Will the Western Sanctions Be a Blessing in Disguise for Vladimir Putin’s Russia?

After an initial collapse, this could accelerate the necessary diversification of the Russian economy. But this will take years at best.

Despite Hungary's reluctance, the European Union has just agreed to an embargo on Russian oil. The measure will allow Hungary, Slovakia, and the Czech Republic to continue to be supplied. The Europeans will do without a total of 90% of the oil they buy from Russia by the end of the year.

This is not the total embargo initially hoped for, but the European Union is getting closer to it in terms of oil with this sixth set of sanctions. So it seems logical to ask what this means for Putin's Russia as it continues to wage its heinous war in Ukraine.

One-third of the Russian federal budget is made up of revenues from the sale of oil and gas. This is the main resource of the elites, financing everything that Russians need, from civil servants' salaries and pensioners' pensions to the payment of health care and the smooth running of the police. If hydrocarbon purchases by European countries drop suddenly, this will eventually stimulate the productive diversification of the economy.

Indeed, it will become essential for the country to seek new sources of revenue and develop its civilian industries. Prioritizing internal development would also help prevent a continued brain drain from Russia. The number of researchers leaving the country has increased from 14,000 in 2012 to 70,000 in 2021. A great demographic decline threatens Putin's Russia in the long run.

Western Sanctions could accelerate the long-awaited diversification of the Russian economy

This forced diversification of the Russian economy is something that many Russians want. These people understand that the rejection of dependence on hydrocarbons can lead to a more balanced development of regions in Russia.

The figures speak for themselves about the weaknesses of the Russian economy: the EU produces 15% of the world's GDP and Russia only 1.3% even before the Western sanctions. To catch up, there is a real desire for change in society which was reflected in the last Duma elections.

Thus, in 2021, the ruling party, “United Russia”, obtained relatively worse results in the regions that are driving economic growth. These are the most educated and the ones that export resources: Moscow, St. Petersburg, and their surroundings, but also the regions of Kaluga, Samara, Sakhalin, Sverdlovsk, Khantys-Mansis, ...

On the other hand, “United Russia” remains powerful in the regions that are heavily subsidized, either because they are financially dependent on the federal center, such as the Caucasus and South Russia, or because of a very weak private sector, such as in the Republic of Tyva or Magadan.

Poverty is likely to get worse in Russia in the years to come

Even if this diversification could finally be a good thing for Russia, one should not neglect the initial collapse that will occur for its economy in the coming months. A collapse that could worsen poverty in Russia, and why not pose a threat to Vladimir Putin's power.

The differences with Europe remain glaring. In terms of GDP per capita, the standard of living in Russia is four times lower than in France, for example. In the whole EU, the standard of living at purchasing power parity is 1.5 times higher than in Russia. The share of Russians who are below the poverty line is 13% of the population, according to official statistics. The various forecasts for 2022 are alarming: Russia's GDP will decrease by at least 10-15%. It could even exceed a 20% drop in GDP if we believe the more pessimistic forecasts of certain economists.

De facto, the sanctions will increase poverty even more initially.

Nevertheless, according to the polls of the independent center Levada, Vladimir Putin's popularity index has risen from an average of 62% in 2021 to 83% in April 2022. The Russian middle class, previously opposed to Putin, is finally giving in to Kremlin propaganda and supporting this war in the belief that the West is an existential threat to Russia.

This support could be used to mobilize underdeveloped sectors, redirect the use of resources, reduce administrative pressure on business and weaken the size of the state apparatus. And ultimately, to reduce poverty. But this will still have to be proven in reality. In any case, it will depend on the resilience of the Russian people, and it will take a long time.

The Kremlin is counting on China to take the hit in the months and years to come, but Putin may be disappointed

Although renowned for its resilience, the Russian people will still be dealt a very hard blow in the coming months. The diversification that could result from the Russian economy will take years to bring real benefits to Russian citizens. In these conditions, the Kremlin will have to find a solution to absorb the shock as well as possible.

For this, the Kremlin assures that China will be able to take over from Europe.

This vision seems unlikely to me because the pandemic and the confinements are weighing on the Chinese economy and reducing its energy needs. Moreover, the infrastructure for this reorientation of energy supplies toward Asia remains limited. The “Power of Siberia”, the only pipeline carrying Russian gas to China, was operating at half capacity even before the crisis.

It should also be remembered that China wants to keep a balanced position on geopolitical issues, as China's trade with the US is about five times larger than with Russia. The same is true with the EU, which is five times more important than Russia as a trading partner for China.

Russia will be able to rely in part on its partnership with Xi Jinping's China, but Putin is likely to be disappointed if he thinks that it will be really without limits as the two dictators declared to the world in February 2022.