Why Is Russia's Economy Surviving?

Putin avoids economic collapse by keeping oil exports robust in April while punishing Ukraine.

Despite predictions of doom for Russia's heavily sanctioned economy, nearly two months after Russian President Vladimir Putin's invasion of Ukraine, his country's oil exports to Europe and countries like India and Turkey have increased, and its financial sector has escaped a serious liquidity crisis.

Experts believe that while sanctions may succeed in the long run, many of the same nations that are sanctioning Russia are nevertheless undermining their efforts by buying energy from it—in some cases in even higher amounts in April than in March.

"Putin continues to make at least a billion dollars a day selling oil and gas, with Europe accounting for the lion's share," said Edward Fishman, a former State Department Europe specialist. "European countries are paying military aid to Ukraine, but it pales in comparison to the payments they are making to Russia for oil and gas."

Despite Western sanctions on Russia's banking sector, oil shipments increased to 3.6 million barrels per day in April, up from 3.3 million barrels per day the previous month, according to Matt Smith of Kpler, an oil cargo ship tracking firm. "The key message is that Russian crude oil exports have risen this month compared to previous month," Smith added. "It's unexpected."

Russia's oil shipments in April are moving at a "record pace," according to specialists from the Institute of International Finance in a report released this week. Even with the substantial discount on Russian crude compared to global benchmarks, "oil export revenues are anticipated to exceed by a large proportion the same month in prior years," according to the report.

Russia's current account surplus has reached new highs as a result of these revenues. It amounted to $60 billion in the first three months of the year, compared to $120 billion for the entire year in 2021, providing the Kremlin with new funds to offset sanctions, despite the fact that Russia is significantly less able to import supplies and parts from outside due to sanctions limitations. After the United States and Saudi Arabia, Russia is the world's third-largest crude oil producer.

The exact amount of oil Russia is currently exporting, as well as to whom, is still up for debate. According to experts, some of that crude is still being transported, in some cases to unknown destinations or storage facilities. According to Christopher Haines, an analyst at Energy Aspects, a London-based consultancy business, much of it involves the fulfilling of long-term oil contracts while a European "wind-down" is underway.

Other energy analysts believe Moscow is raising or front-loading exports from current stocks in anticipation of more Western oil restrictions (and Western countries are picking them up for the same reason, aided by Moscow's steep discounts). Domestic Russian refining has actually decreased in the interval, according to Haines. According to the International Energy Agency, Russian oil production had dropped by 700,000 barrels per day by early April. This shows that Russia is allocating limited production to exporters rather than refining at home.

Natural gas is much more difficult to cut off for many European countries than oil because it is traded on longer-term contracts through fixed pipelines and isn't as fungible. Though Germany put a halt to the new Nord Stream 2 pipeline from Russia shortly after the invasion, most Russian gas continues to flow into Europe as before. Alternative supplies of liquefied natural gas that can be transported by water, particularly in Central and Eastern Europe, are now limited. It could take years to transition to other major producers such as the United States (the world's largest natural gas producer, behind Russia), Qatar, or Canada.

By the end of 2022, the European Union's executive commission has outlined a strategy to reduce Russian gas imports by two-thirds by importing more liquefied gas and converting to more pipeline gas from Norway and Azerbaijan, as well as increasing wind and solar power. However, the idea remains hazy, and many experts believe it is unworkable. It has also encountered strong opposition, particularly in Germany, which consumes the most Russian gas, accounting for a third of the country's total yearly consumption.

German Chancellor Olaf Scholz said in an interview with Der Spiegel published Friday that Berlin couldn't afford to cut off Russian supplies any time soon, claiming that a gas embargo would not only fail to end the Ukraine conflict, but would also result in "a dramatic economic crisis, the loss of millions of jobs, and factories that would never open again." "This would have huge ramifications for our country, for all of Europe, and for the financing of Ukraine's reconstruction," he continued. As a result, it is up to me to declare, "We cannot allow that to happen."

Even US Treasury Secretary Janet Yellen said this week that a ban on Russian oil and gas would damage Europe significantly while "contrary to popular belief," it would have "relatively little detrimental impact" on Russia, which would be able to find clients overseas while raising prices. "Europe obviously needs to lessen its energy dependence on Russia," Yellen added, "but we must be cautious when considering a comprehensive European ban on, say, oil imports."

Europe's only energy exports have been coal, which it has managed to wean itself off of to some extent. Petr Bobylev, a coal official in Russia's energy ministry, told the Duma this week that coal shipments have dropped by 20% year on year in recent months.

Officials from the United States and Europe insist that, in the long term, Putin's aggression would have catastrophic economic consequences. "The economic crisis that Russia is experiencing will leave the Kremlin with fewer resources to support the Russian economy, pursue its invasion of Ukraine, and project influence in the future," said US Deputy Treasury Secretary Wally Adeyemo on Monday.

That may turn out to be true in the end. Following an announcement on April 6 of what are known as "blocking" sanctions on Sberbank and Alfa Bank, Russia's fourth-largest bank, freezing their assets and prohibiting any U.S. firms from dealing with them, the Biden administration imposed additional sanctions on Russian banks and individuals this week. That means the US has sanctioned 60 percent of Russian banking assets, and Europe is gradually following Washington's lead.

Elvira Nabiullina, the head of Russia's central bank, stated on April 18 that supply shortages of technology and other equipment will hit shortly, and that the country was "facing a severe time of structural changes connected with sanctions." With the economy decreasing by 8 to 15% this year, experts predict a significant reduction in credit available to Russian consumers and enterprises. In the long run, some experts predict that Russia's economy will contract by a fifth or more in the next several years, based on existing conditions.

The longer the battle continues, the more this trend will accelerate. According to data from Yale University's Russia disinvestment campaign, Western and international companies are leaving or halting operations in Russia in droves, with 800 out of 1,200 having done so so far. These include household names like Kellogg's, Nokia, and Panasonic, as well as large brands like IBM and Microsoft and Cargill. As a result, Moscow Mayor Sergei Sobyanin confirmed this week that the capital is facing a significant unemployment crisis, writing in a blog post that "about 200,000 people are at risk of losing their jobs."

"If he's stating that figure, it has to be ten times that," said Yale School of Management Dean Jeffrey Sonnenfeld, who is leading the Yale disinvestment campaign. Sonnenfeld likens the current effort to the South African boycott of the 1980s. "At the time, 200 enterprises were fleeing the country. He stated, "We now have more than four times that."

Even in the EU, there are increased efforts to prevent Putin's major bread and butter: oil purchases. Due to Russia's invasion of Ukraine, the global shipping company Maersk announced in mid-March that it will stop importing Russian oil, while Greece temporarily seized a Russian oil tanker off the coast of Evia this week.

"The United Kingdom has clearly prohibited crude imports outright," said energy researcher Haines. "Countries with longer-term commitments will continue to honor them, but they will no longer buy spot crude."

Still, for the time being, Russia's income figures paint a very different story—one that indicates how divided and uncertain the world response is, as well as how appealing discounted Russian crude is at a time when energy prices are rising and inflation is rampant almost everywhere. This is especially true in the energy markets. According to the most recent figures, Russian crude exports increased significantly in the first few weeks of April, with India, Turkey, and Italy receiving significantly more, while the rest of the EU remained relatively unchanged. While the United States, the United Kingdom, Australia, and Canada have explicitly banned Russian imports, the majority of European countries, led by Germany, continue to buy.

India, which has declined to join the sanctions or denounce Putin's incursion, has seen the largest percentage increase. Taking advantage of Putin's steep price cuts, India has imported 17 million barrels of high-grade "Urals" oil from Russia in the last two months, compared to 12 million for the entire year, according to Kpler analyst Smith. (Previously, New Delhi purchased most of its oil from Middle Eastern suppliers and Nigeria, but it now receives a significant discount from Russia.) Nonetheless, India's intake is dwarfed by Europe's. According to Smith, Turkey increased its Russian oil imports from 200,000 barrels per day in March to 300,000 barrels per day this month. So far this month, Italy has increased its imports of Russian crude from 100,000 to 300,000 barrels per day, he noted. Some of that crude will be shipped to European refineries that Russia still owns and controls in part.

Putin has claimed to his home audience since the beginning of his invasion that Western sanctions will only have a negative impact on the US and Europe due to Russia's massive oil and agricultural exports, generating inflation and economic suffering in the West. Indeed, such anxieties have restricted US Vice President Joe Biden and dominated debate in European parliaments thus far. Eliminating Russian oil, according to JPMorgan analyst Natasha Kaneva this week, will inflict all of the economic misery that Germany and other EU countries anticipate, potentially sending prices up by 65 percent from around $110 to $185 a barrel.

This may be disastrous for economies like Germany's, which imports 25% of its oil and 40% of its gas from Russia. Berlin, unsurprisingly, has been at the forefront of the energy debate. German Finance Minister Christian Lindner appeared to backtrack on Foreign Minister Annalena Baerbock's promise to cease oil imports by the end of the year, with a gas ban following later. Lindner told the BBC, "We have to be patient." "It's only a matter of time before we terminate all energy imports from Russia."

Insurgent right-wing contender Marine Le Pen, who is attempting to deny President Emmanuel Macron a second term, has said she opposes energy sanctions against Russia, and she implied in this week's discussion that she would prefer to increase France's reliance on imported gas. The Biden administration is pushing for a harder stance, but it is wary of getting ahead of the Germans and the EU, which it wants to keep united.

However, political factors in the United States are limiting Biden's ability to impose penalties that would suffocate Russia's energy sector. "It's Vladimir Putin's gas price hike," Biden said of the rising gas prices on Thursday, reaffirming his administration's consistent stance. In recent polls, voters have tended to agree that Putin and the oil firms deserve the most of the blame, but they also prefer to punish incumbents for a weak economy, and the Democrats are practically guaranteed to lose in the upcoming midterm elections. In a Quinnipiac University poll released earlier this month, Biden's popularity rating fell to 33% with inflation at 8.5 percent.

In Gazprombank, the financial arm of Russian energy behemoth Gazprom, the Kremlin has also managed to orchestrate a newly powerful—and unsanctioned—banking center. According to senior US and foreign sources, Moscow is pressuring European countries and others to deposit payments in dollars in Gazprombank and receive rubles in exchange. The ruble exchange rate is roughly where it was in February, thanks to Nabiullina's skillful manipulations, which have hiked rates and implemented currency controls to prevent Russians from transferring money out of the country. The government has also enforced an export surrender requirement, requiring that 80 percent of the hard cash generated by exports be sold through recognized banks, namely Gazprombank. Inflation in Russia is swiftly rising, with prices climbing into the double digits, although according to various predictions, it will not approach 25% by the end of the year.

"Sanctioning only a few banks, as is the situation presently," the Institute of International Finance research noted, "allows Russian energy exports to continue, preserving the current account surplus and Russia's rapid foreign asset buildup." "In other words, existing sanctions are re-jigging, not stopping, foreign wealth accumulation." Only an energy embargo or bank-wide sanctions will accomplish this."

The most pressing financial issue for Putin is the possibility that Russia could default on its foreign debt for the first time since the Bolshevik Revolution in 1918, having missed an April 4 deadline to pay in dollars. Even if Russia defaults on its $60 billion in sovereign debt, causing foreign lenders to raise rates, the country has already been blocked from international borrowing and may be able to fund itself for a long time with energy income. The secondary market in Russian bonds has already been blocked due to sanctions. Despite this, IMF economist Alfred Kammer remarked in a press conference on April 22 that "while Russia at this time does not have any market funding needs," its firms are saddled by an outstanding debt of more than $400 billion and will have problems retaining credit in the long term. These pressures may drive Putin to sue for peace sooner than he prefers.

Meanwhile, it's unclear how many international corporations are committed to leaving Russia. Some big American enterprises, like as International Paper and Koch Industries, as well as a host of European, Indian, and Chinese firms, including German steel powerhouse Thyssenkrupp, continue to operate there. According to Yale's Sonnenfeld, many people are adopting deception to avoid public disapproval. Some industries, such as Big Pharma, argue that they supply important medicines to Russia, despite the fact that they continue to sell over-the-counter drugs in many circumstances, he added. Others, notably some American food corporations, claim to be selling "nutritional requirements" while many of their goods are simply snack foods, according to Sonnenfeld. According to Sonnenfeld, roughly 400 global companies continue to do business in Russia, while others indicate they are deferring future planned investment, development, and marketing or are restricting operations.

Other businesses are already attempting to circumvent the Biden administration's investment embargo in Russia through legal maneuvering, he claims. "It's quite aggravating to observe how, where there are economic repercussions on future investment, some corporations try to deceive internal regulatory pressure by claiming, for example, that this isn't new plant equipment, but rather repair."

The most pressing concern for Putin in the future will be whether he can adjust his economy to long-term isolation. Other economies, such as Iran's, have done so, and Moscow can keep its banks functioning for a long time on energy-generated subsidies if they become technically insolvent; unlike Iran, Russia has not faced a near-total constriction of its energy exports. However, the refusal of Western imports of consumer items, as well as production materials and parts, as well as mounting financial demands on Russia's budget, would wreak havoc on the economy. And if unemployment rises, Putin may face an issue he hasn't had to deal with before: how to stay in power.

"For the time being, the government is continuing to backstop and pay some of these individuals," said Fishman, a former State Department expert. "How long can they keep it up, though?" Regardless of what happens next with sanctions, I believe you'll see waves of unemployment in the second half of 2022."

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