Russia's economy would suffer little from all the sanctions, it is often claimed. The opposite is true, according to a study by Yale University. Russia's economy is anything but resilient. A parade of rusty tanks, trucks and rocket launchers passed through Khrushchatyk, Kyiv's main street, last week in celebration of Ukraine's 31st Independence Day. 'Putin wanted a military parade on Khrushchev. Here it is," tweeted parliamentarian Oleksi Hontsjarenko to a photo of Ukrainian day-trippers strolling among cannons and other captured Russian war materiel. Besides the ceremonial uniforms left behind in the Russian tanks, freshly steamed up for the triumphal march through Kyiv that never came, Ukrainian soldiers have been surprised at something else over the past six months: the pitiful state of the tracked vehicles. Lately, Russian tanks even appear to be full of microchips scrapped from refrigerators and dishwashers. This is because the sanctions against the Putin regime have made it impossible for the Russian military to obtain chips from Taiwanese global market leader TSMC, as well as other advanced semiconductors. In desperation, Belarusian dictator Aleksandr Lukashenko has offered that his poverty-stricken country will supply chips then - although Belarusian microchips are slightly less "micro" than those of the competition, Lukashenko admitted.
For months now, the media and reports from clubs like the IMF and the World Economic Forum have echoed the same refrain: that the Russian economy is proving so resilient despite all the sanctions. In a speech recently, Putin even bombed the West's "economic blitzkrieg" into failure. This despite an economic contraction of 4 percent in the second quarter - at least according to official Kremlin figures - while the Dutch economy still grew 2.6 percent. 'Once again, the weapon of sanctions proves to be a double-edged sword, which does as much, if not more, damage to its proponents,' Putin said nonetheless. In reality, the Russian economy is not in much better shape than the rusty tanks on the streets of Kyiv, a recently published Yale study shows. Twenty economists led by Yale professor Jeffrey Sonnenfeld not only checked the increasingly scarce statistics that the Kremlin still entrusts to the light of day, but also dug up a series of figures that do not have Putin's blessing, such as ship data, black market transactions, trade balances and customs data. From these, they purged six reasons why Russia's economic "resilience" is a myth.
1. Less gas
That Europe has blundered in recent decades by making itself dependent on Russian gas is a truism. What gets less attention is that Russia is actually much more dependent on Europe than the other way around. Before the start of the Ukraine war, 83 percent of Russian gas went to Europe, while Europe itself got 54 percent of its natural gas from non-Russian sources, such as Norway, Qatar and Algeria. Six months after the start of the war, Europe is already consuming more than 60 percent less Russian gas than it did a year ago, while the United States, with its liquefied natural gas, has surpassed Russia as a gas supplier. A big problem for Putin, because of every five rubles in his treasury, he owes three to oil and gas. At least: before the war. Now that the West has eliminated virtually all other Russian goods, his budget presumably leans even more heavily on the black and blue gold. Simply selling more gas to China won't do. There is only one pipeline, operating at half speed, from Eastern Siberia to China, and to make matters worse, there is no pipeline running between Eastern Siberia and Western Siberia, where the gas meant for Europe comes from. So diverting European gas supplies to China is out of the question, quite apart from the fact that China, thanks to an abundance of cheap coal and renewable energy, is also not keen on Russian natural gas. Last year, China took only 2 percent of Russian natural gas. By necessity, much Russian gas now remains in the ground. According to Gazprom's own figures, gas production is 35 percent lower than a year earlier. Russian oil revenues have also declined sharply. A barrel of Russian oil has fallen more than 30 percent in price since the end of February compared to a barrel of Brent oil, the benchmark for oil from the Middle East and North Sea. In all, more than half as much oil and natural gas revenue flowed into the Treasury in May, the last month for which the Kremlin published figures, than the previous month.
2. No 'turn to the east'
In recent years, Putin has been talking highly of a "turn to the east. The idea is that doing more business with China should make Russia less vulnerable to Western sanctions. So far, however, little has come of this turn. Chinese exports to Russia have shrunk by more than half since the war began. Indeed, for China, Russia is an insignificant trading partner, less important than, say, Mexico, Vietnam and the Netherlands. And China's main trading partner, the United States, does not hesitate to hand out draconian penalties to Chinese companies that do business with Russia. Hence, the world's largest bank, China's ICBC, no longer lends in Russia, Chinese energy giant Sinopec is washing its hands of Russian oil projects, and the world's largest smartphone manufacturer Xiaomi is now ignoring Russia.
3. Fewer imports
China is not the only country that has opposed Western sanctions, yet trades less with Russia. The Peterson Institute for International Economics, a U.S. think tank, analyzed the export figures of 54 countries, which together accounted for ninety percent of Russia's imports in 2021. It showed that exports to Russia from countries that are not pro-sanctions are now on average 40 percent lower than a year earlier, compared to a 60 percent drop in the case of countries that do support the sanctions. As a result, Russian industry is facing a dire shortage of parts. Production of Ladas, UAZ off-road vehicles, GAZ minivans and other Russian cars was 75 percent lower in May than a year earlier, as Russian manufacturers are unable to get their hands on brakes, airbags, microchips and other parts. Tank manufacturer UralVagonZavod recently even sent its workers on leave - in the middle of a war - because it ran out of chips for armored vehicles.
4. Artificial ruble
A showpiece of Putin's propaganda is the exchange rate of the ruble. In early March, the ruble shot to an all-time low: 150 rubles for every euro. Six months later, however, a euro is worth only 60 rubles, the highest ruble rate in years. However, this rate is no more a sign of health than the steady heartbeat of a coma patient. What does the exchange rate of a currency that is barely redeemable say? Just as doctors keep a coma patient alive with artificial respiration, the Russian central bank props up the ruble with a series of monetary horsepower. By restricting the exchange of rubles for dollars and euros, Russia prevented the tatters of its currency. The ruble trade has since collapsed completely, except in the black market, where rubles are worth up to twice as little as in the legal market.
5. Diminishing reserves
Thanks to oil and gas roubles, Putin managed to save more than $600 billion in international reserves in recent years. This war chest was supposed to protect Russia from Western sanctions. At the end of February, however, the U.S., Japan, the EU and others froze half of Russia's bank balances, bonds and other reserves, which Putin's regime had deposited mostly in euros, pounds and dollars in the West. Of the remaining $300 billion, Putin has now rushed a quarter through, partly by sprinkling money around to keep the economy afloat. At this rate, Russia will run out of reserves within a few years.
6. Exodus
The Ukraine war has triggered a Russian migration. More than half a million mostly highly educated Russians have left their homeland since late February. More than 800 international companies have left for good or not, another 300 firms are putting their Russian operations on hold for the time being. Together, these companies had more than $600 billion in capital outstanding in Russia, more than one-third of Russia's GDP. As long as the West does not take its boot off Putin's neck, the Yale researchers conclude, his regime is heading inexorably toward "economic oblivion. 'The facts show that the Russian economy, at whatever level and with whatever yardstick you look, is teetering, and that now is not the time to apply the brakes (in terms of sanctions, ed.).
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