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As sanctions bite, how much economic pain is Putin willing to take?

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By Jorge Liboreiro
President Putin said Western sanctions would have been implemented "no matter what."
President Putin said Western sanctions would have been implemented "no matter what."   -   Copyright  Yevgeny Biyatov/Sputnik

When Vladimir Putin succeeded the widely unpopular Boris Yeltsin in 2000 as president of the Russian Federation, he arrived at the Kremlin shrouded in obscurity.

A former KGB agent, Putin had been prime minister for just one year and was largely-unknown in the international arena.

Putin inherited a country in massive upheaval. Russia was reeling from a chaotic transition to market capitalism. Yeltsin's "shock therapy" had led to a sovereign default in 1998, a 5.3% drop in economic output and a dramatic devaluation of the national currency, the rouble.

The devastation offered the president a blank canvas to redefine his country after the collapse of the Soviet Union. In the energy sector, he found the perfect oil to redraw the map – and assert his legacy from early on.

A steep rise in energy prices and huge demand from both developed and emerging economies resulted in immediate gains to the Russian state.

Between 1999 and 2008, the country's GDP per capita skyrocketed from $1,330 to $11,635, a spectacular rise that – while unequal and prone to cronyism – helped spread the perception of middle-class prosperity among the population.

In parallel, a concentrated push from Moscow drastically cut the central government's debt, falling from 100.7% of GDP to 6.5% over the same period of time.

In 2012, the country officially joined the World Trade Organization (WTO), a moment that definitely aligned the nation with the global economy and was personally hailed by U.S. President Barack Obama.

A decade later, the revival that took years to materialise threatens to come undone in months.

Western countries have slapped an ever-expanding and hard-hitting raft of sanctions against Russia over the invasion of Ukraine with the aim of crippling the costly war apparatus and forcing a ceasefire.

The European Union, in coordination with allies, has targeted everything from luxury goods and aircraft components to semiconductors and state-owned media.

In a shocking move, the West went directly after Russia's Central Bank, cutting off lending and blocking the access to nearly half of its $640 billion in foreign reserves. The rouble went into freefall, inflation shot up and the stock market was abruptly closed with no reopening in sight.

A swarm of Western companies, such as Apple, Netflix, Ikea, H&M and even McDonalds, the first American fast-food restaurant to ever set shop in the Soviet Union, have fled the country under intense pressure from concerned investors and outraged consumers.

The Institute of International Finance, the global association of the financial industry, revised its economic forecast for Russia from a 3% growth to a 15% contraction in 2022.

A default on sovereign debt is seen as a matter of when, not if.

The prerogatives of great power

Notwithstanding the seismic developments, the Ukraine war rages on, with cities under siege, a mounting death toll and a relentless pace of destruction.

The Kremlin appears unbothered by the dire warnings coming from Western capitals, who promise harsher punishments if the situation deteriorates.

"These sanctions would have been imposed in any case," Putin said during a government meeting, in a rare recognition of the dire circumstances.

"There are some questions, problems and difficulties but in the past we have overcome them and we will overcome them now."

The president's resolve leaves Western allies wonder how much pain he would be willing to tolerate in order to subjugate Ukraine's will to his geopolitical paranoia.

Russians have a long history in "defying external pressure" and an ingrained belief in a "strong state," two qualities that have served to strengthen and prolong Putin's rule, says André Gerrits, a professor of international studies and global politics at Leiden University.

"Even if he ultimately agrees to a peace treaty with Ukraine, he will never openly recognise that he agreed to peace talks because of the sanctions. We will never be absolutely sure of the role that sanctions played" in the resolution, Gerrits told Euronews.

To understand Putin's behaviour one has to look back at Russia's imperial past, an age of conquest, grandeur, modernisation and, particularly, absolute power, all of which the president has attempted to emulate.

After a short-lived bid to embrace liberal democracy in the post-Soviet era, totalitarianism inside the country has gradually increased and is today as pronounced as it was before the glasnost years of Mikhail Gorbachev, Gerrits notes.

"Putin believes that Russia can only be strong if it has a strong leader – a president – and a strong political system – the elite – to act independently and sovereignly on the international stage. There is a direct link between the state's authoritarianism and its room to manoeuvre," the scholar says.

The Russian leader believes in "the special prerogatives of great power" and thinks countries are inevitably left to fend for themselves, an aspect of foreign policy that the West tends to "underestimate," Gerrits adds.

"The anarchy of international relations has returned to Europe with a vengeance."

Russification push

Faced with near universal censure, the president is holding his ground and doubling down on his contempt for the West and his spite for what believes to be NATO's encroachment into Russia's sphere of influence.

Putin and his close circle of officials have said the West is an "empire of lies," that sanctions are "akin" to a declaration of war and that any shipment of military support bound to Ukraine will be considered a "legitimate target" for retaliation.

The Kremlin has also warned it will seize and nationalise the assets of the foreign companies that pull out of the country, including their production facilities, offices and intellectual property.

"In the end, this will all lead to an increase in our independence, self-sufficiency and our sovereignty," Putin predicted.

But for a country of 146 million people that has for years moved deeper and deeper into the world economy, a sudden shift to autarky would represent a formidable, onerous and possibly unattainable challenge.

"The room for reinvention is very narrow. Russia has a very tight relation with Western technology, software and investment," says Dr Maria Shagina, a senior researcher at the Finnish Institute of International Affairs.

"If we take that away, there’s isolation and self-sufficiency. But self-sufficiency in very modest terms."

Shagina, whose work focuses on international sanctions, energy security and Russia, expects the Kremlin to intensify efforts of "russification" and "reallocation" of strategic industries but believes the survival strategy is "very questionable" due to Russia's entrenched dependence on its Western trade partners.

As commerce with the West plunges under the weight of sanctions, Moscow can look for alternatives further to the south, in China and India, two enormous economies that were among the few countries who abstained on a United Nations resolution that condemned the invasion of Ukraine.

"China can provide financial lifeline when Russia is under sanctions, the question is whether it will do so," Shagina tells Euronews.

China, Russia's largest trade partner after the EU, has so far expressed its support for Ukraine's independence, called for "maximum restraint" and offered help to secure a ceasefire, even if US officials have suggested the Asian giant might be willing to provide Russia with military and financial assistance, claims that Beijing has denied.

"It's quite intentional for China be vague, they want the West to guess. They want to benefit from both sides, they don’t want to be clearly on one side or the other," Shagina notes.

"Ultimately, China wants stability and doesn’t want to be locked with a partner like Russia."

A EU-made lifeline

As international observers rack their brains trying to figure out which way China will tilt, Moscow can count itself lucky to have an additional lifeline – or rather, a loophole – conveniently close to home.

Last year, the European Union spent €98.9 billion buying fuel from Russia, amounting to 62% of total imports. The energy-thirsty bloc bought 155 billion cubic metres (bcm) of gas, disbursing at least €15 billion, numbers provided that Eurostat that, due to confidentiality, don't represent the full picture.

Oil and gas exports account for about 40% of Russia's federal budget, which among its lines features national defence spending, estimated to be worth $61.7 billion in 2020.

The EU has long been aware of its heavy dependency on Russian oil and gas but has done little to alleviate its addiction. Following the sanctions imposed against the Kremlin in 2014 over the annexation of Crimea, which the bloc forcefully condemned and never recognised, EU purchases of Russian gas actually increased, hitting an all-time record of 166 bcm in 2019, the year prior to the pandemic.

The question of energy imports has become so glaring and problematic that it has somehow eclipsed the other penalties that the EU has slapped on Moscow in record time and with extraordinary unity. Washington's decision to ban all Russian energy imports has only served to put the EU in a more awkward position.

Despite pressure from the US, Ukraine and its own Eastern member states, the bloc has so far refused to directly target Moscow's most profitable source of income. German Chancellor Olaf Scholz said energy imports were of "essential importance" for citizens' daily life.

This has given Putin a "vital feeding tube" to sustain his declining economy, says Jeffrey J. Schott, a senior fellow at the Peterson Institute for International Economics.

Western sanctions are "obviously sending the Russian economy into a tailspin and will have corrosive effects on Russian economic growth for the near to medium term. But the immediate impact isn't clear. It still allows some breathing room because of the exceptions for oil and gas," Schott told Euronews.

"The economic pain will not be decisive for some time. If you don't increase the restrictions on oil and gas trade, that would afford the Russian military time to do more damage to innocent civilians in Ukraine. So from a humanitarian point of view, the argument is you have to you have to cut it off much faster."

Making matters worse for the bloc, the soaring energy prices that have been haunting consumers since early autumn have further ballooned the bill that Europeans pay to Moscow on a daily basis.

Since the invasion of Ukraine began on 24 February, the EU has spent over €13 billion on Russian fossil fuels, including €6 billion on gas, according to a tracking tool set up by the Centre for Research on Energy and Clean Air (CREA), an independent research organisation.

Brussels recently unveiled an ambitious roadmap to cut Russian gas imports by two thirds before the end of the year, but leaders failed to agree on a final deadline to completely wean them off.

"On the one hand, we have have these financial sanctions that are very hard, but on the other hand, we are supporting and actually financing Russia's war by purchasing oil, gas and other fossil fuels, so the situation isn't a very good one," admitted Finnish Prime Minister Sanna Marin at a meeting of EU leaders.

Putin's one-dimensional yet lucrative economic model is, for the time being, spared from total ruin

While the country's remaining sectors are struck with sanctions from all possible angles and consumers face empty shelves and sky-high prices, the state is guaranteed a smaller but reliable source of revenue that can satisfy its most pressing needs.

The lifeline bodes ill for hopes of capitulation. Expectations of a popular revolt that might force Putin to give up the fight have been swiftly dashed by a tightening grip on society, with protesters being detained for simply holding a blank sign on the street.

Only an uprising from oligarchs, the powerful and secretive billionaires who prop Putin's regime, could make the president change his mind, the three experts noted. But such mutiny remains to be seen and is unclear when or if it will place at all, despite the barrage of travel bans, asset freeze and luxury ban the West has imposed on the elite.

"There is a possibility of the Russian economy reinventing itself," says Schott. "But it's hard to see how that could possibly happen under a regime led by Vladimir Putin."