Western sanctions take toll on Russia’s wartime economy

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When Russian President Vladimir Putin launched last month a new council to coordinate supplies for the Russian army, he seemed to realize the extent of the economic problems that faced by the country, and his sense of urgency is palpable.

“We must be faster in deciding questions connected to the supply of special military operations and countering economic sanctions that, without exaggeration, have never existed,” he said.

For months, Putin has claimed that the “economic blitzkrieg” against Russia has failed, but Western sanctions imposed over the invasion of Ukraine have further eroded Russia’s economy, exacerbating equipment shortages for its army and restricting its ability to launch any new land offensives or. build new missiles, Russian economists and business executives say.

In response to Russian President Vladimir Putin’s invasion of Ukraine, the West has sanctioned some of his closest advisers. (Video: Luis Velarde/The Washington Post)

Recent figures show that the situation has worsened significantly since the summer when, fueled by a steady stream of oil and gas revenues, Russia’s economy appeared to be stabilizing. Figures released by the Ministry of Finance last week showed a key economic indicator – tax revenue from the non-oil and gas sector – fell 20 percent year-on-year in October compared to a year earlier, while Russia’s state statistics agency Rosstat reported that retail sales fell 10. percent year-on-year in September, and freight turnover fell 7 percent.

“All objective indicators show that there is a very sharp decline in economic activity,” said Vladimir Milov, a former Russian deputy energy minister who is now a leading opposition politician in exile. “The spiral is getting bigger, and there’s no way out of it now.”

The Western ban on technology imports has affected most sectors of the economy, while the Kremlin’s forced mobilization of more than 300,000 Russian conscripts to serve in Ukraine, coupled with the departure of at least as many many abroad who fled the draft, caused an additional blow, economists said. In addition, Putin’s own restrictions on gas supplies to Europe, followed by the unknown explosion of the Nord Stream gas pipeline, led to a sharp decrease in gas production – less than 20 percent in October compared to last year. Meanwhile, oil sales to Europe are falling ahead of the European Union embargo expected to be imposed on December 5.

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The Kremlin has trumpeted a lower-than-expected decline in GDP, predicted by the International Monetary Fund at just 3.5 percent this year, as showing that the Russian economy can cope with a raft of draconian sanctions.

But economists and business executives said the headline GDP figures did not reflect the true state of the Russian economy because the Russian government had effectively ended the ruble’s conversion since the sanctions were imposed. “GDP stopped having any meaning because firstly we don’t know what the real ruble rate is, and secondly if you build a tank and send it to the front where it is immediately blown up, then it is considered added value ,” said Milov, who wrote a report explaining the situation for the Wilfried Martens Center for European Studies published this month.

Deeper problems also lurk in Russia’s banking sector, where most accounting is classified. The Russian Central Bank reported this week that a record $14.7 billion of hard currency was withdrawn from Russia’s banking system in October, amid growing concerns over mobilization and the state of the economy.

However, a November report by the Central Bank warned that Russia’s GDP will face a sharper decline of 7.1 percent in the fourth quarter of 2022, after falling to 4.1 percent and 4 percent in comparison last year in the last two quarters. Last week, as the Russian economy officially entered recession, Central Bank Chairwoman Elvira Nabiullina told lawmakers that next year the situation could get even darker. “We really have to look at the situation very carefully and with our eyes open. Things can get worse, we understand that,” he said.

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Angry families say that Russian conscripts were thrown into the front line unprepared

Putin’s announcement in September of a partial mobilization of troops caused a big blow to business sentiment. “For many Russian companies the reality of war has sunk in,” said Janis Kluge, senior associate at the German Institute for Security and International Affairs. “It has become clear that it will continue for a long time. Now the expectations are worse than in the summer.”

Putin’s creation of the coordination council, headed by Prime Minister Mikhail Mishustin, is a sign that the Russian president is troubled by the growing impact of sanctions, economists and analysts said. Putin is “concerned that he will have to intervene to ensure supplies are available,” said Sergei Guriev, provost of Sciences Po in France. “He’s worried that the sanctions are really hitting the ability to do things.”

It also signals that the Russian government is preparing a wider mobilization of the Russian economy to supply the army amid chronic shortages of basic items such as food and uniforms. A series of new laws will impose heavy fines on business executives who refuse to carry out orders on behalf of the Russian military as well as potential prison sentences, clearing the way for businessmen which will be forced to provide products at knockdown prices. The creation of the council “is linked to the great pressure on business and the need to implement a tough diktat to make business do what it does not want to do,” said Nikolai Petrov, senior research fellow for Russia and Eurasia at Chatham House in London.

A Moscow businessman with connections to the defense sector said a quiet mobilization of the Russian economy had been underway for a long time, with many businessmen forced to make supplies for the Russian army but afraid to speak out. against orders at cut prices.

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“It has been necessary since the beginning of the war,” said the businessman, who spoke on condition of anonymity for fear of retaliation. “The main mass of business is quiet. If you say you are making supplies or weapons for the Russian state you may have problems abroad.

As Putin escalates the war, some in Russia’s business elite are losing hope

Anecdotal evidence reported in the Russian press points to many problems in supplying newly drafted Russian conscripts with equipment. An in-depth October report in the Russian daily Kommersant described major shortages of ammunition and uniform supplies for conscripts with manufacturers citing difficulties in securing the necessary materials due to of punishments.

Some Russian business executives say the collapse of the Russian military in Ukraine has revealed many inefficiencies and corruption in Russia’s military-industrial complex. “There are big questions about where all the trillions of rubles of the last decade were spent,” said a former senior Russian banker with connections to the Russian state.

If the new economic council fails to better coordinate the production of supplies and weapons, it could hamper Russia’s ability to launch new offensives in Ukraine, Petrov said. “The main problem before the Kremlin is the question of when the army is ready to start a new military action in Ukraine, and the preparation of weapons and ammunition etc. will determine these plans .”

The outlook seems likely to worsen when the EU embargo on Russian oil sales comes into force December 5, economists said. Combined with a price cap expected to be imposed on all Russian oil sales outside the EU, the move could cost the Russian budget at least $120 million in lost revenue per day, Milov said, and Russia’s budget is expected to rack up a deficit by the end of this year.

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