This does not mean that Putin is closer to withdrawing his troops
The perverse effect of sanctions means rising fuel and food costs around the world
It has been months since the West began its economic war against Russia, but it is not going according to plan. On the contrary, things are really going very badly.
The sanctions were imposed on Vladimir Putin not because they were considered the best option, but because they were better than the other two options available: do nothing or the West intervene militarily.
The first package of economic measures was introduced immediately after the invasion, when it was assumed that Ukraine would capitulate within days. This did not happen, as a result of which sanctions, although still incomplete, are gradually being stepped up.
However, there are no immediate signs of Russia’s withdrawal from Ukraine, and this is hardly surprising, as sanctions have had the perverse effect of raising the price of Russian oil and gas exports and significantly increasing Russia’s trade balance and funding their military efforts. In the first four months of 2022, Putin boasts a current account surplus of $ 96 billion, which is 3 times more than in the same period of 2021.
When the EU announced a partial ban on Russian oil imports, the price of crude oil on world markets rose, providing the Kremlin with another unexpected financial income. Russia has no difficulty finding alternative markets for its energy, with oil and gas exports to China up more than 50 percent year-on-year in April.
This does not mean that sanctions are painless for Russia. The International Monetary Fund estimates that the economy will shrink by 8.5% this year as imports from the West collapse. But Russia has stocks of goods needed to sustain its economy, but they will be depleted over time.
But Europe is only gradually weaning itself off its dependence on Russian energy, preventing an immediate financial crisis for Putin. The ruble, thanks to capital controls and a strong trade surplus, has become stronger. The Kremlin has had time to find alternative sources for spare parts and components from countries wishing to circumvent Western sanctions.
When global engines met in Davos, the public message was to condemn Russian aggression and to renew the commitment to stand firmly behind Ukraine. But he was personally concerned about the economic costs of a protracted war.
These fears are completely justified. Russia’s invasion of Ukraine has only given further impetus to the already strong price pressure. The annual inflation rate in the UK is 9%, the highest in 40 years, with petrol prices reaching a record high and energy ceilings are expected to increase by Ј700-800 per year in October. The latest package of support from British Finance Minister Rishi Sunak to tackle the cost of living crisis was the third in four months and will be available later this year.
As a result of the war, Western economies faced a period of slow or negative growth and rising inflation and a return to stagflation in the 1970s. Central banks – including the Bank of England – believe they will have to respond to near-double-digit inflation by raising interest rates. Unemployment is expected to rise. Other European countries face the same problems, if not greater, as most of them are more dependent on Russian gas than the United Kingdom.
The problems facing the poorer countries of the world are of a different order. For some, the problem is not stagflation, but hunger, as a result of blocking wheat supplies from Ukraine’s Black Sea ports.
As David Beasley, executive director of the World Food Program, said: “Currently, grain silos in Ukraine are full. At the same time, 44 million people around the world are marching to starvation.
Fears of a humanitarian catastrophe are growing in any organization that includes many countries such as the IMF, the World Bank, the WTO and the United Nations. The position is simple: unless developing countries themselves are energy exporters, they face a triple blow in which fuel and food crises will also cause financial crises. Faced with the choice of feeding their populations or paying their international creditors, governments will choose the former. Sri Lanka was the first country after the Russian invasion to fail to pay its debts, but it is unlikely to be the last. The world looks closer to a complete debt crisis than at any time since the 1990s.
Putin has rightly been condemned for turning food into a “weapon,” but his desire to do so should come as no surprise. From the very beginning, the Russian president has been playing his long game, waiting for the international coalition against him to disintegrate. The Kremlin believes that Russia’s threshold for economic pain is higher than the West’s, and is probably right.
If proof is needed that sanctions are not working, then President Joe Biden’s decision to supply Ukraine with modern missile systems makes it happen. His hope is that modern US military technology will achieve what energy bans and the seizure of Russian assets have so far failed to do to force Putin to withdraw his troops.
A complete defeat for Putin on the battlefield is one way to end the war, although in the current circumstances this does not seem so likely. There are other possible results. One is that the economic blockade will eventually work, with tougher sanctions forcing Russia to back down. The other is a negotiated agreement.
Putin will not surrender unconditionally, and the potential for serious side effects from the economic war is obvious, including declining living standards in developed countries and famine, food riots and a debt crisis in the developing world. The compromise with the Kremlin is currently difficult to swallow, but the economic reality suggests only one thing: sooner or later a deal will have to be reached.
(Translation for “Trud” – Pavel Pavlov)
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