Vladimir Putin, the president of Russia, has turned to bragging about his nation’s supposed economic strength and resistance to international sanctions, even in the face of intense efforts by the US and its G7 allies to starve Moscow of military hardware and cut off its oil earnings.Putin recently made fun of the European economy by stating, “They have decay, we have growth.” Their problems are through the roof and are unmatched by ours.As the second anniversary of Russia’s full-scale invasion of Ukraine approaches, it is true that the Russian state is making billions from the sale of oil and diamonds, that its weapons facilities are running at full capacity, and that many Russian banks are still able to access the international financial system.
Russia has adapted to the numerous limitations imposed by the West. By no means is the Russian economy crumbling under their weight; in fact, it is 1% larger than it was the night before the invasion.In the long run, though, things are significantly less encouraging. War is distorting the economy and directing resources at an unsustainable rate towards the manufacture of weapons.Rostec, a state-owned defence company in Russia, produced over five times as many armoured vehicles in the year that ended in November, according to its chairman Sergei Chemezov. The manufacturing of armaments and drones has increased dramatically.
Chemezov told Putin, “We increased the production of munitions for firearms and MLRS [multi-launch rocket systems] by 50 times,” during a meeting in the Kremlin in December.That being said, building things just to have them destroyed in battle is not a viable business plan.
Building a “Ghost Fleet” for Oil Exports and Dodging Western Sanctions: Russia’s Economic Resilience
Western governments have been trying since February 2022 to reduce Russia’s revenue from oil and mineral exports, as well as to deny it access to capital and technology, which has limited its capacity to wage war.Consequently, sanctions have been imposed on over 15,000 Russian individuals and organisations, according to a database set up by the Atlantic Council.Penalties, however, take time to take effect. Russia is best at selling commodities, and there are still plenty of customers for oil and other commodities. Russia has access to ready markets for its oil and high-tech equipment that it previously bought from the West because most of Asia has not signed the sanctions. According to Alexander Novak, the deputy prime minister, 90% of Russia’s oil exports are now to china and India.
In an attempt to limit Russian oil income, the G7 countries announced that Western ships and insurance could only be used when the price of oil was less than $60 per barrel. Russia consequently established a new shipping network in order to get around the restrictions and carry on supplying to China and India.By the end of 2023, Russian income had dropped along with the price of crude oil globally, though it was still $15.2 billion in November of that year.A growing “ghost fleet,” whose ownership and registration details are concealed, is said to carry 71% of Russia’s oil exports, according to the Atlantic Council think tank, which tracks the impact of sanctions.
shipping analysts According to Windward’s September estimate, up to 1,400 boats—many of which were sailing uninsured—were allegedly used to deliver Russian oil in defiance of western sanctions.The limit on oil prices “has become subject to more widespread evasion over time, both due to direct violation of the terms of the cap and by Russia building out its own shadow fleet to transport oil,” according to Christine Abely, who wrote “The Russia Sanctions: The Economic Response to Russia’s Invasion of Ukraine.”
The US imposes penalties on companies, but Russia continues to obtain sanctioned goods and access SWIFT, posing challenges to curbing evasion.
This evasion is being attempted to be stopped by Western authorities. The US Treasury Department fined companies in Turkey and the United Arab Emirates in October for shipping Russian oil that was sold for more than the maximum amount.However, in the murky world of merchant shipping, tracking down the evasion is difficult.Moreover, the bulk of Russian banks still retain access to SWIFT, a worldwide messaging network that connects financial institutions, as the Atlantic Council notes, which enables them to settle cross-border payments and carry out international commerce. Sanctions have only resulted in the platform being cut off from a limited number of institutions.
Additionally, according to the think tank, Russia bought weaponry and dual-use technology worth more than in the first half of 2023.
Russia’s Changing Approaches: Increasing China Imports and Using Middlemen to Get Around Sanctions
A Financial Times analysis of official Russian statistics indicates that due to Western restrictions on access to precision tools, Russia has increased its imports of sophisticated machine tools from China, known as computer numerical control (CNC), tenfold. These military-useful devices have also been sold by South Korean and Taiwanese companies, according to the Financial Times.
Russia has been using middlemen with more assurance to conceal the ultimate use and location of anything from ball bearings to navigational aids. Abely claims that in an attempt to maintain its competitiveness, the US Treasury is going after these intermediaries. Last month, it placed sanctions on several Chinese, Turkish, and United Arab Emirates corporations.
Russia will pay more for this process, despite the fact that it is difficult. “Sanctions have restricted the access of Russia’s military industry to sophisticated technology and Russia has been forced to pay a premium for substitutes from other markets,” reads a new research from the Bank of Finland. Calculations show that between 2021 and 2023, the cost of Chinese goods that Russia needed for its military campaign rose by 78%.
measures against individuals, such as the freezing of their assets and the confiscation of superyachts, have not resulted in a wave of resistance to the Kremlin or even in the war among the wealthy, despite the fact that a few billionaires have expressed their objections (from relatively safe foreign locations). Relatively little of their assets have been taken by Western countries, and the Kremlin has presented them with an impossible choice: defend the homeland or risk losing everything.
Sanctions Have Little Effect on Ordinary Russians: They Don’t Stop Travel, Expensive Shopping, or the Availability of Consumer Goods
There are few signs that the average Russian has been significantly impacted by the sanctions imposed by the West.Thousands of Russians have vacations in Turkey, Egypt, and Thailand, even though it is much harder for them to go to Europe. Seven million Russian visitors visited foreign countries in the first nine months of this year, up 50% from the same period in 2022, according to the Russian tourism industry.Many of the Western goods found in Moscow’s opulent stores are imported from Kazakhstan and other developing countries.
The consequences of these fines are already being felt by customers. Reduced flight schedules and staff layoffs followed the Russian airline S7’s December announcement that 20% of its aircraft were grounded owing to unrepairable US-made engines.Regarding the European Commission, sanctions will eventually have an impact on the Russian economy. In a mid-2023 assessment, the executive branch of the European Union claimed that the effects “will further intensify over time, as the measures have a structural, long-term impact on Russia’s budget, financial markets, foreign investment, and its industrial and technological base”.