Why the Russian Economy Refuses To Collapse
Certain structural advantages prevent Russia from going into a death spiral
When the western world slapped sanctions after sanctions on Russia, the world anticipated the tightening financial screws will force Putin to back down. But so far we have not seen any evidence of a slowdown in the war due to the sanctions.
Are we missing something?
Or did the sanctions miss their target?
Biden warned Putin in December 2021 that if he invades Ukraine he will face “economic consequences like none he has ever seen.” The United States rallied 37 nations to impose an unprecedented set of sanctions against Russia after the invasion.
The Kremlin’s foreign currency reserves were frozen. Russian banks were knocked out of the Swift payment system, making it hard for Russia to trade in the global markets. A ban on semiconductor exports to Russia was imposed to make weapons production more difficult. Thousands of western companies packed their bags and left Russia.
In the wake of the ruble’s collapse and Russians withdrawing money from banks, many expected Putin to back down.
Yet here we are, one year later, with Putin giving pep talks about a long war. The Russian economy has not collapsed in the past year, and it will not collapse in the near future.
The Russian economy is able to avoid going into a tailspin because of certain structural advantages.
Grain is Russia’s second oil
Of course the Western media will never take their eyes off the Russian oil and gas industry, since it is one of the biggest revenue earners for Russia. But it is not the only industry that brings in revenue and employs millions of people.
As the world’s largest country, Russia has plenty of land available for agrarian work. Russia exported $37 billion worth of agricultural products in 2021. The world’s largest producer of wheat, doubled wheat exports in the first months of this year compared to last year.
Russia produces a lot of agricultural products than it consumes internally. Just a week into the war, Putin referred to the country’s agricultural production at a meeting with the flight crew of Russian Airlines.
“But it not even in the volume of exports that matter, the point is that we are fully self-sufficient in all food products, basic products, we have completely covered the needs of the country,” Putin said.
That was a bit of an exaggeration. But he wasn’t completely off the mark. Russia produces more vegetable oil, grains, fish, seafood, and sugar than it needs for internal consumption. They are self-sufficient or almost self-sufficient in potatoes, meat, eggs and milk.
The west will never be able to stop the flow of money into Russia for the sale of agricultural products.
I don’t think the agricultural industry will be able to completely offset the revenue lost by the Oil and Gas industry. The agricultural industry, however, is sufficiently large to absorb some of the workers who lose their jobs as a result of the recession.
Size Matters
There is a lot of talk about the unlimited manpower of Russia. That is probably the biggest joke in the world. Russia does have a lot of manpower, but not for the war. That is why the Russian army keeps recruiting people from ethnic communities geographically distanced from each other.
Mass mobilization that covers the entire country will lead to an internal revolt. They need to do it quietly and disparately. That is not unlimited manpower.
But the size of the country, 146 million consumers, creates a market of its own. Of-course, you can still make a complete mess of it, just like Putin is doing right now. But that size of the consumer base does allow some leeway for the Russian government to keep the economic wheels running. Slow and painful, but still running.
The state is the biggest spender in Russia.
“While official statistics don’t break out military production, the output of “finished metal goods” — a line that analysts say includes weapons and ammunition — rose by 7% last year. Production of computers, electronic and optical products, another line said to include military output, rose by 2% for the year and 41% in December compared with November. By contrast, auto output fell about 45% year-over-year”.
Will the uptick in war related manufacturing jobs be enough to offset the economic impact of vanishing traditional manufacturing jobs?
Of-course not.
However, it offers some protection against a catastrophic short-term outcome.
Oil and Gas Revenue down, but not out
In December 2021, Western allies approved a price cap that prevents Russian crude oil from reaching more than $60. The Russian oil price has been adversely affected by the price cap. In February 2023, Russia sold nearly the same amount of oil as it did last year but revenue plunged by nearly 45% when compared to last year.
The west did not set the price cap at zero, so why did they not do that?
It makes no sense for Russia to deliver something for a loss, so they will simply stop production. The Russian oil industry produces over 8 million barrels per day, and removing that level of production from the supply side will trigger an energy crisis that will disrupt the entire world economy.
By using their purchasing power, the west can exert downward pressure on Russia’s oil prices. This is the reverse of OPEC. But they do not want Russia to completely stop exporting oil.
Although the reverse OPEC cartel has a lot of buying power, they cannot completely shut down Russian production. As a result, Russian oil revenue will decrease, but it will never reach zero. Over the next six months, Russia will stabilize its revenue from oil and gas sales.
Not just oil, the same theory applies to Russian natural gas exports as explained above. They will have to sell to Asia and Turkey because they have lost access to the lucrative European gas market. They will offer them at less than market prices and find a way to sell everything they can.
Forex Reserves
The Russian currency reserves were $582 billion as of January 2023. Nearly 40% of that currency reserve is held in Russia and China, which means Russia has access to it whenever it needs it. The West has frozen an estimated $300 billion held in its central banks, which is why Russia has been buying and storing gold inside its borders to counteract this.
- Russian reserves in gold stood at $135 billion by March 22, 2023.
- In January and February 2023, Russia had a deficit of $34 billion.
Difficult spot. But not so bad that they will die tomorrow.
The Limitless Friend
China has done a lot of background work to assist Russia.
“Russia offers a fairly liquid market for Chinese goods, and Western sanctions have made Beijing Russia’s main trade partner. Chinese companies are joining parallel import programs, trying to replace the Western companies that have left the Russian market.
Eleven out of fourteen brands on the Russian automobile market are Chinese, for example. Chinese products accounted for 40 percent of Russian imports of goods at the end of 2022, and only North Korea is more dependent on Chinese imports now than Russia. In addition, the Chinese Union Pay system is the only way Russians can use bank cards overseas”.
The Side Effect
Despite this, not everything is going Putin’s way. He is scratching the bottom of the barrel and the 282 billion dollars in forex reserves do offer him some breathing room.
The one thing I am looking at very closely is Russia’s labor shortage.
Every day, Russia’s available workforce is shrinking due to the relentless drawdown of men of working age. More than 1,000 Russians are killed every day in Ukraine, and another two thousand to three thousand are injured and unable to work. The Russian workforce, on average, has been losing 1000 to 4,000 workers every day for more than a year.
The impact will have no other way to catch up and find its way to affect the broader Russian economy.
Labor shortage will push up wages. Together, these two factors play a wonderful role in jacking up inflation. The ruble will be under constant pressure. Things can quickly go south for the Russian economy if inflation gets out of hand, which is not impossible for a country that keeps spending more than it earns.
Yes, there are problems. There is an opportunity to fall. But nothing as big as the western media suggests.
As a matter of fact, the sanctions have played a major role in keeping the Russian economy under pressure and, as a result, the Russian war machine is under pressure. It is one of the levers that can be used to slow down the progress of the Russian war effort, and sanctions need to be continuously tightened.
Enforcement has been lax. There is a huge amount of Russian oil that is still finding its way to Europe through third parties. And it is such a shame because the Russians predicted way back in May 2022 that this will happen.
Europe will continue buying Russian oil via third countries once it introduces an embargo, RIA news agency cited Vladimir Dzhabarov, first deputy head of Russian upper house’s international affairs committee, as saying on Wednesday. (May 2022)
According to a report published by Politico last week, Russian crude oil is swimming its way into Europe.
But large volumes of Russian crude oil — a bigger source of revenue than gas — are still being shipped onto global markets, leading some experts to suspect they are finding their way to Europe’s market through the back door.
“Since the introduction of sanctions, the volumes of crude oil Russia is exporting have remained more or less steady,” said Saad Rahim, chief economist at global commodities trading firm Trafigura. “It’s possible that Russian oil is still being sold on to the EU and Western nations via middlemen.”
There is plenty of work the west has to do in order to keep the Russian revenue under check. For every action, they are responding with some form of counter measures. Not all of them are successful.
Russian economy is in a difficult position, but to keep stating that it is about to collapse is not true.
