Unprecedented, the sanctions against Russia have not had the expected effects. Particularly because the task is difficult, because we have underestimated the adaptation capacity of the target country, and because it is still too early.
The economic and financial sanctions imposed on Russia after its invasion of Ukraine were to “crush its economy” and “reduce the ruble to a state of ruin”, said the American president, Joe Biden, at the start of the crisis, he almost two years ago. It is true that by prohibiting trade with the aggressor in addition to freezing its assets abroad and cutting the country off from important financial channels, these sanctions were the heaviest imposed on a great power since the Second World War. .
At that time, the International Monetary Fund (IMF) expected the Russian economy to plunge by at least 10% in 2022 and 2023. Instead, Russian growth saw a modest decline of 1.2%. in 2022, followed by a 3% rebound last year. As for this year, the IMF was forced to admit last month that instead of a new relatively modest growth of 1.1%, as was still forecast this fall, Russia should do it again with a another expansion of 2.6%.
However, civilian production, including that intended for consumption, stagnated or even declined last year, the Bank of Finland reported in December. Automotive manufacturing, for example, fell by more than half compared to 2011.
The strength of the price of raw materials, particularly in fossil fuels, of which Russia is a major exporter, offset part of this decline with an increase, even if sales in this area were down compared to 2022. .
A war economy
But it was on the military front that most of the manufacturing and economic growth came last year, with industrial production increasing by around 35% since the start of the war in Ukraine. And it’s not just about building more drones and tanks. This also comes with salary bonuses for workers in the defense sector, financial compensation for soldiers sent into combat and their families, in addition to spending in the occupied territories, the Minister recently observed. Financial Times.
Experts talk about Russia’s transition to a real war economy. Rather conservative in matters of public finances, the Russian state has fallen into a sort of “military Keynesianism”, with a third of its expenditure devoted to the war effort, three times more than before the invasion of Russia. Ukraine.
This trend does not seem any closer to being reversed, noted at the end of last year The Economist. The government’s defense budget is expected to be equivalent to 6% of gross domestic product (GDP) in 2024, more than spending on health, education and the environment combined and unseen since the fall of the Berlin Wall. No doubt having the approach of the presidential elections in mind, Moscow should also increase its various economic recovery measures to 5% of GDP, i.e. more than in response to the COVID-19 pandemic.
All this money spent is heating up the Russian economy so much that its main concern lately has not been recession, but inflation. Exceeding 7%, the surge in prices and wages, combined with the weakness of the ruble, forced the central bank to raise interest rates to 16%.
Kafka in kyiv
This does not mean that the countries which wanted to sanction Russia were not serious, notes the Bruegel Institute. The latter have, among other things, almost completely severed their commercial relations with the pariah, sometimes at great cost. The value of Russia’s exports to the European Union plunged, for example, from a total of just under 26 billion a month just before the war to less than 4 billion last December. The problem is that part of the ground lost by Russia on the side of some has been occupied by others, such as China and India.
It is also because Russia has resorted to all sorts of tricks to circumvent the embargo to which it is subject, particularly in its vital energy and defense sectors. It has thus turned to a fleet of “ghost ships” to export its oil to markets less careful than Western countries, with their ban on buying, transporting and even insuring Russian black gold.
This game of hide and seek is even more troubling in the case of components and equipment linked to military production, notes the Ukrainian economic institute KSE. At the heart of Russian arms production before the war in Ukraine, microprocessors, sensors, electronic components and elements of communication systems manufactured by American, European, Japanese and even Canadian companies were initially more difficult to find, before becoming accessible again to the Russian war effort after detours to China, Turkey or the United Arab Emirates. It has reached the point where of the almost 3,000 components needed to manufacture the weapons currently used by the Russian army in Ukraine, 95% still come from companies from countries in the coalition opposed to Russia.
We are thus faced with the “Kafkaesque” situation where Ukraine must beg its allies to provide it with more military equipment to defend itself against attacks from missiles, drones and other Russian weapons made from components produced by companies of its same allies, deplores KSE.
The price of war
Countries opposed to the Russian invasion are now trying to plug the holes in their sanctions. Europe announced on Wednesday that it now also had in its sights Chinese and Indian companies which have become accomplices of Russia. Turkish and Chinese banks have also started to distance themselves from Russian companies since Washington suggested that it will soon attack any financial institution that is complicit in circumventing sanctions.
Russia will pay, one day or another, the economic price for its war in Ukraine, several economists continue to believe. Because its war economy is not sustainable in the long term. Because there will be a cost to its economic break with developed countries and for having neglected other priorities more conducive to long-term development all this time. Or because it is estimated that between 820,000 and 920,000 Russians have left the country since the start of the war, either to avoid having to fight it, or because they saw their future elsewhere.
But “there is no magic weapon”, concluded Wednesday The Economist. “Economic and financial war cannot replace sending Ukraine the money and weapons it needs. »