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Russian economy tottering under sanctions, experts say

July 30, 2022

In a recent interview, the EU's foreign policy chief told DW that sooner or later Russia will crumble. Many international researchers also say the sanctions will eventually work. Others are less convinced.

Red fireworks over the Kremlin, Moscow
How long can Russia survive without links to the West? Image: Sefa Karacan/AA/picture alliance

The European Union has adopted six packages of sanctions against Russia since the invasion of Ukraine at the end of February. Economic exchange between Russia and the European Union has almost completely halted, with the exceptions of gas and oil, which continue to be piped into the EU, and food, crops and certain fertilizers, which are not covered by the sanctions.

According to the Council of the European Union, which represents the 27 member states, sanctions now apply to 1,212 individuals — including Russian President Vladimir Putin, Foreign Minister Sergey Lavorv, several top oligarchs and 108 entities. Half of the Central Bank of Russia's reserves have been frozen, and Russian banks have been cut off from the SWIFT international payment system. Exports of EU technology, aeronautical engineering, electronics and luxury goods are banned. More than 1,000 Western companies have pulled out of Russia.

The US, Canada, Japan, Switzerland and the UK have also imposed sanctions on Russia. In its live tracker of the sanctions, the German nonprofit investigative newsroom Correctiv found that, as of July 30, 6,891 measures had been imposed since February. There have never been so many sanctions against a single country.

Josep Borrell in front of the EU eymbol
Josep Borrell says the West needs to be patient and Russia will be isolatedImage: Alexandros Michailidis/EU

Russia hit 'hard'

On Friday, Josep Borrell, the EU's foreign policy chief, told DW that sanctions are hitting Russia "hard."

"The Russian economy is decreasing by 10%," Borrell said. "They will suffer the biggest recession since the World War or the end of the Soviet Union." He acknowledged that the European Union remains dependent on energy supplies from Russia, but said that would change in the coming months. EU member states are still buying gas from Russia, he said, "but we have reduced to half the amount of imports — we cannot do miracles." He said the Kremlin could no longer use the income to shop in the European Union, meaning that EU technology for Russian tanks was now off limits. "They have the money," he said, "but they cannot buy anything."  

Protesters demand that Russia be cut off from SWIFT in Geneva
Russia was eventually cut off from the international SWIFT payment systemImage: SALVATORE DI NOLFI/KEYSTONE/picture alliance

Several studies by renowned universities and economic research institutes on the possible impact of the sanctions on Russia — and on the countries that have imposed them — are now available. They all project a drastic decline in Russia's economic output in 2022. 

The economic researcher Maria Shagina, from the London-based International Institute for Strategic Studies, projects a drop of 6% referring to recent estimates from the International Monetary Fund. "Russia continues selling oil and gas at record high prices, and it accumulated this war chest, this fortress Russia, that it used to have before the war," Shagina told DW. "So we have this unique situation where on the surface Russia is not very affected by sanctions. But, if we look at the microeconomic level, and in particular at the automotive industry and the aviation sector, the sales in those sectors have dropped by more than 80-90%. In the long term, we're talking about Russia's structural transformation because it can no longer accrue this Western capital and access Western technology, and it will go through a reverse industrialization. How quick can Russia solve it and come up with a new economic model or team up with China, India? Who can provide this is a big question mark."

Russia 'suffering massively'

Julian Hinz, from the Kiel Institute for the World Economy, said trade statistics showed that the sanctions have worked. "The Russian economy is suffering massively under these sanctions — way more than the European economies are," he said. "There's really just no comparison."

Hinz said it would be difficult for Russia to produce domestic alternatives to imported goods because the national industry needed preliminary products and technical know-how from abroad. He said the Kremlin would struggle to find buyers for the oil and gas no that are longer going to the EU and the US. "The pipelines are not there," Hinz said. "There's some pipeline capacity going to China, but that is just roughly about 10% of what could be sent to Europe at the same time. None of that, in terms of capacity, is able to replace the pipeline capacity going to Europe."

Borrell said Russia would end up isolated. "A modern economy cannot work if the link with the rest [of the] economic powers, technological powers is cut. This will damage the Russian economy a lot — not tomorrow: The war will continue, unhappily continue. But the economy will suffer a lot." 

"Putin has to choose if he wants to have guns or wants to have butter for his people," Borrell said. "I know he does not care much about his people."

The crucial question, then, is whether the economic sanctions will eventually help to change the political will of the authoritarian regime in Moscow. Alexander Libman, a professor of Russian and East European politics at the Free University of Berlin, is skeptical. He recently told the German public broadcaster Deutschlandfunk that Vladimir Putin is not impressed by damage to the Russian economy.

"Sanctions will not change anything within weeks or months," Libman said. "One must be honest: Sanctions are an instrument — there is quite a lot of research on this — that generally does not work. In most cases, sanctions have not influenced the behavior of the sanctioned states."

This article was translated from German.

Borrell defends energy plans and gas cuts

Bernd Riegert
Bernd Riegert Senior European correspondent in Brussels with a focus on people and politics in the European Union