The Russian gas giant Gazprom was a money machine for the last two decades, enriching many insiders and helping keep Vladimir Putin’s government flush. But that run has ended, with Gazprom recently announcing it lost $6.9 billion in 2023, mainly because of Russia’s war in Ukraine and sanctions that have punctured Gazprom’s sales.
Like Gazprom, the whole Russian economy is beginning to crack under the twin strains of enormous wartime spending and withering sanctions. Since invading Ukraine in February 2022, Russia has held up better than many Westerners expected or hoped. That has been mainly due to skillful central bank management of the economy and robust oil and gas revenue.
But US-led sanctions, imperfect as they are, are slowly strangling Russia’s economy, and the Biden administration is hinting at more to come. Russia’s war production may be peaking now, with equipment shortages, possibly dire ones, looming in 2025 and beyond.
“The Soviet Union was a war machine, and it ran out of steam,” Fiona Hill, a Russia expert at the Brookings Institution, said at a May 28 Brookings conference. “This will, as well, eventually run into considerable consequences. Putin wants us all to think he can’t be defeated. He knows he can be. And he is genuinely worried at this particular moment.”
The biggest news regarding Russia’s war in Ukraine this year has been the precarious condition of Ukraine’s frontline troops, who have been outgunned, outmanned, and slowly losing territory. A six-month delay in vital US military aid, combined with manpower shortfalls and other problems, has allowed Russia to exploit weaknesses, pound Ukrainian infrastructure with bombs and missiles, and threaten Kharkiv, Ukraine’s second-largest city.
But Russia is on borrowed time too, and the real test may be whether its economy can hold up long enough to exhaust the Ukrainians and their sometimes flaky allies.
On the surface, Russia’s economy looks OK, with the International Monetary Fund forecasting 3.2% GDP growth this year. That’s better than the 2.7% GDP growth forecast for the United States.
But some analysts think the GDP outlook masks so many underlying problems that it’s almost meaningless. Putin “still has some ability to finance the war, but this is running out very fast,” Vladimir Milov, a Russian economist who led some reforms in the late 1990s and has since left Russia, said in a recent podcast for the UK’s Royal United Services Institute. “The signs that sanctions are working are there, but it really takes more time. Putin’s economy is a big beast. It takes time to strangle.”
Among Russia’s problems: Its national wealth fund, a pool of reserves Putin taps to finance the war, has dropped from $113 billion before the war to about $56 billion now. Not all of the $56 billion is liquid, and Russia needs to keep some money on hand for a genuine emergency.
“Their reserves are fast depleting,” Agathe Demarais of the European Council on Foreign Relations said at the May 28 Brookings event. Gazprom’s losses, she said, are “going to be a problem for replenishing the reserves. We’re talking about really big numbers. I don’t think there will be an easy way out for Russia.”
Analysts think Gazprom will continue losing money through at least 2025, mainly because European nations that used to be the firm’s biggest customers have weaned themselves off Russian energy. The easiest way to transport gas is by pipeline, and while other countries buy Russian gas, they’re not connected by pipes.
Oil is easier to transport, and oil revenue continues to provide Russia with desperately needed cash. Yet it’s also more expensive for Russia to ship oil to Asian buyers that have replaced Europeans, causing another crunch.
Sanctions, meanwhile, have weakened the value of the ruble and pushed up the cost of goods, especially imports. Russia’s central bank has tried to offset those problems by raising interest rates, with short-term rates currently set at 16%.
Yet difficulties persist. Russia’s official inflation rate is an uncomfortable 7.8%, and the Russian research firm Romir reports that overall price levels for common consumer goods have nearly doubled since the 2022 invasion. Vegetables, as one example, have shot up in price because of sanctions on Western supplies of seeds, fertilizer, and other staples of agricultural production.
To plug some of the holes, Putin is planning tax hikes on businesses and the wealthy, but that could backfire. Foreign investment in Russia has plummeted, and most businesses can’t afford loans at double-digit interest rates. So the only source of investment is companies’ own profits, which new taxes will take a bigger bite out of, discouraging investment. The whole cycle is a recipe for collapsing output, similar to what caused the dissolution of the USSR in the late 1980s.
China is helping in ways by selling Russia many of the products Western sanctions seek to limit. But China is exploiting Russia’s weakness more than helping it regain its economic footing, according to a recent paper Milov wrote for the Wilfried Martens Centre for European Studies in Brussels.
Chinese suppliers are marking up the prices of cars, electronics, industrial products, and just about everything else Russia needs, in some cases charging even more than the American and European suppliers they’re replacing. That’s contributing to Russian inflation.
When buying Russian oil and gas, China demands discounts ranging from 20% to 50% off the market price. At the same time, there’s barely any new Chinese investment in Russia or any sign China is taking long-term economic risks for Russia’s sake.
“Russia is learning the hard way that China is not interested in being Russia’s donor,” the Milov report says. “China is only interested in Russia economically as a supplier of cheap raw materials with sizeable discounts, as a market for Chinese finished products sold at a premium, and not interested in investing in seeing Russia emerging as a competitor at international markets of manufactured goods.”
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Sanctions were never meant to unilaterally end Russia’s barbarity in Ukraine, and nobody thinks they will now. What they are meant to do is raise the price Russia pays for invading a peaceful neighbor and perhaps contribute to an outcome that looks something like a win for Ukraine.
Ukraine is not close to winning, and much depends on future events, starting with this year’s US presidential election. If Donald Trump wins, he’s likely to ease the pressure on Putin, whom he has publicly admired, possibly opening the door to a Russian victory. If Biden wins, however, a more aggressive effort to defeat Putin is possible.
The Biden administration has given Ukraine increasingly sophisticated weapons and has now changed its policy to allow Ukraine to use some of them to strike military targets inside Russia, which has been a taboo up till now.
Congress recently passed a law allowing the US government to seize around $6 billion worth of Russian assets in the United States and give them to Ukraine. The Biden administration is trying to do persuade European nations to do the same with up to $300 billion of Russian assets parked there.
Another big step Biden could take would be lowering the price cap on Russian oil sales — currently $60 per barrel — and better enforcing it. Russia has found a variety of ways to evade the cap and has been selling oil for more when market conditions allow. Biden, for his part, has been reluctant to impose any sanctions on Russia that could raise prices in global markets and, crucially during an election year, at home.
That could change if Biden wins a second term, which would definitely be a disappointment to Putin, who’s hoping for friendlier governments in Washington and other capitals. If not running for reelection, Biden would be freer to make decisions he deems necessary, even if they’re not popular. There could be a lot more of those before Russia’s Ukraine war is over.
Rick Newman is a senior columnist for Yahoo Finance. Follow him on Twitter at @rickjnewman.
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