why sanctions do little to change that

Coen Nij Bijvank

news editor

Coen Nij Bijvank

news editor

Chained mega yachts, a ban on Russian oil and half of the national money reserves frozen. By means of far-reaching sanctions, the West is hitting the Russian economy and thus Putin’s war chest hard, it seems.

But more than a year after the first sanctions, the economy continues to run, and the Russian army does not seem to be short of money. Tens of billions of euros are even flowing from the West to Russia.

Even if the West ramps up sanctions to the maximum, Russia can probably go to war for years without running out of money. What’s up with that?

Russian Ministry of Defence

For an answer, let’s first look at the cost side. Waging war is expensive. For example, the missiles used by Russia cost up to millions of euros each, and the monthly salary of the hundreds of thousands of soldiers is around 3,000 euros, according to Russian media. In addition, Russia has lost billions on equipment and logistics.

Business magazine Forbes calculated that the first nine months of the war cost the Russian treasury 75 billion euros. American researchers from think tank Jamestown arrive at 135 billion euros for 2022 and 2023, almost a fifth of government expenditure. Important: they base themselves on figures published by the Kremlin itself, which may obscure reality.

‘Russia is militarizing’

This year, a third of Russia’s spending will go to defense and security, the Kremlin expects. Russia expert Hubert Smeets, who also went through the figures, emphasizes that almost a quarter of the total expenditure is secret, much more than in previous years. “Most of that will also go to defense and state security. These are not all costs of the Ukraine war, but it says something about the militarization of Russian society.”

Gazprom

The costs of the invasion are therefore enormous, and in the meantime revenues are under pressure.

A significant decrease, but it does mean that countries are still spending tens of billions on Russian energy. Also EU member states.

Researchers at the Brussels think-tank Bruegel calculated that the EU will receive between 14 and 69 billion euros worth of oil and gas from Russia over the next twelve months. “It remains a huge amount,” says Bruegel researcher Maria Demertzis.

New customers

How is that possible? Russian oil is subject to EU sanctions, but an exception applies to member states that are said to be dependent on Russia due to their location. There are no penalties at all for gas. Demertzis: “Gas imports only decrease because countries themselves reduce their dependence on Russia.”

Europe can hit Russia extra hard here, because it is difficult for gas to find new customers. “Building a gas pipeline to China takes a long time, even at the Chinese pace,” says financial-economic journalist Roel Janssen.

European oil sanctions, on the other hand, are less effective because oil can be moved relatively easily via ships. “The oil that Europe does not buy, India and China buy,” says Demertzis.

ANP

Russia largely manages to circumvent many other sanctions and trade restrictions. Goods that are not allowed to be sold to Russia still end up in Russian stores via China, Turkey and Kazakhstan, among others.

Dutch computer chips, for example, still end up in Russian (military) equipment:

For example, we discovered Dutch chips in Russian weapons

But that could have been much more, says journalist Janssen. “Russian businessmen have had enough time to change the ownership structure of many of their companies so that they are no longer subject to sanctions.”

Moreover: these sanctions do not have a major effect on the Russian treasury. What it does have is freezing Russia’s assets. At the start of the war, the Russian central bank had some 600 billion euros in reserves in gold and dollars, euros and other foreign currencies.

Take money away?

Much of it was deposited with banks in the West. Russia has filled these piggy banks considerably in recent years, in order to have a safe reserve in the event of a sudden fall in the exchange rate of the ruble. But foreign assets now appear to be a weak spot. “Due to the sanctions, half of the 600 billion is no longer accessible to Russia,” says Demertzis.

That 300 billion euros would have been frozen by foreign banks, although the Russian state remains the owner. There are calls to give the money to Ukraine, but Demertzis thinks that’s a bad idea. “Confiscating money from a country creates enormous uncertainty in the financial system.”

Russian government

Either way, hundreds of billions are locked up. And furthermore, Russian finances are not very prosperous either. Trade continues to run smoothly, but the country is certainly struggling with much higher expenditure than income, partly due to the expensive war and plummeting energy income.

The government is trying to solve this with cutbacks and additional taxes on energy companies. And Western companies that leave Russia must pay 10 percent of the value of the parts they sell to the state treasury.

Deferred maintenance

And yet: with the current reserves, Russia can sustain the war for quite a few more years. And Russia may be able to further adjust its economy. For example, after sanctions following the capture of Crimea, Russia made the food supply much more self-sufficient.

Printing rubles is also possible, says financial journalist Janssen, but not indefinitely. “Then you get hyperinflation.”

If the war chest does run out, the country can switch to a war economy and force arms factories to maintain their production level. The question then is whether the quality of the army remains up to standard. “Russia cannot carry out much maintenance because of the lack of equipment and technical knowledge due to the sanctions,” says Janssen. But: here too, new suppliers could step in.

Xinhua News Agency

Determining exactly how long Russia can sustain the war financially is impossible. Ultimately, Russia connoisseurs expect, it’s all about whether Russians themselves start to feel that the economy is going down the drain. Dissatisfaction can lead to protest or even an uprising.

Smeets: “Putin promises that the armed forces will receive everything they need, and that this will not be at the expense of the welfare state. He is doing everything he can to prevent the war from leading to lower wages and higher prices in the shops. But that moment will come sooner than the time when the war becomes unaffordable.”

---

Source

---