Despite the bluster from Putin, Russia’s economy is hurting

Russia’s oil and gas market is a tough sell for the West, and the Russian economy is on a downward downward slide since the invasion of Ukraine

Western countries retaliated against Russia when it launched its invasion of Ukraine a year ago. The aim is to deal an economic blow so severe it would cause Putin to rethink his war.

The economy is on a decline because of these dynamics. And they will force Putin to choose between ramping up military spending and investing in social goods like housing and education — a decision that could have consequences both for the war and the Russian public’s support of it.

“The Russian economy and system of government have turned out to be much stronger than the West believed,” Putin said in a speech to Russia’s parliament Tuesday.

Russia, the world’s second-largest exporter of crude, was able to send barrels that would have gone to Europe to countries like China and India. As of November, the European Union imported 3.3 million barrels of Russian crude and oil products per day, while still purchasing 2.3 million barrels per day according to the IEA.

Russia has seen a lot of windfall profits from its oil and gas market. Janis Kluge, an expert on Russia’s economy, told CNN that this era is over.

Meanwhile, the ruble has slumped to its weakest level against the US dollar since last April. The currency’s weakness has contributed to high inflation. And most businesses say they can’t conceive of growing right now given high levels of economic uncertainty, according to a recent survey by a Russian think tank.

At an event hosted by the Center for Strategic and International Studies, Russia’s former deputy minister of finance said that it was a question of natural resources. He said that the economy experienced a decline, but not a collapse.

In fact, Russia’s average monthly oil export revenues rose by 24% last year to $18.1 billion, according to the IEA. A repeat performance is not likely, presaging increasingly difficult decisions for Putin.

Finding new buyers for processed oil products, which are also subject to new embargoes and price caps, won’t be easy either. Ben McWilliams said that India and China prefer to buy crude from each other.

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“Whatever energy resources are obtained, they’ll be spent on military needs,” said Gulnaz Sharafutdinova, acting director of the Russia Institute at King’s College London.

“Whether the economy shrinks or expands in 2023 will be determined by developments in the war,” Tatiana Orlova, an economist at Oxford Economics, wrote in a note to clients on Tuesday. She noted that the risks of shortages of workers tied to military recruitment and emigration are a key risk.

Sectors that rely on imports have been particularly vulnerable. Domestic car makers such as Avtovaz, which manufactures the iconic Ladas, have struggled with shortages of key components and materials.

The Russian auto industry was weakened after some companies stopped production and began to sell their local assets. Chinese firms have stepped up their presence, part of a broader trend. Even so, sales of new cars dropped 63% year-over-year in January, according to the Association of European Businesses.

Across sectors, firms are struggling to plan for the future. Almost half of Russian businesses plan to keep production the same for one to two years, despite the fact that growth is a distant dream according to a survey. The group said this contributed to a high risk of “long-term stagnation of the Russian economy.”

According to one of the experts at King’s College London, Putin is likely to back down. She said that his war chest was likely to diminish.

Source: https://www.cnn.com/2023/02/22/business/russia-economy-ukraine-anniversary/index.html

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“In normal times, we might have said that the population would protest against that,” Sharafutdinova said. These are not normal times.

He said at an economic conference in Siberia that there wouldn’t be any money next year and that they needed foreign investors.

The government has said that Russia’s economic output fell in the last year. Many economists initially predicted a bigger contraction than it actually was.

Foreign investors, especially from “friendly” countries, also have a big role to play, Deripaska said. If Russia can create the right conditions and make its markets attractive, they will bring them, according to him.

China has provided an alternative to the US dollar by buying energy from Russia, as well as replacing Western suppliers of machinery and base metals.

The collapse of the Soviet Union caused a scramble for assets which led to the creation of the aluminum business for Deripaska. In 2018, he was sanctioned by the United States, which noted that the oligarch “does not separate himself from the Russian state.” He was indicted last year for violating US sanctions.