Is the Russian economy stabilizing — or doomed? Both. – Grid News

Introducing Grid Health, our new weekly health and policy newsletter

Is the Russian economy stabilizing — or doomed? Both.

From Russian President Vladimir Putin’s perspective, almost nothing about the war in Ukraine has gone as well as hoped: The Ukrainian resistance has been far more formidable, the international response far more unified, Russia’s own military far less capable.

The one notable exception, two and a half months into the war, has been the Russian economy.

That certainly wasn’t how things looked in the first days of the war, when Russia’s stock market fell 33 percent before suspending trading, the ruble hit record lows against the dollar, and Russians were lining up at ATMs to withdraw their savings. Russia’s billionaires, targeted by some of the most punishing international sanctions, lost an estimated $39 billion in one day. In the days that followed, nearly 1,000 global firms from Apple to Boeing to McDonalds pulled out of the country, Western governments unveiled historically severe sanctions targeting Russia’s central bank and technology imports, and the country’s financial institutions were cut off from SWIFT, the global financial messaging system that banks use to communicate and conduct transactions.

And yet by May, even as the situation on the battlefield in Ukraine has evolved into a bloody stalemate for Russia, things don’t look quite so dire on the homefront. The ruble has recovered to prewar levels. Real-time measures of economic activity like electricity consumption and consumer spending have stayed fairly stable. Most important, Russia is still raking in profits from its most crucial export: Oil and gas revenues hit record levels in March and April and are more than double what they were at this time last year.


“When Putin says Russia has weathered the first shock of sanctions, you know, it’s hard to argue with that,” Janis Kluge, an expert on the Russian economy at the German Institute for International and Security Affairs, told Grid.

No one expects the stability to last, least of all the Russian government itself. The country’s finance ministry is forecasting a drop in the country’s gross domestic product by as much as 12 percent this year, the kind of contraction not seen since the chaotic days of the early 1990s. Some experts think the drop will be even more severe. S&P Global has downgraded its assessment of Russia’ ability to pay its foreign debts, meaning that Moscow could be headed for its first debt default since the 1917 Bolshevik Revolution.

Judging by the two kinds of headlines you read about Russia’s economy these days, the country is both weathering the storm and standing on the edge of an abyss.

“There’s truth in both of those narratives,” Edward Fishman, a former U.S. State Department staffer who worked on Russia sanctions policy, told Grid. “The narrative that the Russian economy has stabilized to a certain extent — and the one that it’s heading toward historic contraction this year and that the economy is effectively toast.”

Juicing the ruble

Central Bank of Russia Governor Elvira Nabiullina reportedly tried to resign immediately after the invasion of Ukraine but was told no by Putin. It’s not hard to see why the president wanted to keep her at her post. The 58-year-old economist is one of the few high-ranking Russian officials who regularly receives widespread international praise. (For her competence, that is, not the cause to which it’s devoted: She was sanctioned by the U.S. last month and Russian opposition activists call her a war criminal.)


Elina Ribakova, deputy chief economist at the Institute of International Finance, told Grid that Nabiullina’s “very skillful response” is one reason why the economic impact of sanctions has not been as profound as anticipated. Ribakova also noted that Russia had taken steps to sanction-proof its economy since it was first hit by major international penalties after the annexation of Crimea in 2014. “They sort of insulated themselves. They are less integrated into global capital flows than they were before 2014,” Ribakova said. “They implemented inflation targeting. They cleaned up the financial system to the extent they could.”

The Russian government, which has pointed to the ruble’s recovery as evidence that sanctions aren’t working, has also done a number of things to prop up the value of the Russian currency since the invasion; relatively conventional steps like hiking interest rates to 20 percent (they’ve since been cut back), and more unusual measures such as requiring businesses to convert 80 percent of any money they make overseas into rubles and restricting citizens from transferring money abroad. Putin also signed a decree requiring foreign buyers of Russian gas to pay in rubles and cut off supplies to countries that refused.

Had the war in Ukraine been the short, sharp conflict that the Kremlin seemed to expect, these measures might have worked. But the war shows no signs of ending any time soon, the sanctions aren’t going anywhere, and the government’s austerity measures are seriously hampering economic growth.

“Basically, the government has leveraged Russia’s future by introducing these very harsh capital controls to freeze the situation and avoid the collapse,” said Kluge.

“Freezing the situation” is one analysis; another is that Russia is creating an artificial success story on the economic front. More than one observer has compared Nabiullina, the Central Bank of Russia chief, to Grigory Potemkin, the 18th century Russian nobleman who, according to legend, built fake village facades to impress Catherine the Great about the state of her empire.


Pipe dreams

Meanwhile, revenues keep pouring in to the Kremlin coffers.

The nearly $47 billion in oil and gas that the EU imported from Russia in the first two months of the war — compared with $147 billion for all of last year — can make the entire international project of supporting Ukraine and isolating Russia feel fairly futile. To put this in perspective, Russia spends $65.9 billion per year on its military. The West is essentially funding both sides of this war.

The numbers are somewhat misleading — oil companies pay taxes based on the previous month’s profits, so it takes at least a month for profits and losses to show up in government revenue figures. And given extremely high global energy prices, it’s not surprising that Russian energy companies were still raking in profits in the early weeks of the war, before many sanctions went into effect.

But it is true that energy has been the gaping loophole in Western sanctions against Russia. Western governments have been cautious about punishing Russian energy companies directly, and sanctions on Russian banks include carve-outs to allow for energy payments. The U.S., a relatively small consumer of Russian fossil fuels, announced a ban on Russian oil imports, but unlike the case of Iran, it has not applied so-called secondary sanctions preventing other countries from buying Russian oil and gas, for fear of the impact it would have on the global economy and on key allies like Germany that rely heavily on Russian imports.

A number of major global energy companies, including BP and Shell, have responded to global criticism by announcing that they won’t buy any new Russian oil or gas. But this “self-sanctioning” will take time to show up in Russia’s bottom line, since the companies are locked into long-term contracts in the country. Analysts also report a dramatic uptick in “dark activity” in the oil sector — Russian-affiliated tankers turning off their transponders to avoid sanctions.

Might the West finally get serious about cutting off Russian energy? Under a new set of EU sanctions proposed last week, EU countries would have six months to stop buying Russian crude oil and a year to phase out refined petroleum products. The sanctions require the agreement of all 27 EU members and are currently being held up by objections from Hungary, which imports two-thirds of its oil from Russia. At the moment, talks are deadlocked. The implications are profound: Kluge estimates the impact of an effectively implemented oil embargo by the EU could be an additional five to 10 points of GDP losses.

Russia will try to make up the losses with exports to non-EU countries, but that will take time, and Europe is also looking at ways to target these shipments, such as a ban on insuring ships that transport Russian oil anywhere in the world — a tactic previously used against Iran.

Russia’s most important lifeline may not last forever.

Parts needed

Following the invasion, the U.S. imposed a range of export controls meant to prevent Russia’s defense and technology industries from obtaining crucial parts. Dozens of other countries have joined in these sanctions, including Taiwan, the world’s leading producer of semiconductors. These measures may be starting to have an impact. Treasury officials say Russia’s government-funded Moscow Center of SPARC Technologies, which makes chips for technology used by the country’s military and intelligence services, has been disrupted by supply shortages.

Meanwhile, Russian automaker AvtoVAZ, which is owned by France’s Renault and produces the iconic Lada car, has had to partially suspend production at two plants due to shortages of electronic parts. Kluge also noted that before the war, mobile phone applications had been “one of the fastest growing sectors” of the Russian economy, but development in this sector is likely to grind to a halt in coming months with the retreat of mobile phone giants like Nokia, Ericsson and Huawei from the Russian market.


Ribakova predicts that “within this year, we will see the effect on Russian economy as companies start to run out of parts or equipment and have to start laying people off or putting them on unpaid leave.”

Will it matter?

Fishman, who helped craft the sanctions placed on Russia after 2014, said, “Those sanctions were a two out of 10, in terms of intensity. Within the first week of the [2022] war, the U.S. escalated to about eight out of 10. The speed of escalation was much faster than anyone was expecting.” That escalation was what sowed panic in the Russian financial markets in the early days of the war. “But then as the war went on, we didn’t get from eight out of 10 to 10 out of 10 as fast as many anticipated,” he added. This allowed the relative stabilization seen since. With serious talks over an oil embargo and other measures looming, Fishman said, “I think sanctions are now kind of back on the upswing and there’s nothing really that can prevent Russia’s economy from cratering.”

For all these reasons, Russia will likely soon face far more economic pain as a result of the global response to Putin’s invasion of Ukraine. But when it comes to pain that might influence Kremlin behavior, Rachel Ziemba, adjunct senior fellow at the Center for a New American Security, isn’t optimistic. “This is a country that’s already been willing to forgo a fair amount of growth [in pursuit of foreign policy goals.]” she told Grid. “And so we haven’t necessarily seen this sort of policy change the U.S. and its allies are going for.”

After all, leaders like Iran’s Ali Khamenei, North Korea’s Kim Jong Un and Venezuela’s Nicolas Maduro have ruled for years under far more severe sanctions than what Putin is currently facing. Circumstances are of course different in those countries, but their leaders look likely to continue to rule for years without significantly changing the behavior that led to the sanctions.

As always, with sanctions policy, it’s important to keep in mind what they can and can’t accomplish. Economic pressure can punish a nation for certain actions. Getting those countries’ leaders to change their ways is another story.

Thanks to Alicia Benjamin for copy editing this article.

  • Joshua Keating
    Joshua Keating

    Global Security Reporter

    Joshua Keating is a global security reporter for Grid focused on conflict, diplomacy and foreign policy.