Report: Sanctions are devastating the Russian economy
For months, Russian President Vladimir Putin has insisted that his country’s economy – facing sanctions, hundreds of global companies pulling out and a shortage of manufacturing materials – is is fine.
But according to economists – and ordinary Russians – that’s not all.
Stanislav, who The record only identifies himself by his first name to protect his safety, owns an online marketing company in St. Petersburg, Russia. In March he spoke with the Click here podcast about Russia’s invasion of Ukraine and the ensuing sanctions, which were already eating away at its income.
Today, these sanctions hit small businesses owner even more difficult.
“It reduces my income by 20%”, he said in july, explaining that his foreign clients cannot pay for his services. “So I’m trying to find a solution for my family.”
A recent report by Yale economists argued that the Stanislav experiment is now commonplace in Russia, despite Putin’s defiant rhetoric claiming otherwise. For months, the Russian president pretended to be world energy czar. He brags that Europe needs Russian gas far more than Russia needs the money to sell it.
Jeffrey Sonnenfeld from the Yale School of Management and steven tian of the Yale Chief Executive Leadership Institute support rather than Russia needs to export energy to save its spiraling economy.
Contrary to Putin’s boastful claims, Sonnenfeld and Tian say the country is experiencing massive supply shortages and domestic production has stalled.
“The weapons that the Ukrainians scavenge from the battlefield, you find semiconductor parts in those weapons that were salvaged radios, refrigerators“, Tian said. “This is the level of desperation that Putin must sink to because he cannot get the parts and equipment he desperately needs.”
According to Sonnenfeld, hundreds of thousands of engineers and technicians have also left the country. This has left a shortage of skilled workers that Russia needs for long-term success.
“Russia brings nothing to the world market other than energy, grain and cyberterrorism,” he said. “That’s it.”
Sonnenfeld said the true state of Russia’s economy, contrary to the state’s self-reported statistics, is similar to South Africa’s wheezing economy in the 1980s when it reeled under the weight of sanctions worldwide due to apartheid.
The Click here podcast spoke with Sonnenfeld and Tian to find out more about what the future might hold for Russians like Stanislav. The interview has been edited and condensed for clarity.
CLICK HERE: Can you summarize how sanctions against Russia are hurting its economy?
JEFFREY SONNENFELD: In all sectors of the economy, we are witnessing declines ranging from 20% to 60, 70%. You can see that unemployment is skyrocketing. Twelve hundred companies have already withdrawn from Russia. Multinational companies took away up to 40% of the GDP, maybe a little more. They also cut a lot of jobs. Russia acknowledges that it was at least 12% of its workforce.
CH: What surprised you most about your research on the Russian economy?
JS: What was most surprising was how Putin suppressed all the bad news. The standard national income statistics that all nations have used at least since World War II – including Russia for the last 30 years under [former President Boris] Yeltsin and, believe it or not, even under Putin over the past 20 years, they have built their credibility in numbers. As an expert in oil economics Daniel Yergin commented recentlythey have destroyed 20 years of their own statistical credibility and trust in the past few months.
CH: Can you tell us a bit about the unorthodox ways in which you gathered this information?
JS: We just go to the other side to get the data. In a global economy, for every buyer, there is a seller; every seller, there is a buyer. If Russia does not publish the real information, it is still available.
STEVEN TIAN: We look at data from the port industry, we look at proprietary data from companies and financial institutions, and we’re able to take advantage of so many different data sources and piece together a really holistic picture of what’s going on in the Russian economy.
CH: So instead of looking at the big dots, you look at all the little dots.
ST: It’s true. It’s the same reason why we don’t boil everything down to a simple GDP forecast like some others, like the IMF [International Monetary Fund], without explaining anything. What we do is we try to give you the full picture of what is happening in the Russian economy at all levels. And no matter how you slice and dice it, the same picture emerges, which is that the Russian economy is really, really, really devastated.
CH: Can you give us an example of how the economy is devastated?
ST: These are reports from Russia itself on the automotive industry. It is no secret that coin cannibalization takes place. Russia was opened on suspend safety regulations regarding automobile production. The reason is that they don’t have enough airbags. They don’t have enough safety brakes. They now make cars without airbags or safety brakes. I don’t know about you, but I wouldn’t want to drive a car without airbags and safety brakes.
You can also look at some of the weapons the Russians use on the battlefield. Ukrainians collect weapons with semiconductor parts salvaged from radios, refrigerators. This is the level of desperation Putin must sink to because he cannot get the parts and equipment he desperately needs.
CH: One of the things that everyone is talking about is how unprecedented these sanctions are. And what I found really interesting about some of the different things that you talked about is that there are actually comparisons like apartheid sanctions.
JS: These withdrawing companies had both symbolic and substantive significance, so Afrikaners could no longer hide their heads in the sand, as many average Russians are. They could now see that the rest of the world saw them as a rogue nation. What’s going on here is a kind of game of chicken, a game of who can last the longest.
CH: What is the thing you keep an eye on?
ST: It’s hard to boil it down to one thing, because ultimately it’s not a short-term story. No economic pressure campaign works overnight. This has never happened in history. On the contrary, the thrust of economic pressure is to structurally degrade and empty Russian civil society by eroding its economic capacities over time, and this is happening at all levels.
JS: What is happening here is a kind of chicken game. And Putin’s desire is to divide the West. So what I’m looking for is to make sure that unity is reaffirmed in the West. And we just saw last week that the EU [European Union] came together for a 15% reduction in gas consumption. The fact that they have come together is very important and this continued unity is what I seek to see. And that’s what will win, I think, in this waiting game.
Sean Powers and Will Jarvis contributed reporting for this story.