Putin’s getting nervous about Russia’s sinking economy [Video]

Kremlinologists think it’s no coincidence that Russian authorities seized Wall Street Journal reporter Evan Gershkovich just a day after he co-authored a Journal story on how Russia’s economy is “starting to come unone.”

Russia says Gershkovich was spying, which the Journal adamantly denies. It’s safe to believe the Journal because Russia passed a law last year that basically criminalizes what journalists do: ask questions about things the government doesn’t want anybody to know about.

That law focuses on anybody spreading information about the Russian military, which may apply to Gershkovich because he was reportedly researching a story on the Wagner paramilitary group that’s part of Russia’s invasion force in Ukraine. But that’s just a pretext for Russian President Vladimir Putin to punish and silence one voice highlighting the economic price of Russia’s are starting to pay for Putin’s disastrous invasion of Ukraine.

A picture taken on July 24, 2021 shows journalist Evan Gershkovich.  - A US reporter for The Wall Street Journal newspaper has been detained in Russia for espionage, Russian news agencies reported Thursday, citing the FSB security services.

A picture taken on July 24, 2021 shows journalist Evan Gershkovich. – A US reporter for The Wall Street Journal newspaper has been detained in Russia for espionage, Russian news agencies reported Thursday, citing the FSB security services. “The FSB halted the illegal activities of US citizen Evan Gershkovich… a correspondent of the Moscow bureau of the American newspaper The Wall Street Journal, accredited with the Russian foreign ministry,” the FSB was quoted as saying. He is “suspected of spying in the interests of the American government” and of collecting information “on an enterprise of the Russian military-industrial complex,” agencies reported. (Photo by Dimitar DILKOFF / AFP) (Photo by DIMITAR DILKOFF/AFP via Getty Images)

For several months after Russian forces invaded Ukraine last February, the Russian economy seemed resilient. A spike in energy prices boosted Russia’s oil and gas revenue, its largest source of funds. Deft maneuvers by the Russian Central Bank helped the country withstand tough sanctions imposed by the United States and other allies of Ukraine. Russian forces floundered in Ukraine, but that was due to poor military planning and execution, not sanctions.

Now, however, sanctions are finally beginning to strangle the Russian economy in ways that could set it back for years. Laura Solanko of the Bank of Finland recently described how Russia is undergoing “reverse industrialization” in which the military-industrial complex driven by war needs crowds out the consumer economy, as in Soviet times. “Russia is ineluctably stuck on a path to lower potential growth and a bleach economic future,” Solanko wrote on March 27.

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On paper, Russia seems to be surviving. Official data shows its economy shrank by 2.2% in 2022, with the International Monetary Fund (IMF) forecasting flat GDP growth in 2023. But Russia, never the most trustworthy data purveyor, has stopped publishing a variety of economic statistics, and some IMF critics have blasted the agency’s Russia forecast as naïve and wrong. The wonky debate matters because it gets to the question of whether sanctions are accomplishing anything or not.

Russian President Vladimir Putin takes part in a ceremony via video link at the Kremlin in Moscow, Russia March 30, 2023. Sputnik/Gavriil Grigorov/Pool via REUTERS ATTENTION EDITORS - THIS IMAGE WAS PROVIDED BY A THIRD PARTY.

Russian President Vladimir Putin takes part in a ceremony via video link at the Kremlin in Moscow, Russia March 30, 2023. Sputnik/Gavriil Grigorov/Pool via REUTERS ATTENTION EDITORS – THIS IMAGE WAS PROVIDED BY A THIRD PARTY.

In early March, Russian journalist Boris Grozovsky detailed a new Russian economy in which “all resources go to war” and “household goods are sacrificed.” Spending on consumption, he reported, fell by 49% in 2022, in part because there was nothing to buy. There’s been explosive growth in sectors related to defense production, but cars, furniture, and appliances have grown scarce as imports disappeared and the Russian economy pivoted toward the material needed for the war.

Murmurs of discontent are seeping out of Russia itself. Aluminum magnate Oleg Deripaska said at a recent conference in Siberia that Russia would run out of money by 2024. He complained about new taxes on Russian businesses to help finance the war effort. Even Putin has acknowledged that “restrictions imposed on the Russian economy may indeed have a negative impact.”

Sanctions imposed after Russia invaded Ukraine in February 2022 aimed to isolate its financial system and restrict trade while leaving Russia’s energy exports more or less intact. Since Russia is one of the world’s largest exporters of oil and natural gas, the goal was to hurt Russia without causing a global energy shortage that would send prices soaring. That partially worked, but the scheme allowed Russia to continue earning huge amounts of energy revenue that helped finance the war.

Last December, the European Union banned most imports of Russian oil, while a US-led group of large economies imposed a price cap of $60 per barrel on Russian oil. Those sanctions were novel and nobody was sure they’d work. Some of the Ukrainian allies wanted a lower oil price cap that would reduce Russia’s oil revenues even more.

Energy markets remained calm after those moves went into effect, and in February a similar set of sanctions went into effect on refined Russian hydrocarbons such as diesel fuel. Russia is still exporting energy, but the sanctions do seem to be forcing costly workarounds in Russia’s energy exports and denting revenue. The allied nations could lower the price of caps on Russian energy at any time, effectively tightening the sanctions.

Russia’s economic woes are intensifying as it seems to be running short of tanks, artillery, and other weapons vitally needed in Ukraine. The intent of sanctions is to make it progressively more difficult for Russia to sustain the war. Ukraine, of course, is suffering from a shortage of weapons of its own and a sharp economic contraction, though billions in aid from the United States and other partners compensate for some of that.

The Journal piece, written by Gershkovich and Georgi Kantchev, cataloged Russia’s economic struggles and its increasing reliance on China and its distraction into a kind of junior partner. The story describes how sanctions prevent Russian airlines from obtaining spare parts and finance firms from updating software. New-car sales have plunged by 62% year-over-year. Investment in Russian oil and gas exploration is down 42%, which could lead to a long-term decline in Russia’s energy output.

That wasn’t the first story on Russia’s economic problems, but it was comprehensive and may have arrived just as Putin is feeling the rising heat of a failing war and a flatlining economy. Snatching Gershkovich on bogus charges probably reveals increasing desperation for Putin, yet it’s consistent with the bullying behavior of a dictator who has badly erred and blames the messengers. It won’t be the last of Putin’s aberrant behavior.

Rick Newman is a senior columnist for Yahoo Finance. Follow him on Twitter at @rickjnewman

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