food, all of which have eroded our standard of living. The World Bank estimates that 1.1 million Filipinos will fall below the poverty line if global food prices continue to stay elevated for six months. The sooner this war ends, the better for all of us.
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Email: andrew_rs6@yahoo.com. Follow him on Twitter @aj_masigan