By Emily Guan
Introduction
“As a result of our unprecedented sanctions…the Russian economy is on track to be cut in half”, Joe Biden announced in March 2022, as the US and its allies bombarded sanctions on the Russian economy (Biden). Along with being a strategic move of the US and its allies to limit Russia’s economic potential, such sanctions have sought to punish Putin’s government for its perceived unethical actions on the international stage or halt its malign intentions towards Ukraine. “The package unveiled by the U.S. government is expected to ripple across companies and households in Russia”, wrote The New York Times. The Guardian explained that many Russian banks will be removed from the financial messaging system SWIFT, which “underpins global trade”, and further, Reuters reported exits from Russia by mega-corporations such as Nike, Starbucks, McDonalds, Intel and more (Wong et al; Inman and Rankin; Funakoshi et al). However, these measures seem to not have had their expected impact, or at least, not in all aspects. After the initial shock, the International Monetary Fund even predicts that the Russian GDP will return to positive in 2023 (IMF Executive Board). Today, the Russian manufacturing sector is growing at the fastest pace since April 2019, driving a rise in confidence of the average Russian in their country’s economic future, states S&P Global (S&P Global). Theoretically, hurting a nation’s economy will decrease its ability to persist in a long war, thus, one question remains: to what extent are current Russo-Ukrainian war sanctions effectively undermining the Russian economy?
Overall, many may believe that the high inflation rates in 2022, which reflect Russia’s weakened economy, or the decrease in income from Russia’s biggest source of revenue — the energy sector, are what demonstrates impact of these strong war sanctions. However, this paper will reason that while sanctions had relatively little effect on inflation and the energy sector, they have been extremely effective in halting Russia’s technological future.
Impact on Inflation: Reducible
“I have used the title of inflation as a disease” says Milton Friedman, who received a Nobel Prize in Economic Sciences, “a disease which can destroy a nation” (Friedman). The reputation of inflation is not excellent, and thus, some would argue that high Russian inflation rates are a proof of the sanctions’ effectiveness. According to Statista, Russian inflation rates by February, 2023, have reached almost an 11% difference compared to that time of last year. “The figure marked a decrease from April 2022, when it stood at almost 18 percent” (Statista). This meant that during April, a piece of 500 Ruble cash would only buy you 410-Rubles-worth of merchandise. Yet surprisingly, such issues of great magnitude seem to have been able to resolve itself within a year. It is even estimated by Trading Economics, one of the most accurate economic forecasters worldwide, that these rates will fall from 11% back to 4.2% only by April 2023 (“Russia Inflation”). Why is this?
The clarifying explanation is simple: the sanctions’ impact on Russian inflation rates is present but quite quickly reducible, because of Russia’s geological and geopolitical resources. There is much debate in economic theory over whether domestic inflation is something under the control of a central bank, as it is when such inflation spirals out of government control that many extreme conditions emerge. One of the most prominent reasons why inflation could become out of control is rooted in the vicious circle theory. To explain this theory, Professor Jaleel Ahmad of Concordia University writes: inflation causes higher import prices, and as the price of imported goods increases, the domestic price of these goods also rise, causing the government to have to print more money to make sure people have enough to buy them — inflation is created. Ahmad continues by saying: “this inflation, in turn, requires a depreciation of the exchange rate, which causes further inflation”. This is because the demand of domestic currency has decreased — it will now cost even more of it to import foreign goods — a vicious circle (Ahmad). An important premise that enables the application of this theory is the need to import goods. According to the World Bank, 57% of the world GDP in 2021 was generated from international trade (“Trade”). With this scale of interdependence globally, many countries entirely rely on imports for certain needs of the market, and leave their inflation rates vulnerable to be influenced by exchange rates. For them, as the entire cycle starts with domestic inflation, initial inflation caused by sanctions could easily have driven their economy into the cycle. However, Russia has a different situation. According to the World Integrated Trade Solution and World Economic Forum, Russia’s main imports are capital goods, consumer goods, machinery and electronics, which include cars, clothing, furniture, computers and medicines. On the other hand, it is the largest global wheat exporter. It also exports fuels, raw materials, and consumer goods (“Russian Federation”; Rastogi and Ang). This makes the Russian economy functional under domestic inflation, as it has the liberty to decrease imports when domestic inflation occurs. Unlike countries that rely on importing food products and fuels, even if Russia refrains from importing products such as computers, it would still be able to produce foods and utilize natural resources to secure the basic standard of living of an average citizen. Furthermore, Russia’s main imports — machinery and electronics — if desperately needed, could still be attained from China and purchased through RMB, so that Russia could save American dollars — the internationally trusted currency — to stabilize its own currency value (Sutter and Surland).
In sum, Russia’s inflation is mainly caused by market panic, and will not further escalate. Around February 2022 when the sanctions first started, many brands exited Russia and caused malls and streets to suddenly empty (Wallace). This translated into rising inflation rates, but because Russia will not enter the vicious cycle, these rates have stopped rising and will return to normal. The impact of war sanctions on inflation have been present, but is entirely reducible.
Impact on Energy Sector: Dangerous, But Manageable
As mentioned, Russia is a huge exporter of natural resources. It possesses among the largest of the worlds’ natural gas, coal and oil reserves, and revenue generated from these natural resources funded up to 45% of Russia’s government spendings in 2021 (“How Wealthy”; “Energy Fact”). In the face of the Russo-Ukrainian war sanctions, and thus, the withdrawal of European countries and the U.S. from the energy importing market, Russia’s dependence on natural resources has caused concerning financial shortages. According to Eurostat, the share of Russian production in European energy imports alone “declined sharply”, and between the first and third quarter of 2022, has dropped from an initial 25.5% to 15.1% (“Russian Energy”). This decrease in demand from Europe caused Russia’s natural gas production to fall by “more than 13% in 2022”, as presented by the Russian state statistics service Rosstat (“Russia’s Natural”). The poor statistics in 2022 fed into a 46% fall in oil and gas revenue by the first month of 2023, which then, combined with increased spending on the war, directly resulted in a 24.78 billion dollar fiscal deficit (“Russia's oil”).
One could argue that these numbers are devastating to Russia’s ability to sustain the war, and the energy sector has indeed seen dangerous impacts of sanctions; however, they only make the sanctions somewhat effective, as these impacts are still manageable to the Russian economy. First, it is important to understand that not only Russia have been affected by the cuts in European energy imports — the European countries themselves have also, for the winter of 2022, struggled to diversify their fuel suppliers to power houses and secure the welfare of citizens due to the sudden energy shortage (Liboreiro). It is unlikely that European countries and the U.S. would continue to decrease their share of imports under current situations. And on the other hand, ever since the cuts in European energy imports have started, countries such as China and India have been eagerly purchasing cheap Russian fuels. According to data from the International Energy Agency, the Chinese share of Russian oil exports has increased by 73% from January 2022 to January 2023, and the Indian share by a whopping 1500% (IEA). Moreover, “an all-time favorite among China's private refiners, seaborne Russian ESPO Blend crude oil[,] is starting to attract buyers in India, a trend that could intensify competition between two of Asia's top oil importers,” writes researchers of S&P Global in March 2023 (Mohanty et al). This is promising for Russian producers, as with competition among buyers comes increased demand, which leads to higher prices. Echoing this piece of evidence, the Russian Deputy Prime Minister Alexander Novak explains that the fall in Russian oil prices in February are only temporary side effects of seeking new buyers and building a new supply chain (Соколов). In this case, if trade with Indian and Chinese buyers is regulated and sustained, Russian oil prices should rise given time. In fact, signs of this is already present. The Centre for Research on Energy and Clean Air reports that after its fall in February 2023, Russian oil prices in March have started to stabilize and climb, with production volumes picking up (Pukarinen).
Even without these numbers that only have started to become positive in March this year, expectations for the Russian economy were not entirely negative. Maxim Trudolyubov, Senior Fellow at the Kennan Institute, wrote in February that “despite all the shortfalls, relatively low oil prices, and a growing deficit, Russia will likely avoid a deepening crisis”, and that even in the worst case scenario, the country would be able to fill up the hole in government spending created by the energy industry in the short term through taxing its companies, as well as taking money from the Russian National Wealth Fund (Trudolyubov). Stanislav Murashov, an analyst of the Raiffeisen Bank, adds that if the hole becomes too big, costs in other areas of the government budget could also be cut accordingly (Мурашов). Overall, although dangerous drops in Russian fuel demands are present and have caused huge damages to the government’s income, trends of the Russian energy market’s resilience have started to emerge. Disasters in the energy sector is still manageable for the Russian government.
Impact on Technology Sector: Potentially Devastating
Sanctions so far have seemed be relatively ineffective in undermining the Russian economy, due to their weak influences on inflation of the Russian currency and the country’s energy sector. However, the technology sector would demonstrate otherwise — the sanctions’ impact on its future could potentially be devastating. In terms of military technology, the Center for a New American Security published a comprehensive report on how sanctions will limit Russian technological development. One of the ways is by limiting Russian trade, for example as seen in the energy sector, so that Russia could not fund scientific research. Further, it is said in this report that “the imposition of export controls means that Russia cannot access strategically important goods such as semiconductors or precision machine tools that are produced in third countries, including China, India, Singapore and Taiwan, when they use equipment licensed from the United States or its allies” (Kofman et al). This can be effective, as Russia is cut off from Chinese and Indian help, unlike with the energy sector; even if China risks its own relationships with the U.S. and its allies to increase its military relationships with Russia, China could only supply less reliable technology components of its own. Aside from military technology, the Russian internet has also become less functional due to imposed sanctions. The Insider published in July 2022 that, while the rest of the world experiences the 5G revolution, Russia is stuck in the phase where even 4G routers within the country need to be dismantled and moved to more financially advantageous areas due a shortage of more of them (“Из-за санкций”). 5G has the potential to enable “the age of unlimited connectivity, intelligent automation, and industry digitization”, writes Mohsen Attaran, professor of California State University (Attaran). It is reasonable to argue that Russia, if completely excluded in the global trend of shifting to 5G, will be placed in extreme disadvantage in the next few years.
Conclusion
Looking back, we can now decide that the extremely nationalistic statements made frequently since the start of the war, such as the one published by Joe Biden, are only somewhat true. A lot of times, leaders choose to say these things because it has been proven that people tend to be willing to follow leaders who talk with strong and sure tones (Chamorro-Premuzic and Lusk). However, after the evaluation of the Russo-Ukrainian war sanctions, we start to see that simply marching towards the direction that they point out might not always be the best idea.
Yes, we do live in a confusing time. While Joe Biden will continue overplaying the effectiveness of the sanctions, Vladimir Putin will continue underplaying it, with the reality being able to change in a split second. But arming ourselves — the citizens — with the understanding of these biases makes striving for good critical thinking just a little bit easier.
Works Cited:
For the references for this article, please refer to this link
Comentarios