How the Russian war economy manages to resist (and even grow more than that of the G7 countries)

It was March 2022. The Russian ruble collapsed, the London value of giants Gazprom and Sberbank fell by 97%.

Long queues began to form at ATMs in Moscow. Yachts, football teams, mansions and even their credit cards were confiscated from the oligarchs. Russia fell into a major recession.

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This was the immediate result of the West’s most extraordinary attempt to financially contain the Russia after the invasion of Ukraine.

Among the most important measures was the confiscation of the official foreign currency assets of the Russian state and, in particular, the unprecedented freezing of the central bank’s reserves of 300 billion dollars.

Western governments deliberately avoided using phrases like “economic warfare,” but it certainly seemed like there was a financial battle with the Kremlin. It was better than the alternative of direct confrontation between nuclear states.

Almost two years have passed and a major change has occurred in this economic context.

In a long and rambling interview this week, Russian President Vladimir Putin gleefully exclaimed that Russia is the country fastest growing economy in Europe.

Last week, the International Monetary Fund (IMF) highlighted the strength of the Russian economy by improving its growth forecast for this year. 1.1% to 2.6%.

According to IMF data, the Russian economy grew faster than the entire G7 last year and will do so again in 2024.

In March 2022, the London value of giants Gazprom and Sberbank fell by 97%. (GET IMAGES).

These are not just numbers.

The standoff in Ukraine last year and growing expectations of a frozen conflict on the ground later this year have been underpinned by the remobilization of the Russian economy for its military effort, especially in building defensive fronts in eastern and southern Ukraine.

Can Russia sustain growth?

Western leaders claim that this model is completely unsustainable in the medium term. But the question is: how long can this be sustained?

Russia has transformed its economy into a mobilized war economy. The Russian state is spending a record amount in the post-Soviet era.

Military and security spending, which represents up to 40% of the budget, returned to late USSR-era levels. Other areas of state support for the population were reduced to compensate for funding for the production of tanks, missile systems and defenses in occupied Ukraine.

Furthermore, and despite Western restrictions on Russian oil and gas, hydrocarbon revenue streams continued to flow into state coffers.

Oil tankers are now heading to India and China and most payments are made in Chinese yuan instead of US dollars.

Despite the restrictions, the flow of hydrocarbon revenues continues to reach the State coffers. (GET IMAGES).

Russia’s oil production remains at 9.5 million barrels per dayan amount that is slightly below pre-war levels.

The country circumvented sanctions by purchasing and deploying a “parallel fleet” of hundreds of oil tankers.

Last week, its Finance Ministry reported that hydrocarbon taxes in January exceeded levels seen in January 2022, just before the invasion.

The continued flow of foreign currency into Russian oil, gas and diamonds has also helped ease tensions on the value of the ruble.

Western leaders insist this situation cannot last, but recognize its impact.

A world leader recently said privately: “2024 will be much more positive for Putin than we thought. “He managed to reorganize his own industry more efficiently than we thought.”

Russia exposed

But this form of economic growth greatly increased Moscow’s dependence on oil revenues, China, and nonproductive war spending.

As demand for oil and gas peaks and competing Persian Gulf production comes online next year, Russia will be exposed.

The statistical increases in gross domestic product (GDP) resulting from the production of tanks and shells that then explode in the Donbass of eastern Ukraine are also far from productive.

Russia’s military and security expenditure accounts for up to 40% of its budget. (REUTERS).

However, Russia experienced a brain drain of some of its most talented citizens.

The Western strategy has not been to besiege the Russian economy, but to engage in a game of cat and mouse to restrict its access to technology, increase costs, limit revenues and make the conflict unsustainable in the long term.

“We would rather Russia use its money to buy oil tankers than tanks,” a US official told me. In the oil market, the political objective is not to try to prevent India, for example, from buying Russian oil, but to limit the profits from that trade that return to the Kremlin’s war machine.

But this resilience and stagnation could last at least the rest of this year. And this helps the Kremlin’s clear strategy of wait for a possible change of American president and a reduction in Western funding for Ukraine’s defense.

Frozen assets

That’s why attention is now turning to the central role of these hundreds of billions in frozen Russian financial assets.

Ukrainian President Volodymyr Zelensky told me last month: “If the world has 300 billion dollars, why not use it?” All these frozen funds should be used to finance Ukraine’s reconstruction efforts, he said.

UK Chancellor Jeremy Hunt and Foreign Secretary David Cameron support the measure.

Ukrainian President Zelensky has called for billions of dollars of frozen Russian assets to be used to help his country. (GET IMAGES).

Cameron told me, “We’ve frozen these assets. The question is, are we going to use them?”

Cameron noted that “using some of this money now is, so to speak, an advance on (Russian) reparations” for the illegal invasion of Ukraine, and could be used “to help Ukraine and at the same time save Western taxpayers money “. ” time”.

The G7 asked its central bank directors to prepare a technical and legal analysis. It is understood that this is something that bothers them.

A large financier told me that there are risks from what he called “turn the dollar into a weapon”. Traditionally, central banks enjoy sovereign immunity against such actions.

One plan under development would use funds or investment profits to raise tens of billions of dollars for Ukraine.

But it’s a delicate balancing act. If Russian assets are confiscated in this way, what message will it send to other nations, perhaps in the Gulf, Central Asia or Africa, about the safety of their reserves in Western central banks?

These relationships are some of the central arteries of global finance, recycling hundreds of billions of dollars used to pay for energy around the world.

Putin certainly sought to communicate that China was now emerging as an alternative, if not to the West, at least to emerging economies.

The Russians have also indicated that they will take legal action against any seizures and, in turn, will take similar assets of Western companies frozen in Russian banks.

Therefore, the dark battle over Russia’s economy is essential to understanding where this conflict and the global economy are headed.

Russia’s war economy cannot be sustained in the long term, but it has provided the country with some additional time. The West is about to up the ante after Russia showed this unexpected resilience.

The precise form of this financial escalation will have consequences far beyond Russia and Ukraine.

Source: Elcomercio