Borrell explains how Russia's economy has suffered from Western sanctions
Kyiv • UNN
Russia's economy is suffering greatly from Western sanctions due to the war in Ukraine: falling revenues, high inflation, capital outflows, industrial decline, and growing dependence on China.
The Russian authorities regularly state that the Russian economy will not really suffer from Western sanctions and that time will be on Russia's side in its aggressive war against Ukraine. However, sanctions have already significantly weakened the Russian economy. This was written by the EU High Representative for Foreign Affairs and Security Policy Josep Borrell in his new blog post ,UNN reports .
Due to Russia's war in Ukraine, the European Union has now unanimously agreed on 13 sanctions packages. However, in recent months, there have been claims that these unprecedented sanctions may not work. Especially after the Russian authorities announced that GDP growth will be 3.6% in 2023.
Careful with official figures in Putin's Russia
As Borrell has noted, in an autocracy like Russia, where there is no freedom of information, one must always be very careful with official figures. Russia's data on the state of the economy is as suspect as the results of the last presidential election.
However, the high representative pointed out that the effect of the sanctions could not be instantaneous and that their purpose was to weaken Russia's ability to support its military efforts in the medium term. And that, according to Borrell, is actually what is starting to happen.
With Russia increasing defense spending by 70% in 2024 compared to the previous year, about 30% of Russia's budget and 6% of its GDP is now officially dedicated to national defense, with important additional resources designated as classified spending. Military and security spending has returned to Soviet-era levels, Borrell pointed out.
Russian economy is fueled by rising defense spending
The Russian economy is fueled by booming defense spending, including high payments to soldiers and families of those killed in Ukraine. Regions with a strong military industry or bordering Ukraine have seen higher economic performance due to war-related activities.
The transition to a military economy inevitably means cuts in spending on education, health care, social security, roads, civilian infrastructure, energy systems... This reorientation has already had a negative impact on the lives of many ordinary Russian citizens, Borrell emphasized.
Sanctions are already hitting Russia's wallet
The Russian economy's revenues from fossil fuel exports have been cut in half since the spring of 2022 due to the European embargo on coal and oil and the price cap imposed by the G7 on oil exports. As a major exporter of fossil fuels, Russia has traditionally run a huge external surplus. However, over the past two years, this surplus has shrunk to almost zero.
Inflation is high in Russia
In 2022, the Russian economy also faced a sharp rise in inflation, largely due to Western sanctions. In the first half of 2023, inflation declined significantly, but began to rise again in mid-2023. Currently, the annual inflation rate in Russia exceeds 8% compared to 2.6% in the Eurozone.
Since spring 2022, the ruble has also been steadily falling. Devaluation leads to higher import prices. To stop the fall of the Russian currency and the resumption of inflation, the Central Bank of Russia was forced to sharply raise short-term interest rates, which currently stand at 16% per annum, which is 3.5 times higher than the European Central Bank's interest rate.
"With interest rates very high, private investment in Russia is suffering greatly, and the Russian state itself cannot afford to take out loans," Borrell wrote.
He noted that russia has already faced a significant outflow of capital, and even those countries that russia calls "friendly" are unwilling to put their money on russia's future. A consistent lack of investment will further deteriorate Russia's economic future.
Work to limit the circumvention of sanctions
Borrell acknowledged that EU sanctions are partially circumvented, in particular, by exporting products to Russia's neighboring countries, which are then re-exported to Russia.
He said that the EU and the G7 are constantly working to limit such circumvention, seeking to hold all participants in the supply chain accountable, including banks that facilitate such transactions.
"These efforts are becoming more and more effective. However, even with the partial circumvention, it has become much more difficult for Russia to obtain the goods it needs to wage war, especially high-tech products," Borrell emphasized.
He also added that Russia is now able to get only a small part of what it needs, and at much higher prices than before February 2022.
Borrell noted that Russia's dependence on countries such as Iran or North Korea, which supply the Kremlin with weapons to support military operations, also shows the continued industrial weakness of Russia, exacerbated by Western sanctions.
Car production in Russia has dropped by half compared to the pre-war period. The space industry, once the pride of the country, is in deep decline. Air transportation has become quite dangerous due to lack of maintenance, software updates, and spare parts.
The Great Labor Market Crisis in Russia
The outflow of hundreds of thousands of skilled young people since February 2022, in addition to the hundreds of thousands mobilized, killed or permanently disabled by the war in Russia, has opened a deep labor market crisis in the country.
Because of the war with Ukraine, the Russian economy is more than ever focused on trading basic necessities, often at discounted prices, in exchange for medium- and high-tech goods. China is taking advantage of this situation of weakness to buy cheap oil from Russia and export more goods to Russia, which is becoming increasingly dependent on its "big neighbor." Currently, about 50% of Russia's imports come from China.
