No financial battle plan survives first contact with enemy economies. That is clear from western sanctions on Russia in the wake of its invasion of Ukraine. Russia this week escalated the arm’s length conflict by threatening to keep Europe’s gas switched off until it lifts restrictions.
Russia’s latest broadside reflects both the strengths and weaknesses of its position.
Sanctions are biting less than western politicians hoped, judging from VTB. Russia’s second-largest bank said it had returned to profit in July after record losses in the first half. Its shares, and those of larger rival Sberbank, are at six-month highs.
Many pundits predicted a banking crisis. It has not materialised. The rouble is near five-year peaks. Inflation is reportedly falling.
The caveat is that Russian financial data are suspect. A ban on ordinary financial reporting prevents normal analysis. Russian propaganda downplays the impact of sanctions, which evidently have the Kremlin rattled.
However, Liam Peach at Capital Economics, a UK consultancy, says data from independent private providers are consistent with official figures. A GDP contraction of 12 per cent at the onset of war was first revised to a 7 per cent fall. Peach now thinks Russia’s economy might be 4 per cent smaller this year.
Sanction exemptions for energy have helped hugely. So has enthusiastic purchasing by the likes of India. Lower European and US imports are buoying Russia to a record trade surplus this year.
Liquidity support propped banks up through initial shocks. But these were hefty. Dmitry Tulin, the central bank’s deputy chair, estimated system-wide losses of Rbs1.5tn ($25bn) for the first half of the year, or 12 per cent of total bank capital. Total loans outstanding fell 9 per cent between April and July.
Russia will now be hampered by its lack of access to high-tech capital goods of the sort produced in Germany. This is likely to disrupt energy extraction as the war of economic attrition grinds on.
Russia has shown it can bear the pain of western sanctions. Western Europe must endure reprisals as robustly, or concede a historic defeat.