Russia’s military failure in Ukraine defied almost everyone’s predictions. It was first an abject defeat at the gates of kyiv. Then came the incredible shrinking blitzkrieg, as attempts to encircle Ukrainian forces in the supposedly more favorable terrain to the east turned into a slow-motion battle of attrition.
What is important about this second Russian setback is that it interacts with another big surprise: the remarkable — and in some ways puzzling — effectiveness, at least so far, of Western economic sanctions against the Putin regime, sanctions that work in an unexpected way.
From the start of the war, there was much talk of exerting economic pressure on the invading nation. Most of these efforts have focused on ways to reduce Russia’s exports, especially its oil and natural gas sales. Sadly, however, there has been shamefully little meaningful progress on this front. The Biden administration has banned Russian oil imports, but that will have little effect unless other countries follow our lead. And Europe, in particular, still hasn’t imposed an embargo on Russian oil, let alone done anything substantial to wean itself off dependence on Russian gas.
As a result, Russian exports have held up and the country appears to be heading for a record trade surplus. So is Vladimir Putin winning the economic war?
No, he is losing it. That rising surplus is a sign of weakness, not strength — it largely reflects a slump in imports from Russia, which state-backed analysts say is hampering its economy. Russia does indeed make a lot of money selling oil and gas, but struggles to use that money to buy the things it needs, including crucial components used in the production of tanks and other equipment. military.
Why is Russia apparently having such a hard time buying things? Part of the answer is that many democracies around the world have banned the sale to Russia of a variety of goods – weapons, of course, but also industrial components that can, directly or indirectly, be used to produce weapons. .
However, that cannot be the whole story, as Russia appears to have lost access to imports, even from countries that do not impose sanctions. Matt Klein of The Overshoot blog estimates that in March Allied Democracy exports to Russia were down 53% from normal levels (and early indications are that they fell further in April). But exports from neutral or pro-Russian countries, including China, fell almost as much – 45%.
Some of this may, as Klein suggested, reflect the fear, even in non-allied nations, of “being on the wrong side of sanctions.” Imagine yourself as the CEO of a Chinese company that relies on components produced in South Korea, Japan or the United States. If you make sales to Russia that could be seen as contributing to Putin’s war effort, wouldn’t you worry yourself about facing sanctions?
Sanctions against the Russian financial system, such as the freezing of central bank reserves and the exclusion of some large private banks from international payment systems, could also weigh on imports. Hard currencies can enter Russia, but it has become difficult to use these currencies to buy things abroad. You can’t do modern business with suitcases full of $100 bills.
Now, it is possible, even likely, that over time Russia will find workarounds that circumvent Western sanctions. But time is one thing Putin doesn’t seem to have.
As I said, the war in Ukraine seems to have turned into a battle of attrition, and it is not a battle that Putin seems likely to win: Russia has suffered huge losses of equipment that ‘She won’t be able to replace it anytime soon, while Ukraine is receiving large inflows of equipment from the West. This war may well be over, and not to Putin’s advantage, before Russia finds ways around Western sanctions.
One final point: The effect of sanctions on Russia offers a graphic, albeit macabre, demonstration of a point that economists often try to make but rarely get across: imports, not exports, are l essential to international trade.
That is, the benefits of trade should not be measured by the jobs and incomes created in export industries; these workers could, after all, be doing something else. Rather, the gains from trade come from the useful goods and services that other countries provide to your citizens. And having a trade surplus is not a “victory”; if anything, it means you give the world more than you receive, receiving nothing but IOUs in return.
Yes, I know that in practice there are caveats and complications to these statements. Trade surpluses can sometimes help stimulate a weak economy, and while imports make a nation richer, they can displace and impoverish some workers. But what is happening to Russia illustrates their essential truth. Russia’s trade surplus is a sign of weakness, not strength; its exports are (alas) holding up well despite its pariah status, but its economy is paralyzed by a cut in imports.
And that in turn means that Putin is losing the economic war as well as the military war.