The Russian economy during the years of the war in Ukraine “runs like a bullet”, according to the findings of the European Bank for Reconstruction and Development EBRD. The World Economic Outlook of the IMF points out that Russia is expected to grow in 2024 faster than all advanced economies, in particular the Russian economy will register a growth rate of 3.2% surpassing the USA (2.7%), the United Kingdom (0, 5%), Germany (0.2%) and France (0.7%).
These conclusions are disappointing to the point of cynical for those Western governments who expected sanctions against Moscow to hit the Russian economy, which would have an impact on the outcome of the Ukraine war.
How can we explain that not only did the sanctions not lead to the expected collapse, but that Russia’s economy is growing faster than Europe’s economy?
- Hadn’t all the experts said that this unprecedented tsunami of sanctions would “lead Russia to ruin”?
- Had any of them publicly denied when European Commission President Ursula von der Leyen had predicted as early as 2022 that the Russian economy would “fall to pieces”?
- Had one of the “experts” warned that sanctions could go wrong?
Instead, they had all bid on estimates of how much percent Russia’s gross national product would collapse and how long Russia would be able to afford the costs of the war.
The miscalculations of certain Western economists and opinion makers, as well as EU and NATO governments, about the effectiveness of sanctions came from, and continue to come from, a Cold War-era image of Russia. . However, not all of them seem to have realized that Russia is no longer the Soviet Union, they still consider Russia to be so backward that it cannot exist without Western capital and know-how.
This impression arose because the country continued to earn foreign exchange mainly from the export of raw materials and less from manufactured goods. After the collapse of the Soviet Union, Western companies had gained a strong position in the Russian market through their investments. They were welcome, their goods coveted. Russian products could hardly keep up with this, they were not competitive on a global scale. The automobile industry was an example of this. Nevertheless, the country produced surpluses, if only from the export of raw materials and energy sources. For many so-called experts in the West, this had created the image of a “gas station” with nuclear weapons. They were blinded by this image and believed that they would stifle Russia’s revenues if they could stop raw material exports through sanctions. They fell victim to their self-created illusion.
Although Russia’s income came from the export of basic products, the country still had a fairly developed industry (especially the war industry), even if it had not yet reached the level of the world market. But this is the decisive difference in countries where Western sanctions have been most successful, such as against Cuba, Venezuela and Iran.
The industrial base of these countries was not as high and widely developed as the Russian one. However, the proponents of sanctions in the West apparently did not recognize this difference. While the sanctions affected Russian exports, they also prohibited Western companies from continuing to do business with Russia. This meant that Russian companies were now able to penetrate those markets previously dominated by Western companies. This market shift was possible because the Russian financial system had sufficient capital to support its own companies with loans to expand production capacity. The capital that the Soviet Union lacked for its development was now available in Russia.
Moreover, it had not been taken into account that while Western companies had brought with them brands, capital and production processes, it was Russian workers and technical personnel who carried out and ensured the production. When Western companies had to shut down, the production facilities were still in the country, as well as the workers who could operate them and thus continue production.
In the arrogance that characterizes the West, they apparently did not even consider this, because due to ideological blinders they underestimated the importance of workers for production. In the West, only entrepreneurs count. But Russians, who have a very high level of education and skills, do not necessarily need Western entrepreneurs to produce. They can also do it themselves because they have the necessary skills.
Although sanctions in the first year of the war created obstacles for the Russian economy, the country recovered from them in the second year. In the long run, sanctions could prove to be an advantage. Either the production is taken over by Russian companies because they buy out Western companies, or the market share of Russian companies increases because they and their products no longer have Western competition in the country. This means that the profits of former Western companies now stay in Russia and do not return to the corporate headquarters in the West, which strengthens the economic power of the state.
The fact that sanctions have weakened Russia’s oil and gas revenues cannot be ignored. However, they also led to an economic division of the world market. If less Russian oil is bought from the West, the price of non-Russian grades such as Brent oil or WTI oil rises. At the same time, the excess capacity of Russian oil and gas production is going to Western competitors at lower prices, especially China which has thus increased its economic power, while at the same time Chinese supplies have completely replaced Russian supplies from Europe, the U.S. , South Korea and Taiwan. Also, the limitation of oil production within the framework of the OPEC+ organization has helped to ensure that Russian revenues from oil companies are not significantly threatened. Although Russia’s oil revenues as a whole have fallen, they are still above the price ceiling imposed by the West.
The Western idea of using sanctions to weaken Russia and prevent it from continuing the war was by no means confirmed and turned into the opposite. Restrictions on exports of Russian products caused shortages in the West and also increased prices. This is not the case for Russia. In addition to the raw materials, it also has the industry and financial means to wage this war for longer than the West thought, and no one now doubts that it will last, while it has now been significantly reduced, exhausted, the certainty of victory of the West.
