Russia is winning the economic war

Marcelo Guimarães Lima, Bundle / Burden, 2020.
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By LARRY ELLIOTT*

The West suffers most from the economic costs of a protracted war.

It's been three months since the West launched its economic war against Russia, and it's not going according to plan. On the contrary, things go from bad to worse. Sanctions were not imposed on Vladimir Putin because they were considered the best option, but because they were better than the other two available alternatives: do nothing or get involved militarily.

The first set of economic measures was introduced immediately after the invasion, when it was assumed that Ukraine would capitulate within days. This did not happen, causing sanctions – still incomplete – to be gradually intensified.

There is, however, no immediate sign that Russia will withdraw from Ukraine, and this is not surprising given that the sanctions have had the perverse effect of driving up the price of Russia's oil and gas exports, massively increasing its balance sheet. trade and financing its war effort. In the first four months of 2022, Vladimir Putin could boast a surplus of $96 billion – more than triple the figure for the same period in 2021.

When the European Union announced a partial sanction on Russian oil exports earlier this week, the cost of crude oil on global markets rose, giving the Kremlin another financial windfall. Russia has had no trouble finding alternative markets for its energy, with oil and gas exports to China in April rising more than 50% year-on-year.

This is not to say that sanctions have not affected Russia. The International Monetary Fund estimates the economy will shrink by 8,5% this year as imports from the West collapse. Russia has stockpiles of essential goods to keep its economy running, but over time these will run out.

Europe, however, is gradually shedding its dependence on Russian energy, which means that Vladimir Putin will not face an immediate financial crisis. The ruble – thanks to a policy of capital controls and a healthy trade surplus – remains strong. The Kremlin has time to find alternative sources for parts and components from countries willing to circumvent Western sanctions.

When the powerful and influential met in Davos last week, the public message was condemnation of Russian aggression and a renewed commitment to solidly support Ukraine. But in private spaces, there was concern about the economic costs of a prolonged war.

These concerns are entirely justified. Russia's invasion of Ukraine added further impetus to already strong price pressures. The UK's annual inflation rate is 9% – the highest in 40 years – fuel prices have reached a record high and the energy price cap is set to rise by £700-800 a year in October. Chancellor Rishi Sunak's latest package of support to tackle the cost of living crisis was the third in four months - and more will follow over the course of the year.

Due to the war, Western economies are facing a period of slow or negative growth and rising inflation – a return to the stagflation of the 1970s. Central banks – including the Bank of England – feel they have to respond to near double-digit inflation by raising interest rates. Unemployment is expected to rise. Other European countries face the same problems, if not more, as most of them depend more on Russian gas than the UK.

The challenges faced by the world's poorest countries are of another order of magnitude. For some of them, the problem is not stagflation but starvation as a result of the blockage of wheat supplies from Ukraine's Black Sea ports.

As David Beasley, executive director of the World Food Program put it: “Right now, Ukraine's grain silos are full. At the same time, 44 million people around the world are heading towards hunger.”

In all multilateral organizations – the IMF, the World Bank, the World Trade Organization and the United Nations – fears of a humanitarian catastrophe are growing. The position is simple: unless developing nations are energy exporters themselves, they will face a triple whammy in which crises in fuel and food supply trigger financial crises. Faced with the choice of feeding their populations or paying their international creditors, governments will opt for the former. Sri Lanka was the first country since the Russian invasion to default on its debts, and it will hardly be the last. The world looks closer to a widespread debt crisis than at any time since the 1990s.

Vladimir Putin was rightly condemned for using food as a weapon, but his willingness to do so should come as no surprise. From the beginning, the Russian president has been playing a long game, waiting for the international coalition against him to fracture. For the Kremlin, Russia is capable of withstanding a greater limit of economic agony than the West, and it is probably right.

If proof was needed that sanctions are not working, then President Joe Biden's decision to send advanced rocket systems to Ukraine provides it. The hope is that modern US military technology will do what energy sanctions and the seizure of Russian assets have so far failed to do: force Vladimir Putin to withdraw his troops.

The complete defeat of Vladimir Putin on the battlefield is one way in which the war could end, although, as things stand, that doesn't seem all that likely. There are other possible outputs. One would be for the economic blockade to finally work, with increasingly tough sanctions forcing Russia to back off. The other would be through negotiating an agreement.

Vladimir Putin will not surrender unconditionally, and the potential for economic warfare to lead to severe collateral damage is obvious: falling living standards in developed countries; famine, food riots and a debt crisis in the developing world.

The atrocities committed by Russian troops mean that the compromise with the Kremlin is hard to swallow, but economic reality suggests only one thing: sooner or later a deal will be struck.

* Larry Elliott is a journalist and writer. Economics editor for the British newspaper The Guardian. Author, among other books, of Europe didn't work (Yale University Press).

Translation: Daniel Pavan.

Originally published on the newspaper's website The Guardian.

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