Page 29 - bne IntelliNews monthly magazine December 2023

bne December 2023 Cover Story I 29
After two years of war in Ukraine, the sanctions regime has run its course. As sanctions rules are tightened they are starting to boomerang back and are increasingly hurting Europe more than they are Russia.
The extreme sanctions imposed on Russia in the first days of the Ukraine invasion were designed to collapse the Russian economy at best, or at least throw Russia into a crisis that would make it impossible for Russian President Vladimir Putin to fund his war.
It didn’t work. Russia came close to a meltdown in March and April 2022,
but the team at the Central Bank of Russia (CBR) acted fast and efficiently headed off a disaster with strict capital controls and banning withdrawals of dollars. Crucially, the EU continued to send billions of dollars to Moscow every month to pay its gas bill, throwing Russia a key lifeline. That was a mistake.
As 2023 comes to an end it is now clear that Russia’s economy has proved to be a lot more robust than thought, says political economy analyst Alexandra Prokopenko. GDP will expand by 2.2% this year. Growth is so strong in many sectors there is talk of overheating. The budget is back in profit. Both Russia’s oil revenues and its nominal GDP are back above the level they were on the eve of the invasion over 600 days ago.
“Russian real GDP is above where it was before the invasion. That is lamentable, but no one in Brussels gets to lament this.
Russian real GDP
The EU made a conscious decision to put the profits of a handful of Greek shipping oligarchs ahead of the 450mn people it's supposed to represent,” said Robin Brooks in a bitter tweet, the chief economist
at Institute of International Finance (IIF), referring to Greek shippers that have largely ignored sanctions to make money by shipping Russian oil to Asia.
One of the miscalculations the West made was to underestimate the quality of the financial and macroeconomics team running the economy. As Prokopenko points out, these people have been in charge of these policies since the 2008 credit crunch and are crisis veterans. Underpinning this resilience is a mindset of “permanent
By contrast, Europe is not good at dealing with crises. Almost all the EU members saw negative growth in the third quarter according to the latest OECD data and the forward-looking
S&P Global Production Manufacturers Index (PMI) for October remains deeply in negative territory, while industrial production in many countries is sinking.
As bne IntelliNews reported already last year, the lights are going out in Europe’s heavy industry after input and power prices rocketed. German industrial powerhouse BASF has been forced to shutter or dramatical reduce production at hundreds of factories across Europe due to unaffordable energy and gas costs which has made them economically
“Russian real GDP is above where it was before the invasion. That is lamentable, but no one in Brussels gets to lament this”
Source: xxxxx
war”, reminiscent of the totalitarian regime described in George Orwell’s novel 1984. They have had to deal with one disaster after another, which left them uniquely prepared to fight the latest clash with the West.
“The succession of crises has instilled a particular mindset in Russian officials. The perpetual need to address challenges that arise from factors beyond their control, often unrelated to monetary and fiscal matters, has kept them in a state of constant readiness for unexpected crises. This mindset, coupled with substantial oil revenues, has enabled the Russian economy as a whole to withstand the impact of sanctions and swiftly adapt to new realities. The role of crisis management by the central bank and the finance ministry in responding to sanctions should not be underestimated,” says Prokopenko, in the preamble to her report.
On top of that, it appears that Putin has been preparing for the current showdown for over a decade, building a Fiscal Fortress with massive reserves and low debt that has largely sanction- proofed Russia Inc.
unviable. By some estimates 10% of Germany’s heavy industry has been mothballed.
These economic problems can partly
be ascribed to the after effects of the pandemic and the ongoing polycrisis, but the sanctions regime has only made things worse. An indicator of the pain Europe is suffering is the fact that recently Russia overtook Germany to become the fifth biggest economy in the world in PPP terms.
As bne IntelliNews has reported, sanctions across the board have failed to have the intended impact. Oil sanctions are now a spent cannon and technology sanctions have failed thanks to Russia’s long list of friendly countries that are making a killing from transiting banned Western goods to Moscow.
The EU is currently debating the details of a twelfth sanctions package, which are supposed to tighten the sanctions regime and improve enforcement, but there is already stiff resistance to tightening the noose amongst many EU member states because of the painful economic bounce- back effects.
www.bne.eu