August 23, 2022 - 10:23am

It has now been six months since Russia invaded Ukraine. Yesterday Citi released a report arguing that inflation in the UK would hit an eye-watering 18.6% next year — their projections for energy prices showed average monthly bills rising from around £80 a month in 2021 to around £480 a month in 2023.

Annual wage growth is chugging along at just over 6%, so if Citi are correct Britain could be facing down the largest collapse in living standards in decades. The war has been a disaster for the Western economies. And while most people have managed to muddle through so far, a very dark and cold winter looms. How did we get here?

When the war started, the West was full of confidence. Our leaders assured us that the sanctions we were going to impose on Russia would collapse their economy. During a speech in Warsaw in March 2022 President Biden claimed that while Russia was currently ranked the 11th largest economy in the world, after the sanctions it “will not even rank in the top twenty”. Backing out the numbers from this statement it appears that the White House expected the Russian GDP to collapse by at least 55%.

How has this prediction worked out? Not very well. In July the IMF ran actual projections on Russian GDP growth and found that it would fall by around 6% this year. The White House was off in its assessment by a factor of around ten. That is not a simple botched forecast — that implies the White House was occupying an alternative reality.

Yet even the recession in Russia doesn’t tell the whole story. Russia is becoming enormously rich off the sanctions. The sanctions — and recent counter-sanctions in the form of the Russians withholding gas from Europe — are generating enormously high energy prices. These high prices translate to higher revenues for energy exporters like Russia. In July 2022, Russia’s trade account was generating a surplus of $166.6bn — that is more than three times higher than it was a year previously. The Russians are raking it in.

Meanwhile, as noted previously, Western economies are being badly damaged by high energy costs and energy shortages. These do not simply harm consumers; they result in massive disruptions in the industrial sector. Just today it was reported that the European metals industry is falling to pieces, with an aluminium smelter in Slovakia shutting down, and a zinc factory in the Netherlands following suit. These are key components for other sectors of European industry, such as automotive, construction and infrastructure.

This is not to even mention the enormous global realignment that is taking place in the wake of the invasion. The BRICs economic alliance looks set to expand enormously, with sixteen new potential applicants rumoured to want to join. Notably these include core oil producer and (former?) Western ally Saudi Arabia. New payments systems are rapidly rolling out to replace the Western-centric SWIFT system, with Russia and India testing out a new bilateral payments system that eliminates the need for a “one payments system that rules them all” SWIFT model.

Why did Western sanctions hurt the West and make Russia more powerful? Because we have overestimated our economic and diplomatic power. Western leaders are acting like we are living in 1995. In 2022, however, the BRICs economies are far more prominent, and the diplomatic power of Russia and China often exceeds our own.

If our leaders do not step back and re-evaluate our place in the world, they risk collapsing our economies completely and dissipating the remaining power we have on the global stage. The stakes could not be higher.

Philip Pilkington is a macroeconomist and investment professional, and the author of The Reformation in Economics