"Weeks after events in Ukraine started last year, a White House official warned Moscow that a raft of U.S.-led sanctions could cut Russia's economy in half.
Recently the International Monetary Fund gave some upbeat news for the Kremlin, saying it now expects Russia's economy to grow 1.5% this year, supported by extensive state spending. That follows a shrinkage of 2.1% the year before, when Russia became the most sanctioned major economy in the world.
Economists expect the sanctions to cause Russia to stagnate in the years ahead, and the fault lines are emerging.
But the West's failure to quickly bring the Russian economy to its knees for its conflict in Ukraine mirrors a larger stalemate on the battlefield there, despite a raft of Western lethal aid to Kyiv and economic support for the Ukrainian cause.
When they were unveiled, Biden administration officials called the sanctions the most consequential in history, and the initial shock and awe roiled Moscow's financial markets. But today the economy has muddled through enough for the Kremlin to support an attritional conflict that the U.S. had hoped to avoid.
Sanctions initially starved Russia of microchips and high-tech components last year, crimping its ability to produce precision-guided missiles. But Moscow has found loopholes through neighboring nations, and is bombing Ukraine daily with precision weaponry.
Russia's crude oil continues to flow, even if the lower prices it fetches have hit state coffers. Analysts say that the main effect of sanctions -- technological backwardness and an inability to modernize -- would hamper its economic growth in the long term.
"Sanctions have not destroyed the Russian economy just yet," said Sergei Guriev, a professor at Sciences Po in Paris and a former Russian government adviser. "They have started to constrain but not stop Putin's ability to finance this conflict."
Sanctions became an often-used foreign policy tool of the U.S. after it became an economic powerhouse in the previous century. They have had a mixed record, often falling short of causing a dramatic change in behavior, particularly in authoritarian states, say analysts.
How Russia has avoided collapse and eked out some growth within a year despite a Western economic blockade will be a case study for analysts pondering where sanctions make sense as a policy tool in the future.
Behind Russia's economic resilience has been a significant government stimulus, a shift to a conflict economy and an unprecedented rerouting of its trade to Asian partners, primarily China and India, analysts say.
The Biden administration defends the sanctions as vital to driving up the price that Russia pays for the conflict. The latest growth statistics mask the real pain being felt by the economy, said a senior administration official. "We are making Russia's economy less resilient and less capable of sustaining itself over time," the official said. "It's more difficult for them to run their conflict in Ukraine."
Government spending as part of gross domestic product has jumped by 13.5% in the first quarter compared with the same period last year, the highest growth rate in data going back to 1996. Economists attribute much of the growth in Russian industrial production this year to weapons and materiel. President Vladimir Putin has ordered the government to provide unlimited funding for the conflict machine.
The output of "finished metal goods" -- a line that analysts say includes weapons and ammunition -- rose by 30% in the first half of 2023 compared with last. Other lines associated with military output also have increased: Production of computers, electronic and optical products also rose by 30%, while the output of special clothing has jumped by 76%. By contrast, auto output is down more than 10% year-over-year.
"What we're seeing now is a massive boost in demand distribution via military-industrial complex and conflict beneficiaries, we can call it military Keynesianism," said Alexandra Prokopenko, a former Russian central-bank official who is a nonresident scholar at the Berlin-based Carnegie Russia Eurasia Center.
Continued global demand for Russian commodities also has bolstered the economy. This year, a European Union ban on most Russian oil imports has undermined its price.
Meanwhile, Russian oil production has declined only slightly. That is because Moscow has found ways to sell its oil to Asia by creating a shadow fleet of tankers owned, insured and chartered outside the West." [1]
1. World News: Stimulus Props Up Russian Economy. Cullison, Alan; Kantchev, Georgi. Wall Street Journal, Eastern edition; New York, N.Y.. 03 Aug 2023: A.7.
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