Russian economy crumbles as sanctions take toll on war budget

Sanctions against Russia are effective because they reduce its war budget, assesses Michał Wyrębkowski, an analyst from Yale University. The expert criticizes prestigious media that base their assessments of Russia's condition on International Monetary Fund data. "Misunderstandings are occurring," he warns.

In Wyrębkowski's opinion, the Russian economy resembles "a gas station with nuclear warheads."

He reminded that the country, which in February 2022 began a full-scale invasion of Ukraine, relies on its war budget from profits derived from trading fossil fuels, mainly oil and gas. The exit of over a thousand foreign companies from the Russian market means "a capital flight from Russia of over 220 billion dollars."

Assessments circulating in the media, even those as esteemed as "The Economist," that the sanctions against Russia are ineffective and that the Russian economy is in good condition, are erroneous, the expert believes.

In his opinion, a significant problem in monitoring the state of the Russian economy is the falsified data provided by the Russian statistical office, Rosstat.

"We are certain that the Russians are falsifying information about their GDP," Wyrębkowski admitted.

"Media such as Bloomberg, 'The Economist,' or 'Financial Times' use data from the International Monetary Fund (IMF), and since Russia is still a member, the data is presented as Moscow wants to see it," the expert noted. Therefore, in his opinion, misunderstandings occur when assessing economic indicators, which comprise a large number of data, such as GDP.

"In the first half of 2024, 32.8% of the revenues to the Russian budget came from the sale of oil and gas, showing how dependent the Russian economy is on resource deposits. Russian investments, such as the Arctic LNG-2 gas port, have been halted thanks to sanctions. Therefore, Western restrictions, which set a maximum price of $60 per barrel of Russian oil, are effective," explains Wyrębkowski.

In 2023, Russia recorded a 24% drop in state budget revenues from oil and gas exports compared to 2022. The expert recalled that sanctions "prevented Russia from earning at least several dozen billion dollars, which would have funded its war budget," noted the economist.

He also pointed out that Russians continue to sell some oil for higher amounts than sanctions allow. This mainly happens through the so-called shadow fleet.

"Russians export oil using old ships, after which they transfer it to legitimate, registered tankers. This way, Russian raw material reaches the market and can be sold at market prices," explained the analyst.

Moscow sells oil even when it is not profitable because if they stopped, they would have no way to resume well operations due to the lack of Western technology, noted the PAP interlocutor.

Wyrębkowski assessed that the problem lies in the West's lack of will to sanction countries and territories that enable Russia to access so-called dual-use products, such as semiconductors. "Such a place is Hong Kong, where Western parts are re-exported," he noted. He added that sanctioning port transshipment companies involved in this practice could have a significant positive effect.

China and India are unable to replace Western technology for Russians, assessed Wyrębkowski. "If we look at the Russian industrial park, it is Western equipment that does not come from Kremlin allies but is illegally imported, largely from Europe," he emphasized.

Russians can either wage war with Ukraine or cease aggression depending on how much money they have in their account, assessed the expert. The assets of the Russian central bank are half frozen in the West. As for the other half, two-thirds remain deposited in yuan at the Chinese central bank, and only up to one-third is liquidly accessible to Russians—it's about 100 billion dollars. Since the start of the war, Russian reserves have decreased by about 50 billion dollars, calculated the economist.

He added that the data clearly shows that the Russian economy is in poor condition. At the same time, we cannot predict when its collapse will occur because it largely depends on oil prices. Additionally, the Russian society will increasingly feel the rising inflation, high interest rates, and all other economic factors that are interdependently related, Wyrębkowski believes.