Rubles, Sanctions, and Oil

Fighting the economic war

Boris Kagarlitsky

As expected, the damage to the Russian economy caused by Western sanctions has begun to show in the beginning of summer. The first shock occurred in March when the Western countries announced their decisions, but the effect was mostly psychological and quickly overcome. The main consequence was the collapse of the ruble, but the Central Bank found ways to cope with this challenge after about two weeks. This sharp decline was followed by an equally impressive re-appreciation, which was presented by official propaganda as proof that nothing could threaten the Russian economy, and in fact the special operation had only strengthened our finances.

This course of events was facilitated by the fact that the ruble has been undervalued over the past 5 years, thanks to the policies of that same Central Bank. These decisions were based on the assumption that a cheap ruble would benefit exporters, and thus the budget. Of course, if the Russian government had actually carried out a program of reindustrialization and import substitution, something they had been promising for years, then it would have in fact been necessary to gradually strengthen the ruble. But in any case, these games with exchange rates are only useful as accompaniment to a comprehensive strategy to change the structure of the economy, and not as a substitute for it. By itself, the strengthening of the ruble does not shore up the industrial base, as we can see with our own eyes today.

Of course, the current sharp growth of the ruble was brought about not only by the efforts of the Central Bank, but also by a massive reduction in imports: foreign currency isn’t much good if there’s nothing to buy with it. Moreover, the budget has not benefitted from the overvaluation, as foreign exchange revenues are proving to be insufficient. As for the Russian citizens and companies holding currency, they prefer not to spend it, waiting for better times when the rate becomes more favorable. Business activity is declining. At the same time, ruble prices continue to grow as if nothing has happened, sending the population into a stupor. Everyone is well aware that it is impossible to hold the course indefinitely at the current level of inflation and state of the economy. Although economic crises are breaking out all over the world, the Russian ruble clearly has particularly murky prospects.

To rectify the situation - and especially to prevent the development of the black market for euros and dollars - the Central Bank implemented the depreciation of the ruble at the end of May. However, by this time the sanctions had begun to affect production and exports. The latest round of sanctions - the sixth in three months - includes a reduction in purchases of Russian oil, but even before this the West had been tapering off on their consumption, and China and other Asian countries are demanding discounts of up to 40%. Such a drop in income is especially painful because the production of “black gold” in Russia is much more expensive than in the Middle East or even in Venezuela. Beyond the oil sector, mining companies are unable to buy new equipment, other industrial and commercial enterprises are running out of stocks, and the budget is again constrained. It is possible, of course, to lower the exchange rate of the ruble again, but this may become an ideological liability. Against the backdrop of the events unfolding in Ukraine, mass layoffs, and complaints from managers who do not understand how to manage production, depreciation may come off as an unacceptably gloomy sign.

Most significantly, the sanctions mark the beginning of a restructuring of the global economy that will have long-term consequences. Reducing the use of petroleum products and fossil fuels has been a strategic goal of the ruling circles of the European Union long before the outbreak of hostilities in Ukraine. This is motivated not only by a concern for the environment and an eagerness to fight global warming, but also by a desire to revive the world economy through massive investment in new technology. This is only coincidentally a sop to the demands of environmentalists; its real purpose is to justify the inevitable and necessary return of state oversight to the economy while avoiding an outright ideological rejection of the principles of the free market and of neoliberalism.

However, any structural rearrangement will come with considerable costs. Moreover, if one part of the ruling class hopes to gain from the changes, there is another part frightened by the prospective loss. That is why even absolutely overdue and absolutely necessary changes are sabotaged, stalled, and sometimes blocked.

Capitalist wars will reliably find a way to justify government intervention in the market, and the events of recent months have created many happy opportunities for this. Before the beginning of the events in Ukraine, there was still a question as to who would be left holding the bag, but now everything has been decided. The costs associated with structural changes in the Western and world economy will be borne by Russia.

The gradual reduction of Russian oil imports under the latest package of sanctions is not just a way to put pressure on the Kremlin for its alleged misdeeds, but mainly the West’s most convenient solution to its own problems. Whatever conflicts may have accompanied the coordination of such measures were by no means generated by different attitudes towards Russia, but by the natural contradictions between the interests of various factions of the ruling class in the EU countries. These differences, however, have been overcome. Russia’s belligerent actions are simply making it easy to hasten the transition that has already begun.

It was inevitable that Russian fuel exports to Western Europe would eventually decline. But Kremlin authorities not only failed to take any steps to prepare for this situation, but also exacerbated the problem with their actions. Not surprising - the elite in a country that lives off raw material exports cannot, in principle, think strategically. Its prospects are completely tied to the dynamics of the world market, which the resource powers can influence only by entering into cartels; and in this case, the Kremlin can only act as a junior partner of Saudi Arabia. Since the cost of oil in our country is higher than in most other exporting countries, transitioning into a “commodity superpower” is possible only by strangling all other industries; in other words, by destroying your own country. It is not surprising that our rulers’ own initiatives amount to little more than ridiculous improvisations, behind which is not even the facade of strategic thinking.

It is clear that now that irreversible changes have been set in motion, and that the Russian economy that has been built over the last 30 years has been nullified. We have to create a new economy. But don’t dream that you can do it under the existing political and social order. If the Russian elites truly wanted to change anything in the country, they would have to nullify themselves first.

Translation by Dan Erdman