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In response to Russia’s invasion of Ukraine, the United States and its allies slammed Russia with sanctions aimed at waging war and destroying its economy.
Two years later, Russia is stronger than virtually anyone expected. How the country subverted expectations and why experts are skeptical its success will continue.
Western countries will punish Russia’s aggression by imposing price caps on oil exports, restricting imports of electronic components, freezing large portions of foreign exchange and gold reserves, and seizing overseas assets of Russian elites. I hurried. Reduce Whether central banks can use dollars and euros.
avoidance sanctions
Widespread restrictive measures have pushed Russia into recession in 2022. But the country’s economy rebounded last year, expanding by an estimated 3%, and the International Monetary Fund recently raised its growth forecast for this year to 2.6% from 1.1%.
The inflation rate soared to nearly 18% in April 2022, but fell sharply to 7.5% in February. In recent months, the unemployment rate has fallen to a record low of less than 3%. Even the Louvre, which is in trouble, The price has fallen to a 16-month low. The exchange rate against the dollar rose last fall.
President Vladimir Putin was just re-elected to a fifth term in a sham election, winning 87% of the popular vote. He is on track to become Russia’s longest-serving leader since Catherine the Great in the 1700s.
Russians may be tired of war, but gallup poll In December, records showed 56% believed their local economy was improving. The proportion of respondents who said the same about their standard of living also rose to a new high of 46%.
India and China to the rescue
This sunny situation is very different from what many experts expected. Russia defied their predictions by rapidly reorienting its economy away from the West and rapidly towards friendly countries, taking advantage of the fact that sanctions were not universally adopted or enforced.
A shadowy consortium of shipping, insurance and oil trading companies has emerged to link Russia with India, China, Turkey, the UAE and other willing partners.
As a result of so-called ghost fleets transporting Russian oil under other countries’ flags, the country’s energy revenues have fared better than expected. Russia has been able to profit from high energy prices, import munitions and other supplies, and obtain Western products such as phones and microchips through neighboring countries such as Georgia and Armenia.
More recently, political infighting within the United States over whether to continue funding Ukraine has shown that the United States is not united against Russia and likely weakened sanctions.
Eswar Prasad, a senior professor of international trade, said, “The escape valve provided by China, Russia’s ability to evade many of the sanctions, and the U.S. Congress’ blocking of military aid to Ukraine have made these sanctions both symbolic and substantive. “Their power has been significantly diminished.” A policy expert at Cornell University and a senior fellow at the Brookings Institution told Business Insider.
Difficulty ahead?
Russia’s spending on manufacturing military equipment and other war assets has accelerated national growth and strengthened the region for defense production. However, other industries and regions did not benefit as much.
“While this has been a stimulus package, other sectors have It’s pretty sluggish,” he told Business Insider.
“With the economy in good shape and consumers losing out, shortages of parts and supplies could become more acute over time,” he added.
Military vehicles at the Almaz Antei factory in St. Petersburg.
Ilya Pitarev/AFP/Getty Images
Volodymyr Lugovsky, an associate professor of economics at Indiana University, said Western sanctions are having a “painful impact” on Russia’s aviation industry, which has been unable to find suitable alternatives to Airbus and Boeing. told Insider.
He also warned the auto industry, which is struggling to obtain critical electronic components due to export bans, and the agricultural industry, which is facing severe labor shortages.
Indeed, Russia is currently surviving a widespread labor shortage, with so many people serving in the military or fleeing the country. This pushed up wages and prices and accelerated the hoarding of labor by companies.
drone attack
Russians are also facing shortages of staple foods such as beef and chicken, with egg prices soaring 40% last year as households scrambled to buy food.Gasoline is also in short supply, and Russian authorities are crack down on exports until domestic demand is met.
The Russian government is struggling with its budget, as expenditures soar and tax revenues decline. Moreover, Russia’s increasing dependence on oil exports means that any disruption, such as this month’s drone attack that destroyed an estimated 12% of its refining capacity, could have “dire consequences”. Lugovsky said.
At the same time, India ready to reduce Russia’s oil purchases faced tougher sanctions after becoming a member state of Russia biggest customer Post-invasion era.
More broadly, Russia is dealing with an outflow of people and capital, reduced access to technology and related expertise, reduced foreign investment, and pressure on the ruble, which has become difficult to convert into other currencies. .
Tight spending
We also wonder how long President Putin can continue such aggressive spending, and what his full-scale approach to investing in the military-industrial complex will do to the quality of life of Russians and economic growth in the long term. It is unclear whether it has any meaning.
“It remains to be seen whether the Russian government will be able to maintain last year’s trends, as the main drivers of growth in 2023 were public investment and public consumption,” said Igor Delanoan, deputy director of the French Russian Observatory. in Moscow, he told Business Insider.
It is no exaggeration to say that Russia could be in serious trouble if Western sanctions continue to hinder the supply of vital imports while Russia overcomes many other challenges.
“Russia’s ability to overcome sanctions should not be overestimated because the war effort is boosting the economy, but that does not necessarily translate into a productive and prosperous peacetime economy,” Prasad said.
Still, it is worth emphasizing that the West has misjudged Russia’s resilience and could do so again. Mr. Delanoe said that embassies are understaffed, experts are traveling less to Moscow, and there is less communication with colleagues on the ground, making it difficult for outsiders to properly understand the Russian economy. He warned that it was likely to become increasingly difficult.
“The risk for Western policymakers is that they will have a distorted picture of the reality of Russia’s economy that is inconsistent with political expectations of Russia’s economy and regime collapse,” Delanoe said.