Western sanctions sting but don’t cripple Russia’s economy

Western sanctions are hurting Russia’s economy but the Kremlin’s war chest is still brimming with cash thanks to soaring commodity prices, new data shows.

Russian exports of oil, gas and metals fell significantly last month as sanctions announcements spooked international buyers, according to Kremlin estimates seen by the Russian daily Vedomosti — but rising prices muted the impact on state revenues.

Since the start of Russia’s war on Ukraine and the West’s sanctions response, Moscow has kept mum about its export and financial statistics. The Russian government even claimed that its economy was booming and that sanctions were more painful for the West.

However, it’s clear that sanctions — and Russia’s own effort to use energy exports as a political weapon — are having an impact.

Oil deliveries in physical terms sank by 13 percent from May to June, from 18.9 million tons to 16.5 million tons, but revenues actually increased from from €10.2 billion to €10.5 billion, and are higher than for the same period in 2021.

Russian gas exports fell by about a quarter in June compared with last year, but earnings rose to $11.1 billion compared with $3.6 billion. Crude oil prices are about double last year’s level, while natural gas prices are about six times higher.

EU sanctions on oil won’t actually kick in until later this year or in 2023 — while gas isn’t even under EU sanctions. That means the fall in trade is “more about de-risking, self-sanction[ing], where companies are perceiving Russian fossil fuels as toxic,” said Maria Shagina, a research fellow at the International Institute for Strategic Studies.

The West — including the EU — has been pummeling Russia with waves of sanctions ever since Moscow invaded Ukraine in late February. Alongside oil and certain metals, the EU has also banned imports like coal and gold and made it illegal to export key dual-use technology like microchips in an attempt to blunt Russia’s war economy.

Beyond Russia’s exports, another key metric is how much the country is importing: Some analysts estimate that imports in April could have dropped by as much as 80 percent compared with the previous year, in a sign that the country’s industry and economy is shriveling.

The International Monetary Fund on Tuesday released its growth predictions for the year, forecasting a 6 percent contraction in Russia, while EU economies like Germany will see 1.2 percent growth, France 2.3 percent and Italy will grow by 3 percent.

Stable cash flows

Although the Russian data shows the blow to exports, it also raises questions over the effectiveness of Western sanctions.

Shagina said the EU’s announcement that it planned to embargo Russian oil “indicated to the market that oil supply will be sparse … so prices skyrocketed, which actually benefited Russia.”

In June, European Commission President Ursula von der Leyen said EU sanctions were “grinding their teeth into the Russian economy” and argued that reducing reliance on Russian energy would “drain Putin’s war chest.”

But Russian state revenues from oil and gas will actually increase in 2022 compared with last year, according to Russian government forecasts included in the Vedomosti report. Around 41 percent of the government budget will come from the two fossil fuels this year — or roughly €170 billion — compared with 35.8 percent in 2021.

For Alexander Gabuev, a senior analyst at the Carnegie Moscow think tank, the question of whether sanctions are working hinges on “what the word ‘work’ means.”

Russia will “definitely” go into recession and see its telecommunications, arms manufacturing and oil production sectors atrophy as it is denied access to high-technology Western imports, he said, but added: “Does [sanctions policy] change the Kremlin’s calculus and create sufficient pressure for Russia to change its Ukraine policy? No.”