Russia’s economy is reeling but still on its feet

Not since the collapse of the Soviet Union has Russia faced economic upheaval on the scale provoked by Western sanctions following its invasion of Ukraine. Half of its $640 billion in foreign exchange reserves are frozen, several of its top banks have been cut off from the international payments system, and Ural crude is selling for about $20 a barrel thanks to sanctions risks Discount at international prices. About 1,000 Western companies, accounting for an estimate for 40 percent of Russia’s gross domestic product, have restricted operations.

And yet, six months after Vladimir Putin’s aggression unleashed the harshest Western sanctions against Moscow, Russia’s economy is holding up better than many expected. Though the war seems deadlocked, at least for now, and Turkish President Recep Tayyip Erdoğan claims Putin is ready for war negotiated solutionSanctions have not yet eroded Moscow’s ability to fight on.

Rapid action by Moscow’s central bank to impose capital controls and sharp hikes in interest rates have stabilized the ruble. Overall higher global oil prices offset the “Russia rebate” and rising sales to China, India and Turkey helped offset falling exports to the EU. The International Energy Agency estimates that Russian oil production last month was less than 3 percent below pre-war level.

Many Western companies have also withdrawn not entirely deserted or have sold to local buyers so the assets are still in operation. Increased trade with large emerging markets, especially TurkeyHe provided another cushion. Russia’s central bank now forecasts GDP contraction of a distressing but not catastrophic 4 to 6 percent this year; the IMF projects a 6 percent declinedown from a forecast 8.5 percent in April.

With Europeans facing unprecedented increases in heating bills, less used to hardship than Russians and more inclined to take to the streets, Putin might assume Russia is in a better position to weather the economic pain than many of its western counterparts.

He would be wrong. Sanctions would never lead to an immediate collapse of the Russian economy. Over time, however, Western action will become a tightening noose, and the costs to Russia will add up.

Western democracies will have to persevere: they must do more to reduce Russia’s energy revenues, while optimizing the design of a forthcoming EU oil embargo to ensure it does no more harm to the democratic world than Moscow. They must better prepare their people for energy price hikes through embassies and direct support, and step up efforts to dissuade Beijing, Delhi and Ankara from helping Moscow weather sanctions.

The pain of energy decoupling is likely to be shorter for the West than for Russia; For example, the EU already sees a realistic way of living without Russian gas, while the lack of infrastructure means it will take Moscow years to divert gas exports to China. Perhaps the biggest impact for Russia is not the loss of western energy markets, but western ones technology and components — which cannot fully replace Beijing or others — and hamper manufacturing and its natural resource industries, as well as its military-industrial complex.

There are parallels with the restrictions on high-tech exports to the Soviet Union after the 1979 invasion of Afghanistan. These slowed Soviet growth and deepened its technological backwardness, which, together with falling energy prices, triggered a deep crisis in the late 1980s. Sanctions may not yet have affected Putin’s ability to wage his war in Ukraine. But in doing so, Russia’s president may have compromised his ability to conduct a long campaign — or launch a similar large-scale conventional war in the future. Russia’s economy is reeling but still on its feet

Adam Bradshaw

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