Almost six months on from Russia’s invasion of Ukraine, some Western commentators continue to argue that opposition to Putin has cost the united front dearly, while proving less damaging to the ‘resilient’ Russian economy.
However, new research from the Yale School of Management, more specifically from the team responsible for the widely used list of companies leaving Russia (or staying active in the country), proves that the aforementioned narrative is untrue – rather, a reflection of widely held but factually incorrect misunderstandings over how the Russian economy is actually holding up amid international sanctions and the exodus of more than 1,000 global companies.
The authors of the Yale report state that these misunderstandings are perpetuated by the Kremlin’s economic releases, which have become increasingly rose-tinted and propagandic. They add that Vladimir Putin-selected statistics are then picked up by many “well meaning but careless experts” who create economic assessments that are unrealistically favourable to the Kremlin.
Yale’s recent release, by contrast, brings together a large team of experts that use Russian language and unconventional data sources – such as high-frequency consumer data, cross-channel checks, releases from Russia’s international trade partners and data mining of complex shipping data – to provide a highly comprehensive and authoritative take on the state of the Russian economy. The picture they find is bleak.
The self-destruction of the Russian economy
Yale’s research begins with Russia’s trade market, since there is widespread underappreciation of the damage already wrought to Russia’s status as a leading commodity exporter.
Note that energy revenue represents 60% of total Russian government revenue, so Russian commodity exports are far more important to Russia than the rest of the world.
“Russia’s strategic positioning as a commodities exporter has irrevocably deteriorated, as it now deals from a position of weakness with the loss of its erstwhile main markets, and faces steep challenges executing a ‘pivot to Asia’ with non-fungible exports such as piped gas,” writes Yale.
For example, in terms of natural gas, Russia is far more dependent on Europe than the other way round. So, although EU countries have made many headlines about the pain of decreased Russian gas, it is the Russian economy that is hurting most by the shift in natural gas supply chains away from its traditional and key market. To clarify, Russian gas exports to Europe have hit near-record lows, as has the revenue associated with it.
Meanwhile, Putin has made a lot of noise about diversifying commodity exports to Asia, but Russia’s Asian pipeline network contains but a fraction of the capacity of the European pipeline network. Even long-planned Asian pipeline projects currently under construction remain years away from becoming operational, according to Yale.
Imports into Russia suffer
Russia is facing a simultaneous crisis of imports, which made up (pre-invasion) 20% of the country’s GDP. Its economy is largely reliant on imports across industries and across the value chain with few exceptions.
“Despite some lingering leakiness, Russian imports have largely collapsed, and the country faces stark challenges securing crucial inputs, parts and technology from hesitant trade partners, leading to widespread supply shortages within its domestic economy,” says Yale’s paper.
A review of trade data from Russia’s top trade partners – since the Kremlin is no longer releasing its own import data – suggests that Russian imports fell by upwards of 50% in the initial months following the invasion.
“Despite Putin’s delusions of self-sufficiency and import substitution, Russian domestic production has come to a complete standstill with no capacity to replace lost businesses, products and talent; the hollowing out of Russia’s domestic innovation and production base has led to soaring prices and consumer angst,” writes the Yale team.
With the drop-off in Russian imports, many domestic producers have been unable to procure supplies and inputs. In desperation, Putin has effectively legalised a grey market and intellectual property infringement.
Many Russian manufacturers are having to cannibalise and recycle parts in the absence of foreign supply. As US Commerce Secretary Gina Raimondo said: “We have reports from Ukrainians that when they find Russian military equipment on the ground, it’s filled with semiconductors that they took out of dishwashers and refrigerators.”
It is no surprise therefore that, on top of global inflation, consumer spending and retail sales have plunged dramatically in Russia since the invasion of Ukraine. For example, prior to the invasion, an average of 100,000 automobiles were sold every month across Russia. Yale shows that the most recent data indicates that only 27,000 cars were sold in the month of June across all of Russia.
The loss of foreign investment (and sense)
In addition to this comes the impact of the corporate exodus from Russia. Revenue drawn from the 1,000-plus companies curtailing or ending operations in Russia is equivalent to approximately 45% of Russia’s GDP.
“[Putin is] reversing nearly all of three decades’ worth of foreign investment and buttressing unprecedented simultaneous capital and population flight in a mass exodus of Russia’s economic base,” writes Yale.
By all anecdotal reports, wealthy Russians are fleeing the country in droves, with financial centres such as Dubai providing a popular place for these exiles. In fact, Russian capital inflows in Dubai are so significant in magnitude that many local real estate experts attribute Dubai’s ballooning property values over the past four months to the influx of new Russian wealth seeking shelter, with many Dubai real estate companies reporting 100% and even 200% year-over-year increases in sales to buyers from Russia.
“[As a result of Russia’s economic fall], Putin is resorting to patently unsustainable, dramatic fiscal and monetary intervention to smooth over these structural economic weaknesses, which has already sent his government budget into deficit for the first time in years and drained his foreign reserves even with high energy prices – and Kremlin finances are in much, much more dire straits than conventionally understood,” writes Yale.
Russian domestic financial markets, as an indicator of both present conditions and future outlook, are the worst performing markets in the entire world in 2022 despite strict capital controls – in addition to the country being substantively cut off from international financial markets, limiting its ability to tap into pools of capital needed for the revitalisation of its crippled economy.
Yale concludes that, on its current trajectory, Russia is heading for economic oblivion. The international opposition must not step on the brakes until Russia ends its invasion.