Report: Sanctions Devastating Russian Economy

For months, Russian President Vladimir Putin has insisted that his country’s economy — facing sanctions, hundreds of global companies pulling out and a shortage of manufacturing materials — is doing just fine. 

But according to economists — and everyday Russians — that’s not the full story. 

Stanislav, whom The Record only identifies by first name to protect his safety, owns an online marketing business in St. Petersburg, Russia. Back in March, he spoke with the Click Here podcast about Russia’s invasion of Ukraine and the ensuing sanctions, which were already eating away at his bottom line.

Today, those sanctions are hitting the small business owner even harder. 

“It’s reducing 20% of my revenues,” he said in July, explaining that his foreign customers can’t pay for his services. “So I'm trying to find a solution for my family.”

A recent report from Yale economists argued that Stanislav’s experience is now common in Russia, despite defiant rhetoric from Putin arguing otherwise. For months, the Russian president has styled himself as the world’s energy czar. He’s bragged that Europe needs Russia’s gas far more than Russia needs the money from selling it. 

Jeffrey Sonnenfeld of the Yale School of Management and Steven Tian of the Yale Chief Executive Leadership Institute instead argue that Russia needs to export energy to save its spiraling economy.

Contrary to Putin’s boastful claims, Sonnenfeld and Tian say the country is experiencing massive supply shortages and domestic production has stalled. 

“The weapons that the Ukrainians are recovering from the battlefield, you're finding semiconductor parts in these weapons that were salvaged from radios, from refrigerators,” Tian said. “This is the level of desperation that Putin is having to sink to because he can't get the parts and equipment that he so desperately needs.”

According to Sonnenfeld, hundreds of thousands of engineers and tech workers have also left the country. That’s left a deficit in skilled workers that Russia needs to succeed in the long-term.

“Russia brings nothing to the world market other than energy, grain and cyber terrorism,” he said. “That's it.”

Sonnenfeld said that the actual state of the Russian economy, in contrast to the state’s cheery self-reported statistics, is similar to South Africa’s wheezing economy in the 1980s, when it staggered under the weight of global sanctions due to apartheid. 

The Click Here podcast spoke with Sonnenfeld and Tian to learn more about what the future might hold for Russians like Stanislav. The interview has been edited and condensed for clarity. 

CLICK HERE: Can you give us an encapsulation of how the sanctions against Russia are damaging its economy?

JEFFREY SONNENFELD: In every sector of the economy, we're seeing declines from 20% all the way up to 60, 70% declines. You can see that unemployment is soaring. Twelve-hundred firms have pulled out of Russia already. Multinational firms have taken away as much as 40% of the GDP, maybe a little bit more. They also have taken away a lot of employment. Russia acknowledges that that was at minimum 12% of their workforce.

CH: What surprised you most about your research into the Russian economy?

JS: What was most surprising is how Putin suppressed any of the bad news. The standard national income statistics that all nations have used at least since the Second World War — including Russia over the last 30 years under [former President Boris] Yeltsin and, believe it or not, even under Putin in the last 20 years — they've built up credibility in their numbers. As the oil economy expert Daniel Yergin commented recently, they've destroyed 20 years of their own statistical credibility and trust in the last few months. 

CH: Can you talk a little bit about the unorthodox ways that you gathered this information?

JS: We just go to the other side to get the data. In a global economy, for every buyer there's a seller; every seller, there's a buyer. If Russia's not going to put out the true information, it's still available. 

STEVEN TIAN: We’re looking at data from the ports industry, we’re looking at proprietary data from corporations and financial institutions, and we’re able to draw across so many different data sources and piece together a really holistic picture of what's going on in the Russian economy.

CH: So instead of looking at the big dots, you're looking at all the little dots.

ST: That's right. That's the same reason why we don't just boil it all down to a simple GDP forecast as some others, such as the IMF [International Monetary Fund], without explaining any of it. What we do is we try to give you the entire landscape of what's going on in the Russian economy at every single level. And no matter how you slice and dice it, the same picture comes out, which is that the Russian economy is really, really, really being devastated. 

CH: Can you give us an example of how the economy is being devastated?

ST: These are reports coming out of Russia itself about the automotive industry. It's not a secret that cannibalization of parts is taking place. Russia has been open about suspending safety regulations when it comes to the production of automobiles. The reason is they don't have enough airbags. They don't have enough safety brakes. They're now making cars without airbags and safety brakes. I don’t know about you, but I wouldn't want to drive a car without airbags and safety brakes.

You can also look at some of the weapons Russians are using on the battlefield. The Ukranians are recovering weapons with semiconductor parts that were salvaged from radios, refrigerators. This is the level of desperation that Putin is having to sink to because he can't get the parts and equipment that he desperately needs.

CH: One of the things everybody's been talking about is how these sanctions are unprecedented. And what I found really interesting about some of the various things you've talked about is there actually are some comparisons like the apartheid sanctions.

JS: Those businesses pulling out had symbolic as well as substantive meaning so that the Afrikaners could no longer bury their heads in the sand, the way many average Russians are. They could now see that the rest of the world is seeing them as a rogue nation. What's going on here is sort of a game of chicken, a game of who can hold out the longest. 

CH: What's the one thing you're keeping an eye on?

ST: It's hard to boil it down to any one thing, because ultimately this is not a short-term story. No economic pressure campaign works overnight. That's never happened throughout history. Rather, the thrust of economic pressure is to structurally degrade and hollow out Russian civil society by eroding its economic capabilities over time, and that's happening at every single level.

JS: What's going on here is sort of a game of chicken. And Putin's desire is to split the West. So what I look to is to make sure that unity is reaffirmed in the West. And we just saw this past week that the EU [European Union] came together for a 15 percent reduction in gas use. The fact that they came together is very important and that continued unity is what I look to see. And that's what will win out I think, in this waiting game.

Sean Powers and Will Jarvis contributed reporting to this story.