In the light of recent statistics, it seems that the effectiveness of sanctions has been muted, but is this view reasonable?
Recently there has been positive news about Russia’s economy. However, as sanctions imposed due to the war in Ukraine have tightened further, data show, for example, that Russian industrial production has turned to growth.
It increased by 1.2 per cent in March compared to a year earlier, while the reading in February was negative at 1.7 per cent.
The reading for March was positive for the first time in over a year, and this suggests an increase in output, particularly of the Russian military industry.
However, there are some unofficial indicators that contradict the official figures.
According to the financial newspaper Wall Street Journal, satellite data collected by the European Space Agency ESA shows that the amount of emissions produced by Russia’s industrial sectors continues to decrease.
This can be seen in data from the Sentinel-5P satellite, launched in 2017, which has been studied by Quantcube Technology, a Paris-based analytics company.
If industrial activities are to increase, then the amount of air pollution should also increase.
Are Russian statistics unreliable or have sanctions failed in their mission?
Satellite data is a relatively new thing, but interest is growing, according to Laura Solango, a senior consultant at the Bank of Finland (SP). They are already applied in some studies.
Satellite data are at least indicative. But Russian statistics are also relatively reliable.
The background is a weak comparative level of Russian industrial production a year ago. In comparison, even a small increase in production produces growth figures.
Russia’s overall production and private consumption also declined significantly in March from a year ago. However, this did not last very long. Since last summer, production and consumption have remained at broadly low levels, Solanko says.
– The level went down, but it doesn’t go down anymore.
Solenko anticipates that the weak comparative period will be reflected in future production figures as well. However, it cannot be concluded from them that the entire economy is recovering.
Industrial production shows a structural change. There has been an increase in sectors that are directly or indirectly related to the defense industry or war effort. For example, there has been an increase in the production of metal products and packaged goods.
On the other hand, sectors dependent on private consumption still have low readings. For example, the production of refrigerators or cars has not picked up pace.
Since the start of the war in Ukraine, the EU has already agreed ten sanctions packages against Russia and Belarus. Crude oil sanctions came into effect in December and in February for oil products.
However, no collapse of the Russian economy has been observed. Last year, the GDP decreased by only 2.1 percent.
Gross national product in January-March is still down about 2 percent from a year earlier, according to preliminary estimates from Russia’s economy ministry.
This has given rise to assessments that the sanctions have been ineffective. Solanko stressed that the sanctions are not aimed at collapsing the economy.
– They weren’t even designed for that. The goal is to limit the flow of money into the Russian state and its ability to produce war material. Sanctions have affected them.
The fact that the ammunition is produced and fired in Ukraine inflates the gross national product by calculation.
According to the Bank of Finland’s Boffitt Research Institute, the transition of the Russian economy from a market economy to a war economy means that monitoring and analyzing the economy is more difficult than before.
Expenditure in the field of security and defense is borrowed from the state exchequer. The development of the military industry also increases the GDP.
But is this the right measure if at the same time the purchasing power and standard of living of ordinary citizens fall markedly?
– In most cases, gross national product is related to a number of things that increase welfare. However, in Russia, the link between GDP growth and citizens’ well-being is weak, Solanko admits.
– The fact that ammunition is produced and fired in Ukraine inflates GDP. It may be a bit bad gauge at the moment.
The Russian Central Bank expects GDP to grow by 0.5-2 percent this year. Most foreign forecasting institutions expect a slight or pronounced contraction in the economy this year.
– In recent months, forecasts have been revised in a more positive direction and Russian officials are confident in economic growth. However, this requires that public spending be increased further, Solanko.
This, in turn, increases the state’s budget deficit, which has to be covered by the state’s domestic debt collection.
How long this can continue is an open question. The borrowing of the state is outside other sectors.