As the Berlin Wall collapsed to wide rejoicing, a virtuous cycle of revolution began in Europe. As the Iron Curtain collapsed, the ideals of democracy and market economy spread to the Eastern Bloc. The Soviet Union was in terminal decline, with failed attempts to revive it with Glasnost and Perestroika. By the end of 1991, the empire created by Lenin and Stalin came tumbling down. A KGB agent stationed in Dresden considered its demise the ‘greatest humiliation’. His name was Vladimir Putin. Three decades later, under his zealous leadership, Russia seeks to revive its former glory. On 22 February, Mr Putin ordered his tanks into Ukraine in a ‘special military operation’, ostensibly to protect Russian-speaking people from genocide. As Ukraine fought valiantly, its allies responded swiftly: they quickly armed Ukraine with the latest NATO kit; they slapped a harsh sanctions regime on Russia hoping to choke the Kremlin’s war effort.
In the first days of the invasion, led by Washington, Ukraine’s partners chalked up a copious sanctions regime: everyone from oligarchs close to the Kremlin to banks and businesses to Mr Putin’s family was targetted. These assets and bank accounts were swiftly frozen. The foreign reserves of Russia’s central bank were grounded, as were Russian aircraft. In a decisive blow, Russia was cut off from the Swift payments system, curtailing its ability to transact abroad.
The bulk of Russia’s economy runs on lucrative oil and gas exports- with Europe being the main customer. The US banned all imports; the EU followed through by curtailing exports by 90% by December. More tricky was a ban on Russian gas, on which European firms and households run. Despite its bullying attempts- shutting down pipelines routinely and demanding payments in the Rouble- Europe restricted the use of Russian gas, as inflation skyrocketed amid chaos in energy markets. Russia’s provincial industrial sector was deprived of Western spares, electronics and technology. As soon as these sanctions came into effect, Russia’s economy went into a tailspin.
The Rouble fell to its lowest against the dollar, and real GDP was said to contract by 12.5%: consumption and investment were to take a serious hit. The Kremlin ordered the stock market to cease trading as stocks collapsed. As Western businesses pulled out of Russia, demand was unmet and empty grocery aisles were a reality- memories of the Cold War were rekindled.
But as it has come to be, the Kremlin was well prepared to pay the price of sanctions to achieve its goals in Ukraine. Mr Putin immediately ordered gas and oil payments in Roubles, propping the currency; India and China quickly bought discounted oil. The central bank ramped up interest rates and imposed capital controls. Businesses such as McDonald’s and Starbucks were quickly replaced by local chains. Mr Putin’s propaganda machine kept the outlook positive as nationalistic sentiment prevailed.
In reality, Russia’s economy contracted by a measly 4.8%. As prices of oil and gas trebled, Russia’s current account surplus ballooned to 162 billion dollars. Consumption and the labour markets seemed to hold on. To cushion the blow of rising inflation, Mr Putin ordered an increase in wages by 10%; similarly, pensions were hiked too. It is worth taking into account that most news in Russia trickles from Moscow, the capital; the reality might be very different in provincial oblasts. Now, answering the hot question: what explains Russia’s economic resilience?
After its invasion of Crimea in 2014, the Russian economy was increasingly isolated from the West prompting businesses and consumers to quickly adapt to shortages and downturns- something citizens of the former Soviet Union are used to. After 2014 Russia ordered foreign firms to increasingly use domestic supplies, making supply chains increasingly self-reliant; even Russia’s financial sector has been isolated from the West. Russia has steadily built up its reserve and kept its debt to a minimum, hampering the West’s attempts to hobble the economy.
Under Vladimir Putin, the Russian economy has grown steadily over the years; he has delegated the management of the economy to wonks in the CBR, the central bank. The degree to which sanctions have damaged the economy varies, but the consensus remains: at least in the short run, the West has failed to dent Russia.
In the medium to long term though, sanctions will take a toll. Coming next year, most of Russia’s industry will be deprived of Western spares, and will be forced to use incompatible Chinese technology. Most of its aircraft fleet will be grounded. Russia’s large weapons industry- led by Mikoyan and Sukhoi- will fail to attract customers for their equipment as the reputation of Russian weaponry has been blown to pieces (even key buyers such as India seem to be diversifying). The young and educated have fled Russia in droves, depriving the country of their talents. Living standards and incomes will see a fall.
Importantly, Russia’s main objective- for which it is paying a massive economic cost- is failing. Ukrainian counter-attacks have pummelled the Russian army, as it loses territory every day, prompting Mr Putin to order a partial mobilisation. Even the provinces Russia illegally annexed have seen strong Ukrainian counterattacks. It is estimated that Russia has lost over 90000 troops and tons of columns and divisions of tanks, howitzers and artillery.
Russia’s hope to fracture European unity has failed; another flashpoint- the expansion of NATO- has failed too, with Finland and Sweden abandoning their long neutrality.
But the West has been tipped into a recession too, with prices of gas and food soaring. The war has brutally exposed the chinks in its economic armour: a dependence on despots for economic needs and supply chains. As war with China over Taiwan looks imminent, the West will find it hard to combat the economic consequences, with China being a manufacturing and finance powerhouse. Whatever happens, a new world economic order is in the making.
Preview image: Carmen Rodriguez via Flickr, public domain.