If there is currently one thing in common between Vladimir Putin and his adversaries in the presidential and chancellorships of the West, it is the defiant belief that they will ultimately have the upper hand. If the gas supply to the EU states is turned off bit by bit, the Moscow warlord calculates, social unrest will inevitably occur in many places, causing governments to collapse and resistance to the Russian invasion of Ukraine to crumble. Conversely, Olaf Scholz, Joe Biden and their comrades-in-arms are counting on the Western sanctions sooner or later wearing down the economy and population of the giant empire so much that Putin will have to call off his campaign or be put out of office himself.
Political scientists, economists and editorial writers have been arguing for months about which of the two hopes will ultimately be fulfilled and who will win the war of words, defiance and perseverance. Only recently, for example, a study by scientists from the US elite university Yale caused a stir, which stated that Russia’s economy had suffered irreparable damage as a result of the sanctions and was on the verge of an “implosion” – a forecast whose assumptions were immediately dismantled by many other western experts. The sober reality is probably that the punitive measures taken by the USA, the EU and their allies are having an effect. Whether the pressure will be enough to force Putin to give up is still an open question. Instead of a quick decision, the world must be prepared for a long war in Ukraine and an equally arduous economic attrition between Russia and the West.
If you look at the current economic data, then Russia is far from an “implosion”. Gross domestic product (GDP) shrank by four percent in the second quarter of this year compared to the previous year, falling back to the level of 2018. However, the slump fell far short of the much more drastic crash forecasts made by many experts, some of whom had predicted double-digit minus values. The unemployment rate also remains extremely low at 3.9 percent, which does not take into account that, according to official figures, at least 236,000 workers are currently on furlough or forced to work part-time.
The Russian central bank saved the country from collapse
There are several reasons why the country has so far been less economically weakened than the West had hoped. First and foremost is probably the prudent action of the Russian central bank, which curbed inflation and resolutely stopped the slide in the ruble and capital flight by raising interest rates sharply, limiting dollar withdrawals by Russian account holders and forbidding banks from paying out foreign currency. Russia’s oil and gas companies were also obliged to exchange 80 percent of their euro and dollar earnings for rubles with the central bank, which thereby replenished their currency reserves and undermined the blocking of their foreign accounts. The measures were so successful that the central bank was able to reverse some of them. The ruble is now one of the few currencies in the world that not only did not lose ground dramatically against the US dollar in the past six months, but actually increased its value.
In addition, there are stimulus packages from the Russian government, which are fed from the country’s lavish reserves and ongoing oil and gas revenues. Despite all Western efforts to save energy, the latter have not fallen, but rather have skyrocketed due to the sharp rise in world market prices. This fits with the latest news that the state-controlled gas company Gazprom made a record profit of 2.5 trillion rubles (42 billion euros) in the first half of the year, in the middle of the war, despite all the sanctions and drastically reduced supplies to the EU. And there is another circumstance that is often underestimated in the West: Russian companies are extremely crisis and sanction-tested and have built up high inventories over the years and made their production methods more flexible. They should therefore be able to manage without imports from the West for a long time, some even permanently.
Conversely, the truth is that the GDP minus of “only” four percent glossed over the development a little. The import of microchips, vehicle and machine parts and hundreds of other Western products has plummeted because of the sanctions. However, falling imports have a positive effect on GDP because purchases abroad are deducted when calculating economic output. Or to put it another way: Between April and June, the private consumption of the citizens, the investments of the companies, in short the prosperity of the Russians fell more than the officially reported four percent. In addition, the economic downturn is likely to continue in 2023, even central bank deputy Alexei Sabotkin warns that Russia must adjust to a “new economic equilibrium” – a code for permanently lower growth rates. According to a columnist for the Bloomberg news agency, when Putin pretends that his country can easily put up with the sanctions, then he is presenting “Potemkin villages” to the citizens.
The West wants to become more independent from Russia. It is the same the other way around
Nevertheless, the question remains: Who gets more injuries in the long term? The Western Europeans, who will now have to use a crowbar to implement the energy transition and will probably freeze or even starve in winter? Or the Russians, whose economic base is slowly but surely eroding as a result of the boycotts by the West and the withdrawal of thousands of international corporations?
Katharina Bluhm, head of the Eastern Europe Institute at the Free University of Berlin, says it’s simply too early for a serious answer – even if this may be unsatisfactory. “On the one hand, the bloodletting of creative minds and the decoupling from Western technologies will undoubtedly leave deep marks,” emphasizes the economic sociologist, but at the same time warns against writing off the Russians too early and underestimating their willingness to change. “Possibly,” said Bluhm, “Moscow is using the crisis to finally invest more money in domestic companies and rebuild domestic value chains.” After all, the country has also imported many products in the past that do not belong to the high but rather to the middle technology segment and which it could actually manufacture itself. According to the Eastern Europe expert, this replacement process has been underway for a long time since the Russian annexation of Crimea and the Western economic sanctions in 2014: “It’s not just the West that wants to make itself more independent from Russia. It’s the same the other way around.”
And nobody needs to have one more hope: that the Russian ruling class from business, society, culture and the church will soon stab Putin in the back. “The elites are still counting on Europe not being able to withstand the sanctions against their country and ultimately dismantling itself,” says Bluhm. “As long as that’s the case, Putin is firmly in the saddle.”