How Russia gets by financially

Vladimir Putin claims Russia has everything it needs to withstand the cost of the war and the West’s sanctions. Military and national security expenditures in 2023 through 2025 reportedly are planned to be 9.5 trillion rubles, and social spending is set at 7.3 trillion rubles. Putin may command sufficient money to pursue such outlays for several years by drawing on Russia’s reserves of gold, Chinese yuan and euros. 

Overall, however, Russia’s future is bleak. It faces decades of economic stagnation and regression. Industrial production, even for the military, is likely to continue falling. High-tech goods from the West are no longer available. Many Western companies have left Russia, trade with the West has dwindled, and financing the war is draining the budget. Numerous foreign airlines have ceased service to Russia. Thousands of Russia’s best and brightest minds have fled the country. Labor shortages have pressured authorities to scour prisons for skilled and unskilled workers.

Despite the bite of sanctions, Russia in 2022 earned huge sums from foreign trade, led by sales of crude oil. On Dec. 5, 2022, the EU started enforcing an embargo on Russian crude oil exports. Sanctions were supposed to curtail revenues and dissuade European shippers from moving fossil fuels to the rest of the world. According to Investigate Europe, however, Moscow still profits highly from exports and European firms still facilitate much of the trade. In the month ended Jan. 5, 2023, some 250 European tankers — most of them Greek — reportedly left Russian ports carrying fossil fuels. In 2022, Greek-owned ships carried more carbons from Russia than did ships from nine other countries, including China and Russia, combined.

Russia’s future trade prospects are complicated. Its oil revenues declined toward the end of 2022 as price caps took effect and EU demand collapsed. The Russian oil benchmark averaged $66.5 per barrel in November and $50.5 per barrel in early December. From Dec. 15, 2022, to Jan. 14, 2023, however, it fell to $46.8. The West’s oil price cap was introduced in December 2022 at $60 a barrel — substantially lower than the early 2023 market price for benchmark Brent crude of about $85.

Demand for Russian energy has dropped. Russia needs to find buyers for its gas. By mid-2022, Germany had cut by half the amount of natural gas it imported from Russia, relying more on Norway and the United States. Russia lost more than half the physical volume of its former gas sales to Europe. By year’s end, prices of gas in Europe had returned to pre-February 2022 levels. Europe acquired liquefied natural gas from North Africa, the U.S., and the Middle East.

Unlike oil, which is carried by tankers at sea, much of Russia’s gas leaves through pipelines that take years to construct and are costly to maintain. Gas exports to China have increased, but Russia has just one existing pipeline to China and it moves only a fraction of the volume of Russia’s pipelines to Europe. To move gas by ship, Russia would need to build facilities to liquefy the gas, another expensive and time-consuming process.

The effects of sanctions on Russia probably will become more severe, but when and to what degree are uncertain. Still, Russia’s ability to produce oil and other commodities will not suffer unless war or civil strife hit the homeland directly.

Russia’s National Wealth Fund (NWF) fell to $148.4 billion as of Jan. 1, 2023 — down $38.1 billion in just one month — as the government took out cash to plug its budget deficit. Along with heavy state borrowing at domestic debt auctions, the NWF was becoming a main source of financing for the budget deficit. It was originally intended to support pensions.

Economist Alexandra Prokopenko is correct in this assessment: “The Russian economy’s pre-war potential was not overly large, with growth at 2-3 percent per year. The war against Ukraine and external restrictions have lowered it to about 1 percent. For now, the economy’s development will be put into reverse and it will take three to five years for that decline to come to a halt.”

The big picture for Russia’s economy does not look good. The war has lowered global demand and prices for Russian oil and gas. The overall impact will damage the country’s macro-stability and worsen Russia’s longer-term economic malaise.

Walter Clemens is professor emeritus of political science at Boston University. He is the author of several books, including “The Republican Virus in the Body Politic: How to Reboot America.”