Comment When Russian President Vladimir Putin last month inaugurated a new council to coordinate procurement for the Russian military, he appeared to recognize the scale of the economic problems facing the country and the sense of urgency was palpable. “We need to be faster in deciding issues related to the delivery of the special military operation and dealing with constraints on the economy that, without any exaggeration, are truly unprecedented,” he said. For months, Putin claimed his “economic blitzkrieg” against Russia had failed, but Western sanctions imposed over the invasion of Ukraine are digging deeper into the Russian economy, exacerbating equipment shortages for its military and hampering its ability to launch any new ground attack or build new missiles, economists and Russian businessmen said. Recent figures show the situation has worsened significantly since the summer, when, boosted by a steady stream of oil and gas revenues, the Russian economy appeared to be stabilising. Data released by the Finance Ministry last week showed a key economic indicator – tax revenue from the non-oil and gas sector – fell 20% in October compared with last year, while Russia’s state statistics agency Rosstat said retail sales were down 10 percent year-on-year in September, and cargo turnover was down 7 percent. “All objective indicators show that there is a very sharp decline in economic activity,” said Vladimir Milov, Russia’s former deputy energy minister who is now a leading opposition politician in exile. “The spiral is escalating and there is no way out of it now.” A ban on Western technology imports affects most sectors of the economy, while the Kremlin’s forced mobilization of more than 300,000 Russian conscripts to serve in Ukraine, combined with at least as many fleeing the military abroad, has caused another blow. said the economists. In addition, Putin’s own restrictions on natural gas supplies to Europe, followed by the unexplained explosion of the Nord Stream gas pipeline, led to a sharp drop in natural gas production — down 20% in October from a year earlier. Meanwhile, oil sales in Europe are plummeting ahead of the European Union embargo expected to be imposed on December 5. The Kremlin has been horrified by a lower-than-expected GDP decline, which the International Monetary Fund forecasts at just 3.5 percent this year, proving the Russian economy can withstand a series of draconian sanctions. However, economists and business people said the basic GDP figures did not reflect the true state of the Russian economy because the Russian government effectively ended the convertibility of the ruble after the sanctions were imposed. “GDP has stopped being meaningful because firstly we don’t know what the real exchange rate of the ruble is and secondly if you produce a tank and send it forward where it immediately blows up, then it’s still considered value added.” said Milov, who wrote a report explaining the situation for the Wilfried Martens Center for European Studies that was published this month. Deeper problems also lurked in the Russian banking sector, where most accounts are classified. Russia’s central bank said this week that it withdrew a record $14.7 billion in hard currency from the Russian banking system in October, amid growing concern about mobilization and the state of the economy. Still, a November report from the Central Bank warned that Russia’s GDP would face a sharp contraction of 7.1% in the fourth quarter of 2022, after falling 4.1% and 4% compared to last year in the previous two quarters. Last week, as the Russian economy officially entered recession, Central Bank President Elvira Nabiulina told lawmakers that next year the situation could get even darker. “We really have to look at the situation very soberly and with our eyes open. Things can get worse, we understand that,” he said. Outraged families say Russian conscripts were thrown into the front line unprepared Putin’s announcement in September of a partial troop mobilization dealt a huge blow to business sentiment. “For many Russian companies the reality of the war has sunk in,” said Janis Kluge, a senior fellow at the German Institute for Security and International Affairs. “It has become clear that this will continue for a long time. Now the expectations are much worse than they were in the summer.” Putin’s creation of the coordination council, headed by Prime Minister Mikhail Mishustin, was a sign that the Russian president is reeling from the growing impact of sanctions, economists and analysts said. Putin is “concerned that he has to intervene to make sure supplies are available,” said Sergei Guriev, a professor at France’s Sciences Po. “He’s worried that the sanctions have really hurt the ability to produce goods.” It also signals that the Russian government is preparing a wider mobilization of the Russian economy to supply the military amid chronic shortages of basic goods such as food and uniforms. A series of new laws will impose heavy fines on businessmen who refuse to carry out orders for the Russian military as well as possible prison terms, opening the way for businessmen to be pressured into providing goods at low prices. The creation of the council “is associated with a lot of pressure on business and the need to impose a hard check to make business do what they don’t want to do,” said Nikolai Petrov, senior research fellow for Russia and Eurasia at Chatham House in London. A Moscow businessman with links to the defense sector said a quiet mobilization of the Russian economy had already begun, with many entrepreneurs forced to produce supplies for the Russian military but afraid to speak out against low-priced orders. “This became necessary from the beginning when the war started,” said the businessman, speaking on condition of anonymity for fear of reprisals. “The main mass of business is silent. If you say you’re making supplies or weapons for the Russian state, then you might have problems abroad.” As Putin escalates the war, some in Russia’s business elite are despairing Anecdotal evidence reported in the Russian press indicates huge problems in supplying newly recruited Russian conscripts with equipment. An October detailed report in Russia’s Kommersant newspaper described huge shortages of ammunition and uniforms for conscripts, with manufacturers citing difficulties in securing the necessary materials due to sanctions. Other Russian businessmen said Russia’s military debacle in Ukraine had exposed massive inefficiencies and corruption in Russia’s military industrial complex. “There are huge questions about where all the trillions of rubles of the last decade were spent,” said a former high-ranking Russian banker with ties to the Russian state. If the new economic council fails to better coordinate the production of supplies and weapons, it could affect Russia’s ability to launch new attacks on Ukraine, Petrov said. “The main problem in front of the Kremlin is when the army will be ready to start new military action in Ukraine and the preparation of weapons and ammunition and so on will determine those plans.” The outlook looks likely to worsen when the EU embargo on Russian oil sales takes effect on Dec. 5, economists said. Combined with a price cap expected to be imposed on all Russian oil sales outside the EU, the measure could cost the Russian budget at least $120 million in lost revenue per day, Milov said, and already the Russian budget is expected to accumulate a deficit by the end of this year. Understanding the Russia-Ukraine conflict See 3 more stories
