Without firing a shot, President Joe Biden’s team and American allies are successfully waging an economic war against Russia, my analysis of data from the Kremlin and other sources shows.
Vladimir Putin’s economic muscle is fast withering even as his inept generals, demoralized conscripts, and mercenaries recruited from the Gulag fail to gain much ground against the scrappy Ukrainians with their flexible field tactics, superior intelligence gathering, and expanding arsenal of sophisticated American and European weapons.
Russia’s economy, never vibrant, is now in tatters. Russia is pretty much a one-note economy: Fossil fuel exports pay the bills. More than 75 percent of Russian exports are fossil fuels, chemicals, and other products made with fossil fuels.
That lack of diversity makes Russia vulnerable to smartly designed and rigorously enforced Western economic sanctions. The sophisticated sanctions drawn up by the Biden administration are proving far more effective than the sanctions imposed by previous administrations against various misbehaving countries, sanctions that were mostly cosmetic and easily sidestepped.
Ominously for Putin, Russian oil now sells for well below the world price of oil, another sign of effective economic sanctions.
The European Union has cut Russian oil imports from about 750,000 barrels per day to near zero. Europe’s replacement oil is coming largely from the Middle East, a boon to dictators there, but a tightening vice on the Kremlin pocketbook.
Europe has also weaned itself off cheap Russian natural gas, which Putin mistakenly thought gave him a cudgel with which to beat Europeans into closing their political eyes or at least looking the other way at his Ukraine invasion. Some more cynical experts asserted when the war started that Europe would never make these moves, but Europe has proven them wrong.
Comparing three prices for oil illustrates Putin’s revenue problem.
West Texas Intermediate, an American oil used to set benchmark prices, has plummeted more than 44 percent, from a high of $123.68 last year to $69.20 last Friday.
Brent crude, oil from beneath the Atlantic between Scotland and Norway, is selling at $73, down from $114 last June.
The price of Russian oil fell from $92.20 a barrel a year ago to $49.50 this month. That’s a 46 percent decline. Those figures come from the Kremlin Finance Ministry.
Since the war began, the ministry has cut back sharply on the release of information. Still, its statistical reports assert that the Russian economy is growing.
That’s hard to believe because of a 30 percent drop in Russian net exports—mostly fossil fuels—from a year ago.
But then it’s much easier to fudge or even outright lie about domestic economic numbers than those for imports and exports because data from other countries can be compared to Russian Finance Ministry reports.
Because of sanctions, Russian oil shipped on water by tanker is limited to $60 a barrel, well below the two benchmarks for crude. Actual Russian price: lower by more than $10 per barrel, based on the Kremlin’s own account.
The West can limit the price to $60 because seagoing tankers rely on maritime insurance companies that Western governments can make comply with their sanctions on Russia.
To get around this it is widely believed that Russia has been paying huge premiums to buy aging oil tankers. This will help Russia create a shadow fleet to, maybe, get around the $60 price cap. Savvy reporters at Bloomberg, CNN, and The Washington Post are among those who sussed out the purchases of old tankers through fronts.
Russia no longer has oil buyers with strong finances. Its remaining overseas oil customers include Cuba, Egypt, North Korea, and Sri Lanka, all countries with little capacity to pay cash for imported oil.
The one bright spot for Putin is the oil he moves by pipeline to China and other neighbors on whom maritime sanctions have no effect. That’s almost certainly one of the topics that Putin raised when Chinese President Xi Jinping visited Moscow last week.
Putin has also driven some of the best minds out of his country, a costly brain drain that will further weaken government revenues, perhaps reduce revenue from cybercrimes, and hurt long-term economic growth. Ukraine also has a brain drain.
The Western oil companies with the technological skill to extract oil from the harsh Russian climate—including BP, ExxonMobil, and Shell—have all withdrawn from Russia, which will likely mean damage to Russian oil fields, pipelines, and refineries due to a lack of technical expertise.
Because Western companies won’t sell Russia spare parts, its internal air travel network is shrinking. Many Russian jetliners were impounded overseas. Airbus and Boeing jets are being cannibalized for parts, which risks compromising flight safety.
Putin is also vulnerable because, despite almost as much land mass as America and China combined, the Russian economy is small. In 2021 Russia’s economic output, or gross domestic product, was less than $1.8 trillion, compared to $23.3 trillion for the United States.
California alone has a $3.4 trillion economy, almost twice the size of Russia’s but with only about a fourth as many people.
Russia’s economy is $4 trillion when measured using purchasing power parity, the most favorable way to compare Russia to the rest of the world. That’s still not much more economic output than California, which if it were a nation would have the world’s fourth-largest economy.
Russia’s ability to import is also weakened by the falling ruble, down 30 percent against the dollar since the war on Ukraine began in late February 2022. Computers, machinery, and vehicles account for more than 40 percent of Russian imports, items all needed to pursue the war that now cost much more at a time when money to buy these items is tighter than tight.
My analysis of the latest Russian Federation budget shows that spending in the first two months of this year was 59 percent greater than in the same period in 2022 and 90 percent more than in 2021. That hints at how much Russian economic activity has shifted to war.
At the same time, government revenues fell 28 percent and oil revenues fell 46 percent.
Rising spending and falling revenues aren’t sustainable, especially for a country that must sometimes borrow in foreign currencies, unlike the U.S., which has no trouble rolling over its debts and taking on more debt.
At some point, the Russian Federation’s fiscal mismatch, the falling ruble, and weak export revenues, along with revulsion at the war, have led to scattered demonstrations despite the Russian culture of coping with privation, queues, and government oppression.
To finance his war, Putin has been breaking into the national piggy bank. In a year, he has drawn down more than a fifth of the Russian sovereign wealth fund. In September 2021, it stood at 14 billion rubles, but it shrank to 11 billion rubles this month, which is less than $150 billion. For a country the size and population of Russia, that’s not a lot—even without a war.
In time, Putin will run out of economic bullets to buy war material—drones, missiles, and Wagner Group mercenaries. Every policy that forces Putin to spend down Russia’s sovereign wealth fund, constrains his revenue from exports, and makes technology and spare parts difficult to get is a smart way to stop his atrocities.