Putin wants the West to believe that sanctions have no effect. But time is against Russia.
Many believe that Western sanctions against Russia have not worked. As an excuse, critical voices point to macroeconomic indicators that are supposed to show that the Russian economy has proven its resilience. Sanctions haven’t worked as planned because Russian President Vladimir Putin shows no sign of ending his disastrous war against Ukraine.
These arguments are not valid. It’s important to remember that Russia’s economy was able to deal with the effects of Western sanctions before Putin went to war with Ukraine. First, Russia has accumulated significant financial reserves. Since 2014, it has stepped up its economic ties with Asia, allowing it to weather the decline in trade with the West. But most of all, Putin has made his system of repression stronger on purpose to stop large-scale protests against falling living standards. For all these reasons, expectations that Western sanctions could quickly bring down the Russian economy and Putin’s regime were unrealistic.
Putin has invested considerable resources in a disinformation campaign aimed at misleading people about the real impact of sanctions.
Sanctions are clearly hurting the Russian economy. If the myth that sanctions are ineffective continues to spread, it could push politicians to lift them, giving Putin a lifeline.
Some macroeconomic indicators give the wrong impression that the Russian economy has been able to handle sanctions very well. Critics of the sanctions mostly point to the fact that the ruble is getting stronger, the Russian GDP is going down a little bit, and unemployment is low. However, these figures do not reflect the real situation.
Let’s take unemployment as an example. The official unemployment rate is currently 3.7 percent. This would mean that only 2.7 million Russians are unemployed. This would be a negative record. In fact, at the end of the third quarter of 2022, nearly 5 million Russian workers were unemployed in some way. In particular, 70 percent of them were on unpaid leave. The difference between unpaid leave and unemployment is purely conceptual. In reality, 10 percent of Russia’s labor force is unemployed. This is comparable to the second half of the 1990s, when Russia had the highest unemployment rate: 10 to 13 percent of Russians were unemployed then.
Another misleading statistic is the ruble exchange rate. The ruble has gotten stronger, but that’s only because the government has made it very hard for Russian businesses and people to get their money out of the country and turn it into foreign currency. The supposedly strong ruble is supported by draconian currency controls and falling imports. This policy is hurting industries like metallurgy very badly. In 2022, finished steel production will be down by more than 7%.
Politicians who don’t like the sanctions point to the Russian Ministry of Finance’s prediction that Russia’s GDP will fall by 2.7%, which seems to show that the economy hasn’t been hurt. However, it is important to remember that this GDP figure also includes an increase in production in the arms industry. A main battle tank that was just made and sent straight to the front, where it was shot down by Ukraine with a Javelin anti-tank missile, is still only a small part of Russia’s GDP.
In any case, other indicators point to a much more serious economic contraction than the official GDP figures. Revenues from sources other than oil and gas exports may be the best way to measure Russia’s economic health. As of October 2022, these revenues were down 20% from the same time last year. The manufacturing sector, and thus the part of the Russian economy that is most dependent on Western technology and components, has been hit hardest by the sanctions. In 2022, production dropped by two-thirds in the Russian auto industry, which directly or indirectly employed 3.5 million people.
Also misleading is the Russian information that indicates a controlled level of inflation. Even the Central Bank of Russia now reports that observed inflation, that is, the estimate of price increases determined by population surveys, is 16 percent. Official statistics say that the inflation rate is just under 12%, so this is more than four percentage points higher than that. It’s easy to see why the official numbers don’t match up with people’s lives, since the Russian people’s standard of living is getting worse and worse quickly. According to a survey done by the private Russian research company Romir in October 2022, 68 percent of Russians have noticed that the number of goods in stores has decreased over the past three months. According to the Russian Public Opinion Research Center, in 2022, 35 percent of the Russian population will be forced to cut back on food spending. The Russian Public Opinion Research Institute, “Public Opinion Foundation” (POF), reported in December 2022 that only 23 percent of Russians would describe their personal financial situation as “good.”
Overall, sanctions are having a profound impact on the Russian economy. Putin is trying to improve his country’s financial situation in a number of ways. He is using import substitution to encourage domestic industry and reduce reliance on industrial imports. He is also shifting trade and investment flows to Asia and buying semiconductors and other goods from Turkey to get around Western sanctions. None of these ideas will solve Russia’s problems.
China and India are not interested in helping Russia build its own competitive manufacturing sector.
Russia has had some success getting around sanctions by importing key goods made in the West, like parts for manufacturing, through third countries, especially Turkey. In the third quarter of 2022, Russia imported more than a billion dollars’ worth of goods every month, which was twice as much as in the same quarter last year. However, Western governments can use diplomatic pressure to close these loopholes. And Putin cannot rely on foreign investment to support the Russian economy. According to the Central Bank of Russia, capital outflows from Russia are expected to reach $251 billion in 2022.
None of this means that Putin’s government is on the verge of collapse. Putin has broken up the organized political opposition by putting Alexei Navalny and most of the other major Russian opposition figures in jail or sending them away. He has scared off the Russian people by giving harsh prison sentences to those who disagree with his leadership. Now, Russians can go to jail for up to 15 years for “political extremism” or “discrediting the Russian armed forces.”
But public opinion is increasingly turning against Putin. As the collapse of the Soviet Union showed, change can happen quickly when long-suppressed popular discontent is unleashed. Therefore, policymakers should give sanctions more time to take effect. Counting on instant results is unrealistic and even counterproductive. Over time, sanctions may well dissuade Russia from aggressive actions. Western decision-makers should analyze the impact of sanctions in depth,and not be satisfied with a limited set of manipulated indicators. And above all, you have to have a lot of patience.