Opinion: Waves of sanctions were meant to crush Russia’s economy, but it still shows signs of resilience

Valves near a drilling rig at a gas processing facility on Russia’s Arctic Yamal Peninsula May 21, 2019.MAXIM SHEMETOV/Reuters

Towards the start of the war, as sanctions piled up, Russia’s economy was seen as doomed, possibly forcing President Vladimir Putin to call for a quick peace. Nearly three months later, there are no signs that a peace deal is about to be negotiated, and there are no signs that the Russian economy is collapsing. The two can be linked.

Yes, the Russian economy is suffering and undoubtedly in recession. But the economy is also showing embarrassing signs of resilience, largely because oil and natural gas revenues are rising even as Europe tries to wean itself off Mr Putin’s hydrocarbons as punishment for launching a unprovoked war that kills an alarming number of civilians. and trigger war crimes investigations.

Last week, the International Energy Agency said Russia’s oil revenues had risen 50% this year, even as some refiners refused to accept Russian shipments. But other refiners are buying as much as they can – China and India are gobbling up cargo that Europe and North America no longer want. Moscow has earned around US$20 billion this year – money used to finance the war – from the sale of crude and refined products.

At the same time, the sanctions, coupled with the proposed embargo on Russian oil exports to Europe, are sending Europeans into a low-level panic that intensifies daily as energy prices soar and widespread inflation takes off – always a popularity-shredding recipe for any politician in power.

This week, Italian Prime Minister Mario Draghi, calling for a ceasefire and the start of peace talks, indicated that the country’s support for the war is waning. Italy was one of the European countries most dependent on Russian energy and one of the biggest exporters to Russia – until the start of the war. Recent polls indicate that nearly half of Italians now oppose sending arms to Ukraine and a similar proportion say that Russia should be handed over Crimea and eastern parts of Ukraine only it currently occupies, if that is what it takes to end the war. The figure is double the level of those who think Ukraine should fight to recover territories lost to the Russians.

Sanctions and embargoes are delicate, often dangerous activities. The idea of ​​work is that those who receive should suffer much more than those who deliver. In this case, the pain is shared by both sides, even if Russia suffers more. Yet, as energy writer Irina Slav points out, Europe’s assumption – that Russia needs to sell its hydrocarbons to Europe more than Europe needs to buy them – may not be true.

Take Hungary. The European Union struggles to ban oil imports from Russia because Hungary is totally dependent on Russian oil; its economy would grind to a halt without them, especially since most of its refineries are unable to process non-Russian oil. About two-thirds of Hungary’s oil and more than 80% of its gas come from Russia.

And because much of the rest of Europe is also dependent on Russian hydrocarbons, the sanctions take on a two-way flavor. Finland revealed on Friday that Gazprom, the Kremlin-controlled gas giant that has a monopoly on Russian gas exports, will stop supplying gas to Finland on Saturday (since Russia supplies only 5% of Finland’s gas, this decision does not will not do much harm but serve as a warning to European heavyweights much more dependent on Russian gas, especially Germany and Italy).

Sanctions and embargo wars, like the war in Ukraine itself, are getting ugly, with no obvious winners or losers. The West is still waiting for the Russian economic implosion.

In March, shortly after the start of the war, JPMorgan forecast a 35% drop in Russian GDP in the second quarter compared to the same period in 2021. Earlier this month, the Wall Street bank said the drop of GDP would probably be less severe than it had anticipated. They wrote that the data “does not indicate a sharp drop in activity, at least for now.”

One of the reasons for Russia’s relative poor health is that the country’s oil and gas export revenues are not only intact – they are growing – even as the EU tries to reduce, and eventually stop, imports of these fuels (the United States and Canada have already banned Russian oil and refined petroleum products).

Russia was making a fortune from oil and gas revenues even before the war began, as global demand grew. Oil began to soar around this time last year as pandemic restrictions eased and economies came back to life. Brent, the international benchmark, is up 73% in one year; OPEC’s failure to meet its oil production target certainly adds to upward pressure on prices, much to the chagrin of Americans. Mr. Putin is not complaining.

As Russia’s hydrocarbon revenues rise, its current account surplus, which includes trade and some financial flows, is at record highs. The Institute of International Finance recently estimated that Russia’s surplus could reach $250 billion this year, roughly double the figure recorded in 2021. Meanwhile, the Russian rouble, which was downed early in the the war, has recovered and is one of the best performing currencies in the world, in part because of capital controls and Moscow’s insistence that Gazprom be paid in rubles, not dollars or euros.

Of course, Russia is suffering. Various Russian and international forecasts predict that Russian GDP will shrink by 10% this year. The Russian central bank is hampered by sanctions on its foreign exchange reserves and Western companies are leaving en masse (although Russian companies are recovering some of these abandoned assets at sell-off prices). But the country is not suffering enough to be motivated to end the war to save its economy. That may change, but probably not anytime soon.

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