Western sanctions are catching up with Russia’s wartime economy

For months Putin has claimed that the ‘economic blitzkrieg’ against Russia has failed, but Western sanctions imposed following the invasion of Ukraine are sinking deeper and deeper into the Russian economy, exacerbating equipment shortages for its military and hampering its ability to launch any new ground offensives or build new missiles, Russian economists and businessmen said.

Recent figures show that the situation has deteriorated considerably since the summer when, buoyed by a steady stream of oil and gas revenues, the Russian economy seemed to stabilize. Figures released by the Ministry of Finance last week show that a key economic indicator – tax revenue from the non-oil and gas sector – fell 20% in October from a year earlier, while the Russian agency Statistics Rosstat reported that retail sales fell 10 percent year on year in September, and freight turnover fell 7 percent.

“All objective indicators show that there is a very sharp drop in economic activity,” said Vladimir Milov, Russia’s former deputy energy minister, now a leading opposition politician. in exile. “The spiral is intensifying and there is no way out now.”

The Western ban on technology imports affects most sectors of the economy, while the Kremlin’s forced mobilization of more than 300,000 Russian conscripts to serve in Ukraine, combined with the departure of at least as many abroad fleeing conscription, dealt an additional blow, say economists. In addition, Putin’s own restrictions on gas supplies to Europe, followed by the unexplained explosion of the Nord Stream gas pipeline, led to a sharp drop in gas production – down 20% in October from the previous year. Meanwhile, oil sales to Europe are plummeting ahead of the European Union embargo due to be imposed on December 5.

The Kremlin has trumpeted a weaker-than-expected GDP decline, predicted by the International Monetary Fund at just 3.5% this year, as demonstrating that the Russian economy can withstand the series of draconian sanctions.

But economists and businessmen said the GDP figures did not reflect the true state of the Russian economy because the Russian government has effectively ended the convertibility of the ruble since the imposition of the sanctions. “GDP has ceased to make sense because firstly, we don’t know what the real ruble rate is, and secondly, if you produce a tank and send it to the front where it is immediately exploded, it is still considered as an added value,” said Milov, who wrote a report explaining the situation of the Wilfried Martens Center for European Studies published this month.

Deeper problems were also lurking in Russia’s banking sector where most accounts have been shelved. Russia’s Central Bank announced this week that a record $14.7 billion in hard currency was withdrawn from Russia’s banking system in October, amid growing concerns about mobilization and the state of the economy.

Despite this, a November Central Bank report warned that Russia’s GDP would face a steeper contraction of 7.1% in the fourth quarter of 2022, after falling 4.1% and 4% from last year in the previous two quarters. Last week, as Russia’s economy officially entered a recession, Central Bank President Elvira Nabiullina told lawmakers that next year the situation could get even worse. “We really have to look at the situation very soberly and with open eyes. Things can get worse, we understand that,” she said.

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Putin’s announcement in September of a partial mobilization of troops dealt a severe blow to the business climate. “For many Russian companies, the reality of war has taken hold,” said Janis Kluge, senior associate at the German Institute for Security and International Affairs. “It has become clear that this is going to continue for a long time. Now the expectations are much worse than they were over the summer.

Putin’s creation of the coordination council, headed by Prime Minister Mikhail Mishustin, was a sign the Russian president is rattled by the growing impact of sanctions, economists and analysts said. Putin “fears he will have to step in to make sure supplies will be available,” said Sergei Guriev, provost at Sciences Po in France. “He fears that the sanctions have really harmed the ability to produce goods.”

It also signals that the Russian government is preparing a broader mobilization of the Russian economy to supply the military amid chronic shortages of basic goods such as food and uniforms. A series of new laws will impose heavy fines on businessmen who refuse to fulfill orders from the Russian military as well as potential prison terms, paving the way for pressure on contractors to supply goods at unbeatable prices. The creation of the council is “related to strong pressure on companies and the need to apply a strict diktat to force companies to do what they do not want”, said Nikolai Petrov, senior researcher for Russia and Eurasia at Chatham House in London.

A Muscovite businessman with links to the defense sector said a quiet mobilization of the Russian economy had already been underway for a long time, with many contractors forced to produce supplies for the Russian military but fearing to denounce orders at reduced prices.

“It became necessary from the start of the war,” the businessman said, speaking on condition of anonymity for fear of reprisals. “The main body of business is silent. If you say you make supplies or weapons for the Russian state, you might get in trouble abroad.

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Anecdotal evidence reported in the Russian press pointed to huge problems with the supply of equipment to newly recruited Russian conscripts. An October in-depth report in the Russian daily Kommersant described huge shortages of ammunition and uniform supplies for conscripts, with manufacturers citing difficulties in obtaining the necessary materials due to sanctions.

Other Russian businessmen have said that Russia’s military debacle in Ukraine has exposed the huge inefficiencies and corruption of Russia’s military-industrial complex. “There are huge questions about where all the trillions of rubles of the last decade have been spent,” said a former senior Russian banker with ties to the Russian state.

If the new economic council fails to better coordinate the production of supplies and armaments, it could impinge on Russia’s ability to launch new offensives in Ukraine, Petrov said. “The main problem awaiting the Kremlin is the question of when the army will be ready to start a new military action in Ukraine, and the preparation of weapons and ammunition, etc., will determine these plans.”

The outlook looks likely to worsen when the EU embargo on Russian oil sales comes into force on December 5, economists said. Combined with a price cap expected to be imposed on all Russian oil sales outside the EU, the measure could cost the Russian budget at least $120 million in lost revenue per day, Milov said, and already the Russian budget is expected to run into a deficit by the end of this year.