Wednesday, March 23, 2022

Are ‘Profound Sanctions’ Having Any Effect on Putin?

By Jim Geraghty

Wednesday, March 23, 2022

 

Back on February 24, after the Russian invasion of Ukraine began and President Biden delivered an uneven press-conference performance, I wrote that Biden’s worst line was, “They are profound sanctions. Let’s have a conversation in another month or so to see if they’re working.”

 

A month ago, I griped that, “It’s not clear that President Volodymyr Zelensky, the Ukrainian government, and the Ukrainian armed forces have another month.”

 

Well, the Ukrainians have fought like hellions, Zelensky is still breathing as of this writing, and the Ukrainian government still stands, even though the Russian forces have taken bites out of Ukrainian territory in the north, east, and south.

 

And those sanctions are indeed having a big impact on Russia. Whether they’re having an impact on Russia’s ability to fight the war, or when they will have that impact, are separate questions.

 

The Treasury Committee of the U.K. Parliament issued a new report yesterday that concluded:

 

The Russian economy, and its citizens, have already been substantially hit by the significant sanctions imposed by the UK and its international partners, and Russia faces both a significant hit to the size of its economy and significant inflation. One of the boldest moves in the financial sanctions package has been the sanctions levelled at the Russian Central Bank, which appear to have denied access by Russia to half of its reserves. The energy sanctions already imposed are likely to inflict significant damage on the Russian economy. If energy sanctions and reductions in demand are introduced in line with the statements made by the United States, EU, the UK and others then the impact on Russia’s economy could be catastrophic and long lasting.

 

The Russian Central Bank recently stated that, “The Russian economy is entering a phase of massive structural adjustment. . . . Companies in many industries are reporting bottlenecks in production and logistics due to the imposed trade and financial restrictions.” Only a portion of the Moscow Stock Exchange has reopened, trading government bonds, with authorities discussing a plan to reopen the markets in stages.

 

The BBC reports that Russian supermarkets are restricting the purchase of certain items — one bag of flour per person, one container of salt, no more than three bottles of vegetable oil, no more than three kilograms of rice. The Guardian reports on long lines for sugar in the city of Saratov, with citizens waiting an hour and a half to buy one bag — a return to the Soviet era, for Russians with long memories.

 

There’s an intriguing argument that the Russian economy is particularly hard to measure because so much of it is tied up in the black market and “shadow economy.” This makes most people conclude that the Russian economy must be larger than the official GDP number of 1.48 trillion. (This is smaller than the individual GDPs of California, Texas, and New York, and not too far ahead of Florida.)

 

Miroslav Singer, a former governor of the Czech National Bank, wonders if the opposite is true, and if the Russian economy is something of a Potemkin village — that beyond the ostentatious display of oligarch’s wealth in the cities, Russia is much poorer than its reputation suggests. He points to the anecdotes of Russian soldiers heading into battle strikingly under-equipped and under-supplied:

 

Most military observers agree that the maintenance of Russian military vehicles was inadequate, given their slow progress in Ukraine. The army’s chinovniki, the decision-makers who determine where money should be spent, have siphoned off funds for themselves to invest in other assets, which show up in GDP statistics. This money, recorded as being spent on army upgrades and maintenance, is double counted in GDP statistics. With the size of the Russian army growing over time, the scale of this double counting must also have increased.

 

Russian troops have had to resort to looting food only a few days into their campaign. Speaking as a former trainee logistics officer in the army, the Russian forces should have been much better provisioned if the supplies ‘paid’ for were actually delivered.

 

Russia’s foreign minister, Sergei Lavrov, told students at Moscow State Institute of International Relations that Moscow was taken aback by the scale of sanctions over the war in Ukraine, according to Financial Times correspondent Max Seddon. But that’s a rare concession, and otherwise, Putin and Lavrov seem content to embrace a long-term economic decoupling from the U.S. and its allies: “Russia will survive the sanctions. The main conclusion for us in the context of geopolitics is that there is no more illusion of relying on the West. We can rely only on ourselves and on our allies who would stay with us.”

 

Indeed, in that report to the U.K. Parliament, Professor Jagjit Chadha, director of the U.K’s National Institute of Economic and Social Research, predicted that Russia could experience inflation of 20 to 30 percent and said that the sanctions were creating “a very large hit on the Russian economy, which will be terribly problematic and will have a distributional consequence: it will be particularly damaging for those on fixed incomes or low wages.”

 

Meanwhile, Dr. Amrita Sen, the director of research at Energy Aspects, a research consulting firm, told the British government that in the long run, Russian oil and gas production is “crippled”:

 

Russian production depends heavily on tax breaks given by the government. These sanctions are crippling for the economy. Our economists think you could get Russian GDP going down by 20 percent, potentially. I know their official forecast is for 8 percent. There is no way that the government will have money for tax breaks, which is what is required to produce in some of these more difficult areas. We absolutely think that, in the longer term, Russian production is crippled. Oil production is about 11 million barrels per day. Maybe it will struggle to get above 8 million or 9 million, even with Chinese and Indian help.

 

But the U.S. and our allies aren’t really setting out to impoverish and immiserate a country with 6,257 total nuclear weapons (at last count). The goal is to halt the Russian invasion, restore Ukraine to its prewar borders if possible, and avoid World War III while we’re at it.

 

If the theory is that the economic squeeze will make the oligarchs turn against Putin and depose him, on Monday, this newsletter discussed why that’s unlikely to happen. If the hope is that the Russian people will rise up and depose Putin, that’s another longshot bet. Putin has exterminated his most vocal critics with ruthless brutality; more rickety regimes in places such as Pyongyang and Tehran have held on to power in the face of tough economic sanctions.

 

Eventually, a severe-enough economic collapse in Russia will make the military unable to function. It’s just a question of how long that takes, because it is clear that Putin is willing to let his people suffer before stopping the onslaught on Ukraine. For what it’s worth, the General Staff of the Ukrainian Armed Forces claims that, “Occupation troops operating in Ukraine feel the urgent need for repair and restoration of damaged weapons and military equipment. According to the available information, due to the lack of revenues of nadhodženʹkogo foreign production, the work of the enterprises of the Uralzavod Corporation and the Chelyabinsky tractor plant has been suspended. The specified companies specialize in the manufacturing and repair of tanks, as well as other armored equipment for the Russian Federation armed forces needs.” Color me skeptical, however, that any reliable and verified intelligence that Ukrainian agents obtain would actually be pushed out on Facebook.

 

But last week, Russia started firing hypersonic missiles — the first known use of such weapons in war — to blow up a Ukrainian weapons depot. Outside observers noted that it didn’t make a lot of sense for the Russian military to start using state-of-the-art weapons to attack mundane targets. The current theory, according to U.S. officials talking to Politico, is that Russia is running out of their regular precision-guided missiles.

 

Unfortunately, it will be a long time before the Russian military runs out of other, less expensive conventional weapons.

 

ADDENDUM: I caught Volodymyr Zelensky’s old television show, Servant of the People, on Netflix — it’s like a Ukrainian version of Kevin Kline’s Dave, where a series of unexpected events leads to an ordinary high-school history teacher becoming the newly elected president of Ukraine. It is funny, cynical, and absolutely surreal at times, as Zelensky is playing the schoolteacher-turned-president and filmed this in 2014 or 2015 — in other words, he doesn’t look that different than he does now. (The show also makes Kyiv look like a beautiful city, which gives the whole show a new tragic subtext. It will probably be a long time before Kyiv looks and feels whole again.)

 

This scene on YouTube, where Zelensky gets a call from Angela Merkel welcoming him to the European Union, gives you a good taste of the show’s style. (Warning, there’s a little bad language.)

 

In an early scene, the prime minister and his staff are attempting to adjust the image of the newly elected schoolteacher president, making him look more authoritative and glamorous. He’s offered a selection of watches. “You know who wears this one?” the prime minister asks the new president, “Putin.”

 

Think about how life has turned out for Zelensky. Seven years ago, you’re playing the Ukrainian president on television and cracking jokes about Putin. Now you are the president, and Putin is trying to kill you.

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