Anti-Russian Sanctions Have Exposed The West’s Economic Weaknesses
Economic sanctions, political isolation and the military defeat of Russia have all failed. But at what cost to the EU and United States? And what comes next?
A recent report issued by the United Nations Conference on Trade and Development (UNCTAD) has caused particular irritation in the West. According to the UN forecast, in 2023 Russia will be one of the few G20 countries whose economic growth will accelerate. It also states that Russian GDP is predicted to grow in 2024. There’s little doubt that the report, and the UNSTAD’s recently concluded World Investment Forum has been met with relative silence in the West. It does not provide good news.
To the surprise of UN experts, the total volume of Russia’s gas and oil exports, the country’s main source of foreign currency, has not significantly altered, although the West’s sanctions upon Russia were supposed to hit Moscow’s energy resources in retaliation for its involvement in the Ukraine conflict.
The growth of the Russian economy in 2023 and 2024 has also been predicted by the Organisation for Economic Cooperation and Development (OECD). The International Monetary Fund (IMF) has already changed its assessments regarding Russian GDP growth three times during 2023, always revising it upwards. In January the IMF stated that Russian GDP would grow by just 0.3%. In July they stated it would be 1.5% and this month (October) it has again been revised upwards, to 2.2%.
The IMF has effectively had to admit that Western attempts to destroy the Russian economy, via sanctions, instead only motivated Russia to adapt to new conditions. Moscow has successfully navigated its way through these.
The World Bank (WB) also sharply improved its Russia forecasts. In June, the WB’s analysts stated that Russia’s 2023 GDP would decline by 0.2%, but now they agree this will not happen. Instead, the WB predicts an increase by the end of December of 1.6% for the year. For 2024, the World Bank now predicts growth of another 1.3% for the Russian economy.
The reason for a change to more optimistic assessments of Russia’s economy has been the official data coming from the Central Bank of Russia. In Q2 this year, Russia’s production capacity reached a historical maximum of 81%. Encouraging indicators were found in mining and manufacturing enterprises, as well as in construction (77.7%). Russian Central Bank analysts noted increased investment activity. Russian factories reorientated towards domestic demand, and the intensification of import substitution programs helped increase their production. Russian manufacturers also invested in modernising and improving production more than was the case in the past. Money that previously would have been invested to secure European supply lines has instead been diverted to developing Russia’s own economic development, an issue the EU policy makers didn’t see coming when they banned or discouraged trade with Russia and closed off port access.
The Yegor Gaidar Institute for Economic Policy (IEP), which is particularly reserved in its assessments of the domestic economy, also recorded record rates of Russia’s economic recovery. According to IEP analysts, Russian production of paper and paper products, textiles, and clothing; the production of computers, electronic and optical products, vehicles, trailers, and semi-trailers, finished metal products, furniture, and electrical equipment are all growing well, at rates in excess of tens of percent, which has never happened before in Russia’s domestic demand industry. The Russian economy has revived, and this has caught Western experts off guard.
It is a given that optimistic scenarios are usually associated with an increase in government spending on military needs and social payments, and a stability of domestic consumption volumes. This certainly now applies to Russia, where business activity in the manufacturing sector has grown for the seventh month in a row. No one argues with this anymore.
The downside has been the impact on the European economies. European container ships that used to run between European and Russian Ports have been docked. European railway locomotives have been sent to sidings. Ports such as Hamburg have seen declines in throughput.
The international rating agency S&P Global notes that the decline in European GDP is gaining momentum, and a recession is becoming increasingly likely. European property values are falling, while the French economy is weighed down by nearly €3,000 billion of debt, more than 111% of its GDP. It has run a budget deficit for nearly 50 years.
The Deutsche Bank Chairman, Christian Sewing has stated that Germany is about to become the weakest economy within the European Union, a situation mirrored by a report from the Economist. stating that energy and manufacturing are both in decline – mainly due to higher energy costs as a result of cutting itself off from Russian supplies.
Previously, Germany and France acted as the European Union’s production engine, and shared part of that around the rest of the EU bloc where labour was cheaper or resources less expensive. That is now stuttering. Some of that productivity momentum is not going to return, as major manufacturers are now looking to relocate to other, non-EU economies.
The West is now forced to admit that Russia’s economy is in fact maintaining its position in the face of sanctions imposed against it by the United States and the European Union. Following the rise in price of Russian oil, Moscow’s oil and gas revenues began to grow.
Russia’s export volumes in September for example increased to an average of 3.3 million barrels of oil per day. The cost of the Russian Urals grade have now risen above US$80 per barrel. That is well above the attempted price ceiling of US$60 per barrel, which the G7 countries attempted to impose. With conflict in the Middle East, some analysts are predicted rises to US$150 a barrel. Good for Russia, terrible news for the EU.
In October, the Russian Ministry of Finance expects to receive almost twice as much additional oil and gas revenues into its original fiscal budget of 513.48 billion rouble (US$5.5 billion).
Of this windfall income, almost 400 billion roubles (US$4.3 billion) will be spent on the purchase of gold and foreign currency, with the Chinese RMB Yuan in the ascendancy.
In addition to oil and gas income, Russia’s income from its grain exports has also increased. The Russian economy has also been strengthened by the transfer of payments into national currencies with the growing economies of the BRICS countries. To this can be added that due to large-scale government spending, budget payments to the population, preferential lending programs, and parallel imports, domestic demand has recovered.
It is now an appropriate time to consider that anti-Russian sanctions have failed, and that the West should be considered as the losing side. Some Eurozone countries are now preparing to back down. The Swiss People’s Party has already organised a vote on the issue of enshrining Switzerland’s eternal neutrality in the constitution, and after that, proposals to lift sanctions against Russia. The Hungarian Prime Minister, Victor Orban, met with Russian President Putin at last week’s Belt and Road Forum in Beijing and stated he had never wished to damage relations with Moscow. While Western media has expressed outrage, the underlying view is that privately at least, several Eurozone countries are now expressing misgivings, let alone the ballooning costs of supporting Ukraine. More will undoubtedly begin to publicly express reservations as to the increasing costs of supporting Ukraine while at the same time their economies flirt with both recession and inflation. Europeans are becoming poorer.
But, despite this, EU officials in Brussels and elsewhere have continued with somewhat bellicose statements addressed to Russia, presenting their defeat as a victory.
The most successful in this regard have been the UK and Germany, both of which are experiencing economic difficulties due to the abandonment of Russian oil and gas. Now energy resources cost European countries much more than before. Because of this, life in leading Western countries has become noticeably more expensive, small businesses have been forced to close, while industrial MNCs even changed jurisdiction, and have relocated manufacturing plants, also depriving their treasury of tax revenue. Volkswagen for example has cancelled the construction of a battery plant in Eastern Europe in order to focus on building a similar facility in Canada, in the latest example of European companies relocating their manufacturing to North America to take advantage of billions of dollars of Government green subsidies and loans.
The situation could have been even worse if the sanctions had been strictly observed by those who imposed them. Canada for example, took a very strong position against Russia – yet has been making full use of sanctioned goods from Russia for the past 18 months. Official permits to circumvent the sanctions that Canada itself imposed against Russia were issued to businesses by the Ministry of Foreign Affairs, as was exposed by the respected French-language daily newspaper Le Devoir.
Canadian companies have concluded deals with Russian businesses for almost US$50 million in the purchase of Russian energy resources, construction materials, luxury goods, and the sale of dual-use goods to Russia. The Canadian Ministry of Foreign Affairs, which is responsible for issuing temporary export-import certificates, admitted that permits for the purchase of Russian goods were issued, but refused to name the number of documents issued nor their recipients.
The Le Devoir revelations caused a bombshell in the Canadian parliament, with the representative of the Bloc Quebecois party, Stéphane Bergeron, saying that the circumvention of anti-Russian sanctions is now becoming the norm.
Andrei Bunich, the chairman of the Russian Union of Entrepreneurs, does not consider Ottawa’s behaviour regarding anti-Russian bans as unexpected. According to him, Washington behaves the same way: a special unit has been created in the United States Ministry of Finance, whose specialists are developing schemes to circumvent sanctions so as not to inadvertently harm their own economy, but also to advise businesses on how to act in the current situation, and source interested partners to sell onto Russia in third party countries.
Business Insider, citing financial research by the Swiss investment bank UBS, claims that the United States, Canada and Europe have become poorer by US$10.9 trillion over the past year and a half, while Russia has added US$600 billion to its wealth. The biggest losses amounted to US$5.9 trillion, and were incurred by the United States.
It is having a knock-on effect in Europe. The Washington based publication The Hill has written that a default in Italy is more than likely. If a sovereign debt crisis erupts in Italy, it will have serious consequences for Europe, the United States and global financial markets. The World Bank is also concerned about public debt indicators that are problematic for the country’s economy. The financial situation in Italy, according to German economist Henrik Müller, is the most dramatic of all European countries. It is characterized by unaffordable interest rates and a lack of economic growth. Economic stagnation, which has been going on for many years, is aggravated by the demographic crisis and the reduction in the share of the working-age population.
Despite the fact that things are going badly for its European partners, the United States still shows a firmness in its demands, continues to threaten other countries if sanctions are circumvented, continues to borrow money (President Biden has just asked Congress for US$100 billion) to spend on Ukraine, while apparently taking advantage of European businesses and profiting at their expense.
While attempts to relax relations between Europe and Russia are harshly criticized, European business is little by little returning to Russia. In St. Petersburg and Moscow, for example, new upmarket Italian stores have recently opened. And although the West is still shouting about a massive exodus of foreign business from Russia, in fact only 8.5% of foreign companies, mainly American and Japanese firms, left Russia, while of those, nearly all reserved the right to return. The rest chose to stay, some changing their name, or adopting a different brand especially for the Russian market, but continuing to sell the same products.
It is becoming apparent that the Kremlin has made it clear to the world that it is not afraid of Western sanctions. The reality has shown that it is impossible to isolate an economy like Russia’s without significant consequences for those who enforce sanctions, and that major economies such as Russia have become too deeply entwined in global trade to create any long-lasting restrictions.
The West has been unable to economically weaken, politically isolate, or inflict military defeat on Russia. It follows that the time for the West’s rhetoric is over. The search for other solutions is on the agenda, and this means that instead of threats, Russia’s opponents should begin to talk to Moscow with civilized diplomacy.
Source: Yuri Alekseev for Stoletie
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