Even after sanctions, Russian economy can pay for war

The Russian economy has faced unprecedented sanctions since the Kremlin launched the full-scale invasion of Ukraine on Feb. 24.

The latest events – the West's embargo on seaborn oil and price cap on Russian oil sales worldwide – are seen as a blow to the Russian economy, whose backbone is the energy industry.

But, paradoxically, Russia's economy has not collapsed and is unlikely to do so in the foreseeable future, analysts say.

The cap is too high, Europe isn't the only market, while Russia's stocking of revenues from oil and gas sales will keep the economy afloat.

Russia's ability to fund its war against Ukraine may remain unchanged. Instead of reducing war spending, the Kremlin is likely to redirect resources from the civilian sector toward the defense industry, experts say.

Russia's economy is expected to become increasingly militarized as the Kremlin seeks to supply its invasion force in Ukraine.

This means that the civilian sector will shrink further, and living standards will fall, but the war won't end.

Oil sanctions

Since Russia launched its full-scale invasion on Feb. 24, the West has cut off some Russian banks from the SWIFT messaging network, banned high-tech exports to Russia, and frozen $300 billion in Russia's foreign exchange reserves.

The latest blow dealt to the Russian economy is an unprecedented sanctions package against Russian oil.

The U.S. and U.K. banned Russian oil imports in March, and the E.U. followed suit on Dec. 5.

The E.U. will also start implementing an embargo on Russian oil products starting from Feb. 5.

The embargo on oil products will be extremely painful for Russia because it will not be able to supply them to China and India, which are exporters – not importers – of oil products, Mikhail Krutikhin, a Russian-born oil and gas analyst based in Sweden, told Ukrainian political blogger Olena Kyryk in December.

On Dec. 5, G7 and the EU started implementing a $60 per barrel price cap on Russian oil.

Since the EU, the U.K., and the U.S. have previously banned the imports of Russian seaborne crude, the price cap mostly applies to other countries that still buy Russian oil. Insurers for the oil market, which are mostly based in the West, are banned from dealing with Russian oil priced above the cap.

In Europe, several landlocked countries – the Czech Republic, Hungary and Slovakia – also continue to buy Russian petroleum shipped via pipelines.

Ukrainian oil and gas analyst Oleksandr Kharchenko told the Kyiv Independent that China and India would not be able to compensate for the drop in Russian oil supplies to Europe because transportation costs for shipping oil to Asia would be much greater.

The United States' highly advanced market economy was also successfully transformed into a war machine during World War II, but it was also very different from Russia's.

"The U.S. economy was much more powerful," Sazonov said. They had a high level of competence and gigantic experience in organizing mass production."

Funding the war

The purpose of the sanctions was to deprive Russia of its ability to fund its war against Ukraine. However, experts say that Russia's ability to fund the war may remain virtually unchanged.

"The reduction in oil and gas sector revenues will mean that as the government continues the war, it will deplete its savings and accrue debt more rapidly," Sharples said. "In time, this could undermine the ability of the government to fund the war."

But he added that "it is also possible that the government will face the more difficult financial circumstances by prioritizing military spending and cutting back elsewhere, such as spending on health, welfare, and education."

"If so, the Russian population will increasingly bear the costs of the war," Sharples added.

Movchan argued that the sanctions would not have "any impact" on Russia's ability to finance the war machine.

The war against Ukraine is a "priority task" for Russia, and it will redirect resources from the civilian sector to the war effort and print money to fund the war, he said.

Sazonov said that Russia would not spend less on the war even if its revenue fell dramatically. Instead, he said that it will reorient its resources, forcing living standards to fall.

Impact of sanctions

Sazonov believes the economic sanctions would not affect Russia's ability to wage war.

"There were no examples when a country's will to wage war was crushed by economic pressure," he said.

Nazi Germany did not lose its ability to wage war even when it was completely isolated and was being bombed by the Allies at the end of World War II, Sazonov said.

He also cited the examples of Iran, which has been able to survive and wage wars for decades despite Western sanctions, and North Korea, which has been isolated for decades but managed to create a nuclear bomb.

"The idea that it's possible to defeat Russia economically is a dead-end," Sazonov said. "Russia has all the basic resources inside the country – food, fuel, and ammunition."

The only way to defeat Russia is for the West to dramatically increase the production of weapons and supply them to Ukraine, he added.

The idea that the Western sanctions and Russia's economic problems will lead to regime change is questionable.

Sazonov argued that Russians' resentment with falling living standards would not lead to any coup, uprising, or revolution. Putin has destroyed all independent elites and is strong enough to crush any dissent, he said.

But Georgy Satarov, a Russian political analyst, told the Kyiv Independent that regime change is unpredictable, and economic difficulties may be one of the numerous factors that can lead to a coup or revolution.

"The (1917) February Revolution started after a women's revolt in bread lines," he said. "A hundred years later, this may be one of the many factors that will become the trigger."

Note from the author:

Hello! My name is Oleg Sukhov, the guy who wrote this piece for you. 

I was born in Russia and moved to Ukraine in 2014 because I couldn't stand the suffocating atmosphere of that totalitarian country. I used to think it might be possible to transform Russia into a liberal Western-oriented country. Now it's clear that it's a lost cause. 

But at least I can atone for the crimes of my homeland by exposing its barbaric aggression against Ukraine and providing objective and independent coverage of what is going on there. I'm also trying to contribute to Ukraine's transformation into a full-fledged Western liberal democracy strong enough to defeat Russia. 

Our publication needs help from every one of you — support Ukrainian wartime journalism, become a patron of the Kyiv Independent.