Why sanctions bite: Russian economy isn’t huge to begin with

People buy the last remaining groceries at a Finnish Prisma store as they know the store will close soon, in St. Petersburg, Russia, March 15, 2022. The Finnish holding company S Group has decided to curtail all operations in Russia – part of a wider squeeze by Western governments and businesses since Russia invaded Ukraine.

Freedom is costly. So is dictatorship.

In choosing to counter Russia’s military invasion of Ukraine with economic measures, the West is striking directly at Moscow’s Achilles’ heel. For such a large power, Russia’s economy is surprisingly small, considerably behind those of Italy, Canada, and South Korea. Thus, maintaining the world’s No. 2 military represents a large financial burden on Russians.

Russia also looks much like a developing country in terms of trade. Its exports are mostly raw materials: energy, agricultural products, and metals. This concentration gives Moscow immense economic leverage: Relatively modest U.S. measures to restrict Russian energy exports have sent oil and gasoline prices skyrocketing. Tougher sanctions on its wheat, sunflower oil, and fertilizer exports are making food more expensive for people around the world.

Why We Wrote This

Russia spends a lot of money on its military, given the size of its economy. Now sanctions are shrinking that economy rapidly. That could put Russia’s projection of power on shaky footing.

But it’s a short-term advantage. The longer Vladimir Putin takes to pull those levers – cutting off Russian gas to Europe, for example – the less powerful they become. That’s because markets and nations can adjust to shortages more easily and quickly than Russia can cope with the West’s tightening economic noose.

Farmers from Illinois to Brazil can expand production. And while Europe cannot hope to wean itself off Russian gas before the next heating season, it assuredly will be on a crash course to achieve that transition far faster than anticipated just two months ago, predicts energy analyst Henning Gloystein at Eurasia Group.

Russia, by contrast, is stuck with a largely undiversified economy, a depreciating currency, and few options to strengthen either one. That’s true for its energy industry – now oriented toward Europe more than China or beyond – and also for developing alternatives to get around banking sanctions.

All this makes flouting 21st-century international norms – such as invading a neighboring country without provocation – very expensive. 


Sources: World Bank Group, GlobalFirepower.com, Goldman Sachs, Institute of International Finance, JPMorgan Chase, GlobalData, Yahoo Finance, Investing.com

Jacob Turcotte/Staff
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