Invasion fallout Is Russia’s economy really hurting?

Russia’s economy was predicted to collapse after Western countries imposed unprecedented sanctions on Moscow over the war in Ukraine. But this week, the Russian statistics bureau Rosstat said gross domestic product (GDP) in the first six months of the year had fallen by just 0.4%.

Capital investment is up, the ruble has rebounded and inflation — which soared when the war began — has started to subside, according to official data. This week, a top Russian government official predicted that GDP for the whole year would be just 3% lower and not contract by a third. So what is going on?

As expected, oil and gas revenues, particularly from the European Union, are continuing to shore up the country’s finances, despite the likes of Germany and Italy cutting their reliance on Russian energy. The state-owned energy giant Gazprom just announced a record first-half profit of 2.5 trillion rubles ($41.36 billion), sparking a 30% rise in its share price.

“Even if the Russian economy is performing worse than six months ago, it’s not enough to stop Russian President Vladimir Putin from financing the war,” Maxim Mironov, a professor of finance at the IE Business School in Madrid, told DW.

There’s no doubt that Western sanctions have started to bite. Last month, a study by Yale University found that imports to Russia have collapsed and manufacturers are struggling to obtain components, including semiconductors and other high-tech parts.

Russia’s position as a commodities exporter has been irreversibly eroded, the report said, as Moscow has been forced to sell more of its oil and gas to Asia at a steep discount.

One of the report’s co-authors, management professor Jeffrey Sonnenfeld, recently told Britain’s Times Radio that Russia’s economy could only “survive with tremendous hardships for two years or so,” as long as the West remains firm on sanctions. Other trade experts think a full economic collapse will take much longer.

“In the long run, Russia will be no more than a gas station for China...but I don’t buy this argument that the economy will collapse in two years,” Rolf J. Langhammer, a German trade expert and former vice president of the Kiel Institute for the World Economy (IfW-Kiel), told DW. He said Russia had spent several years building its war chest and noted how international finance experts think the country is well prepared for any economic decoupling from the West.

“The International Monetary Fund (IMF) wrote last year that Russia had hoarded cash since the 2014 conflict in eastern Ukraine and the annexation of Crimea and was prepared for a war of attrition.”

Langhammer noted how Germany had paid 20 billion euros ($19.97 billion) to Russia for energy imports in the first half of 2022 — a 50% rise from the same period last year. “Even if volumes fall, with soaring prices we will still pay them roughly 3 billion euros every month,” or 15 billion euros every six months.

But despite the better-than-expected economic picture, the Kremlin has stopped publishing a raft of economic data shortly after Russian tanks rolled into Ukraine.

The Yale researchers noted how Russia was drawing down the $600 billion in foreign currency reserves that have acted as a cushion for Putin in the first months of the war. They said $80 billion has already been utilised, while another half of the reserves has been frozen by the West.