The Sanctions Against Putin’s Russia Are Pushing the Economy Towards Total Paralysis.
It is a marathon that requires patience, but from which, Ukraine and the West will emerge victorious.
Over the summer, the European public debate has seen a growing Russian propaganda message. Western sanctions against Russia following the invasion of Ukraine were said to be a failure. Not only would the embargo not work, but it would be turning against the interests of its promoters. Worse, the Russian economy would show an unsuspected resilience.
That was all it took for some to call for the lifting of these sanctions against Vladimir Putin's Russia.
For a while, this discourse was confined to the far right and to the bangs of short-sighted populism, but it is gaining influence at a time when the damage caused by inflation and the energy crisis is beginning to be felt in the European Union. It is largely fueled by the unreliability of available statistics since the Kremlin stopped publishing updated and verifiable figures in favor of flawed and largely manipulated data.
To claim that the sanctions would be ineffective is not only false. It is above all to give credence to the narrative distilled by Russian propaganda, which has only one objective: to break Western unity in an attempt to loosen the stranglehold that threatens its economy with asphyxiation. These last days, the use of the gas weapon to plunge the European democracies into uncertainty and the fear of the shortage has no other goal.
For Putin, it is a matter of stopping a descent into hell that, without a hypothetical turnaround by Western leaders, seems inevitable. It seems more and more obvious that Putin will lose this war, and that the geopolitical mistakes he has made in starting this war will not allow him to remain at the head of Russia after the humiliating defeat has been revealed to all Russians.
So far, it can be said that Russia's disintegration is slower than expected. With low foreign debt and abundant foreign exchange reserves, it was naive to think that the world's 11th largest economy would collapse like a house of cards. At the beginning of the war, Russia's GDP decline was estimated at 15%.
In the end, the recession should be half as bad. Even so. The magnitude remains equivalent to that recorded by the eurozone in 2020, at the onset of the COVID-19 pandemic crisis. But this time, Russia has not deployed either “whatever it takes” or a massive short-time working plan to cushion the blow.
On the eve of the war in Ukraine, Russia was still counting on a 3% growth for 2022. The sanctions have therefore contributed to a 9-point decline in the economy. Only the soaring price of oil, which accounts for one-third of GDP, half of the tax revenues, and two-thirds of exports, has helped limit the damage. But with the current oil prices, without the sanctions, the growth potential of the Russian economy should be around 7%.
Russia has turned into a Potemkin village: behind a façade that gives the illusion of resilience, cracks are already threatening the foundations.
The thesis that the Russian economy is resilient is based on the fact that the country has a record trade surplus (more than $74 billion in hydrocarbon exports alone by the end of July 2022), while the ruble is showing unexpected strength. But if these two indicators are doing well, it is for the wrong reasons.
Russia's foreign trade balance bears the stigma of a collapse in imports. As for the myth of a strong currency, the situation is deceptive because it is essentially explained by the massive interventions of the Russian central bank to support the ruble and by drastic exchange control. Consumption has slumped by 10% and, due to a lack of components and markets, industrial production has fallen by 7%. In the automotive industry, the decline has reached 90%. To avoid falling to zero, the government was forced to relax safety standards by allowing vehicles without airbags and ABS brakes.
More than 1,200 foreign companies have left Russia, the equivalent of 40% of GDP, wiping out almost all of three decades of foreign investment, according to a recent study by a group of researchers at Yale University, who speak of a crippled Russian economy.
The ban on imports of industrial components also acts as a slow poison. The Russian commercial air fleet is not yet grounded, but companies are forced to dismantle some aircraft to maintain others. More troublesome for the “special military operation”, the official name of the war with Ukraine in the words of the Kremlin, is the lack of electronic components that are essential for the manufacture of missiles and tanks of the latest generation. Despite the use of smuggling channels, Russia's military potential is shrinking like a stone, due to its lack of technological autonomy.
What remains are the hydrocarbons. If Russian gas is at the center of debates in Europe, it represents only one-third of the country's oil revenues. Black gold is therefore a crucial issue for the war effort. Until now, oil revenues have continued to fill the state coffers. The sanctions, announced in May 2022, have raised world prices, but they will not be fully implemented until December 2022.
In the meantime, Europeans have continued, for lack of alternatives, to buy more expensive Russian oil, giving the illusion that the embargo has no effect. Even if China and India partially take over by buying cheap oil from Russia, the collapse of Western demand from 2023 will be a key moment in the balance of power with Russia.
The effects of sanctions are gradual and cumulative, as world experts keep reminding us. It is a marathon, which requires patience. Europeans' patience is being tested, as energy rationing and recession loom. They must convince themselves that time is on their side for democracies.
Giving up our energy comfort and purchasing power has a cost, but defending our values and our sovereignty is priceless.
Some reading
Loved in the World, Hated in Russia — This Is the Legacy of Mikhail Gorbachev. His death at a time when Putin is inflicting a three-decade setback on the Russian people is a strange symbol of history.
Buy, Hold, and Don’t Watch Too Closely – Warren Buffett’s 3 Tips for Bitcoin Bear Market. The Oracle of Omaha may have been overtaken by new technologies, but it is still good advice in some cases.
Who Is the Current Winner of the War in Ukraine? America and It Is the US Dollar That Tells Us So. The impressive strength of the US dollar does not lie.
Cold War Between America and China — The New Space Race. The war in Ukraine started by Putin also upsets the balance in space.
This 8-Letter Word Alone Explains Why the Rich Keep Getting Richer While the Poor Keep Getting Poorer. It’s up to you to use the power of this magic word!
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After reading your rant I assume it's a paid advertisement from the Zelensky Propaganda Ministry. I find it ironic that this trash emits from an author whose insight into crypto is without equal. "It is a marathon, which requires patience." Perhaps, we will revisit this in 3-5 years time and see how it has played out. Assuming your analysis is correct, I know the fickle, "what can you do for me today;" immediate satisfaction paradigm that pervades the western world does not have the patience your analysis requires. Already they are buckling. On Sunday Sweden, next weekend Italy, maybe a month later the Netherlands or Denmark, or even the UK. Of one thing I do know is that the Russian people and culture are far more resilient than any peoples in the West and their woken leaders. Moreover, you can always count on the revanchist moves by the Poles and Hungarians who will jump at the opportunity to restore lands seized by Stalin. Putin knows this also.