A year after Putin’s invasion of Ukraine, some cynics complain that an unprecedented campaign of economic pressure against Russia has not ended the Putin regime. What is missing is the transformation that has taken place in front of us: Russia has become an economic thought and a broken world power.
Coupled with Putin’s own mistakes, economic pressures are undermining Russia’s economic strength as the brave Ukrainian fighters, HIMARS, Leopold tanks, and PATRIOT missiles keep Russian forces on the battlefield. This past year, Russia’s economic engine has been crippled as our compendium of original research shows. Here are Russia’s most important economic defeats:
Russia’s permanent loss of 1,000+ global multinational businesses is compounded by mounting economic sanctions
The 1,000+ global companies that voluntarily chose to exit Russia in an unprecedented mass exodus in the weeks after February 2022, as faithfully told and updated so far, have mostly kept their promises and fully divested. is in the process of fully separating from Russia with no plans to return.
This voluntary business comes out of a profitable company in a country that accounts for 35% of Russia’s GDP employing 12% of the country’s workforce coupled with international government sanctions unmatched in scale and scope, including export controls on sensitive technologies, restrictions in the Russian elite and confiscation of assets, financial sanctions, immobilizing the assets of the Russian central bank, and removing key Russian banks from SWIFT, with even more planned sanctions.
Energy revenues fall due to G7 oil price cap and Putin’s natural gas crackdown
Russia’s economy has long been dominated by oil and gas, which account for more than 50% of government revenue, more than 50% of export earnings, and nearly 20% of GDP each year.
In the initial months after the invasion, Putin’s energy income soared. Now, according to Deutsche Bank economists, Putin has lost $500 million a day in oil and gas export earnings relative to last year’s high, with a rapid decline.
The drastic decline was accelerated by Putin’s own fault. Putin is coldly withholding natural gas shipments from Europe—which previously received 86% of Russia’s gas sales—in the frozen hope that Europeans will get angry and replace their elected leaders. However, a warmer-than-usual winter and increased global LNG supplies mean that Putin has now permanently eliminated Russia’s relevance as Europe’s main supplier, with dependence on Russian energy up to 7%–and not for long. With limited pipeline infrastructure to pivot to Asia, Putin now has almost 20% of his previous gas income.
However, Russia’s energy collapse was also fueled by shrewd international diplomacy. Capitalizing on G7 oil prices has struck an unimaginable balance of keeping Russian oil flowing to global markets while also reducing Putin’s profits. Russian oil exports have been very consistent at pre-war levels of ~7 million barrels per day, ensuring the stability of the global oil market, but the value of Russian oil exports has dropped from $600 million per day to $200 million per day as a Ural benchmark. fell to ~$45 per barrel, barely above Russia’s breakeven price of ~$42 per barrel.
Even countries on the fringes of the price cap scheme, such as India and China, are riding the G7 buyer cartel to secure Russian supplies at discounts of up to 30%.
Flight of talent and capital
Since last February, millions of Russians have fled the country. An initial exodus of about 500,000 skilled workers in March was compounded by an exodus of at least 700,000 Russians, mostly working-age people fleeing possible conscription, following Putin’s partial mobilization order in September. Kazakhstan and Georgia alone each registered at least 200,000 Russians who recently fled the war in Ukraine.
In addition, fleeing Russians are desperately filling their pockets with cash as they escape Putin’s rule. Remittances to neighboring countries have increased more than tenfold and are rapidly attracting former Russian businesses. For example, in Uzbekistan, Tashkent IT Park has experienced year-over-year growth of 223% in revenue and 440% growth in total technology exports.
Meanwhile, offshore havens for wealthy Russians such as the UAE are booming, with estimates suggesting 30% of Russia’s high-net-worth individuals have fled.
Russia will only become increasingly irrelevant as the supply chain continues to adapt
Russia has historically been a top commodity supplier to the world economy, with major market shares in the energy, agriculture, and metals complex. Putin is quickly making Russia irrelevant to the world economy because it is always easier for consumers to replace unreliable commodity suppliers than for suppliers to find new markets.
The supply chain has adapted by developing alternative sources that are not subject to Putin’s wishes. We have shown how in many important metals and energy markets, the combined output of new supply developments to be opened in the next two years could completely and permanently replace Russian output in the global supply chain.
Even Russia’s remaining trading partners apparently prefer short-term, opportunistic purchases of Russian market goods to prop up depressed prices rather than investing in long-term contracts or developing new Russian supplies.
It appears that Russia has moved towards its longest-standing fear: becoming economically dependent on China – a source of cheap raw materials.
The Russian economy is supported by the Kremlin.
The Kremlin has had to prop up the economy with ever-increasing measures, and the Kremlin’s control has increased over every corner of the economy with less room for private sector innovation.
These measures have proven to be costly. Government spending is increasing by 30% per year. Russia’s 2022 federal budget has a deficit of 2.3% – unexpectedly exceeding all forecasts despite the start of energy revenues, the withdrawal and transfer of 2.4 trillion rubles from Russia’s sovereign wealth fund which was reduced in December, and the fire sale of assets of 55 billion yuan this month.
Even these last steps are not enough. Putin has been forced to raid the cash of Russian companies in the so-called “revenue mobilization” due to the decrease in energy revenues, extracted 1.25 trillion ruble windfall tax from the treasury of the company Gazprom with other scheduled raids – and forced a massive 3.1 trillion ruble issue of local debt down the throats of Russian citizens in autumn.
More can be done
Although 2023 will increase each of these trends and damage the Russian economy, more can be done to put it on the skid.
A crackdown on sanctions evasion and smugglers, perhaps through secondary sanctions in the case of Turkey and other extreme offenders, will ensure that bad actors do not feed Putin’s war machine.
Sanctions provisions between technology, financial institutions, and commodity exports can be expanded. The pressure on companies remaining in Russia to immediately exit the country must be maintained. About $300 billion in frozen foreign exchange reserves can be seized and committed to the reconstruction of Ukraine
Tightening those screws will help improve the chances that before next year, Russia will realize it doesn’t need Putin, just as the world has learned it doesn’t need Russia.
Only then will the Russian economy and people have a chance to return to prosperity.
Jeffrey Sonnenfeld is the Lester Crown Professor in Management Practice and Senior Associate Dean at the Yale School of Management. Steven Tian is director of research at the Yale Chief Executive Leadership Institute.
Opinions expressed in Fortune.com comment pieces are solely the opinions of the authors and do not necessarily reflect their opinions and beliefs. fortune.
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