fewer cars and motors, but more domestic drinks and cigarettes

“Many analysts argue that the sanctions would have little or no effect on Russia, firstly because they did not force Putin to change policy, and secondly because the Russian economy has shown very resilient,” said Russian opposition politician Vladimir Milov, vice-president. Chairman of the Free Russia Foundation, former Deputy Minister of Energy of the Russian Federation (2002).
His report, in which he argues that both claims are “misleading to the public”, was published by the Wilfried Martens Center for European Studies. On January 31, it was presented to the Washington Atlantic Council.
Milov’s report is titled Beyond the Headlines: The Real Impact of Western Sanctions on Russia. The peculiarity of the study is that it is based on sources openly published by the Russian Federation: despite the fact that a significant part of the statistics began to be hidden by the Putin regime after the start of the invasion of Ukraine, many data are still available.
At first glance, the economic situation of the aggressor seems good: “Russian macroeconomic indicators show only a moderate decline: according to official data, GDP fell by only 2% in annual terms over the nine months of 2022”, agrees Vladimir Milov.
However, if you look beyond the oil and gas numbers, the picture becomes different. Milov analyzes the so-called NOGR indicator (non-oil and gas budget revenue) – the basis of which (about 70%) is business VAT paid to the federal budget. This figure “decreased by 4.3% over the nine-month period compared to the same period in 2021”. For comparison: “In 2021 and 2020, NOGR increased in Russia by 15.8% and 15.3% year-on-year, respectively (while GDP increased by 4.7% in 2020 and decreased by 2 .7% in 2020). Gas exports fell by more than 40% year-on-year in July-September last year, while its production fell by 26%. At the same time, “it is assumed that by the end of 2022, military spending will be 33% higher than forecast,” Milov recalls.
The further the numbers go from mining to producing end goods, the sadder the picture becomes. Thus, the “overall freight turnover in the Russian Federation decreased by 1-2% in April-May, increased to 4-5% in July-August and more than 7% in September on a annualized”; “Retail trade fell 9.8% year on year already in April and has not improved much since then – in July-August it fell almost 9% year on year,” the expert quotes .
Russia is rapidly becoming more resource-rich and less productive: “While mining fell just 1.8%, manufacturing fell 4% in December.”
If you look at individual key industries, their growing imbalance becomes evident. “The collapse of the Russian automotive industry is evident, where the production volume in September fell by 77.4% year on year.” Milov emphasizes the important social role of this sector: the automotive industry is extremely labor intensive: according to the Russian government, it creates 3.5 million jobs directly and in related industries.
In addition to automobile production, due to the sanctions, the following items have been severely affected (data as of the end of the third quarter): the production of railway locomotives (by 20-30% year-on-year), freight wagons (by 32 %), freight vehicles (by 34%), buses (less than 5 tons – by 51%, more than 5 tons – by 21%), bulldozers by 20%, internal combustion engines (37%), batteries leaded (10%), centrifugal pumps (26.5%).
Putin’s Russia began to produce semiconductor devices by 24.5% less, power transformers – by 23%; fiber optic cables – by 20%. It is not difficult to see that all of these products have some relation to army supply.
Consumer goods were even worse: production of washing machines fell by 58%, televisions by 50%, refrigerators by 42%.
Are there any goods whose production in Russia increased during the war? There are. Due to the urgent need to replace imports, food production increased (by 2% year-on-year), although the production of agricultural machinery fell by 15%. Russia also increased production of its beverages and tobacco products (4% each), household clothes (6%) and pharmaceuticals (12%). But all these categories belong to those where Russians traditionally preferred imported products to domestic ones: because of their completely different quality.
Milov says, based on Russian opinion poll data: “Mostly, consumers miss the defunct brands of household appliances and electronics (57%), cars (53%), non-food products, clothing and footwear (50% each) . The once-forgotten used market is blooming again: “The market for used laptop and computer components has doubled to quadruple in the first nine months of 2022.” Here, import substitution did not work: “In recent years, Russia has tried to develop its own Baikal and Elbrus processors as an alternative to Intel and AMD processors,” recalls Vladimir Milov. “However, studies have shown that they cannot compete with market leaders. At the end of 2021, Sberbank tested the applicability of Elbrus processors and found that they met only 16% of the requirements.
The changes that have taken place have already had their first social consequences: “13% (4.3 million people) of the total workforce of Russian companies (excluding those employed in small businesses) worked part-time ,[…]the share of hidden unemployment in the manufacturing industry reached 24.4%.
Inflation peaked at 17.8% in April 2022 (about 9% in January-February) – “the highest level since 2001”. Analyzing official Russian figures over several years, the expert concludes: “Today, Russians are on average 10 to 15% poorer than they were before Putin’s invasion of Ukraine in 2014. This is the direct price of the policy of “krymnachism” for the ordinary Russian.
Consumer prices, the expert points out, “did not follow the impressive” strengthening “of the ruble on the Moscow Stock Exchange, which indicates that the current exchange rate of the ruble against the dollar is only another Potemkin indicator that has little to do with reality.”
Speaking at the Atlantic Council, Milov pointed out: “Polls of Russian businessmen show that they consider lack of consumer demand to be the number one problem hampering development: 50% of those polled think.
The so-called National Welfare Fund (NWF) does not give much hope: it “accumulated 10.8 trillion rubles as of October 1, 2022 (13.6 as of February 1), but according to the Russian Ministry of Finance, only 7.5 trillion rubles of this is “fund cash”. The rest is invested in stocks, bonds and other financial instruments, Milov clarifies. – The cash part of the NWF can be spent in about a year and half (1 to 1.5 trillion rubles per quarter) But with the entry into force of the oil embargo, the budget deficit is likely to widen, requiring a faster pace of spending.
The conclusion the expert comes to is simple: “In 2023, the focus should not even be on introducing new sanctions, but on monitoring compliance with existing ones – because Putin has so far found ways around them.
This forecast is generally accepted by another expert – Charles Lichfield (Charles Lichfield), senior researcher at the Atlantic Council Geoeconomics Center (Senior Fellow, GeoEconomics Center, Atlantic Council). “Moscow expects a budget deficit of 2% of gross domestic product (GDP) in 2023, based on the assumption that oil from the Urals will trade at $70 a barrel. However, if the cap on price is reduced to $60 and spending remains the same, the budget deficit, according to Financial Times estimates, will approach 4.5%,” Litchfield said.
This is also facilitated by the resumption of Venezuelan oil deliveries to the United States, which is a temporary coincidence of interests on both sides. “Oil exports fund two-thirds of Venezuela’s budget, and Maduro could take advantage of that, get opportunities to rebuild his country’s crumbling oil industry,” remarks Venezuela’s Charles Lichfield, still seen as Putin’s ally.
Lichfield believes that in 2023 the Kremlin will have to abandon inflationary indexation of pensions: “It simply cannot afford it, so the Russian population will start to feel the consequences of the sanctions”. To assess the real impact of the sanctions, the expert suggests using a wider set of statistics: up to the indicators of “alcohol sales or the number of divorces”.
Russian opposition politician Leonid Volkov, chief of staff to Alexei Navalny and a panelist on the Atlantic Council, adds: “Putin’s money-stealing friends must be punished. But at the same time, we were reserved on the sectoral sanctions, because we saw how the propaganda uses them every time as food for its propaganda machine, making it possible to attribute all the problems of Russia to the “bad West”. Most Russians still think Putin is doing the right thing. Volkov believes that not everyone in Russia understands that “the current wave of sanctions is a punishment for war, they confuse cause and effect.”
At the same time, Leonid Volkov is convinced that while “sanctions are a very important part of the Western reaction to the war in Ukraine, they should by no means be the central element of this reaction”.
“I think that in Washington and in European capitals there is a better understanding now that military assistance to Ukraine is much more important. But that is already beyond the scope of today’s discussion,” summarizes Leonid Volkov.