Page 60 - bne Magazine February 2023

60 I Eastern Europe bne February 2023
Europe just released a report saying it had been "largely spared" pain from the sanctions but Russia's economy is also doing surprisingly well. / bne IntelliNews
Ukraine fatigue builds, but Western support for Kyiv unlikely to falter soon
Ben Aris in Berlin
In December the EU commissioned a secret report to assess just how badly the war in Ukraine, and the polycrisis it is fuelling, is hurting Europe’s economy. Good news: the conclusion was that the bounce-back effect of sanctions imposed on Russia has “largely spared” Europe’s own economy. In all, the EU member states have spent a total of €525bn on relief and subsidies, and given the size of the EU economy (€16.6 trillion) that is a relatively modest amount – 3.1% or less than many countries spent on stimulus during the coronacrisis.
However, the same is true of Russia. Sanctions have not badly hurt its economy either. In the first month of the war Russia’s economy was widely expected to contract by at least 15% and things like its oil production and banking sector were supposed to
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collapse. Not only did that not happen, but Russia is actually making more money than it has ever made before. This year the current account surplus is predicted to be $270bn by the end of the year – more than twice as much as the $120bn it had in 2021, and that was already an all-time record.
Calculating the cash cost to Russia is very difficult. The budget has earmarked a total of $75bn (RUB4.7 trillion) for military spending this year, which is planned
to double to $84bn next year. However, you could include the spending on the police, which is set to be almost as much as on the military and is presumably
to prevent anti-war demonstrations or make sure they are easily crushed if they happen. All-in-all as part of the new three-year budget passed in December, Russia intends to spend a total of $600bn on defence and security out to 2025.
Another way to look at the cost is the cost of the 3% contraction this year. Russia’s economy was worth $1.8 trillion in 2021, so a 3% contraction is only worth about $53bn. That is a lot less than the $267bn that a 15% contraction would have been worth.
In relative terms the sanctions war is costing Europe about 3% of GDP so
far (just counting subsidies), whereas adding Russia’s contraction and budget spending and the cost is of the order
of 7% of GDP, although it still remains well within Russia’s means to finance it just from the windfall $150bn extra it has earned this year from commodity exports. If you add in the spending
on the police the total rises to around $200bn, but Russia can easily afford that too, as it has another approximately $180bn in the National Welfare Fund. Russia still has plenty of money.