July 6, 2023 - 5:00pm
Virtually every forecast, whether it concerns the war in Ukraine, the economic outlook, or the strength of far-Right parties, has a tendency to end up worse than expected. The one thing that is running better than expected is the Russian economy, with the country’s GDP growth currently outperforming Germany’s.
This is not a statement about the likely outcome of the war. Given enough Western support, Ukraine stands a good chance to regain some, if not most, of its Russian-occupied territories. But the Ukrainian counteroffensive, too, has been running below expectations so far. We can conclude, therefore, that there is something wrong with how we form expectations.
Mikhail Mishustin, the Russian Prime Minister, yesterday presented Vladimir Putin with an economic update, estimating that the economy will grow by 2% this year. Russian GDP caused a surprise by only going down 2% last year, following forecasts of a collapse of double-digit percentages. And so the aggregate effect of Western sanctions, the largest ever imposed on any country, has thus far been a minor and short-lived recession.
The 2% projection is at the upper end of forecasts, but not outrageously so. Reuters polled economists who came up with a consensus of 1.3%. The IMF has 0.7%. The Vienna Institute for International Economic Studies, which specialises in Central and Eastern Europe, put it at 1%.
These are astonishing numbers. When I wrote last year that the sanctions were failing to achieve their primary purpose of denting Putin’s war machine, I was told that the effect should be measured over a longer period. That is entirely fair: it’s the long-term effect that matters. Yet this is precisely where I would argue the sanctions are failing. Russia has succeeded in realigning its economy, evidently with the help of massive sanctions leaks through Central Asian republics, and with the assistance of China and India.
The German outlet FAZ quotes Vasily Astrov, a Russia expert at the Vienna Institute, citing two reasons for Russia’s economic resurgence. The first is the war economy, a classic Keynesian boom similar to what happened in the US and the UK during the Second World War. The second is the rise in real wages. This is in contrast to the West, where real wages are falling because of high inflation. In Russia, though, inflation is falling, from 14% at its peak last year to under 5%.
The argument in favour of sanctions was to make ordinary Russians worse off, so that Putin would lose domestic support. This has not happened, with private consumption now back at the 2021 level. A less benign factor behind the rise in real wages is acute labour shortages due to the draft.
Russia’s biggest vulnerability going forward is liquidity, but this is not a question of do or die. The country has suffered a loss of oil and gas revenues, as well as an increase in cost this year. This will result in a budget deficit, which Russia estimates to be 2% of GDP. The Vienna Institute, meanwhile, is forecasting 3.5%. In the last year, forecasts and commentators have claimed that Putin will literally run out of money by next year. This is not going to happen, as these forecasts are based on unrealistic scenarios, such as a total oil and gas embargo. Excessively optimistic military forecasts follow a similar trend, based as they are on unrealistic extrapolations about the level of Western support.
The economic situation in Ukraine remains dire, unsurprisingly, and most of the other Eastern European countries are currently registering the beginning of a recession. Since many of them are dependent on the German economy, the recession there is dragging them down.
Evidently, then, the combination of the Ukraine war and the resulting sanctions constitute a fairly symmetrical economic shock to both Europe and Russia. That is not what was expected. Policymakers would be well-advised to remember that economic sanctions are a powerful tool, one which should be handled with care. It is worth asking whether those making decisions, in the White House and the European Commission, know what they are doing.
This is an edited version of an article which originally appeared in the Eurointelligence newsletter
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SubscribeSsssh. You’ve said the unspeakable.
Anyone who believes all or most of the economic data coming from Moscow is a fool. But as even the author states, most of the growth is coming from military spending. On a related issue, India is supporting a genocidal regime in return for discounted gas – it will feel SHAME for decades.
Anyone who believes all or most of the economic data coming from Moscow is a fool. But as even the author states, most of the growth is coming from military spending. On a related issue, India is supporting a genocidal regime in return for discounted gas – it will feel SHAME for decades.
Ssssh. You’ve said the unspeakable.
Net Zero. Even worse than war. Suck it up.
Net Zero is collective suicide.
So is current use of fossil fuels.
Checked world temperatures lately?
It would be wonderful if the weather got a bit nicer, but I am in my seventies and don’t expect this to happen in time to benefit me. Perhaps it will help my children, though I am not convinced.
It would be wonderful if the weather got a bit nicer, but I am in my seventies and don’t expect this to happen in time to benefit me. Perhaps it will help my children, though I am not convinced.
So is current use of fossil fuels.
Checked world temperatures lately?
Net Zero is collective suicide.
Net Zero. Even worse than war. Suck it up.
Fascinating. When all this is over, we are going to have to have a good long think about sanctions as an economic weapon. Is it the nature of Russia’s economy that is making sanctions ineffective? Or have we completely overestimated the effects of sanctions on any national economy?
I would argue that America overestimated its ability to get most major economies to unconditionally sign on to its sanctions regime, especially when, as in much of Europe, the sanctions will, directly or indirectly, hurt the sanctioning country as much as Russia.
It didn’t help that, at roughly the same time as sanctions, the US became more protectionist (e.g., certain provisions of the Inflation Reduction Act) and also increased pressure on other countries to choose between the US and China.
Also, every country has seen what America can do to them if they depart from American doctrine (e.g., cut them off from Swift) and must consider lessening their dependence on the US at least slightly.
It’s worth noting that Putin prepared for sanctions for many years in the run up to invading Ukraine by building up reserves of gold etc. It will only last for so long.
While our willingness to fund this war will be infinite?
Longer than Russia’s capacity to continue the war.
It certainly won’t be able to reconquer any territory ever again..
Longer than Russia’s capacity to continue the war.
It certainly won’t be able to reconquer any territory ever again..
While our willingness to fund this war will be infinite?
When this ia all over we will be lucky if sanctions as an economic weapon are our key concern.
Sanctions have always been bad at achieving objectives: think Cuba, Iran, North Korea, or Venezuela (my country). Also, it is incredibly easy to launder oil. You mix your black stuff with someone else’s and nobody can track where it came from.
Russia is self-sufficient in most things. Why would they have a problem?
During WW2 they dealt with bigger privations than the absence of US fried chicken and Gucci handbags.
I would argue that America overestimated its ability to get most major economies to unconditionally sign on to its sanctions regime, especially when, as in much of Europe, the sanctions will, directly or indirectly, hurt the sanctioning country as much as Russia.
It didn’t help that, at roughly the same time as sanctions, the US became more protectionist (e.g., certain provisions of the Inflation Reduction Act) and also increased pressure on other countries to choose between the US and China.
Also, every country has seen what America can do to them if they depart from American doctrine (e.g., cut them off from Swift) and must consider lessening their dependence on the US at least slightly.
It’s worth noting that Putin prepared for sanctions for many years in the run up to invading Ukraine by building up reserves of gold etc. It will only last for so long.
When this ia all over we will be lucky if sanctions as an economic weapon are our key concern.
Sanctions have always been bad at achieving objectives: think Cuba, Iran, North Korea, or Venezuela (my country). Also, it is incredibly easy to launder oil. You mix your black stuff with someone else’s and nobody can track where it came from.
Russia is self-sufficient in most things. Why would they have a problem?
During WW2 they dealt with bigger privations than the absence of US fried chicken and Gucci handbags.
Fascinating. When all this is over, we are going to have to have a good long think about sanctions as an economic weapon. Is it the nature of Russia’s economy that is making sanctions ineffective? Or have we completely overestimated the effects of sanctions on any national economy?
Something wrong with the way we form expectations?
Most media expectations about the Ukraine war are only what the writer wants to happen. Even more so for commentators BTL. And triply so for pessimists (I am one of those).
Something wrong with the way we form expectations?
Most media expectations about the Ukraine war are only what the writer wants to happen. Even more so for commentators BTL. And triply so for pessimists (I am one of those).
“It is worth asking whether those making decisions, in the White House and the European Commission, know what they are doing.”
Is it really worth asking when the answer on so many issues in recent times, not just sanctions, has clearly been a resounding NO!
“It is worth asking whether those making decisions, in the White House and the European Commission, know what they are doing.”
Is it really worth asking when the answer on so many issues in recent times, not just sanctions, has clearly been a resounding NO!
Why was not the effect of the sanctions on the West “expected”? Just because politicians do not articulate something does not mean it was not expected.
Why was not the effect of the sanctions on the West “expected”? Just because politicians do not articulate something does not mean it was not expected.
Sanctions have reduced the ability of the Russians to replace equipment lost to the war. The shells rained on Ukraine are slowing down. Russia may be capable of feeding itself and replacing some consumer goods at the moment but it was already a low standard to begin with. Unclear what happens as oil field production begins to degrade from parts issues.
Germany has decided to self-destruct on the green platform. Will that lead to improvements elsewhere? German skills may move.
Sanctions have reduced the ability of the Russians to replace equipment lost to the war. The shells rained on Ukraine are slowing down. Russia may be capable of feeding itself and replacing some consumer goods at the moment but it was already a low standard to begin with. Unclear what happens as oil field production begins to degrade from parts issues.
Germany has decided to self-destruct on the green platform. Will that lead to improvements elsewhere? German skills may move.
“Russian minister presents overly optimistic forecast of economic growth” haven’t we heard that one before?Another statistical oversight is that if Russia loses 2% of its GDP and then gains 2% back it hasn’t regained its economy, it has still lost GDP. It would take 3 years of 1%GDP growth to regain its former standing.
Russia’s economy being smaller than Italy’s, Canada’s and Australia’s (look it up) the gulf between the West and the rest has never looked so wide. The West is objectively pulling further ahead of everyone else leaving China massively isolated. Are India going to provide a similarly tight ally to Beijing as the EU to Washington? They are the only non-western power in the top 10 and they don’t have the best relations with their neighbour.
Milton I think the comparisons with Italy, Canada and Australia are erroneous. First of all GDP figures are more a reflection of the current strength of the US led Western financial community than of tangible outputs. Purchasing Power Parity is a better but still flawed measure.Russia is totally self sufficient in everything. So a better rule of thumb would be to compare Russia with Canada but with three times the population putting Russia on about 6 trillion. This gives a rough and ready idea of the underlying strength of the Russian economy.
This was the comparison raised by the author, not me. GDP is a pretty fair measure – thus why he used it and why most people talk about it when comparing countries. Self-sufficiency is nice when you are isolated but global trade networks are a better bet in the long run.
I don’t know how PPP makes your point, Russia comes up as one of the worst countries in the world (significantly worse than some African nations). I am not an expert:
Purchasing Power Parity by Country 2023 (worldpopulationreview.com)
Perhaps you are referring to a different measure?
The problem is even Russia’ military production is now insufficient to keep the war running for long.
The fact they are forced to use T-55s that are older than me suggests they are scraping the bottom of the barrel.
And Putin dare not call for a full-scale draft.
This was the comparison raised by the author, not me. GDP is a pretty fair measure – thus why he used it and why most people talk about it when comparing countries. Self-sufficiency is nice when you are isolated but global trade networks are a better bet in the long run.
I don’t know how PPP makes your point, Russia comes up as one of the worst countries in the world (significantly worse than some African nations). I am not an expert:
Purchasing Power Parity by Country 2023 (worldpopulationreview.com)
Perhaps you are referring to a different measure?
The problem is even Russia’ military production is now insufficient to keep the war running for long.
The fact they are forced to use T-55s that are older than me suggests they are scraping the bottom of the barrel.
And Putin dare not call for a full-scale draft.
Milton I think the comparisons with Italy, Canada and Australia are erroneous. First of all GDP figures are more a reflection of the current strength of the US led Western financial community than of tangible outputs. Purchasing Power Parity is a better but still flawed measure.Russia is totally self sufficient in everything. So a better rule of thumb would be to compare Russia with Canada but with three times the population putting Russia on about 6 trillion. This gives a rough and ready idea of the underlying strength of the Russian economy.
“Russian minister presents overly optimistic forecast of economic growth” haven’t we heard that one before?Another statistical oversight is that if Russia loses 2% of its GDP and then gains 2% back it hasn’t regained its economy, it has still lost GDP. It would take 3 years of 1%GDP growth to regain its former standing.
Russia’s economy being smaller than Italy’s, Canada’s and Australia’s (look it up) the gulf between the West and the rest has never looked so wide. The West is objectively pulling further ahead of everyone else leaving China massively isolated. Are India going to provide a similarly tight ally to Beijing as the EU to Washington? They are the only non-western power in the top 10 and they don’t have the best relations with their neighbour.
As usual, the writer take a very short-term view of things.
Still, nice to not use current figures. The rouble stands at 93/$, and falling. The lowest it’s been in years. Nabiulina says it’s because of a negative trade deficit.
But what does she know? She’s not a KGB alumnus.
However, the fact that investors are disinvesting in Russia (RTS at 970, and falling) should be of some concern.
The real point is that our main economic goal in all this isn’t to see a Russian economic collapse. It’s to keep Russia hooked on a dead end commodity: oil and gas.
If we can keep Putin’s economy addicted long term to fossil fuels for all its revenue (plus production of weapons that don’t work), it will never be a threat to us again.
As usual, the writer take a very short-term view of things.
Still, nice to not use current figures. The rouble stands at 93/$, and falling. The lowest it’s been in years. Nabiulina says it’s because of a negative trade deficit.
But what does she know? She’s not a KGB alumnus.
However, the fact that investors are disinvesting in Russia (RTS at 970, and falling) should be of some concern.
The real point is that our main economic goal in all this isn’t to see a Russian economic collapse. It’s to keep Russia hooked on a dead end commodity: oil and gas.
If we can keep Putin’s economy addicted long term to fossil fuels for all its revenue (plus production of weapons that don’t work), it will never be a threat to us again.