Ukraine war: The ruble rolls in a detour - why Russia's economy continues to grow despite sanctions

After almost two years of the Ukraine war, the only reliable forecast is: No forecast is reliable.

Ukraine war: The ruble rolls in a detour - why Russia's economy continues to grow despite sanctions

After almost two years of the Ukraine war, the only reliable forecast is: No forecast is reliable. In the early morning hours of February 24, 2022, the day of the Russian attack on Ukraine, no one believed that there would be no end to the deaths on the front in the winter of 2023. Kiev would fall within days, it was widely believed, after hundreds of thousands of Russians invaded the neighboring country and marched on the Ukrainian capital. How were the defenders supposed to defy a seemingly so overpowering neighbor?

But Kyiv did not fall. Kyiv held firm. What's more, Ukraine managed to push back the attackers in many places. And when Kherson was recaptured nine months later, hopes of a Russian defeat were briefly revived. Suddenly the question was no longer how long the Ukrainians could hold out, but rather how long the Russians could hold out. Some optimistic analyzes suggested that sooner or later Moscow would run out of soldiers, political friends and, above all, money.

Today, almost two years after the Russian invasion, one has to bitterly state that these forecasts are also waste. The war seems frozen in a bloody stalemate. And there is no sign of Russia going bankrupt. On the contrary: "We have become stronger," claimed Kremlin chief Vladimir Putin on Tuesday in a video message to the meeting of the so-called World Council of the Russian People, an organization under the auspices of the Russian Orthodox Church. He boasted that Russia had consolidated "its sovereignty as a world power."

But is that actually a realistic description of the situation? What is true about the balance sheet drawn up by Putin?

It is said that Moscow was said to have hoarded 550 billion euros in gold and foreign exchange reserves at the beginning of December 2021, shortly before the start of the invasion. Putin had saved for a lightning victory, but now has to pay for trench warfare. The fact that he seems to have been able to do this without any problems so far is mainly due to the West's porous sanctions policy. Even the recently passed twelfth penalty package will hardly change anything. The reason is the same as eleven times before: The EU states are still divided as to whether and to what extent they can – and want to – do without Russia as a trading partner.

One country in particular keeps dropping out of the much-vaunted community of solidarity with Ukraine: Hungary under ruler Viktor Orban. The autocrat makes no secret of the fact that ideologically his country has much more in common with Moscow than with Brussels. When Orban shook Putin's hand in Beijing in mid-October, it angered many in Brussels, but surprised only a few. What's more: Despite the sanctions regime imposed, Orban does not shy away from continuing to do business with Russia. Most recently, Budapest declared that it wanted to expand nuclear power – in cooperation with Moscow. “It’s their war, not ours,” said the right-wing populist succinctly.

But there are also solid economic reasons why a tough sanctions regime against Putin and his loyalists is reaching its limits. The EU and the G7 countries blocked the Russian Central Bank's reserves amounting to 300 billion euros and also froze billions more in oligarch accounts. But it turned out that the money supply on the globalized markets cannot be turned off so easily and, above all, not so unilaterally.

The Moscow regime is said to have earned more than five billion euros this year from selling liquid gas to the EU alone. France has increased LNG imports from Russia by 40 percent, Spain and Belgium have even doubled it. Only China, Russia's pretty much best friend anyway, is a bigger buyer. In Washington they have apparently had enough. At the beginning of November, US President Joe Biden imposed tough sanctions on a huge Russian LNG project in the Arctic - even though European companies such as the French energy company Total Energies are involved.

But above all, black gold is fuel for the military machine. In 2022, Russia increased its oil revenue by 28 percent compared to the previous year. EU states (with the exception of Bulgaria) have been completely banned from transporting Russian oil by sea for a year. Russia avoids the sanctions. Literally. Before the war began, every second freighter that had loaded Russian oil sailed under the Norwegian or G7 flag. Now it's not even one in four anymore. Today, the Russian energy giants deliver crude oil to Asia via shadow fleets. Hundreds of often outdated freighters sail across the world's oceans, mostly under African flags. "If the authorities in Europe find that a company or a tanker is violating the sanctions, the name of the company and even the name of the tanker change relatively quickly," explains Christopher Weafer, managing director of the management consultancy Macro-Advisory, to "Euronews" .

The insurance of the cargo, which is allegedly often reloaded along the way, is taken over by either Russia itself - but especially India and China. As the largest buyers, they in turn are happy about the cheap raw material. As third countries, they refine the crude oil and sell the "clean" product, sometimes legally, on the world market - including to Europe (you can read more about Russia's new secret routes across the world's oceans here). The price cap of $60 per barrel that was actually set is de facto ineffective. In October, Russia reportedly even collected a whopping $80 per barrel - which, in addition to the decision by oil exporters (OPEC) to reduce production, was also due to the chaos in the Middle East.

When an EU diplomat tells the US magazine "Politico" that in the energy sector we have "reached the limits of what we can do without shooting ourselves in the foot," it is not without a certain cynicism. It turns out that isolating Russia without endangering Western economic interests doesn't work.

While Russia's economy undoubtedly went downhill in 2022, the assessment for 2023 is ambivalent. The Organization for Economic Co-operation and Development (OECD) believes a decline of 2.2 percent. The International Monetary Fund, however, predicts growth of 0.7 percent. Of course, Putin speaks of having consolidated Russia's position as a world power. However, the question arises as to what status he sees as consolidated. Canada, France, India, even Italy and South Korea had a larger gross domestic product (GDP) in 2020.

What can hardly be denied, however, is that Russia's economy has proven to be much more resilient than expected. Shortly after the start of the war, Biden predicted that it would be halved. Instead, the economy is “now bigger than it was before the invasion,” calculates Russia expert Janis Kluge from the Science and Politics Foundation in “Zeit Online”. However, GDP in wartime is "a pretty poor measure of prosperity," Finnish economist Laura Solanko points out to the New York Times. After all, although the arms industry generates billions on paper, it does not improve people's quality of life.

After all, completely new opportunities are likely to open up for Russia in 2024: With Iran, Saudi Arabia, the United Arab Emirates, Egypt, Ethiopia and Argentina, the Brics alliance is set to gain seven new members in the new year. The alliance, which so far includes Brazil, Russia, India, China and South Africa, is intended to offer a geopolitical and, above all, economic counterpoint to the West. That means: a lot of potential trading partners for the Kremlin.

Next year, almost a third of Russia's state budget will go to the military. The equivalent of 111 billion euros comes together - almost three times the Ukrainian defense spending. So far, Putin has been able to shift much of the war costs onto other departments without much fanfare. Military spending skyrocketed, while at the same time the regime pumped more money into the social budget (for example into pensions) in order to secure the support of the population. The ingredients for this were stolen from the pot for education, health and infrastructure. “Putin is financing the war by withdrawing money from the future,” says an article by the US think tank “Wilson Center”.

According to research, a large part of the Russian population continues to support the war - mainly because living standards have not deteriorated significantly. Many Western companies (including McDonald's, Starbucks and VW) have turned their backs on Russia. Alternatives come from in-house production – but above all from China.

However, it is questionable whether the upheaval trick will be successful in the long term because of the recent sharp rise in inflation. The Russians feel this in everyday life - which could have consequences in the upcoming elections in spring 2024. Putin has not yet officially applied for a fifth term in office. But so far he has always been able to rely on the fact that the people of Russia were willing to overlook the shortcomings in democratic decision-making as long as the president guaranteed them relative prosperity.

So what does Russia's "sovereignty as a world power" look like? Has it actually become “stronger,” as Putin claims? The answer is ambivalent: economically, Russia lags far behind the ambitions of its ruler. But despite all the Western sanctions, Putin hardly has to worry about running out of money. And the Kremlin chief is known to have a very idiosyncratic interpretation of the term “sovereignty”.

Sources: "Politico"; "Wilson Center"; "Euronews"; "Foreign Policy"; "New York Times"; "Time Online"