A slip, a dive or even a complete collapse.
This is how the prospects of the Russian economy were described after the first strong economic sanctions were imposed on the country fighting a war of aggression. It was estimated that the country’s economy would shrink by up to 15 percent during 2022.
That didn’t happen. Despite the strong sanctions, the Russian economy has floundered and the president has not Vladimir Putin the war fund is at least not completely depleted. According to the most recent estimates, the Russian economy shrank by about four percent last year, and a similar drop is predicted for this year. So a complete collapse has not been seen.
Have the Western countries failed in their sanctions?
According to the experts, exactly this interpretation cannot be made.
Senior economist following the Russian economy Heli Simola emphasizes that the sanctions have indeed had an effect – but only where they have been directed. Simola works at the Bank of Finland’s Research Institute for Emerging Economies.
– Sanctions have still been targeted quite narrowly. Especially the restrictions related to exports to Russia, which came into effect in the spring, have made it difficult for Russian production in many sectors.
The production of machines and equipment in particular has collapsed. For example, the production of passenger cars and excavators fell by around 80 percent in November compared to a year ago. Retail trade and, for example, the forest industry have also taken a dive.
Sanctions alone do not end wars
Since the beginning of the war of aggression, the European Union has made a total of nine sanctions packages against Russia. The scope of the sanctions has been described as unprecedented.
Professor of Economic History at the University of Helsinki Jari Eloranta however, the importance of sanctions has not been properly understood. Sanctions are associated with overly optimistic expectations, says Eloranta.
– Sanctions do not work the way politicians threatened at the beginning of the war.
For example, the president of the European Commission Ursula von der Leyen said at the end of February (you are switching to another service), that the sanctions will have “maximum impact on the country’s economy”. French Minister of Finance Bruno Le Maire again emphasized in March that the sanctions will cause the Russian economy to collapse.
In the United States, sanctions were appointed even before Russia’s actual attack on Ukraine as “the mother of all sanctions” (you move to another service)“.
According to Eloranta, the idea that sanctions would quickly bring Russia to its knees and even end the war is not based on historical evidence. You can’t just end wars or topple dictatorships with the help of sanctions, says Eloranta.
Sanctions still matter. They have contributed to warfare and, according to Eloranta, weakened Russia’s ability to produce new military technology and equipment.
Senior economist Heli Simola says the same.
– Sanctions are a very important means of reducing Russia’s chances of waging this war. They cut the Russian state’s income and make it difficult for the Russian military industry to produce. Unfortunately, sanctions alone will not end the war.
The wider effects of the sanctions will only be seen later. It takes time for sanctions to work.
In the long term, the outlook for the Russian economy is in any case very weak. As a result of the war and sanctions, the country may be facing a lost decade, i.e. a long-lasting cancellation phase.
– The prospects for the Russian economy in the next 5–10 years are really bleak, Eloranta states.
Russia has burned bridges with its most important trading partners, and the brain drain accelerated by the war further weakens the conditions for growth. At the same time, a large number of Western companies have completely withdrawn from the country. According to the forecast published by the Bank of Finland in October, Russians have “a long and partly painful adjustment to a lower standard of living” ahead of them.
The drop is not that strong, but it is long-lasting
The Bank of Finland also significantly changed its assessment of the development of the Russian economy. In March, the bank estimated that Russia’s gross domestic product would shrink by 10 percent during 2022. In October, the estimate was only four percent.
According to Simola, several factors explain the calculation of the estimate. First of all, the perception of the time span of the crisis has been updated.
– In the spring, it was thought that there would be a very deep and rapid drop, after which the situation would stabilize. Now it seems that the drop is not as strong, but it lasts significantly longer.
The sudden collapse of the economy did not happen primarily for two reasons. Russia managed to avoid a large-scale financial crisis, as the Russian central bank set strict restrictions on the financial market right in the spring, Simola estimates.
Professor Jari Eloranna was surprised by the power of the Russian financial system.
– The Russian banking system works much better than we thought. Even I have been surprised by how quickly it has been possible to react to the situation.
The Russian economy has avoided collapse also because Russia has received record export revenues due to the rise in the price of fossil fuels. Fossil fuels – above all oil – are Russia’s most important export products.
Export earnings are expected to drop significantly soon.
One month ago, the EU’s import ban on Russian crude oil and the Russian oil price ceiling set by the G7 countries came into force. Next month, the ban on the import of Russian oil products set by the EU will come into force.
According to preliminary information, it seems that Russia will not find replacement buyers for all its crude oil now that crude oil is no longer allowed to be brought to the EU area by sea. Export volumes in December have decreased by around 15–20 percent compared to previous months, says Simola.
The export price of Russian oil has also fallen clearly, and export revenues have already seen a dip.
Simola estimates that the shrinking of oil exports and lower prices will further tighten the state of Russia’s state economy. This is also stated by the Russian Finance Minister Anton Siluanov opinion. His including the Russian budget deficit (you switch to another service) swells to a greater extent than expected due to the shrinking of export revenues.
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