WIIW The Vienna Institute for International Economic Studies - Wiener Institut für Internationale Wirtschaftsvergleiche

image credit: Andreas Knapp/wiiw

• The Russian economy has been weakened by Western economic sanctions, although the policy response by the government and the central bank has cushioned their impact.
• However, in financial terms, the war is not proving particularly expensive for the Russian government; and since the public finances are overall in good shape, the economic sanctions are rendered relatively ineffective.
• Russia is facing a deep recession, but growth in the EU will also slow, and in the event of a Russian gas embargo, it may well turn negative.

Russian economist Vladislav Inozemtsev is one of many scholars who are suggesting that the economic sanctions imposed by the US and the EU will not succeed in persuading Russia to stop the war with Ukraine. In a lecture given at the Vienna Institute for International Economic Studies (wiiw) on 25 May, Inozemtsev argued that the only way to end the war will be for Russia to be defeated militarily. The Western response so far has mainly taken the form of economic sanctions, but Inozemtsev believes that ‘Russia could easily lose the war in the field.’ Not only is its army relatively weak, but the society's overall mood has darkened, as opposition to the war has mounted, according to the director of the Center for Research on Post-Industrial Societies.

Inozemtsev pointed to the lack of success of the economic sanctions imposed so far, suggesting that further sanction would also fail to end the war. Financially speaking, the war is not really hurting Russia, since it is not proving very expensive. Thanks, in part, to the country’s previously buoyant export revenues (which have now evaporated, of course), it has been possible to maintain macroeconomic stability. Russia’s central bank reacted swiftly to the West’s surprisingly harsh sanctions by drastically hiking the policy rate and imposing capital controls. Inozemtsev believes this allayed the initial apprehension concerning the government’s ability to keep the economic situation under control.

Inozemtsev estimates that the Russian economy will shrink by 12–15% this year, with 80% of the decline attributable to the withdrawal of Western companies from Russia. The economist cited the automotive industry as an example, given its heavy dependence on Western components and partners. Inozemtsev doubts whether AvtoVAZ, for example, will be able to resume production without Renault.

In order to allow the production of trucks and lorries to continue, Russia will probably turn to building Soviet-era engines. For other parts, Inozemtsev expects unofficial imports via Turkey, for example, citing Russia’s recent legislation that allows 96% of goods to be imported without certification. Nevertheless, the problems caused by the lack of parts and components in many industries are ‘enormous’, according to Inozemtsev. As well as the aviation and railway industries, the shortages are also affecting the packaging industry, for example. Without Western equipment, Russia will also be unable to expand its liquefied natural gas capacities. All in all, he concluded, ‘the Russian economy will never be the same again’ and we need to prepare for – economically speaking – ‘a world without Russia’.