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Julien Vercueil: "The war and sanctions have cost Russia 5 % of its GDP".

Western sanctions against Russia have deprived it of "two years of economic growth", and the accelerating rise in world food prices is indeed due to Russia's war of aggression in Ukraine: economist Julien Vercueil gives his analysis at the IHEDN.
Julien Vercueil : « La guerre et les sanctions ont coûté à la Russie 5 % de son PIB »

Julien Vercueil holds a doctorate in economics and is a university professor and vice-president of the Institut national des langues et civilisations orientales (INALCO). After writing his thesis on the transition and opening up of the Russian economy between 1992 and 1999, he specialised in the economies of Russia and the post-Soviet states, as well as international trade. Since the outbreak of the war, he has focused in particular on the impact of Western sanctions on the Russian economy.

THE EUROPEAN UNION HAS ALREADY ADOPTED 13 "SANCTIONS PACKAGES" AGAINST RUSSIA, IN ADDITION TO THE AMERICAN AND BRITISH SANCTIONS. WHAT IS THEIR REAL IMPACT ON THE COUNTRY'S ECONOMY?

The first (financial) sanctions considerably destabilised the Russian financial system, which had already been hard hit by the outbreak of war. The capital outflows they accelerated risked emptying the reserves of the Central Bank of Russia in a matter of weeks and triggering a major financial crisis. The monetary authorities reacted swiftly and managed to contain the impact by introducing drastic exchange controls, even stricter than during the 1998 crash.

Subsequent rounds of sanctions, which had a greater impact on the real economy (exports and imports), had sectoral effects. This was the case for Western exports of sensitive or dual-use components [Industrial and military] In the words of the vast majority of Russian companies interviewed, it is still more difficult and more expensive for them to source imported components and machinery than it was before the war.

Inflation, which persists in Russia at relatively high levels two years after the start of the war, is only slightly linked to the sanctions, but it is not totally unrelated to them and represents a major imbalance in the economy. If we take an overall assessment of these two years, we can say that the war and the sanctions have cost Russia 5 to 6 % of its GDP, i.e. two years of economic growth. And they will continue to weigh on the Russian economy in the future.

IS RUSSIA MANAGING TO GET ROUND THESE SANCTIONS? A REPORT BY THE KYIV SCHOOL OF ECONOMICS ESTIMATES THAT BETWEEN JANUARY AND OCTOBER 2023, ALMOST HALF THE COMPONENTS USED IN WAR EQUIPMENT CAME FROM COUNTRIES THAT HAD ADOPTED SANCTIONS...

This is a point that had already been observed for other countries under sanctions, such as Iran. [Editor's note: regularly sanctioned since 1979].. Yes, the Russian economy is adapting and to some extent managing to get round Western sanctions. This is because it is still lucrative today for a foreign - sometimes European - entity to take the risk of being sanctioned by trading with a Russian entity, given the likelihood of being confused.

To circumvent international sanctions on foreign trade, it takes at least two: the Russian company and its foreign partner. This is why Russia's economic recovery in 2023, despite the sanctions, is not just a sign of the resilience of a Russian economy that is used to hardship, as is sometimes claimed: it is above all a sign of the ability of players in today's globalised capitalism to adapt to a rapidly tightening regulatory environment. 

RUSSIA CLAIMS THAT THESE SANCTIONS ARE HAVING A MAJOR IMPACT ON FOOD PRICES, PARTICULARLY IN THE POOREST COUNTRIES. IS THIS REALLY THE CASE?

Attributing the rise in food prices to Western sanctions is misleading, for a number of reasons. This rise is the continuation of a trend that dates back to the end of Covid. It was initially driven by the recovery in Chinese demand (particularly for maize, wheat and barley). In 2021, agricultural prices rose sharply, reaching levels not seen for ten years. Sanctions were not in place at that time.

Against this bullish backdrop, Russia's outbreak of war in Ukraine had an accelerating effect: by attacking one of the world's leading exporters of cereals and oilseeds, Russia destabilised the world market and triggered speculation on many products.

Russia has not only occupied and rendered unproductive part of Ukraine's grain-exporting territory, but has also bombed other cultivated areas from a distance, reducing Ukrainian harvests. Finally, it carried out a naval blockade of unoccupied Ukrainian export ports and destroyed storage silos, in violation of all international conventions. These abuses have reduced Ukrainian grain export volumes in 2022, keeping prices rising.

"THE RISE IN FOOD PRICES PRE-EXISTED WESTERN SANCTIONS".

Russia has also reduced its exports of nitrogen fertilisers (of which it is traditionally the leading international supplier). As a result, fertiliser prices have risen, which has had an impact on the agricultural production costs that depend on them.

From summer 2022, an agreement has been reached between the UN and Russiaunder the aegis of Turkey, guardian of the Bosphorus straits, to allow a number of Ukrainian grain vessels to leave the country. [Editor's note: since 17 July 2023, Russia has suspended its participation in this agreement].. This was enough to quickly bring international grain prices down to pre-war levels. It was therefore the naval blockade that kept them at abnormal levels.

It can therefore be said that Russia's war of aggression against Ukraine is the cause of the acceleration in the rise in world food prices. This rise pre-existed the Western sanctions. They were a response to Russia's war of aggression and did not play a significant role in the rise in prices that was observed: they have since been tightened, and yet grain prices have fallen.