The oil and gas industry appears to have been won by Russia, notwithstanding International sanctions. However, many claim Moscow will soon require monetary assistance.
After the West slapped enormous restrictions on Russia because of the war in Ukraine, the Russian economy was expected to crumble. However, Rosstat, Russia’s statistical service, reported last week that the country’s GDP fell by only 0.4% in the first half of this year.
As per official figures, public investment has increased, the ruble has recovered, and inflation, which shot through the roof when the conflict started, has started to decline. In the last week, a senior member of the Russian government forecast that the GDP would fall by merely 3% rather than by a quarter of the population for the entire year. So what is happening?
Though countries like Germany and Italy have reduced their dependency on Russian resources, as anticipated, oil and natural gas income, notably from the European Union, are still supporting the nation’s budget. A 30% increase in the share price of the state-owned oil giant Gazprom followed the announcement of a record first-half profit of 2.5 trillion rubles ($41.36 billion, €41.41 billion).
According to Maxim Mironov, a research professor at the IE Business College in Madrid, “even though the Russian economy is functioning worse than six months before, it is not sufficient to prohibit [Russian President Vladimir] Putin from funding the war.”
Without question, the effects of Western sanctions are beginning to manifest. According to a Yale Academic research released last month, shipments into Russia have completely stopped, and producers are having trouble finding components like semiconductors and other elevated items.
The research claimed that because Moscow was compelled to sell more of its oil and gas to Asia at a significant discount, Russia’s position as an exporter of commodities has been irreparably weakened.
Jeffrey Sonnenfeld, a management professor and one of the report’s co-authors, recently told Britain’s Times Radio that as long as the West maintains its commitment to sanctions, Russia’s economy would only be able to “survive with terrible suffering for two years or so.” Some trade experts believe it will take considerably longer to collapse completely.
The International Monetary Fund (IMF) stated in a report from the previous year that Russia had been stockpiling funds since the turmoil in eastern Ukraine and the annexation of Crimea in 2014 and was ready for an attrition-style war.
According to Langhammer, Germany paid Russia €20 billion ($19.97 billion) for imported energy during the first half of 2022, an increase of 50% over the same time in the previous year. “We will continue to pay them almost €3 billion monthly, even if volumes decline and prices skyrocket.”
However, immediately after Russian tanks entered Ukraine, the Kremlin ceased releasing many economic statistics despite the economy looking stronger than projected.
The Yale researchers saw that Russia was using up its $600 billion in foreign exchange reserves, which served as a safety net for Putin in the early stages of the conflict. They claimed that $80 billion had already been used and that the West had frozen the remaining half of the reserves.
According to Alexander Mihailov, associate director of economics at the University of Reading in the UK, Putin won’t run out of money for the war until the West completely weans itself off of Russian energy, which he estimates will take another two to three years.
If his alternatives are restricted, Putin may start printing money to cover soaring military expenditures. Mihailov called this “madness” since it would “lead to significant currency devaluation, hyperinflation, and societal instability.”
As the Soviet Union fell apart in the 1990s, Mironov pointed out the extreme hardships that Russians had to endure throughout the communist era. He warned against predicting the timing of the populace’s uprising against Putin.
“When inflation in the West reaches 10%, people get quite alarmed and demand action from government. Because Russian society isn’t structured that way, Putin has greater room to allow a 20–30% decrease in living standards without facing significant opposition.”