Russian economy reeling from sanctions

 Market Watch:

Media reports trumpeting the resilience of the Russian economy in the face of the international response to its invasion of neighboring Ukraine are based on misunderstandings that don’t reflect what’s happening on the ground, according to a new paper from the Yale School of Management.

The report, called “Business retreats and sanctions are crippling the Russian economy,” found that far from the “prosperity” touted by the Kremlin and Russian President Vladimir Putin, the sanctions — and the exodus of more than 1,000 global companies –are having a catastrophic effect.

The report drew on private Russian language and unconventional data sources including high frequency consumer data, cross-channel checks, releases from Russia’s international trade partners, and data mining of complex shipping data, according to the authors, led by Professor Jeffery Sonnenfeld, senior associate dean for leadership studies at the Yale School of Management.

“From our analysis, it becomes clear: business retreats and sanctions are catastrophically crippling the Russian economy. We tackle a wide range of common misperceptions – and shed light on what is actually going on inside Russia,” said the report.

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See now: Companies that exited Russia after its invasion of Ukraine are being rewarded with outsize stock-market returns, Yale study finds — and those that stayed are not

Among the report’s key findings are:

• Russia’s position as a commodities exporter “has irrevocably deteriorated,” as it has lost access to its former main markets and is facing challenges in pivoting to Asia with non-fungible exports such as piped gas.

• Russian imports have also mostly collapsed and it’s struggling to secure crucial inputs, parts and technology from hesitant trade partners, creating serious supply shortages.

• While Putin boasts of the country’s self-sufficiency, domestic production has come to a standstill with no capacity to replace lost business, products and talent. At the same time, Russia is facing the same soaring prices and consumer angst as seen in most of the world.

• The inflation picture for sectors that depend on international supply chains is even more grim at 40% to 60% and that’s impacting a swath of key industries. The report describes how some Russian manufacturers are resorting to cannibalizing and recycling parts, and cites U.S. Commerce Secretary Gina Raimondo as saying Ukrainians are finding Russian military equipment filled with semiconductors that have been removed from dishwashers and fridges.

• The retreat of so many businesses has cost the country about 40% of its GDP, reversing nearly three decades of foreign investment.

“Putin is resorting to patently unsustainable, dramatic fiscal and monetary intervention to smooth over these structural economic weaknesses, which has already sent his government budget into deficit for the first time in years and drained his foreign reserves even with high energy prices – and Kremlin finances are in much, much more dire straits than conventionally understood,” the authors wrote.

• Russia’s domestic financial markets are the worst performing in the whole world this year and that’s despite strict capital controls. At the same time, it’s cut off from accessing global capital markets to revitalize its economy.

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If this continues it is hard to see how Russia could benefit even if it conquered all of Ukraine.  Even the chances of that look remote at this point as Russia occupies a fraction of the country and is having to take troops from its offensive in order to defend some of its early gains. What it has accomplished so far is not worth the costs to its economy.  It has actually weakened Russia's military in the process.