Russia’s isolation from global markets is weakening its economy and will ruin its status as an energy superpower, experts say.
Russia’s isolation from the west is a disaster for the long-term health of its economy, experts told Insider.
Commercial isolation limits what Russia can import, making production more expensive.
Russia’s situation will also greatly diminish its status as an energy superpower.
Russia’s resilience to sanctions surprised experts in the early months of the war in Ukraine, but there are growing signs that deepening isolation will result in a withering economy for years to come and a greatly diminished position as a superpower. energetic.
Since absorbing the first blows of Western sanctions, Russia has largely retaliated by excluding the West, trading exclusively with “friendly” countries and propping up partnerships with nations that can tolerate doing business with a rogue state.
It has had some success in wreaking havoc through its militarization of the energy trade, recently halting gas flows to Europe’s key Nord Stream 1 pipeline while selling its surplus fuel supplies to customers such as China and India. Power sales to those two countries offset Russia more than $24 billion only in the first three months of the war.
But underneath Putin’s defiant show of resilience, signs are mounting that Russia will pay a heavy price for long-term isolation, according to Yuriy Gorodnichenko, an economist at UC Berkeley.
“What they are proposing to do is a recipe for long-term stagnation,” Gorodnichenko told Insider, pointing to other isolated nations with the world’s weakest economies, specifically North Korea, Afghanistan and Cuba.
Russia’s isolation really began in 2014, worsening its economic position in the run-up to the invasion of Ukraine. The country posted a GDP of $1.78 trillion in 2021, up from $2.06 trillion seven years earlier. The International Monetary Fund estimates GDP will fall another 6% this year.
“What happens is that [isolationism] reduce the number of products [Russia] you can buy,” said Jay Zagorsky, a professor of markets at Boston University. “You can only buy Indian agricultural products, you can only buy Chinese manufactured goods, that kind of thing. And when you limit yourself to a particular country, you often end up not getting the best quality or the best price.”
That means Russia’s payment ban on the “unfriendly” US dollar, which represents 88% of world currencies transactions – is a huge barrier, allowing sellers to charge a premium and make imports more expensive.
Since the war, trade with sanctioning countries has fallen by 60%, and trade with non-sanctioned countries has fallen by 40%, economist Paul Krugman noted in a recent opinion piececiting data from the Peterson Institute for International Economics.
Vanishing Energy Perk
All of this has a particularly strong impact on Russia’s energy exports.
Last year, oil and gas sales accounted for 45% of Russia’s GDP, according to the International Energy Agency. However, boosting and sustaining energy production in the long term depends on being able to buy the necessary machinery and technology to power industry, much of which is produced in the West.
“A lot of the oilfield exploration kits and machines are extremely high-tech. We’re talking about GPS systems and robots that control things deep underground. It’s not just a bunch of guys with a big pipeline and a bunch of mallets”. Zagorsky said.
The inability to invest in such technology will be a major obstacle to Russia’s dominance of the energy market in the future, especially as energy-scarce Europe is shelling out billions to increase production over the next decade.
It is also compounded by the fact that Russia now sells its oil to select customers. That has earned countries like China and India deep discounts on Russian crude, and the ability to sell oil and gas to other customers for a profit. That not only reduces Russia’s energy revenues, but also forces the nation to cede much of its power in the oil market, Gorodnichenko said.
That could be one of the reasons why Russia has been quietly recording its losses since the war. Russia’s finance ministry does not publish monthly reports, but internal documents reviewed by Bloomberg found that Russia had incurred billions in “direct losses” from Western sanctions, and its the budget surplus had been reduced by 137 billion rublesor $2.1 billion, as of August.
“The fact that they don’t release a lot of economic data indicates that they know there are costs, but would like to hide the extent of those costs,” Don Hanna, an economist at UC Berkeley, told Insider. “All of this is designed to hide the consequences of the invasion of Ukraine on the Russian economy.”
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