How the West is strangling Putin’s economy

Russia’s military failure in Ukraine has defied almost everyone’s predictions. First came abject defeat at the gates of Kyiv. Then came the incredible shrinking blitzkrieg, as attempts to encircle Ukrainian forces in the supposedly more favourable terrain in the east have devolved into a slow-motion battle of attrition.

What’s 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 are working in an unexpected way.

As soon as the war began, there was a great deal of talk about bringing economic pressure to bear against the invading nation. Most of this focused on ways to cut off Russia’s exports, especially its sales of oil and natural gas. Unfortunately, however, there has been shamefully little meaningful movement on that front. The Biden administration has banned imports of Russian oil, but this will have little effect unless other nations follow our lead. And Europe, in particular, still hasn’t placed an embargo on Russian oil, let alone done anything substantive to wean itself from dependence on Russian gas.

As a result, Russian exports have held up, and the country appears to be headed for a record trade surplus. So is Vladimir Putin winning the economic war?

No, he’s losing it. That surging surplus is a sign of weakness, not strength — it largely reflects a plunge in Russia’s imports, which even state-backed analysts say is hobbling its economy. Russia is, in effect, making a lot of money selling oil and gas, but finding it hard to use that money to buy the things it needs, reportedly including crucial components used in the production of tanks and other military equipment.

Why is Russia apparently having so much trouble buying stuff? Part of the answer is that many of the world’s democracies have banned sales to Russia of a variety of goods — weapons, of course, but also industrial components that can, directly or indirectly, be used to produce weapons.

Loading

However, that can’t be the whole story, because Russia seems to have lost access to imports even from countries that aren’t imposing sanctions. Matt Klein of the blog The Overshoot estimates that in March, exports from allied democracies to Russia were down 53 per cent from normal levels (and early indications are that they fell further in April). But exports from neutral or pro-Russian countries, including China, were down almost as much — 45 per cent.

Some of this may, as Klein has suggested, reflect fear, even in non-allied countries, 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 might be seen as helping Putin’s war effort, wouldn’t you worry about facing sanctions yourself?