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Since the Russian invasion of Ukraine almost a year ago, efforts have been made to destroy the economy.
Russian business has been cut off from vast areas of the Western world. The oligarchs have been sanctioned and their yachts seized. However, almost all measures of the Russian economy have weathered the past year better than expected.
“There are clear signs of a slowdown in the Russian economy,” said Desjardins chief economist Marc Desormeaux. “But things did not turn out as feared when this conflict erupted.”
Beyond the staggering human cost of war, the economic toll also adds up. Russia spends trillions of dollars to finance its military, kept fueled by the oil and gas sector, but without a large surplus to be used.
As President Vladimir Putin crows about Russia’s resilience, some economists predict the economy will shrink, reducing its ability to keep its war machine running.
Tougher than expected
Before the invasion of Ukraine on February 24, 2022, Russia supplied 40 percent of Europe’s natural gas. It also sells about 25 percent of Europe’s oil.
As the European market closed, the Russians rushed to find new markets.
“This is a major [question] at the beginning of this conflict, will Russia be cut off from the global economy?” Desormeaux told CBC News.
“So instead of sending a lot of oil to the EU, a lot of it is sent to India, China, Turkey and other trading partners.”
The new trading partner demanded some heavy discounts from Russia.
But combined with a sharp rise in energy prices, the new market allows the Russian economy to keep running solidly.
“Thus, even if Moscow has to lower the price of crude oil on the global market, the energy sector still provides the government with profits to use in the war because the break-even price of oil production is relatively low,” wrote BMO senior economist Art Woo after Russia posted its third-quarter GDP results. last fall.
“That’s the truth [the Russian economy] continues to do better than many think after being sanctioned,” Woo wrote.
But it’s shrinking, slowly
However, economic activity has slowed considerably. The Russian economy officially fell into recession last fall. In the third quarter alone, GDP shrank by four percent annually.
The International Monetary Fund said after a bad year, with GDP shrinking by 2.2 percent in 2022, Russia’s economy is now poised to bounce back.
In its annual global economic outlook, the IMF said Russia would avoid recession this year and grow by 0.3 percent.
The news was seized by the Russian president.
“It is not only Russia that is enduring these shocks that have been expected, which means a reduction in production, the level of the labor market – by all indications, small growth is expected, not only by us,” Putin said.
But not everyone is as convinced as the IMF that Russia has better days ahead.
Just consider the official numbers. Russia’s finance minister said oil and gas revenues could drop another 24 percent. And the forecast assumes oil prices will reach $70 US per barrel (Russian oil is currently trading below $60 US / barrel).
“Russia’s economy has not collapsed, but it is shrinking,” said Mark Manger, a professor at the Munk School of Global Affairs and Public Policy at the University of Toronto.
“It’s shrinking slowly. And part of it until very recently, the money is still rolling in.”
Manger notes, at current prices and the discounts demanded by India and China, Russia no longer has a surplus.
The prognosis is less rosy
So, contrary to IMF forecasts, many others say that the pain in the Russian economy is just beginning. The World Bank predicts another three percent drop in GDP this year. The Organization for Economic Co-operation and Development (OECD) predicts a six percent decline in 2023.
And Manger says the combined effect of a dwindling surplus and an economy slowly creaking to disaster is changing a lot.
“So now the Russian state is spending a lot of money on a very expensive war,” Manger said, “all that money coming in.”
“Putin’s energy is over,” tweeted Robin Brookschief economist at the Institute of International Finance.
He said that Russia should post a large current account surplus by 2022. But by the end of January this year, the surplus had been significantly reduced.
“The West has great power to destroy the Russian war machine. We can cut off the flow of money to Russia and stop this war,” Brooks posted.
Desormeaux said Russia still has a national wealth fund it can tap into. What is being watched is how the sanctions will continue to be implemented this year.
“Maybe we haven’t seen the full impact of the various rounds of sanctions in the data, but some of these things will take time,” said economist Desjardins.
During a break in the fighting in Bakhmut, Ukrainian soldiers gave a first-hand account of how they managed to hold the strategic city even as Russian fighters changed their tactics and sometimes became more deadly.
Manger said some people expect the sanctions to damage Russia’s economy and force the government to rethink the war in Ukraine. But he says it’s not like sanctions.
“Sanctions are not effective in destroying the regime,” Manger said. “And sanctions may not be as effective in stopping them as war in the short term. But in the long run, they can damage the economy.”
Manger said the calculation has changed and time is now on Ukraine’s side as it can wait and see how the Russian economy will fare.
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