Let's check in on the sanctions against Russia!

There are two contrasting narratives about Russia under sanctions. Can they be reconciled?

Photo by Alexander Smagin on Unsplash

There is a legitimate debate to be had about how well Russia is doing under the economic sanctions imposed by the United States and its allies. At the start of the war there was a lot of talk about how Russia’s economy might contract by 10-15% over the next year. That seems to have been an overstatement. This was followed up by claims that Russia had weathered the sanctions storm compared to the Western economies dependent on Russian energy. That too seems to have been an overstatement.

As fall begins to morph into winter, two stories in mainstream media outlets suggest the difficulty of assessing the effect of sanctions on Russian economic and military power. The first, from the New York Times’ Lara Jakes and Marc Santora, asks how Russia has been able to launch what U.S. ambassador to the United Nations Linda Thomas-Greenfield characterized as “the widest-scale missile attack since the beginning of the war” on Ukrainian infrastructure two weeks ago on November 15th. This came after multiple, repeated assertions from Western officials and analysts that Russian reserves of missiles were close to being exhausted.

The story proffers multiple possible explanations, but the ones that stand out are how Russia may be bypassing sanctions. One possibility is that the Russians are increasing imports from Iran and North Korea. Another is ramped-up indigenous production:

Janes, a defense intelligence firm, said Russia very likely stockpiled microchips and other technology necessary to build precision missiles before invading Ukraine in February, possibly starting years ago, given Moscow’s deteriorating relations with the West after its illegal annexation of Crimea in 2014.

The Janes analysis, provided on Thursday to The New York Times, noted that such microelectronic components were also used for civilian purposes and that Russia may have obtained them through third parties, such as states or private entities willing to risk the penalty of U.S. sanctions if caught.

Russia probably began producing high numbers of Iskanders, Kalibrs, and cruise missiles before the invasion, the analysis said.

“They are likely being produced as we speak, since the economy is on a near war footing and many plants associated with the Russian military industrial complex are working in three shifts and even on weekends,” the Janes analysis said.

That sounds pretty bad! But then a week and a day later the Washington Post’s Catherine Belton and Robyn Dixon offered up another assessment of what sanctions were doing to Russia:

For months, Putin claimed that the “economic blitzkrieg” against Russia had failed, but Western sanctions imposed over the invasion of Ukraine are digging ever deeper into Russia’s economy, exacerbating equipment shortages for its army and hampering its ability to launch any new ground offensive or build new missiles, economists and Russian business executives said.

Recent figures show the situation has worsened considerably since the summer when, buoyed by a steady stream of oil and gas revenue, the Russian economy seemed to stabilize. Figures released by the Finance Ministry last week show a key economic indicator — tax revenue from the non-oil and gas sector — fell 20 percent in October compared with a year earlier, while the Russian state statistics agency Rosstat reported that retail sales fell 10 percent year on year in September, and cargo turnover fell 7 percent.

“All objective indicators show there is a very strong drop in economic activity,” said Vladimir Milov, a former Russian deputy energy minister who is now a leading opposition politician in exile. “The spiral is escalating, and there is no way out of this now.”….

A November report by the Central Bank warned that Russia’s GDP would face a sharper contraction of 7.1 percent in the fourth quarter of 2022, after falling 4.1 percent and 4 percent compared with last year in the previous two quarters. Last week, as the Russian economy officially entered into recession, Central Bank Chairwoman Elvira Nabiullina told lawmakers that next year the situation could get darker still. “We really need to look at the situation very soberly and with our eyes open. Things may get worse, we understand that,” she said.

Can these two stories be reconciled? I think so. But it signals some sobering news about the war.

First of all, the Times story makes it clear that Russia’s missile capacity might not be due to sanctions evasion, but rather effective stockpiling and the exhaustion of other reserves. Follow-on reports suggest that Russia is going deep into their aging cruise missile stockpile to maintain their bombing campaign. So it might be that the sanctions are having their effect and Russia will simply expend its stock of missiles a bit later than expected.

The more likely story, however, is that Russia is allocating its scarce resources to prioritize war material. As the Post story noted, “One Moscow businessman with connections to the defense sector said a quiet mobilization of the Russian economy had already been long underway, with many entrepreneurs forced into producing supplies for the Russian army.”

What this means is that Russian military output, while low, is likely higher than Western defense officials have been estimating. It also means, however, that the civilian Russian economy will be starved for resources and in even worse shape than Western officials have been estimating. Add this to the effect of more than a million working-age Russians leaving the country in response to the partial mobilization and you have a complete wreck of a civilian economy.

This jibes with a Politico story by Jamie Dettmer on life in Crimea where one resident says, “because of the sanctions, a lot of people have lost their jobs and prices for everything, food especially, have skyrocketed and there isn’t much choice available either. If you were making a $1,000 a month before February, now you need to be around $3,000 to be where you were.”

Since Vladimir Putin likely believes that he can repress his way out of civilian discontent with the economy, the deprivation will continue until morale improves.

One final question is whether Russia can wring more efficiency out of their military-industrial complex. The Post story noted that, “Russia’s military debacle in Ukraine had exposed the huge inefficiencies and corruption in Russia’s military industrial complex.” The question is whether, with the pressures that come from a badly-prosecuted war, Russians will eliminate the inefficiencies and corruption.

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