Despite the sanctions imposed by western countries because of the Ukraine war, Russia continues to make substantial profits on the energy market. Although Moscow publishes good figures, some observers see the country on the verge of bankruptcy.

A few months ago, it was said that Russia’s economy would soon collapse under the unprecedented sanctions imposed by Western countries. But this week, Russia’s Rosstat statistics bureau reported that the country’s gross domestic product (GDP) fell by just 0.4 percent in the first half of the year.

Investment capital is plentiful, the ruble has recovered and inflation, which had risen sharply at the beginning of the war, is falling again – according to official figures. A senior government official predicted a few days ago that GDP in 2022 would be only three percent lower, rather than shrinking by a third as predicted. But what is really happening now?

As expected, oil and gas revenues – mainly from the European Union – continue to support public finances, although countries like Germany and Italy are trying to minimize their dependence on Russian imports. The state energy giant Gazprom has just reported record results for the first half of the year: two and a half trillion rubles (41.4 billion euros) have boosted the share price by a third.

“Even if the Russian economy is doing worse than six months ago, that’s not enough for President Putin to stop financing the Ukraine war,” Maxim Mironov, professor of finance at the IE Business School in Madrid, told DW.

There is no doubt that the western sanctions really hurt. Last month, a Yale University study showed that Russian imports have collapsed, and many firms are struggling to source components, including semiconductors and other essential high-tech products.

Exports of bulk and consumer goods have irreversibly collapsed, the study continues. At the same time, Moscow is being forced to sell more and more oil and gas to Asia at lower prices.

One of the study’s authors, management professor Jeffrey Sonnenfeld, recently told a British radio station that the Russian economy can only “go on like this for about two years with enormous difficulties” if the West sticks to its sanctions.

Other economists think an economic collapse will be a long time coming. “In the long run, Russia will be no more than a gas station for China. But I don’t share the assessment that the country will be finished in two years’ time,” Rolf Langhammer, trade expert and former vice president of the Kiel Institute for the World Economy (IfW), told DW.

He added that Russia has filled its war chest for years and, according to international financial experts, is well prepared for economic decoupling from the West.

“The International Monetary Fund (IMF) already stated last year that Russia had hoarded money since the conflict in eastern Ukraine and the annexation of Crimea in 2014 and was well prepared for a war of attrition.”

Langhammer also points out that Germany sent 20 billion euros to Russia for energy imports in the first six months of this year, a 50 percent increase compared to the same period last year. “Even if the import volume falls, we will send Russia about three billion euros a month because of the rising prices.”

The Yale researchers have documented how Moscow tapped into its foreign exchange reserves of more than 600 billion euros, which served as a safety buffer for Putin in the first months of the war. Almost 81 billion euros have already flowed into the war chest, while about half of the remaining money has been frozen by the West

Alexander Mikhailov, an economics professor at Britain’s Reading University, believes that Putin’s war chest will quickly run dry if the West does end its reliance on Russian oil and gas exports. Otherwise it wouldn’t happen for another two or three years.

Should Putin run out of options for action, Moscow could simply print more money to pay for the skyrocketing costs of the war. But that, according to Mikhailov, would be crazy, since it would lead to “an enormous devaluation of the ruble, to hyperinflation and, as a result, to social unrest”.

Economist Maxim Mironov, on the other hand, says that Russians have repeatedly experienced hard times under communist rule and in the 1990s after the collapse of the Soviet Union. He therefore warns against overestimating the possibility that the Russian people will rise up against Vladimir Putin.

“In the West there is 10% inflation and people are really scared and they are asking their politicians to do something about it. That’s not how Russian society works. Putin still has enough leeway to lower the general standard of living by 20-30 percent – without running the risk that there will be significant resistance.”

Many countries in Asia, Africa and Latin America have not imposed sanctions on Russia and are benefiting in part from Western withdrawal from trade with Moscow. In recent days there have also been increasing reports that China is secretly exporting gas bought in Russia back to Europe.

The pressure in the West is increasing to herald another round of sanctions. For example, foreign companies or organizations could be locked out of the international financial system if they continue to do business with Russia. The model for this is the measures used by the US in boycotting Iran to counter Iran’s oil exports and nuclear program.

“India, Turkey and above all China are ignoring the western sanctions,” said Rolf Langhammer. “An end to Chinese support for Putin as a result of more extensive sanctions would give their effectiveness a powerful tailwind.”

Washington has already indicated that more extensive sanctions are an option, but observers warn and urge patience: If further measures were introduced now, this could further fuel demand for oil and gas and drive up their prices even more.

This post was adapted from English.

Author: Nik Martin

The original of this article “How Russia’s economy is really doing” comes from Deutsche Welle.