Russia’s resilience in the face of sanctions surprised experts in the early months of the war in Ukraine, but there are growing signs that deepening isolation will result in a withered economy for years to come and a greatly weakened position as an energy superpower.
Since absorbing the early blows of Western sanctions, Russia has largely retaliated by shutting out the West, trading exclusively with “friendly” countries, and fostering partnerships with nations that can trade with the dispossessed state.
It has had some success sowing chaos by weaponizing energy trade, recently halting gas flows to Europe’s key Nord Stream 1 pipeline while selling its remaining fuel stocks to customers such as China and India. Energy sales to these two countries earned Russia over $24 billion in the first three months of the war alone.
But beneath Putin’s defiant display of resilience are signs that Russia is prepared to pay a high price for isolation over the long term, according to Yury Gorodnichenko, an economist at UC Berkeley.
“What they are proposing to do is a recipe for long-term stagnation,” Gorodnichenko told Insider, pointing to other isolated countries with the world’s weakest economies, namely North Korea, Afghanistan and Cuba.
Russia’s isolation really began in 2014, worsening its economic position in the run-up to the invasion of Ukraine. The country recorded a GDP of $1.78 trillion in 2021, down from $2.06 trillion seven years earlier. The International Monetary Fund estimates that GDP will fall by another 6% this year.
“What happens is that [isolationism] reduces the number of products that [Russia] can shop,” said Jay Zagorsky, a market professor at Boston University. “He can only buy Indian agricultural goods, he can only buy Chinese manufactured goods, things like that. And when you limit yourself to one specific country, you often end up not getting the highest quality or the best price.”
This means that Russia’s ban on payments for the “hostile” US dollar – which accounts for 88% of global foreign exchange transactions – is a huge obstacle that allows sellers to charge a premium and make imports more expensive.
Since the war, trade with sanctioned countries has declined by 60% and trade with non-sanctioned countries by 40%, noted economist Paul Krugman in a recent op-ed, citing data from the Peterson Institute for International Economics.
Advantage of waning energy
All this has a particularly strong impact on Russian energy exports.
Last year, oil and gas sales made up 45% of Russia’s GDP, according to the International Energy Agency. However, boosting and sustaining energy production in the long term depends on the ability to purchase the machinery and technology needed to power the industry, much of which is produced in the west.
“A lot of oil field exploration rigs and machines are extremely advanced technology. We’re talking about GPS systems and robots driving things deep underground. It’s not just a bunch of guys with a big pipe and a bunch of sledgehammers,” Zagorsky said.
Failure to invest in this technology will be a major obstacle to Russia’s dominance of the energy market going forward, especially as energy-strapped Europe spends billions to increase production over the next decade.
It is also compounded by the fact that Russia now sells its oil to select customers. This has given countries like China and India significant discounts on Russian oil – and the ability to sell oil and gas to other customers at a profit. This not only reduces Russia’s energy revenues, but also forces the nation to give up much of its power in the oil market, Gorodnichenko said.
This may be one of the reasons why Russia has been quietly recording its losses since the war. Russia’s Finance Ministry does not release monthly reports, but internal documents reviewed by Bloomberg found that Russia suffered billions in “direct losses” from Western sanctions and its budget surplus fell by 137 billion rubles, or $2.1 billion, in August.
“The fact that they’re not releasing a lot of economic data suggests that they know there are costs, but they’d like to hide the extent of those costs,” Don Hanna, an economist at UC Berkeley, told Insider. “All this is designed to cover up the consequences of the invasion of Ukraine on the Russian economy.”