Ordinary Russians are suffering from sanctions that President Vladimir Putin is unlikely to feel. Hard hit last year, the Russian economy seemed unaffected by Western sanctions.
President Vladimir Putin has created what has been called a “stronghold balance,” with huge cash reserves that have helped the Kremlin weather the loss of foreign investment.
Meanwhile, the ensuing energy crisis triggered a 144% jump in Russia’s oil and gas revenues to $349 billion in 2022. Outgoing Western brands have been replaced. Life in Moscow has hardly changed.
At least at first.
Today, cash reserves are depleted. Oil revenues have almost halved. Russia is losing its workforce as thousands flee the draft, go to fight or die on the front lines. Foreign investment disappeared and the ruble fell. Inflation is gaining momentum.
“The situation is changing quite quickly and in a negative direction,” said geopolitical risk adviser Oksana Antonenko at an event at Chatham House.
“It is clear that at the end of this year the macroeconomic situation in Russia will be much worse than last year, and this will be a sustainable trend.”
While Putin was clearly prepared for the initial economic fallout from the war in Ukraine, the conflict dragged on much longer than he expected. As a result, the economy is increasingly exposed to the ongoing fighting, and Putin is running out of options.
“He built their defenses very well. They had a lot of reserves and their debt ratio was very low. They were running budget and current account surpluses and the energy crisis helped them,” says Timothy Ash, a research fellow at Chatham House’s Russia & Eurasia program. “Now it's erased.”
Last summer, during the first months of the war, the Kremlin ran a budget surplus of $28 billion, according to the Kyiv School of Economics. By last month, the national account deficit was $1.4 billion.
“It's a slow burn,” says Ash. “Over time, it becomes more and more difficult for them. They will have to make a choice: guns or oil.”
Oil revenues plummet – annual profits
The key to the decline in public finances has been the energy market. After rising to a high of $120 last summer, oil is now trading at around $80 a barrel, and the price ceiling imposed by the West has limited how much the Kremlin can get from sales. The European Union imposed an embargo on Russian oil in December and on petroleum products in February 2023.
The Saudi-led OPEC bloc and its allies, including Russia, have tried to drive up oil prices by cutting production, but the Western cap on oil prices has limited the impact of these actions on the Kremlin's finances.
Russia's oil and gas revenues are forecast to fall 43% this year, according to the Kyiv School of Economics. Fossil fuel revenue of $198 billion will still be above pre-war levels. However, the cost of the war in Ukraine exceeds the additional income.
“We are seeing a significant increase in spending, probably related to the war,” says Elina Rybakova, senior fellow at the Peterson Institute for International Economics. “They pretty much covered all the deficit they planned for the year.”
The deficit was the first time since the pandemic. Monthly Current Account
Sanctions and the exodus of Western business have caused Russia's export earnings to fall by a third in the first six months of the year, and the trade balance to fall by 70%.
The drop in exports hit the ruble. This year it has lost 39% of its value against the dollar and 47% against the euro.
“Currency is key for me,” Ash says.
Early in the war, the Russian government intervened to prop up the ruble.
“They wanted to have a strong currency to show that sanctions weren’t working,” Ash says. “Now they need a little help. They are trying to strengthen their foreign exchange reserves. This suggests that they do not have as much liquidity as people think. This is a clear sign that things are not going well.”
The collapse of the ruble spurs inflation. The Bank of Russia raised interest rates by 1 percentage point to 8.5% on Friday as policymakers warned that core inflation “has exceeded 4% year-on-year and continues to rise.”
The central bank said inflation is partly driven by “limited labor availability.”
Just as Russia is losing money, it is losing its workforce. This is happening on several fronts – not only are men being drafted and sent to fight, large sections of the working population have left for fear of being sent to war.
“At the lowest demographic estimates I've seen, 500,000 people left. According to our own estimates, it's one million,” says Rybakova.
“All the talk about diversification or improving the quality of life is all wrong,” she adds.
Putin, of course, does not want to admit this, and there are serious suspicions that official data on the state of the Russian economy is being manipulated to paint a more rosy picture.
Alternative measures suggest that things in Russia are worse than official statistics show.
Adrian Schmit and Hanna Sakho, economists at the European Central Bank, have compiled an economic tracker that uses 15 indicators independent of the Kremlin news agency Rosstat. These include data on financial transactions, imports, property listings and prices, labor market sentiment and retail sales.
The Russian economy is worse than government data suggests. Change in GDP
The alternative tracker correlates with the official data, but it has been consistently lower since the start of the war.
For example, while the official data from Rosstat says the economy contracted by 0.4%, the ECB's alternative indicator indicates a contraction of 3.2%.
Similarly, while official data show that unemployment in Russia is surprisingly low, the German Council on Foreign Relations believes that hidden unemployment – a figure that includes unpaid leave and underemployment – actually reached a record high of 4.66 million people last summer.
Nevertheless, economists are careful not to overdo the magnitude of Russia's economic downturn.
“It's a slow process, but unfortunately, there’s a lot of resilience here,” Ash says. “They can live for a long time.”
Russia still earns about $425 million a day from oil, according to the Kiev School of Economics.
Rybakova of the Peterson Institute for International Economics believes the West should tighten sanctions even further to turn what is currently a slow and painful economic burn into a raging fire that will spark change.
However, officials can fight back: At this stage of the war, the effects of the tightening of sanctions will probably not be felt. as much by Putin and his allies as by ordinary Russians, many of whom do not support the war.
Ash says: “The longer it goes on, the harder the choice will be made, the more the population will suffer.”
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