Following the launch of Russia’s “special military operation” and invasion of Ukraine on February 24, 2022, Joe Biden and EU leaders confidently asserted that Western sanctions would bring the Russian economy to its knees. A primary stated objective of sanctions was to cut off revenue to the Russian government from the sale of natural gas, crude oil, coal, and related energy products into Europe. While the West mercifully declined to impose sanctions on food and agricultural products, U.S. controlled banking and financial system blockades on payments to Russia meant that food insecure countries in Africa and elsewhere struggled with how to pay for them.
I wrote in American Greatness in June 2022 that Russia would successfully navigate economic sanctions, which I asserted would instead largely boomerang on Europe and the West. I argued that, in addition to hurting the economies of the EU member states more than Russia’s, by banishing Russia from the West, we would inadvertently strengthen China’s influence over Russia, while accelerating the process of de-dollarization and the establishment of an alternative global financial system—none of which would be in the long-term strategic interest of the United States.
Following the announcement of sanctions, the Russian stock market fell precipitously, as did the ruble against the dollar. The World Bank described U.S. led sanctions against Russia as the “largest coordinated economic sanctions ever imposed on a country,” predicting that “Russia’s economy will be hit very hard, with a deep recession looming in 2022.” Western businesses were told to get out of Russia, never mind that they are still operating in China despite the continuation there of what has been officially determined by the United States and the West to be a genocide. Many U.S. and European companies dutifully obeyed, announcing plans to leave the Russian market altogether. Some chose instead to scale back operations or at least reduce their visibility, while still others determined to remain and carry on business as usual.
Now, one year later, what do we know? How have sanctions impacted Russia?
Most of the newly released economic data for year-end 2022 largely indicates that while Russia was negatively affected, the effects of sanctions have had much less impact than predicted. Given that someone in the ether appears to be blocking access by U.S. persons (even with VPNs) to Rosstat, Russia’s official government statistical service, some of this data has been difficult to obtain.
The most basic question is economic growth. Russia’s GDP (gross domestic product) contracted in 2022, but only by 2.1 percent (first estimate). Russia’s government had warned in mid-2022 of a 12 percent potential decline in 2022 GDP, in line with the World Bank’s estimate of 11.2 contraction. But then a remarkable thing happened. For nearly every barrel of oil, ton of coal, or cubic meter of gas that the West rejected, buyers in China, India and elsewhere took them up, minimizing the impact on Russia’s economy. For good measure, Russia insisted that their fuel stock be paid for in rubles, which the acquiring nations agreed to pay, driving the ruble, which had fallen 45 percent in February 2022, well above pre-invasion highs. The ruble ended 2022 as the best performing currency against the U.S. dollar amongst the top trading pairs.
Rather than decreasing as planned, Russian exports increased, growing from 9.3 percent to 12.8 of GDP, as fuel and energy prices rose substantially. Imports were down some 18 percent, yet exports reached a record $532 billion, and the trade surplus hit a record high of $316 billion. This was not the outcome the sanctioning leaders of the West had expected.
A new round of sanctions, along with price caps, were imposed in late 2022, impacting an estimated 51 percent of Russian crude and 64 percent of oil products. Yet so far in 2023, oil export volumes remain high despite these newly imposed sanctions and price cap mechanisms.
A February 2023 study on the impact of oil sanctions confirms what was already increasingly evident: Russia is redirecting its crude and thereby maintaining overall volumes at near normal levels. While Russia is selling at a discount, it is a small discount, such that the revenue impact may not be as severe on the national budget at current volumes. And the study also points out that many of the sanctioning countries are buying remarketed Russian oil from markets outside of Russia. According to the authors, the best that the West can do to improve this situation is to “focus on enforcement,” and lower price caps further (what a great idea) noting that many of these sanctions have only recently been implemented.
The value of Russia’s stock market is down substantially since the end of 2021, as foreign investors in the United States and parts of Europe were forced to divest their holdings under the sanctions regime. The MOEX Russia Index, a market-cap weighted index of Russia’s largest companies, is down over 41 percent in local currency terms from year-end 2021 through February 2023. The remaining non-sanctions aligned foreign investors have fared only slightly better, benefiting from the rise of the ruble, as the U.S. dollar denominated index of the same Russian companies, RTS, is down a mere 34 percent over the period. According to the Bank of Russia’s data, volumes for equities and derivatives collapsed some 75 percent and 90 percent, respectively, in 2022.
Russian bondholders, on the other hand, fared well, with the RUABITR aggregate bond index up nearly 10 percent in local currency terms, as interest rates fell from not only early 2022 highs but below 2021 levels. Bond and investment unit trading volumes increased by 26 percent and 44 percent, respectively, making up some of the lost ground in equities and derivatives. The bond market was nearly 10 times the size of the equities market in 2022, so the wealth effect is notable.
The EU nations appear to be adhering to Russian demands for payment in rubles, with euro to ruble trading volume on the Moscow Exchange up 47 percent year over year, according to data from the Bank of Russia. To accommodate foreign payments in rubles, and of course to finance the destructive spending required of wars, Russia’s money supply (M2 basis) increased by 24.4 percent in 2022. Banking sector total assets increased by 16 percent as the money supply grew. Look for a read through to future inflation, along with weakness in the ruble going forward. The Russian government appears to be applying stimulus on top of inflationary war spending, which may be long-term defeating, as it was for the Johnson Administration in the United States during the Vietnam War.
Russia’s official inflation rate for 2022 was elevated at 11.9 percent, nearly half the estimate from the World Bank, which predicted 22 percent inflation for 2022. Russia’s 2022 inflation was only modestly above rates seen across Europe. The Bank of Russia is now forecasting a reduction to five to seven percent inflation in 2023, tempering that optimism by noting that “pro-inflation risks from the labour market persist.” In other words, workers are scarce, especially in technical and highly skilled positions, and real wages may not keep up with inflation as the wage-price spiral continues.
In the meantime, Russia has been moving forward on alternative financial and payment systems with countries including China, India, Turkey, South Africa and many others to circumvent the U.S. dollar’s cross-border payment monopoly through the SWIFT network. At the same time, these countries are strengthening trade, economic, financial, diplomatic, and military ties in what increasingly appears to be a new anti-American alliance. We have brought this upon ourselves by the weaponization of the U.S. dollar dominated global financial system.
In summary, it appears that economic sanctions against Russia are not yet having the West’s desired effect. As painful as they may be to ordinary Russians or the government itself, they are certainly not in the magnitude expected or required to achieve the United States’ broader strategic objectives, which appear to be both destabilization of the Russian economy, stimulation of social unrest, and, ultimately, regime change. An independent poll from January 2023 indicates that 75 percent of Russians support the war, up from 71 percent last year. The government remains adequately financed and the economy holding up, with the IMF projecting some modest GDP growth in 2023.
Since many of the sanctions only became fully effective in the fourth quarter of 2022, it may be too early to reach a definitive conclusion. But for the moment, economic sanctions are doing what they always do: giving Western leaders a lot of virtue signaling and public relations opportunities, but with little tangible result.
Next week I will expand on the question of whether sanctions are having a boomerang effect on the West, harming both Europe’s economy and energy security, while acceleration the process of undermining the U.S. dominated global financial system, and inadvertently pushing Russia, a potential U.S. ally or at least a neutral, into the hands of our most formidable potential adversary.