August 11, 2022·19 min read

A bleak future awaits Russia's economy, say American researchers
A bleak future awaits Russia’s economy, say American researchers

In the study, titled “Business Retreats and Sanctions Are Crippling the Russian Economy” the experts said that Russia had lost companies representing about 40% of its GDP as a result of the business retreat.

This does not mean that business operations have been curtailed – many companies from this list of 1,000 have already divested or sold their Russian businesses to local Russian operators. But such steps do not guarantee the prosperity of companies. A striking example is the failure of the “Vkusno i tochka” (“Tasty, Period”) chain, an analogue of McDonald’s, the authors of the study said.

Here are the main these from the report on how sanctions affect the Russian economy.

Rosstat is hiding real figures

Many of the excessively sanguine Russian economic analyses, forecasts, and projections which have proliferated in recent months share a crucial methodological flaw: these analyses draw most, if not all of their underlying evidence from periodic economic releases by the Russian government itself, without cross-checking or verification of data integrity. The most frequently cited Kremlin sources include the Russian Federal Service for State Statistics, more commonly known as Rosstat; the Bank of Russia, and data releases by the Ministries of Energy, Economy and Finance.

While numbers released by the Kremlin have long been held by the economic community to be largely if not always credible, there are three significant, underappreciated considerations which have severely strained the integrity of the Kremlin’s statistics since the outset of the invasion of this year. Economists and analysts must thus be extra careful about citing official Kremlin statistics and cross-verify the integrity of these statistics wherever possible.

The Russian government is no longer disclosing certain economic indicators which prior to the war were updated on a monthly basis, including all foreign trade data, including those relating to exports and imports, particularly with Europe; oil and gas monthly output data; commodity export quantities; capital inflows and outflows; financial statements of major companies, which used to be released on a mandatory basis by companies themselves; central bank monetary base data; foreign direct investment data; and lending and loan origination data, and other data related to the availability of credit. Even Rosaviatsiya, the federal air transport agency, abruptly ceased publishing data on airline and airport passenger volumes.

Although the Kremlin explains away its newfound obfuscation of its revenue and spending data and other macroeconomic indicators of overall economic health under the guise of “minimizing the risk of the imposition of additional sanctions,” what little data has trickled out from the Kremlin suggests the real reason may lie in the fact these statistics are unlikely to be positive, and getting worse by the day. For example, total oil and gas revenues dropped by more than half in May from the month before, by the Kremlin’s own numbers. As one economist wrote, “it’s likely that the Kremlin is afraid of publishing data that reveal the full scale of the economy’s collapse.”

Even those favorable statistics which are released are questionable if not downright dubious when measured against cross-channel checks, verification against alternative benchmarks – and given the political pressure the Kremlin has exerted to corrupt statistical integrity.

Many forecasts projecting strong revenue from energy exports were based on the last available official export data from March, even though many business withdrawals and sanctions on energy had not yet taken effect, with orders placed prior to the invasion still being delivered.

Take, as one instance of many, one widely cited study by Bloomberg decrying Russia’s surge in revenue from energy exports. The authors wrote: “Even with some countries halting or phasing out energy purchases, Russia’s oil-and-gas revenue will be about $285 billion this year, according to estimates from Bloomberg Economics based on Economy Ministry projections. That would exceed the 2021 figure by more than one-fifth.”

No doubt Russia has continued to draw significant revenue from energy exports, the study authors said. But this specific Bloomberg analysis projected Russia’s 2022 energy export revenues based on its revenue through March of 2022 as disclosed by the Kremlin, even though the Kremlin has belatedly acknowledged that energy export revenues in May and June have diminished significantly.

What happens to exports

Many experts have long argued that Europe’s inability to wean itself completely off Russian energy and other commodities dilutes the efficacy of sanctions and of voluntary business withdrawals, and one recent study estimated that at least in the initial days following the invasion, oil exports provided the Kremlin with $1 billion every day, buttressed by rising energy prices.

Certain European energy companies, such as TotalEnergies, can and must do more to sever all ties to Russia, the study’s authors advised. Likewise, there is no doubt that significant gaps remain in sanctions policy across the United States and EU, which need to be closed urgently to further choke the inflow of revenue from commodity exports into the Kremlin’s coffers. Policymakers are currently working on an international coalition to cap the price of Russian oil at $40-$60 a barrel.

What happens to the main commodity exports

Natural gas

One crucial commodity where – contrary to misleading narratives – Russia is far more dependent on Europe than Europe is on Russia, is natural gas.

Historically, natural gas has lain at one end of the fungibility spectrum, as a highly non-fungible commodity. Russian gas has historically been transported primarily through a complex network of fixed pipelines which connects western Russia to Europe. Many of these pipelines flow through Ukraine, a relic of pre-1989 Soviet planning when Ukraine and Russia were both parts of the same country. In the 1990s, the occasional threat of cutting supplies to Ukraine was not seen to be seriously credible, as Moscow needed the transit route as much as Kyiv needed Russian gas given Russia’s chronic budgetary problems, and the veritable lack of any other gas transport capacity than through Belarus and Ukraine. Although the threat of Russian energy blackmail was initially seen as minimal, nonetheless, the countries were never on an equal footing.

Following the scarring experience of the winter gas crisis of 2008/2009, the European Union purposefully took steps to decrease its potential vulnerability to future Russian energy interventions. In the Third Energy Package, the European Commission required unbundling of the transmission network from integrated energy companies, which blocked, inter alia, the kick-off of the Nord Stream 2 project. Furthermore, reverse-flow capabilities were added to the gas pipelines; and new LNG terminals and interconnectors were built into the network. The added regasification capacity at LNG terminals in Klaidepa and Swinoujscie allowed countries such as Lithuania and Poland to diversify their energy sources while warding off Russian energy blackmail by carrying out a credible threat of importing natural gas from elsewhere.

As of 2021, a whopping 83% of Russian natural gas exports were received by Europe, although Europe now has a far more diversified supply base, drawing 54% of its gas imports from non-Russian sources, including LNG from Norway, Qatar and Algeria in addition to significant domestic supply from sources such as the giant Groningen gas field in the Netherlands.

One of the key factors decreasing Russian vulnerability in its asymmetric interdependence relationship with Europe – while lessening Russia’s dependence on legacy pipelines flowing through Ukraine – was the construction of Nord Stream 1 (the first line in 2011, the second in 2012) with a total capacity of 55 bcm, which allowed Russia to directly supply Germany and other western European countries with Russian piped gas, bypassing Ukraine completely. The building of Nord Stream 2, which would have added 55bcm of gas transport capacity had it opened, combined with other routes of gas transport such as TurkStream (31.5 bcm) would have allowed Russia to further bypass the Ukrainian Gas Transport System (GTS) as an export route to the European Union. The maximum annual capacity of the Ukrainian GTS is 146 bcm, roughly equivalent to all other Russia-EU export routes combined.

Germany’s situation, which was representative of an erroneous belief that Russian gas could provide stability and security of supply as a stopgap measure if nothing else, conveniently turned a blind eye to Russia’s previous weaponization of energy to advance its national interests. But Germany is not necessarily representative of the rest of Europe.

Confrontation with the West has decreased Russia’s leverage as a commodity exporter in its relationship not only with China, but with other relatively minor partners in the former Soviet bloc as well, such as the countries of Central Asia. Taking Kazakhstan as one example, there are already many indicators of minor but increasing tension as Kazakhstan pivots away from Russia, starting with symbolic gestures such as Kazakhstan’s shift to Latin script in 2021, Kazakhstan’s cancellation of the 2022 Victory Day Parade, and Kazakh President Kassym-Jomart Tokayev’s willingness to challenge Putin on his own stage at the St. Petersburg Economic Forum this year. Russia’s retaliatory measures such as a temporary shutdown of the Russo-Kazakh Caspian Pipeline only raises the tension and encourages Kazakhstan to align more with China and Europe. Other traditional Russian partners in Central Asia are likewise pivoting away from Russia.


Russia needs the revenue from oil exports far more than the world needs Russia’s oil.

Russia is the world’s third largest oil producer, with its production amounting to 11.3 mb/d (million barrels per day) in January 2022, behind Saudi Arabia’s maximum of 12 mb/d and the United States’ 17.6 mb/d. About 88% of its oil production – or roughly 10 mb/d – consists of crude oil, out of which 7.8 mb/d was designated for exports. As one of the world’s largest crude oil exporters with about 10% of the total market, approximately 50-60% of its oil exports go to OECD Europe, while 20% goes to China.

Oil exports are the foundation of Russia’s economy – much more so than gas. In 2021, revenues from oil exports totaled 45% of Russia’s budget revenue, or about three times as much as the revenue from natural gas exports. Independent oil producers represent less than 10% of Russia’s oil production.

Historically, Putin himself rode the commodity super-cycle of the 2000s, and rising oil prices, to increased power and prestige, on his way to establishing his grip over Russia more firmly. Oil prices rose from $30 a barrel in 2003 to $147.30 in July 2008. From 1999 until 2000, energy exports accounted for some 90% of Russia’s total growth in GDP. Russia was able to increase its oil exports value eightfold from 2000 to 2012, and thanks to this oil windfall on the back of higher prices and higher export volumes, Russia was able to fill the coffers of its sovereign wealth fund while stashing aside over hundreds of billions in foreign exchange reserves.

While Russians prospered from this oil windfall, Putin was able to consolidate and steadily nationalize significant portions of the oil sector for his personal and political interest.

Even at a technologically inferior level, Russia continues on its oil development course, which has been dubbed by some analysts as Russia’s Kodak moment, making only token efforts to diversify and innovate.

A long term forecast for Russian oil production assumes a severe decline in greenfield ventures in the new gas projects in the Arctic and – in the base scenario – a moderate rate for brownfield decline of 2-3 percent annually. However, as the fields move into their final years of production, and western energy companies are not substituted with Chinese or Indian partners, and the quality of servicing declines, it is highly possible if not probable that there will be a much steeper decline. A depletion rate of 6% falls within the commonly accepted range of a weighted decline of production from all existing world oil fields. The scenarios are quite conservative themselves, as even the Russian Ministry of Finance forecasts that Russia could see its oil production fall by between 9% and 17% in 2022 as western sanctions and departing international oil companies complicate extraction and reduce demand, a rate which could presumably be extrapolated annually as long as sanctions are in effect.

The consequences of the Russian oil fields’ decline are key for the future of Russia as an energy, and specifically oil, superpower. All things being equal, there may very well be additional potential production capacity among the OPEC members, hitherto inhibited by political, security and technical reasons. If those obstacles can be surmounted, it is reasonable to expect OPEC member states could increase their production – in the short term to balance out the majority of the estimated 6 mb/d supply-demand gap, and in the medium to long term to substitute for the dropping of Russian oil production capacity.

What happens to imports

Imports consist of about 20% of Russian GDP, and the domestic economy is largely reliant on imports across industries and across the value chain with few exceptions, despite Putin’s bellicose delusions of total self-sufficiency.

Imports into Russia have not been choked to zero. The Yale CELI List of Companies that have curtailed operations in Russia still features several hundred companies rated “F” – meaning they are essentially doing business-as-usual in Russia, completely undeterred by the withdrawal of over 1,000 of their global peers.

The Kremlin is no longer releasing its own import data, suggesting that Russian imports fell by upwards of about 50% in the initial months following the invasion. For example, according to recent monthly releases from the Customs General Administration of China, which maintains detailed Chinese trade data with detailed breakdowns of exports to individual trade partners, Chinese exports to Russia plummeted by 50% from the start of the year to April, falling from over $8 billion monthly at the end of 2021 to under $4 billion in April.

When the United States imposed export restrictions on Chinese telecom companies Huawei and ZTE in 2020, they were unable to source advanced microchips and saw a massive reduction in their chip-dependent smartphone businesses – a fate which no Chinese company wants to suffer by running afoul of U.S. sanctions related to Russia.

Many Russian economists cite the necessity of finding new trade partners and broadening the range of countries from which Russia imports manufactured products, but the reality is there are few potential partners eager to engage in an economic relationship with Russia. Case in point, Belarus has offered to “help Russia obtain substitutes for Western and Asia microchips,” but Belarus – not known for being a tech hub – simply does not have the technological capabilities to step into the shoes of Russia’s erstwhile western partners.

What happens to domestic consumption

The Russian domestic economy, in many ways, remains somewhat of a black box for many outside observers. The question of how Russian domestic consumption and production are holding up in the face of business retreats and sanctions is of crucial importance. While measures of national accounts and macroeconomic strength, such as assessments of Russian export revenues, are of crucial importance to Putin and the Kremlin – and by extension, Russia’s war-fighting capabilities.

The level of desperation of Russian producers who are unable to procure supplies and inputs is reflected by many anecdotal reports coming out of Russia. U.S. Commerce Secretary Gina Raimondo testified in a recent Senate hearing, “we have reports from Ukrainians that when they find Russian military equipment on the ground, it’s filled with semiconductors that they took out of dishwashers and refrigerators.”

Another prominent example of cannibalization of parts to sustain fledgling levels of domestic production is in the Russian aerospace industry. Russian carriers, including flag-carrier Aeroflot, have been documented to be cannibalizing existing aircraft parts to continue servicing the its remaining operating fleet, even though operators such as Boeing have cut of all support and service and have issued warnings that cannibalized aircraft are not safe for operation. Some carriers, such as Pobeda, have even intentionally grounded up to 40% of their existing fleet to provide parts to service and operate the remaining fleet.

The data release for foreign automobiles in Russia was even more disastrous. Historically, many Russians have preferred to drive foreign automobiles – not only because of prestigious branding but also due to concerns about safety and quality, with foreign automobile sales often surpassing domestic auto sales. But in the months after the invasion, the purchase of foreign-made automobiles in Russia has ground to an almost complete standstill. The list of foreign automobile companies whose sales have plummeted by more than 90% on a year-over-year basis in June 2022 is long.

The auto sector is just one example of many where consumption has ground to a standstill: in several high-tech sectors such as smartphones, an initial rush to clear out remaining inventory in the days following the invasion has given way to the impossibility of finding supply, with most international smartphone manufacturers no longer sending product to the country and with inventories having been depleted by panicked consumers in the initial frenzy.

Given both supply shortages, soaring prices and difficulty finding products on top of fading consumer sentiment, it is hardly surprising that by Sberbank’s own high frequency data readings of consumer spending and retail sales, both plunged dramatically in the months following the invasion, by upwards of about 20% year-over-year. Other readings of high frequency data such as e-commerce sales within Yandex and same-store traffic at retail sites across Moscow reinforce steep declines in consumer spending and sales.

Business, capital, and talent flight from Russia

Since Russia’s invasion of Ukraine began in February 2022, over 1,000 companies have publicly announced they are voluntarily curtailing operations in Russia to some degree beyond the bare minimum legally required by international sanctions. The list has been continually updated over the last four months. This proprietary dataset, which contains detailed Russian revenue information across well over 1,000 companies, was compiled not only using public sources such as government regulatory filings, tax documents, company statements, financial analyst reports, earnings calls, Bloomberg, FactSet, MSCI, S&P Capital IQ, Thomson Reuters, and business media from 156 countries; but also non-public sources, including a sui generis global wiki-style network of over 250 company insiders, whistleblowers, and executive contacts.

The researchers found that across all these 1,000 companies aggregated together, the value of the Russian revenue represented by these companies and the value of these companies’ investments in Russia together exceed $600 billion – a startling figure representing approximately 40% of Russia’s GDP. These companies, in total, employ Russian local staff of well over 1 million individuals. The value of these companies’ investment in Russia represents the lion’s share of all accumulated, active foreign investment in Russia since the fall of the Soviet Union – meaning the retreat of well over 1,000 companies in the span of three months has almost single-handedly reversed three decades’ worth of Russian economic integration with the rest of the world, while undoing years of progress made by Russian business and political leaders in attracting greater foreign investment into Russia.

To be sure, this is not to say that the GDP of Russia will contract 40% overnight. Many of the 1,000 businesses who have curtailed operations in Russia are still in the process of winding down their operations, meaning it will take months if not even years to feel the full impact of their withdrawal. Other companies from this list of 1,000 have already divested or sold their Russian businesses to local Russian operators, which means that even though these businesses will lack western technical and financial support and know-how and deteriorate in the long-run, in the short-term, they will still continue to operate to some extent and thus cannot be written off from Russian GDP immediately.

Unsurprisingly, the Russian business retreat has coincided with rapid “brain-drain” as talented, educated Russians flee the country in droves. It is impossible to assess the exact number of Russians who have left Russia permanently since the outset of the invasion, but most estimates peg the number as no less than 500,000 – with the vast majority being highly-educated and highly-skilled workers in competitive industries such as technology. The mass exodus of skilled Russian natives is further amplified by the forcible expulsion of a not-insignificant population of western expatriates working in Russia. These workers – who understand the structural challenges facing the Russian economy and technical hurdles obstructing Putin’s vows of self-sufficiency and import substitution – are joined by many of Russia’s few remaining high-net-worth and ultra-high-net-worth individuals, who understand that capital controls, taxes, the business and investment climate, and government restrictions are only likely to become worse in the years ahead, particularly for those holding financial capital.

By one measure, 15,000 ultra-high-net-worth individuals have fled Russia since the invasion began, which would represent 20% of the population of Russia’s ultrahigh-net-worth individuals at the outset of the war.

The official level of capital outflows indicated by the Bank of Russia in Q1, nearly $70 billion, is likely to be a gross underestimate of the actual level of capital outflows, given strict capital controls implemented by the Kremlin restricting the amount of wealth Russian citizens can transfer out of the country, particularly foreign-currency denominated wealth. Many of these Russians have swarmed to financial centers such as Dubai in the Middle East; the presence of Russian capital inflows in Dubai is so significant in magnitude that many local real estate experts attribute Dubai’s ballooning property values over the last four months to the influx of new Russian wealth seeking shelter, with many Dubai real estate firms reporting 100% and even 200% year-over-year increases in sales to buyers from Russia.

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