A slow poison for Putin Ex-President Jimmy Carter wants Biden as his funeral speaker

There is great unrest in the West. Actually, the economic sanctions against Russia should mean that Kremlin boss Vladimir Putin has to end his war of aggression against Ukraine. That did not work, on the contrary: the Russian economy turned out to be unexpectedly resilient and the war continued.

People like the left-wing politician Sahra Wagenknecht say: “The sanctions don’t affect Russia, only us.” And the Kremlin is doing everything it can to support this story. Only: It doesn’t have much to do with reality.

Because there is a lot of evidence that Putin is deliberately beautifying Russian economic data to cover up the economic fallout of his invasion. He was helped last year because energy prices rose sharply and his country earned more from the sale of oil and natural gas. This year, however, the outlook for the Russian economy looks bleaker. In fact, she looks more like a tumbling boxer. But when is he really knocked out?

Kremlin improves economic data

Looking back to 2022: On paper, the first year of war for the Russian economy was anything but the catastrophe that international economic experts had predicted.

After the first months of the war, the International Monetary Fund (IMF) initially assumed that the Russian economy would shrink by 8.5 percent. It was even minus 2.2 percent. For critics of the sanctions, this was already proof that the sanctions against Russia would not work.

But that’s illogical. Because Russia has no interest in presenting bad economic data. Putin wants to show that he is unimpressed by Western sanctions – thereby demoralizing the West and its allies.

Everyone in the Kremlin knows that the sanctions are like a slow-acting poison; a wound that gets bigger and more painful over time. And experts agree: the punitive measures are working – and are hitting Russia harder than the West.

For Putin, economic data is therefore also a weapon of war. It would be naive to assume that he would not forge them. This is one of the reasons why the Kremlin introduced statistical censorship in 2022. Hardly any economic data, no data on international reserves, no trade and production figures are published. The result: there is no transparency.

Unfounded predictions

“Don’t trust Russia’s numbers,” wrote Agathe Demarais, director of global forecasting at the Economist Intelligence Unit, in an article for the US magazine Foreign Policy. “That’s because Russia has made statistics a central part of its information warfare.”

But not only the Kremlin publishes dubious figures, also the IMF. The estimate of minus 2.2 percent, with which the International Monetary Fund assessed the Russian recession, was not only a big surprise. The estimate is also significantly higher than many other experts’ calculations.

Has the IMF allowed itself to be blinded by the Kremlin? In any case, the financial experts made an estimate without having the necessary data: they had no foreign trade figures, no data on oil and gas production. They did not know the level of foreign direct investment in Russia, nor the level of capital inflows and outflows. Putin refuses to disclose this information.

Too much money goes to war

The Russian leaders used the IMF forecast, which was right for them, and did not react for two weeks, so many international observers thought the number must be correct. Then the Kremlin published a drop in gross domestic product (GDP) of 2.1 percent – without clarifying how Russian statisticians arrived at this figure.

For the whole of 2022, the IMF even assumed a slight growth of the Russian economy of 0.3 percent and is therefore more optimistic than the Kremlin, which expects a slight recession of just over 1 percent.

In the first quarter of 2023 it is already becoming clear that the burden of war is becoming increasingly heavy for the Russian economy. The current numbers are devastating for the Russian economy, which is largely dependent on commodity exports.

But they are also dramatic for the state treasury. In 2022, Russia had an additional turnover of 10 percent on the state budget due to higher revenues from the oil and gas trade. However, because of the war, government spending increased by 20 percent. While 2022 was another bridging year for the Kremlin, the state of public finances could turn critical this year, economic experts say.

Commodity prices are collapsing

The problem for Putin: falling oil and gas prices. And: the shrinking customer base for raw materials.

Until the beginning of last year, Russia’s main customers were in Europe and the US. It is over. The Kremlin now has to sell its raw materials to China or India, taking advantage of Russia’s plight. Means: Russia must waste them at low prices. As a result, world market prices are also falling, to the detriment of Moscow. According to the Finnish research institute “Centre for Research on Energy and Clean Air”, the Kremlin could lose 160 million euros per day due to the oil ban and the price cap.

Putin is not doing well. Oil and gas prices have fallen below pre-war levels, partly because the EU has installed price brakes, which are currently hurting Russia far more than the rest of the sanctions. The West has managed to reverse the explosion in commodity prices. A small blow to the belligerent despot of the Kremlin.

Oil and gas tax revenues fell 46 percent year-on-year to 521 billion rubles ($6.91 billion) in February 2023. Crude oil and petroleum product revenues — which accounted for more than two-thirds of energy tax revenues last month – fell 48 percent to 361 billion rubles ($4.8 billion), according to calculations by US broadcaster Bloomberg. Russia is now under pressure.

Western sanctions work

Another problem is the national currency ruble. Although this seems to be stable so far, there is no sign of hyperinflation. But the Russian currency is barely traded on the international capital markets and can – if at all – only be exchanged for Chinese yuan. This distorts the ruble against the euro and the dollar.

This means: the Russian currency is only strong on paper, you can hardly trade in rubles internationally – another indication that the Russian economy is in worse shape than Putin would like to believe and that the sanctions are achieving their goal:

These goals are likely to be met. The US government expects Russia to lose up to 20 percent of its GDP by 2030. The sanctions slow down production and trade, and circumventing the sanctions through third countries is possible and annoying for the West, but it costs Russian companies a lot of time and energy. As a result, the gap between the West and Russia is widening economically.

The oil business is now a huge loss-making business for Putin because the price of production no longer covers the costs. Because Russia cannot produce as cheaply as countries in the Middle East, for example. The Russian economy is already being inflated by subsidies from Putin’s so-called wealth fund, and a significant portion of GDP’s value added comes from the defense industry.

China alone cannot and does not want to fill this gap that the EU in particular has left economically in Russia. Although Beijing helps Putin out of the plight, that too has its limits, if only for the lack of gas and oil pipelines. Given these problems, one development seems likely: the worst economic fallout from the war is yet to come for Putin.

Used sources: