Western sanctions take toll on Russia’s wartime economy

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When Russian President Vladimir Putin established a new council to coordinate supplies for the Russian military last month, he seemed to recognize the extent of the country’s economic problems, and it was palpable. its urgency.

“We must be faster in deciding on questions related to the supply of special military operations and the opposition to restrictions in an economic situation that, without expansion, is truly unprecedented,” he said.

For months, Putin has said that his “economic blitzkrieg” against Russia has failed, but that Western sanctions imposed over the invasion of Ukraine are cutting deeper into Russia’s economy. , increasing the lack of equipment for his army and hindering his ability to invade new lands or invade. build a new missile, say Russian economists and businessmen.

The latest figures show that the situation has worsened significantly since the summer, supported by oil and gas revenues, the Russian economy appears to have stabilized. Figures released by the Ministry of Finance last week showed a key economic indicator – tax revenue from the non-oil and gas sector – fell 20 percent from in October compared to a year earlier, while the Russian state agency Rosstat reported that retail sales fell by 10%. year-over-year in September, and commodity prices fell 7 percent.

“All objective indicators show a sharp decline in economic activity,” said Vladimir Milov, a former Russian deputy energy minister who is now a leading opposition politician in exile. “The spiral is increasing, and there is no way out now.”

Western bans on technology imports affect most sectors of the economy, while the Kremlin’s forced mobilization of more than 300,000 Russian soldiers to serve in Ukraine, with withdrawals those abroad at least escaped the bill, caused more blows, said economists. In addition, Putin’s own restrictions on gas supplies to Europe, followed by the unexplained explosion of the Nord Stream gas pipeline, led to a drop in gas production — down 20 percent from in October compared to the previous year. Meanwhile, oil sales in Europe are falling ahead of EU sanctions expected to take effect on December 5.

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The Kremlin has pushed for a lower-than-expected GDP contraction, forecast by the International Monetary Fund to be just 3.5 percent this year, showing that the Russian economy can withstand the severe punishment.

But economists and businessmen say that the GDP growth rate does not reflect the true state of the Russian economy because the Russian government has effectively stopped converting the ruble since the sanctions were imposed. “GDP stopped being meaningless because firstly we don’t know what the real exchange rate of the ruble is, and secondly, if you produce a tank and send it to the front that immediately explodes, it’s still considered value added,” said Milov, who wrote a fact-finding report for the Wilfried Martens Center for European Studies published this month.

Deep problems were also hidden in the Russian banking sector where most of the accounts were classified. The Russian Central Bank reported this week that $14.7 billion in hard currency was withdrawn from the Russian banking system in October, amid growing concerns about stimulus and the economy. .

However, a November report by the Central Bank warned that Russia’s GDP will face a sharp contraction of 7.1 percent in the fourth quarter of 2022, when fell 4.1 percent and 4 percent year-on-year in the previous two quarters. Last week, as the Russian economy officially entered recession, Central Bank President Elvira Nabiullina told lawmakers that next year the situation could worsen. . “We really need to look at the situation carefully and with open eyes. Things can get worse, we get that,” he said.

The angry families say the Russian troops thrown in earlier were unprepared

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Putin’s announcement in September about the partial mobilization of the army caused a huge blow to business sentiment. “For many Russian companies, the reality of the war has sunk in,” said Janis Kluge, senior fellow at the German Institute for Security and International Affairs. “It was clear that this was going to continue for a long time. Today the outlook is much worse than it was in the summer. “

The creation of Putin’s coordination council, led by Prime Minister Mikhail Mishustin, is a sign that the Russian president is nervous about the growing impact of sanctions, economists and analysts say. Putin “is worried that he needs to intervene to make sure there will be supplies,” said Sergei Guriev, provost at Sciences Po in France. “He’s worried that the sanctions have really hit productivity.”

It also reveals that the Russian government is planning a wider stimulus to the Russian economy to fund the military amid shortages of basic goods such as food and uniforms. The new set of laws will impose heavy fines on businessmen who refuse to comply with Russian military orders as well as possible prison terms, clearing the way for businessmen to be forced to supply goods to the price goes down. The establishment of the council “is connected with the great pressure on business and the need to implement a strict diktat to make business do what it does not want to do,” said Nikolai Petrov, senior research fellow on Russia and Eurasia at the Chatham House in London.

A Moscow businessman with ties to the defense sector said there had been a quiet stimulus to the Russian economy, with many contractors forced to produce parts for the Russian military but afraid to speak out against the price order. the price.

“It became necessary from the beginning when the war started,” said the businessman, speaking on condition of anonymity for fear of reprisals. “The mass of the company is silent. If you say you are making parts or weapons for the Russian state, you may have problems abroad. “

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As Putin escalates the war, some of Russia’s business elite are dismayed

Anecdotal evidence reported in the Russian press pointed to serious problems in supplying equipment to the newly formed army. An in-depth report in October in the Russian daily newspaper Kommersant described shortages of ammunition and military uniforms with manufacturers citing difficulties in securing the necessary equipment. because of the punishment.

Other Russian businessmen say Russia’s military debacle in Ukraine has exposed massive inefficiencies and corruption in Russia’s military-industrial complex. “There are serious questions about how billions of rubles have been spent over the past decade,” said a senior Russian banker with ties to the Russian state.

If the new economic council fails to better regulate the production of goods and weapons, it could hamper Russia’s ability to launch a new offensive in Ukraine, Petrov said. “The main issue before the Kremlin is the question of when the army will be ready to start a new military operation in Ukraine, and the preparation of weapons and ammunition and so on will determine those plans.”

The outlook looks set to worsen when the European Union’s ban on Russian oil sales comes into force on December 5, economists say. If combined with the expected oil price restrictions on all oil sales outside the European Union, the measure could cost the Russian budget at least $120 million in lost revenue per day, said Milov, and the Russian budget is expected to raise money. deficit at the end of this year.

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