Even the IMF is surprised: the sanctions hurt Russia less than expected. But for how much longer?
A few weeks ago, European Commission President Ursula von der Leyen said that “Western sanctions bites are hurting the Russian economy” and that reducing dependence on Russian energy “would drain the war chest of Putin”. The promise now appears premature.
A few weeks ago, European Commission President Ursula von der Leyen said that “Western sanctions bites are hurting the Russian economy” and that reducing dependence on Russian energy “would drain the war chest of Putin”. The promise now appears premature. Since the guns started talking in Ukraine on February 24, Russia has been very sparing with economic statistics. However, the latest estimates from the International Monetary Fund, released a few days ago, show that the sanctions are indeed biting into the Russian economy: the IMF expects a contraction in GDP of 6% this year and 3.5% the year. next. That’s a lot, but it’s less than the 10% fall in GDP that even the Bank of Russia had anticipated at the start of the war. The IMF admits: “The contraction of the Russian economy in the second quarter was less than expected, as crude oil exports and non-energy exports held up better than expected.” Because the whole paradox is that the sanctions boost the income of Russian energy producers. Crude oil prices are about twice as high as last year, while natural gas prices are about six times higher. However, the rise in prices more than compensates for the fall in deliveries. Thus, between May and June, Russian oil deliveries fell by 13%. But revenues increased slightly, from 10.2 to 10.5 billion euros and are higher than those earned last year at the same period. This is even more visible when it comes to gas: compared to June last year, Russian gas exports have fallen by 25% this year but revenues have soared, reaching $11.1 billion in June this year compared to $3.6 billion last year. To this must also be added a certain Russian resilience: “the effect of the sanctions on the domestic financial sector has been limited and the labor market has contracted less than expected”, observes the IMF. And then, at the monetary level, everyone agrees that the boss of the Bank of Russia, Elvira Nabiullina, is doing an excellent job. At the head of the Bank of Russia since 2013, the one who had been elected in 2015 by the magazine Euromoney “best central banker in the world” has, as during the first series of sanctions in 2014, avoided squandering the country’s foreign exchange reserves. to save the ruble. Instead, it mobilized the weapon of interest rates, while also severely limiting currency outflows. With success since the rouble, against Western currencies, is now stronger than before the war (see the graph below) and interest rates are calming down. A few days ago, the Central Bank of Russia lowered its interest rate to 8%, a level lower than before the invasion of Ukraine. But Elvira Nabiullina’s task is far from over: inflation is still flirting with 16% and with a Russian financial system that is increasingly disconnected from the Western system, making the use of its foreign exchange reserves very problematic. . Because if Russia seems to suffer less than hoped, in the long term, the dangers accumulate. The impact of the sanctions is growing over time: the European Union has banned imports of coal from Russia from August 2022 and the transport by sea of Russian oil from 2023. Europe has also announced that it would block the insurance and financing of maritime transport of Russian oil to third countries by the end of 2022 and has just blacklisted the main Russian bank, Sberbank. Jeffrey Sonnenfeld of Yale University led a study of the Russian economy which tends to show that Russia is already taking the brunt of it far more than the Kremlin is letting on. “Russia’s strategic positioning as a commodity exporter has deteriorated irreparably as it now finds itself in a weak position in the face of the loss of its former core markets and faces daunting challenges in pivoting to Asia,” says the study. There is currently not enough gas infrastructure to sell to China the gas that Russia refuses to Europe. More broadly, continue Jeffrey Sonnenfeld and the group of economists he led, “Russian imports have collapsed, causing massive supply shortages and depriving the country of crucial parts and technology. is completely shut down and the foreign companies that have left Russia account for 40% of Russia’s GDP and hardly any are going to return anytime soon.The defeatist talk that the Russian economy has rebounded is simply not factual.The facts are that, by any measure and by any level, the Russian economy is faltering, and now is not the time to put the brakes on (sanctions),” they conclude. The fact remains that today, Russia seems to be holding up better than expected, unlike the European economies. The IMF expects the euro zone to grow by 2.6% this year and 1.2% next year. Forecasts much paler than a few months ago. “The effects of the war on the main European countries were more negative than anticipated due to the increase in energy prices as well as an erosion of consumer confidence and a slowdown in the dynamics of the economy. ‘manufacturing industry that have led to persistent disruptions in supply chains and rising costs of factors of production,’ sums up the IMF. And again, in their scenario, the fund’s experts were betting on a continuation of Russian gas supplies roughly until the end of the year, at a time when the Nord Stream 1 gas pipeline was operating at 40% of its capacity. However, we know that since then, Russia has further reduced the tap (Nord Stream is now at 20% of its capacity) and it is to be feared that Moscow will cut off all European supplies before winter. In the increasingly plausible case of this black scenario, the cessation of Russian gas supplies would be accompanied by an additional reduction in oil exports. We would then likely have new bursts of inflation and new rate hikes. And in this case, the IMF warns: growth in Europe would be close to zero next year.