Narrative X-ray: The impact of economic sanctions on Russia

08.10.2023

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Western countries have imposed various economic sanctions on Russia for the past nine years. However, according to the Kremlin, their influence is non-existent and the Russian economy is doing better than ever. Narrative X-ray tries to find out what the patient’s health is really like. We look at the medical history, make a diagnosis, and also make a prognosis.

Western sanctions against Russia were first imposed in March 2014, after Russia annexed Crimea, and have steadily escalated to punish an ever-widening range of activities. Propastop reported on these sanctions and their possible impact in March 2022. Sanctions have become the preferred tool of democratic countries in dealing with Russia. Although these restrictions have been in place for a long time and have become more and more strict, there are opinions that in fact they are not working, that they are not having a significant impact on the Russian economy, and that they may even be strengthening Putin’s regime and pushing Russia further into China’s arms, contrary to what was hoped.

How was the narrative of ineffective sanctions born?

This narrative has been deliberately propagated by the Kremlin since the beginning of the sanctions and is supported by various macroeconomic indicators that indicate that the Russian economy has proven to be resilient. However, the data provided by Russia are not reliable and it is difficult to verify their accuracy.

Since the start of the war, Putin’s regime has seized iron control over the publication of economic statistics, selectively discarding unfavorable figures. Before the war, economic statistics were published monthly, but now the Kremlin restricts the publication of export and import statistics, monthly oil and gas production data, capital inflow and outflow information, financial reports of large companies, central bank reports, foreign direct investment information, etc. Even Russia’s national aviation agency suddenly stopped publishing data on air traffic and airport passenger volumes.

The result of this lack of information is great confusion in assessing the state of the Russian economy and forecasting growth or decline. While the Organization for Economic Co-operation and Development (OECD) predicts a 2.5 percent decline in the total output of the Russian economy this year, the International Monetary Fund (IMF) predicts an increase of as much as 0.7 percent. The decline in GDP in 2022 was also estimated differently by different agencies, ranging from 2.2 percent (according to the IMF) to 3.9 percent (according to the OECD).

Wall Street Journal: GDP forecast

However, the IMF itself admits that they do not have a complete overview of what is happening in Russia, as their own economists have left the country and they are dependent on Russian national statistics, which they cannot verify.

What story does it tell us?

This confusion in the assessments of independent and internationally recognized organizations and experts is a fertile breeding ground for the Kremlin’s narrative about the strength of the Russian economy and the ineffectiveness of Western economic sanctions. This narrative says that sanctions cannot hurt Russia because it is simply too big and resilient. No other country the size of Russia has faced major sanctions since 1945.

The narrative asserts that the departure of Western companies from Russia and various import restrictions are not a problem for the economy, as Russia can replace everything it needs with domestic production. Rather, it even grows the Russian economy and creates new jobs.

Official unemployment in Russia is indeed steadily falling and was at a record low of 3.2 percent in May 2023. However, the reality is that already by the end of the third quarter of 2022, almost five million Russian workers were in various forms of hidden unemployment. Almost 70 percent of them were on unpaid leave. If the difference between being on unpaid leave and being unemployed seems semantic, that’s how it is. In fact, almost 10 percent of the Russian workforce is unemployed. This compares with the difficult period of the 1990s when 10 to 13 percent of Russians were unemployed. If you look, for example, at the strangely comical propaganda clips for military service distributed in Russia (https://www.youtube.com/watch?v=2fo65r9AuCw), the alternative to military service is depressing unemployment. In official statistics, all mobilized and recruited for the war are, of course, full-time employees.

The volume of the total output of the Russian economy has also been increased by the sharply increased production of the military industry, but if it is not exported, it will not contribute to the growth of the real wealth of the country in any way. According to Rosstat, from January to June 2023, compared to the previous year, production in the sectors “finished products other than machinery and equipment” (weapons and ammunition), ” computers, electronics and optical products” (radar equipment, radio electronics) and “other means of transport and equipment” (military aircraft, tanks, and armored vehicles) increased 20…30 percent. The production of military uniforms increased by as much as 76 percent. The overall growth of the entire industrial production during the first six months was only 6.2 percent compared to the previous year.

The head of the Russian Central Bank, Elvira Nabiullina, also admitted at the press conference held on July 21 that “the recovery of economic growth is coming to an end” and economic growth will soon be “more balanced and more moderate,” suggesting stagnation at best.

Who is it aimed at?

First and foremost, the story of how the collective West tries its best to bully Russia with sanctions, but to no avail, is aimed at a domestic audience. The vast majority of Russian residents (according to various estimates, 70…80 percent) have never left the borders of the former USSR, and they do not have this opportunity in the absence of a foreign passport. It is difficult for them to compare their standard of living with that of the residents of other countries, and the change in the exchange rate of the dollar against the ruble does not significantly affect their lives. Store shelves in Russia have not remained empty, only Coca-Cola has been replaced by Dobryi Cola or some other domestic cola drink.

However, if there are layoffs or tax increases, Western sanctions are to blame, not the country’s incompetent leadership. Besides – there is a solution – go yourself or send your father or son to the army and money problems will disappear.

Another important target group, besides the residents of Russia, are various opinion leaders and political decision-makers in Western countries. If they could somehow make it clear that the sanctions have no real effect on the Russian economy, it would be much easier to reach the cancellation of these sanctions as well.

What are its goals?

The longer-term goal is certainly to achieve the lifting of sanctions, but in the short term, this narrative allows for tensions and divisions between Western countries. Tom Keatinge, director of the Financial Crimes and Security Research Center of the British security and defense think tank RUSI (The Royal United Services Institute), stated this in an interview given to ERR in April this year, for example, according to a survey conducted in Hungary, 97 percent of respondents were against sanctions.

He believes that the European Union has a distinctly different attitude towards sanctions. The further one is from the front line or the border with Russia, Belarus, or Ukraine, the less seriously the topic is taken. At the same time, uniformity is very important for the effectiveness of sanctions.

Domestically, the narrative about the petulance of Western countries enables the population to be mobilized and to explain all sorts of deficiencies in state governance and the quality of life of people. The Kremlin’s narrative also confirms that the residents of Western countries are actually doing even worse, as the sanctions imposed by them hit them even more painfully (a colorful example of a Christmas advertisement distributed in Russia, where Europeans had to celebrate Christmas in the cold and dark due to the lack of gas and electricity originating from Russia

How is it going at the moment?

The decline of the Russian economy has indeed not been nearly as fast and sharp as, for example, the World Bank predicted last year, it can be said that the narrative is doing pretty well.

In his interview with ERR, Tom Keatinge also believes that the political leaders of the West were very poor in narrative creation and rhetoric 15 months ago. They gave the impression that the sanctions would devastate the Russian economy and that Putin’s war machine would be economically destroyed overnight. It was foolish to leave such an impression since sanctions only work over a longer period of time.

CNN / Ukrainian Energy Minister German Galushchenko

The IMF’s optimistic estimates and forecasts, based mainly on official Russian statistics, have also been widely reported in the independent Western media (CNN, Washington Post, Politico etc.).

At the same time, since Russia’s military action in Ukraine has been notable for its brutality, Western political leaders have not talked about the lifting of sanctions since the start of the full-scale invasion, and thus the narrative does not seem to fulfill its long-term goal.

However, all objective economic information also indicates that the Russian economy is increasingly falling apart at the seams, economic activity in many sectors has fallen by 60 to 95 percent and Putin is losing $500 million a day in energy sector exports compared to his huge profits last year.

The fear that the sanctions will push Russia more and more into China’s arms has also not come true. Investors are not coming to Russia from the south either: since February 2022, no new investments from Chinese, Indian, or Middle Eastern companies have been registered. The reason is that since the start of the war, Putin’s government has imposed strict capital controls and ownership restrictions on foreign investors, thus driving away business enterprises from “friendly” countries. Import from China and Turkey has increased dramatically. However, it grows the economy of these countries, not Russia. The growing volume of imports together with the weakening ruble also fuels inflation – government deficit spending does the same.

In the long term, according to various experts, the growing budget deficit can make it difficult to maintain social stability – due to the decrease in the real income of the population and the limited ability of the central authorities to buy the loyalty of the elite, including the enforcement structures. With the depletion of reserves and the absence of external support (especially from China), a macroeconomic collapse is very likely to be expected in the future.

It won’t happen tomorrow or the day after tomorrow, because reserves in Russia will initially continue, but not indefinitely – according to Russia’s Ministry of Finance, the federal budget deficit for the first six months of 2023 (2.6 trillion rubles) accounted for 38 percent of the remaining “liquid part” of the Russian National Welfare Fund (6.8 trillion rubles). 

As long as the Kremlin has money to pay local propagandists and brawlers, the narrative of ineffective Western sanctions will live on in Russia.

The images used are screenshots from the referenced pages. The infographic was created by Propastop’s editors.