Jun 28, 2022 - Economy & Business

The West’s economic war with Russia is at a stalemate

Illustrations of two oil barrels facing off on a chessboard
Illustration: Sarah Grillo/Axios

The sense of shock-and-awe surrounding heavy sanctions on Russia early in the war has been overtaken by the reality that the economic battle — like the military assault — will be a slog.

The big picture: "Right now neither side is winning the economic war, if the goal of the economic war in the short-and-medium term is to induce political concessions from your adversary," Chris Miller, a professor at Tufts University's Fletcher School of Law and Diplomacy, tells Axios. "Neither side is getting ready to offer concessions. So in that sense, it's a stalemate."

Driving the news: Group of Seven leaders this weekend prepared a plan to cap the price of Russian oil, another effort to weaken the keystone of Russia's financial durability: oil money.

Why it matters: The G7's continued escalation is a tacit admission that efforts to isolate Russia economically have been insufficient to cut the flow of cash helping to finance President Vladimir Putin's war.

  • Despite some efforts to curtail purchases of Russian energy exports, soaring oil and gas prices — themselves, a reaction to the invasion — have poured funds into Russian state coffers.
  • Russia's current account surplus — the broadest measure of a country's international trade — tripled to more than $110 billion so far this year, putting it on track for record.
  • The income boom has propped up the country's currency and stabilized inflation. That, in turn, allowed the central bank to scale back the emergency interest rate hikes it implemented at the beginning of the war.

That's doesn't mean the Russian economy is strong. Economists expect it to shrink by a massive 10% this year, largely driven by a collapse in consumer spending.

  • In other words, continued oil sales are helping Russia pay for the war. But the Russian people's standard of living is falling fast.

But, but, but: Russians aren't the only ones feeling the impact of the economic war. Ukraine's main backers in Europe and the U.S. now face soaring energy and food prices — linked to fallout from the war and more specifically, the West's sanctions. That's soured the public mood and eroded support for leaders.

  • In Britain, Prime Minister Boris Johnson — a hawk on Russia — is in a perilous political position after being weakened by multiple scandals and a cost-of-living crisis.
  • The government of Germany's new Chancellor Olaf Scholz has begun preparing the German population for rationing of natural gas — Russia is its top supplier — amid the risk supplies run out this winter. Its approval ratings are plunging.
  • In the U.S., President Joe Biden is contending with record low consumer sentiment — the mirror image of record-high gasoline prices and a stock market meltdown — which could spell disaster for the Democrats in the coming mid-term elections. Biden's approval rating is at a record low.

The big question: Can the big democracies of the world — already riven with internal divisions — create a unified front to push back on Putin regardless of which party holds power?

  • It seems fair to consider it an open question. If only because the U.S. intelligence community found that Russia intervened in the 2016 U.S. election in order to help former President Donald Trump win, and he remains the presumed front-runner for the 2024 GOP nomination.
  • The leader of France's far right party, Marine Le Pen, has not only praised Putin, but received financing from Russian-linked banks. Italy's right — which just performed well in local elections — has also taken heat for an odd coziness with Moscow.
  • But even if there was no Russian influence at play, a politician might simply decide that anything to cut the cost of oil, even coming to an accord with Russia at the expense of Ukraine, would make political sense.

The bottom line: Analysts, like Gerard DiPippo at the Center for Strategic & International Studies, say that if the allies can maintain their support for Ukraine in the face of inflation, they clearly have the upper hand.

  • "In the long run, Russia's position is dire," DiPippo tells Axios. In the short-to-medium term, he adds, Putin "might have the ability to fracture the alliance, particularly if prices go higher. But in general, Russia is in a slow bleed mode."
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