The State of the Russian Economy

Russia invaded a peaceful Ukraine in February 2022 — seventeen months ago — and thereafter the West imposed broad economic sanctions on Russia. Putin, knowing he was going to invade Ukraine, prepared for the anticipated economic sanctions by stockpiling liquidity, but was caught off guard by the universality and depth of the West’s sanctions.

[It is now clear Putin made the decision to invade Ukraine more than a year before the actual date of the invasion based on actions he took in preparation for the invasion.]

Putin, who is not a financial genius, safeguarded some of his liquidity in western banks that quickly froze those deposits in retaliation for his invasion of Ukraine. Nice move, Vlad, you bonehead.

His moronic general staff and the intel agencies assured him the invasion of Ukraine would be a rout, would take a week, and would result in the President of Ukraine being hung in Kyiv during  a made for TV pay per view special.

The intel goobers promised Putin the Ukrainian people would rally to the Russians and welcome them with open arms and garlands of flowers.

That did not happen.

So, what has happened, Big Red Car?

Sanctions take time.

When the economic sanctions were announced — which took far too long to be formed and enacted — the Russian economy was doing fine and Putin had access to billions of rubles of wealth, but the West froze all Russian assets in western banks. Putin was caught off guard and lost access to a huge amount of these assets as noted above.

As you can see from this graph, Putin has done a good job with Russian Federation gross domestic product — he has had his fingers on the steering wheel since 2000. Notice the meteoric growth. This also accounts for his thuggish high approval by the average Russian.

Sanctions take time to work and since Russia is a energy focused economy, it also took longer as the oil markets move at a deliberate speed.

Depending upon who you believe — and there are not truly reliable numbers — the Russian economy as measured by GDP is down about 2-5% currently and will continue in that trend.

I think the actual numbers are far greater than these reports from Russia.

OK, Big Red Car, where are we?

Here is where Russia is:

 1. Wars are expensive and this war seems to be costing Russia somewhere between $500mm and $1B a day. If you budget for a one week war and the war is well into its second year, the cost becomes a burden.

It is, of course, very difficult to obtain accurate information and there is no question the Putin regime lies about everything including the cost of the war effort.

 2. The western economic sanctions, while quite porous, are effective when viewed from a global perspective. Russia — never a great manufacturing nation — cannot make/refurbish more than 100 tanks a month and has lost as many as 3,500. They are dragging 1940-50s vintage mothballed tanks out of storage and using them as immobile artillery.

 3. One of the best gauges of consumer sentiment is spending on cars. Russian car sales are down 75% which is due to four things: high short term inflation impacting cost, unreliable manufacturing based on foreign car manufacturers withdrawing from the market, the unavailability of parts including chips, and consumer sentiment.

 4. The Ruble is under enormous pressure. The Ruble slid precipitously at the time of the invasion, rebounded, and is down quite a bit now, but it is tied to two other sectors: the current account (exports v imports) and energy.

 5. The Russian energy sector — from which most of Russia’s governmental revenue comes — is the area in which Russia is most vulnerable.

Russia is part of the OPEC+ cartel that is actively manipulating energy prices to prop up vastly more expensive energy, but the economic sanctions have finally diminished European dependent on Russian energy leaving Russia with only two customers: India and China, both of whom are demanding and receiving a 30-35% discount on Urals crude.

Urals crude at time of Ukraine invasion – $99/bbl

Low price since invasion – $49/bbl

Current price – $64/bbl

Discounted current price – $40/bbl

 6. Manpower in both the civilian sector and the military has become a huge problem.

More than 1,500,000 young men of draftable age have fled the country and this trend continues. Putin has enacted a partial mobilization, but is reluctant to order a full mobilization. He tries to focus the draft levies outside of Moscow and St Petersburg in order to quell potential urban unrest.

The danger here is the loss of working age persons and the best educated and skillful slice of workers in Russia a country of 143,000,000 before the exodus.

Some of the drafted men have been put to work in military equipment manufacturing plants due to the loss of skilled workers who have fled the country.

 7. Russian Gross Domestic Product has been minimally impacted — again, we are relying on  self-reported Russian info here — with a downturn of 1-2%, but this is clearly offset by incredible military spending on war products from ammunition to uniforms.

Military spending is now more than 1/3 of all Russian spending which one may extrapolate to conclude the impact on GDP would be far greater save for the offsetting.

Bottom line it, Big Red Car, we have a tee time

OK, here it is:

 1. The most sanctioned country in the world is feeling the impact. The collective impact of these sanctions will ultimately isolate Russia and may create regime change.

 2. This is a potential death of a thousand cuts, not a knockout punch. The cumulative impact will be crushing.

 3. Russia has effectively diminished the value of Urals crude because of the discount demanded by India and China. This is in spite of the “unlimited” partnership between China and Russia which is a formidable support mechanism.

If the west doesn’t get wobbly, these sanctions will bring Russia to its knees. Stay strong.

But, hey, what the Hell do I really know anyway? I’m just a Big Red Car.

Call your parents, siblings, or a friend.