Columna Foreign Policy, 22.07.2022 Jeffrey Sonnenfeld (senior associate at Yale School of Management), Steven Tian (director of research at the Yale Chief Excecutive Leadership Institute)
Nine myths about the effects of sanctions and business retreats, debunked.
Five months into the Russian invasion of Ukraine, there remains a startling lack of understanding by many Western policymakers and commentators of the economic dimensions of President Vladimir Putin’s invasion and what it has meant for Russia’s economic positioning both domestically and globally.
Far from being ineffective or disappointing, as many have argued, international sanctions and voluntary business retreats have exerted a devastating effect over Russia’s economy. The deteriorating economy has served as a powerful if underappreciated complement to the deteriorating political landscape facing Putin.
That these misunderstandings persist is not entirely surprising given the lack of available economic data. In fact, many of the excessively sanguine Russian economic analyses, forecasts, and projections that have proliferated in recent months share a crucial methodological flaw: These analyses draw most, if not all, of their underlying evidence from periodic economic releases by the Russian government itself. Numbers released by the Kremlin have long been held to be largely if not always credible, but there are certain problems.
Myth 1: Russia can redirect its gas exports and sell to Asia in lieu of Europe.
Long-planned Asian pipeline projects currently under construction are still years away from becoming operational, much less hastily initiated new projects, and financing of these costly gas pipeline projects also now puts Russia at a significant disadvantage.
Myth 2: Since oil is more fungible than gas, Putin can just sell more to Asia.
Myth 3: Russia is making up for lost Western businesses and imports by replacing them with imports from Asia.
Imports play an important role within Russia’s domestic economy, consisting of about 20 percent of Russian GDP, and, despite Putin’s bellicose delusions of total self-sufficiency, the country needs crucial inputs, parts, and technology from hesitant trade partners. Despite some lingering supply chain leakiness, Russian imports have collapsedby over 50 percent in recent months.
China has not moved into the Russian market to the extent that many feared; in fact, according to the most recent monthly releases from the Chinese General Administration of Customs, Chinese exports to Russia plummetedby more than 50 percent from the start of the year to April, falling from over $8.1 billion monthly to $3.8 billion. Considering China exports seven times as much to the United States than Russia, it appears that even Chinese companies are more concerned about running afoul of U.S. sanctions than of losing marginal positions in the Russian market, reflecting Russia’s weak economic hand with its global trade partners.
Myth 4: Russian domestic consumption and consumer health remain strong.
Myth 5: Global businesses have not really pulled out of Russia, and business, capital, and talent flight from Russia are overstated.
Myth 6: Putin is running a budget surplus thanks to high energy prices.
Myth 7: Putin has hundreds of billions of dollars in rainy day funds, so the Kremlin’s finances are unlikely to be strained anytime soon.
Myth 8: The ruble is the world’s strongest-performing currency this year.
One of Putin’s favorite propaganda talking points, the appreciation of the ruble is an artificial reflectionof unprecedented, draconian capital control—which rank among the most restrictive of any in the world. The restrictions make it effectively impossible for any Russian to legally purchase dollars or even access a majority of their dollar deposits, while artificially inflating demand through forced purchases by major exporters—all of which remain largely in place today.
Myth 9: The implementation of sanctions and business retreats are now largely done, and no more economic pressure is needed.
Defeatist headlines arguing that Russia’s economy has bounced back are simply not factual—the facts are that, by any metric and on any level, the Russian economy is reeling, and now is not the time to step on the brakes.
