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A road to ruin: Why Russia failed to counter sanctions and what awaits its key industries

The full-blown invasion of Ukraine, which Putin planned unbeknownst even to his own government, and the subsequent smothering sanctions delivered a tremendous blow to the Russian economy. Despite the many years of public officials paying lip service to the import substitution effort, the sanctions came as a shock to both the manufacturing and mining industries. Major infrastructure projects have also had to be suspended. Only the financial sector proved to be sufficiently flexible and sustainable. Six months into the war, Russian leaders still don't have a contingency plan to handle the crisis, and the economy is headed for an imminent collapse.

ALL CARDS
  • “They would have imposed sanctions nonetheless”

  • Nation's pride: MIR cards and “Russian SWIFT”

  • To China on foot: abandoned projects

  • Metallurgy: how Russia drove it into poverty and then tried to resuscitate

  • Nord Stream gas has nowhere to flow in the east

  • If outer space isn't ours, neither is the Arctic

  • Aviation: on one wing and a prayer

  • The automotive industry: a Chinese Moskvitch and all-out downsizing

  • Hit-or-miss approach and gas blackmail

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“They would have imposed sanctions nonetheless”

Western countries imposed anti-Russian sanctions of an unprecedented scale immediately after the war in Ukraine began. Meanwhile, the Kremlin argued that the pressure allegedly exerted by the US and NATO had been expected and was motivated by Russophobia and the desire to bring Russia to heel, not its attack on a neighboring country. Nevertheless, as the Russian government insisted, all the necessary precautions were already in place, and if the nation braced itself for a short while, life would be even better than before. True sovereignty would result in economic breakthroughs, and the sanctions will backfire on their authors.

Against the background of numerous economic pitfalls, the rhetoric has reached dominance in state-owned media, which are riddled with tales about the suffering endured by adversarial countries and Russia’s resilience. Russia’s “coping mechanisms” presumably include import substitution, reorientation to Asian markets, cooperation with China instead of Europe, and unlocking its domestic potential. Officials of all levels are relentless in emphasizing that Russia’s isolation has failed because most countries – by both number and population – ostensibly refrain from imposing restrictions and remain willing to maintain economic ties with Moscow. Therefore, as authorities explain, everything is in line with the plan.

“We have many advocates, including in the US and Europe, not to mention other continents and countries, and their number will undoubtedly keep growing. I’ll reiterate that even countries that so far remain American satellites are coming to realize that their political elites’ blind obedience to the suzerain hardly does anything to advance their national interests, and often directly contradicts them,” Putin said on July 7 in a meeting with the heads of factions.

However, if the plan was indeed to achieve such a high level of opposition to the West and replace trade partners, we must admit that the preparation for this process was a complete failure.

Nation's pride: MIR cards and “Russian SWIFT”

The most frequently cited example of efficient preparation is the financial sector, which was considerably reinforced after the Crimean sanctions. Launched in 2014, the MIR national payment system made the withdrawal of Visa and MasterCard relatively painless. Most users found the blocking of ApplePay and GooglePay more noticeable. To compensate for the possible disconnection from the SWIFT international banking system, Russia has been developing SPFS – the System for the Transfer of Financial Messages.

Although SPFS is not a full-fledged analog of SWIFT, especially when it comes to international transactions, and although MIR cards are only accepted domestically and in a handful of other countries, the development of these two systems helped prevent a financial collapse in the early days of the war. Back in 2017, Elvira Nabiullina, the head of the Bank of Russia, reported that Russia was fully secured against financial sanctions. Five years later, it became clear that she did put her money where her mouth was.

There is no telling if anyone in the Kremlin believed in the possibility of disconnection from SWIFT, but “liberal” figures in the financial sector (primarily Nabiullina herself and the head of Sberbank Herman Gref, who carefully avoid expressing any support for the war) took the job very seriously. More patriotically inclined agencies appear to have dismissed such meticulous preparation as superfluous.

To China on foot: abandoned projects

In most other areas, Russia pursued no critical objectives, delayed funding, postponed key projects, imposed additional taxes on vulnerable industries, and was driven by sheer spite rather than national interests.

It goes without saying that preparing from A to Z would have been impossible. Thus, the Armata tank project may have failed either due to negligence and embezzlement or for technical reasons, while developing microelectronics from scratch or substituting all foreign software is technically impossible within eight years. However, many aspects leave little room for speculation.

Before the war in Ukraine, Europe was Russia's primary trade partner. According to FinExpertiza, the region accounted for 36% of Russia's trade volume in 2021, which is twice as much as China. Nevertheless, its main eastbound cargo routes – the Trans-Siberian and the Baikal-Amur Mainline (BAM) – turned into bottlenecks in the same year.

In August 2017, Putin directed to allocate $2.5 billion for the modernization of the Eastern Polygon (which includes both routes). As he admitted four years later, tardiness and faulty market forecasting had deprived the economy of coal revenue:

“If truth be told, we weren’t fast enough in expanding the throughput capacity of our railways. ... We failed to prepare the infrastructure in due time, and consequently, cannot fully benefit from the favorable conditions in the global coal market and increase exports the way we could.”

A perfect illustration of the desire to play it safe and the relaxed timeline is the engagement of soldiers, inmates, and college students in the BAM optimization effort of 2021. In other words, the construction project focused on cutting losses to a minimum and fought for each ten million dollars. The situation looked so hopeless that the Russian business community even entertained the possibility of building a private railroad for coal exports. Albert Avdolyan's A-Property presented a project to that effect in July 2021, suggesting a route from the Elga Coal Mine to the Sea of Okhotsk.

The BAM construction project focused on cutting losses to a minimum and fought for each ten million dollars

Another abandoned Siberian initiative is the railway Elegest – Kyzyl – Kuragino, which was to connect South-East Asia with the Northern Sea Route through Mongolia and China. The project was first mentioned in 2017 and won Vladimir Putin's support in February 2018. The cargo volume was expected to reach 15 million tonnes a year. In April 2019, the Russian Railways signed a contract for the construction of the line, but two years later, the project was postponed for at least five years.

In 2022, as the European sanctions began coming into effect, the load on eastern routes increased, and the already overloaded Trans-Siberian Railway and BAM unsurprisingly failed. As early as in April, Oleg Tokarev, the minister of the coal industry in the Kemerovo Region, warned that the coal shipping situation had become critical. He pointed out that local players would fail to fulfill obligations under foreign contracts, would end up fined, and lose clients. In June, the governor of the region Sergei Tsivilev called on the Energy Task Force of the City Council to prioritize coal, but his suggestion garnered little support because that would have meant blocking the shipments of almost 700 enterprises in the European part of Russia. As the government admitted late in August, Russian coal manufacturers found themselves on the verge of bankruptcy.

In the meantime, the Ministry of Transport hastily presented projects aimed at expanding the throughput capacity in the east of the country in July. They envisioned seven ambitious construction projects with a total value of $30.8 billion. Apart from resuming the Elegest – Kyzyl – Kuragino railroad project, the ministry suggested building a 226-kilometer railroad through Mongolia to the Chinese border and a 56-kilometer section Lesozavodsk – Hulin (China), which had been conceived back in 2005. In 2017, the delays were explained by Russia’s reluctance to finance the project.

Other plans include setting up three border crossing points and funding a 270-kilometer transit line in Kazakhstan, from Ayagoz to Bakhty on the Chinese border. China and Kazakhstan started negotiating the route a long time ago but were deadlocked over insufficient funding. Sergei Grishunin, the Rating Service Managing Director at the National Rating Agency, pointed out that the projects were complex and would take years to complete. Border crossings could be built in two years, while the rest will take way longer. In other words, unless the sanctions are lifted, the Russian economy will have to put up with the status quo for many years.

Had Russia been indeed bracing itself for pressure from the West, all of these initiatives would have had to be prioritized. Notably, the success of their implementation did not depend on the foreign partners: thus, Moscow could have simply allocated the needed amount for the railroad in Kazakhstan and could avail itself of the route by now. In reality, though, these projects remained on the margins of attention, and support for them was mostly lip service instead of real investments or active practical steps.

Metallurgy: how Russia drove it into poverty and then tried to resuscitate

The transport infrastructure bottlenecks delivered a blow to metallurgy as well, but in this case, the situation is almost ridiculous. Last May, First Deputy Prime Minister Andrei Belousov announced that metallurgic companies have “duped” the federal budget out of $1.6 billion because of the global metal price growth and that the money would have to be repaid. Vladimir Lisin, head of NLMK, warned the state against fixing what wasn’t broken and compared the desire to rip off successful businesses to the “Gosplan syndrome” (referring to the Soviet planned economy). However, all protestations were in vain, as new export tariffs came into effect on August 2021.

Meanwhile, the government started considering options of levying additional revenue from the industry permanently. Late in the summer of 2021, the Ministry of Finance suggested upping the tariffs by introducing a new excise duty and establishing a dependency between the tax rate and the dividend payout ratio. The latter regulation would allow for retrospective taxation. The expected additional revenue was estimated at $2.6 billion. The Russian Steel Association argued that the policy would cause investment to shrink and eventually decrease the industry’s production capacity.

The government countered that the industry had made good money as a result of global steel price growth and would do well to share. In December, the head of the Russian Anti-Monopoly Service Maxim Shaskolsy threatened enterprises with giant fines, and in February 2022, even before the war, the Service finally had grounds to impose them. In a nutshell, the government tried to make up for budgetary issues by overtaxing a booming industry, expecting the business community to handle investment and keep going no matter what.

By the end of May 2022, steel manufacturers had begun running at a loss. In July, the Vice President of the Russian Steel Association Andrei Leonov informed that the production load at steelworks had dropped by 20%-50%. Early in August, even the traditionally optimistic Russian Ministry of Industry and Trade admitted that rebuilding Russian metallurgy back to its 2019-2020 levels would take at least eight years. One of the ways to rein in the shrinking production was to include metal products in the public reserve, which meant offering government contracts as a relief measure.

Meanwhile, the 2030 metallurgy development plan confirms the critical dependence of Russian enterprises on Western imports. Almost all technologies were purchased from “non-friendly” countries, and domestically manufactured equipment falls behind global standards. Even with sufficient financing, ensuring its compliance would take a decade or so. The enterprises in question had their profits snatched from them even before the war, not even for import replacement but for social allowances, so to speak.

Almost all technologies were purchased from “non-friendly” countries

Considering the imminent confrontation with Europe, the current situation was totally predictable. Most importantly, redirecting metal imports to Turkey, China, the Middle East, South-East Asia, Africa, and Latin America drives down profits. The importers, who seek to develop domestic production, have protective tariffs in place. In May, industry players complained about having to sell their products below cost, with discounts of up to 30%.

Railroad rates further complicate the exports. Since major ocean shippers refused to cooperate with Russian manufacturers, the opportunities for steel product transportation by sea via Azov and Black sea ports have been limited. However, taking the goods to the Russian Far East is also a challenge because the Eastern railway polygon is also struggling. The Russian Steel Association is asking for railroad rate discounts for its members to guarantee stable export volumes, but that would mean infringing upon other industries because both the BAM and the Trans-Siberian railroads are operating on the brink of their capacity.

One can only conclude that steel manufacturers’ problems have caught the Kremlin by surprise. It had not taken any steps to mitigate the blow. On the contrary, before the war, it treated the industry as a “milk cow” for years to come, most likely expecting Europe to keep purchasing Russian steel products no matter what.

Nord Stream gas has nowhere to flow in the east

The gas industry, however, did the best job of ignoring the upcoming sanctions. Few projects enjoyed so much public attention and running commentary from public officials as the Nord Stream 2 pipeline. To supply hydrocarbons to the future “non-friendly countries”, the Kremlin was willing to invest a fortune and resort to any tricks, up to suspending its other projects.

Gazprom initially purchased the pipe-laying vessel Academic Chersky, which was used in the final stage of pipeline construction, for its offshore projects on Sakhalin in the Russian Far East. Auxiliary vessels Ivan Sidorenko and Ostap Sheremeta were built for similar purposes. Primarily, they were intended for the Yuzhno-Kirinskoye Oil and Gas field, which was key to the start of shipments to China via the Far Eastern pipeline known under the informal name Power of Siberia 3. It’s with this oil field in mind that Gazprom and Chinese oil and gas corporation CNPC signed a 25-year contract last February for the supply of 10 billion cubic meters of gas a year.

Beijing insisted on shipping through the Russian Far East and prioritized the pipeline among other Russian projects. The memorandum about its construction was signed back in 2015, but the Russian side was dragging it out. In other words, Russian suspended a Far Eastern gas project that was valuable for the strategic partner in a heartbeat, looking to ship more gas to Europe even without guarantees of future demand. Had Russia been indeed preparing for the sanctions war, it should have made the opposite decision.

Furthermore, soon after annexing Crimea in 2014, Russia undertook to build the Power of Siberia pipeline to China with a maximum throughput capacity of 38 billion cubic meters of gas a year. The contract was interpreted as a milestone turn to the East. Over the following eight years, Russia designed and built the Turkish Stream pipeline with a capacity of 31.5 billion cubic meters and Nord Stream 2 (55 billion cubic meters a year). The project of a second pipeline to China never made it past public statements and vague plans. In January 2022, the Mongolian Deputy Prime Minister Sainbuyan Amarsaikhan reported that the parties were about to get down to detailed project planning and mapping. The official estimated the effort to take around eighteen months before construction works could begin.

Moreover, to further gas shipments to Europe, Gazprom and RusGazDobycha launched the construction of a complex for the processing of ethane-containing gas (CPECG) in the community of Ust-Luga outside Saint Petersburg (where Nord Stream 2 begins) in May 2021. The idea was to safeguard the Russian monopoly against the possible decrease of pipeline gas exports by selling liquefied natural gas (LNG).

Both the submarine gas pipeline to Germany and the gas processing facility required additional domestic pipelines. After the war broke out, Gazprom announced its intentions to use the extra capacities to supply the Leningrad Region. However, its efforts were nothing more than an attempt to keep up appearances. The region couldn’t possibly use so much gas, lacking both consumers and applications. The amount was so outrageously excessive that the monopolist had to burn the leftover gas when Nord Stream shipments plummeted. The fact was impossible to conceal for a very simple reason: the flame this tall was visible not only from space but also from neighboring Finland with the naked eye.

Gazprom chose to burn excess gas instead of shipping it to Europe

The Power of Siberia is expected to start shipping only 15 billion cubic meters by the end of 2022, but further expansion may present a challenge. As surveys have shown, the exploitation of the Chayanda Field featured violations, so the field may be unable to produce the volume of gas required for the target export growth. The same is true about the Kovykta gas condensate field, which will presumably be connected to the Power of Siberia by the end of the year. To address the issues, Gazprom drastically changed the route of the Power of Siberia 2 back in May 2020, making plans for a conjunction with the first pipeline. Respective construction works are yet to start.

In light of the above, replacing European consumers with Asian ones is technically impossible at this state of gas infrastructure development, and none of the plans we can glean from Russia's earlier efforts made allowances for this turn of events. Meanwhile, a lot could have been done in eight years.

If outer space isn't ours, neither is the Arctic

Further proof of Russia’s failure to prepare for a conflict with the West is another gas-related factor that Russia had the power and means to eliminate, had it been willing to place it on the agenda. The matter in question is Russia’s LNG projects in the Arctic.

The first blow was delivered by poor import substitution results. Back in September 2021, the head of Novatek Leonid Mikhelson slammed the first line of LNG processing at Yamal SPG, which had been based on the Russian technology Arctic Cascade. He underlined that none of the contractors had delivered in full and that they had a long way to go before reaching high product quality. In June 2022, Mikhelson shared that the industry needed hundreds of millions of dollars on research and development alone to localize the equipment. According to him, the Western oil and gas industry took decades to build and enjoyed immense investments, so repeating its success without public funding is impossible. In August, it became clear that his appeal had fallen on deaf ears. In response to the request of the Ministry of Industry and Trade to allocate $560 million for the industry before 2030, the government offered less than $5 million, while setting a tighter timeline for equipment localization: the 40% threshold had to be reached by the end of 2022 instead of 2024.

Such apparently unrealistic plans may have been introduced due to the risk of a second blow on LNG exports because there is no short-term solution to that one. Supplying Asian markets from the Yamal Peninsula is more efficient through the Northern Sea Route, but stable winter navigation requires up-to-date satellite images of the sea ice. Almost all commercial satellite providers are foreign entities that have refused to work with Russia, as Evgeny Ambrosov, the deputy chairman of Novatek, revealed. Last spring and summer the company had to use the most recent open-source images, but they are scarce and offer poor coverage of critically important areas.

As the executive explained, addressing the challenge is only possible with a group of Russian Earth remote sensing probes, which offer optic, infrared, and radar images of desired resolution. There is no telling when such probes will begin operation, but as many as three are currently in the works. In June, the Minister of Natural Resources Alexander Kozlov submitted a request of $700 million to the government for the completion of the necessary seven satellites by 2029-2030. Before that, as the ministry pointed out, all-year-round navigation will not be possible.

Under the present circumstances, upping LNG production output will not result in export growth because the product will be impossible to ship. Therefore, the need for domestic equipment will lose its relevance. Once again, the Russian space orbit has all the means to manufacture the satellites and place them in orbit for control over the Northern Sea Route in the last eight years. Western sanctions had no bearing on this process. However, in the summer of 2022, Russia came to realize that its conflict with the West also blocked its access to the Arctic in a sense.

Shipping Russian LNG without foreign satellite images is simply impossible

Shortly before Ambrosov’s statement, Dmitry Rogozin was dismissed from his position of the head of Roscosmos without any explanations. Despite his dog-and-pony patriotism, he has not been offered a new job; the former head of a state corporation has gone off the radar. Such abrupt resignations of superior public officials do not happen often and could indicate serious dissatisfaction among the nation's leaders. Considering that his removal did not coincide with any other failures, the Northern Sea Route situation appears to be its logical cause.

Aviation: on one wing and a prayer

The Kremlin treated rebuilding Russian aviation and making it to the elite circle of civil aircraft manufacturers as a matter of prestige for years. The painful international failure of the Superjet project was a nasty wake-up call, revealing that maintenance is valued on par with the design quality. The new Russian flagship to conquer the world was the MC-21. Its completion deadline was postponed multiple times for varied reasons, including sanctions, but responsible officials steadily reported import substitution successes and the development of competitive parts.

The war in Ukraine and the response of foreign manufacturers, primarily Boeing and Airbus, forced an unpleasant realization on Russia: the manufacturers will no longer service the fleet of Russian airlines. Repairing them domestically without original parts is also impossible with the only remaining options being cannibalization (stripping some of the planes for parts) and gradual replacement with domestically manufactured Superjet and МС-21.

The latter two, however, are yet to be certified. The SSJ version currently in use is critically dependent on foreign supplies and maintenance (its engines are repaired by the French company Safran, previously known as Snecma), so manufacturing new planes of this type is no longer an option. Meanwhile, Superjet New – “born and bred” in Russia – is still in the pipeline, and no one can guarantee that its mass production will start on schedule and without a hitch. As for the MC-21, Rostech expects to submit the first series of the plane with Russian engines to customers in 2024. That is, not only are they trying to design a state-of-the-art plane with a new engine unit from scratch in 18 months, but they also seek to launch its mass production. This is unprecedented in today's Russia (or anywhere else in the world, for that matter), and the attempt to set up Superjet production and maintenance can be rightly considered a failure.

If we take a step outside populist rhetoric, such difficulties were to be expected. Designing aircraft is a lengthy and complicated process without any possible guarantee of success. For instance, in 2020 Mitsubishi dropped the development of the Mitsubishi SpaceJet, Japan's first civilian plane in many years, after rescheduling its release multiple times. The decision was motivated by persistent technological issues and insufficient funding.

By contrast, Russia was well-positioned to mitigate the blow on its airlines, for instance by resorting to domestic planes Tu-214 and Il-96. Russian manufacturers could deliver such liners without any foreign contribution if such an order was placed. The aircraft are modern enough (Tu-214 is “younger” than Airbus 320), and their only significant drawback is the costly maintenance, which could have been remedied by subsidizing airlines. However, even Red Wings, which was the last carrier to use Tu-214, abandoned the model in 2018.

With the current capabilities, the estimated production of both Tu-214 and Il-96 is limited to ten planes a year. Nevertheless, had the programs been promptly resumed in 2014, which required only funding, Russia would have added 200 new, “homemade” planes to its civilian aircraft pool (currently just under 1,000 planes) by 2024. Had the government invested in new enterprises, these numbers would have grown.

Yet neither of the projects received any funding until after the sanctions war began. Russia’s Minister of Transport Vitaly Savelyev announced that Tu-214 could even become the default aircraft for Aeroflot. The decision means that no one paid heed to the possible risks of depending on foreign aviation over the years, with Tu-214 and Il-96 manufacturers building an average of one plane a year. The industry's main and only objective was to conquer the global market instead of rescuing its own.

The automotive industry: a Chinese Moskvitch and all-out downsizing

The Russian automotive industry has suffered the most from the sanctions. As early as in spring, the country only had a few car manufacturers left. Western partners’ refusal to supply parts has paralyzed production, and the future of many enterprises is still uncertain. The only silver lining was the questionable success of AvtoVAZ, which streamlined the production of several outdated models without an automatic gearbox or an ABS in half a year.

The CEO of AvtoVAZ Maxim Sokolov praised the production of Nivas and the restoration of airbags in the Lada Granta as a “true victory”, but the prospects of moving on to new models remain vague. In its draft automotive industry development strategy, the Ministry of Industry and Trade characterized current domestic products as lagging behind their Western analogs. R&D spending before 2035 was estimated at $43 billion, and demand and export support investment was set at around $9.6 billion.

The restoration of airbags in the Lada Granta was lauded as a “true victory”

The current discomfort stems from the fact that Russia developed its automotive industry primarily through collaborations with Western manufacturers. Thus, in June 2014, after the annexation of Crimea, the Renault-Nissan alliance from the countries that would be branded as “non-friendly” in 2022 became the owner of AvtoVAZ (only to sell its Russian assets for peanuts eight years later). Over the last few years, no one set the objective of decreasing the critical dependency, even though the solution was at their fingertips: partnering with Chinese players. Only Haval could squeeze into the Russian market as a local manufacturer, and its plant in the Tula Region may well be the only such facility to continue full-scale operation.

Preferences for Chinese manufacturers – more financing, essentially – could have considerably dampened the current crisis, but Russia took no steps in this direction. As a result, the Moscow Mayor's Office, which laid its hands on the Renault plant in the capital, is hastily looking for Chinese partners to launch the production of Moskvitch cars. Without any doubt, such partners will be able to negotiate the most favorable conditions possible because Russia has run out of options. Today Russia will have to sweat even for this kind of partnership. Thus, the Chinese manufacturer Chery has decided against making cars at UAZ facilities due to sanctions. The localization project with Sollers Auto has been suspended indefinitely, and the company is on the lookout for new partners.

Close cooperation with China could have mitigated the Western exodus, but Russia took no steps in that direction

The dead end was most likely the reason for several mind-blowing PR stunts. For instance, contrary to Moscow mayor Sergey Sobyanin’s announcement, making original electric cars at the Moskvitch plant is hardly possible in the short term. Designing such a vehicle from scratch is a time-consuming endeavor, and Russia’s infrastructure for electric cars is poorly developed. Despite the inspirational potential of Sobyanin's statement, electric cars can hardly remedy the crisis.

Almaz-Antey, Russia’s aerospace and defense corporation, went even further, demonstrating the E-Neva, an electric crossover running on hydrogen, less than a year into the project. The Central Scientific Research Automobile and Automotive Engines Institute (NAMI) presented another prototype of a hydrogen-powered car. Catchy media headlines can create the illusion of promise, but in reality, an innovative prototype is separated from commercial release by years, if not decades, while car manufacturers are laying off workers as we speak.

Hit-or-miss approach and gas blackmail

The list of Russia’s problems goes on and on, including the fact that the National Wealth Fund stores half of its assets abroad, the hasty creation of the parallel import system (in particular, the Bank of Russia has to reinvent the system of combating gray cashing-in import schemes), and reliance on Western telecom equipment suppliers up until recently, despite Beijing welcoming the prospect of a complete migration to Chinese products and Huawei technologies rivaling if not outperforming their Western analogs.

Yet none of the above-mentioned circumstances suggest that Russia was either gunning for war or fueling its confrontation with the West. By contrast, all of them appear to be guided by economic considerations, and each required only attention and funding. Building a railroad to China does not take breakthroughs or unique technologies. Had Russia at least begun working in that direction in due time, it would have had more room for maneuver in its exacerbated conflict with Europe and the US.

The Russian government has offered no explanation for having ignored the problems, which leads us to the only possible conclusion that the confrontation with the West has gone far beyond the Kremlin’s expectations. Essentially, Russia only braced itself for the financial blow, and the system held. Apparently, the plan was to establish full control over Ukraine before long and gain the upper hand, forcing the West to lift sanctions.

Such prerequisites make one challenge the theories of political scientists, such as Ekaterina Schulmann, who argue that the true motivation behind Putin's war was the desire to trigger sanctions and isolate Russia from Western influence for years. Anticipating a long period of pressure, the Kremlin would have certainly made an effort to at least manage the nation's dissatisfaction with economic problems. Either Moscow was not prepared for such a reaction, which means that Russia's severance from the West was never their goal, or the authors of such a convoluted social plan turned out to be incapable of thinking one step ahead.

The failure of Russia’s military offensive coincided with the suspension of a new sanctions package. However, any talk of stabilization would be premature as some restrictions, primarily the EU’s oil embargo, are yet to come into effect. The West is also working to ensure more thorough enforcement of the measures already in place to eliminate the remaining loopholes.

Although the Kremlin’s action plan for the near future – not until 2030 or 2050 – has been concealed from the public, attempts of turning a blind eye to reality are apparent. Oil and gas revenue, which temporarily increased in the first few months of the war, are presented as proof of the economy’s stability, despite them dropping to a minimum since June 2021 by August. Decreasing inflation against the backdrop of shrinking demand, which indicates a deflation spiral, is presented as going back to normal.

The temporary growth of oil and gas revenue is presented as proof of the economy’s stability

Meanwhile, Putin speculates about budget revenue growth as said revenue is dropping, the Ministry of Industry and Trade daydreams about making 1,000 places that aren't even certified yet before 2030, and the Ministry of Energy is banking on a bright future for Russian coal in Asian markets. Sergey Mochalnikov, the deputy head of the ministry, reassures that the only remaining obstacle is logistics, conveniently omitting that addressing the issue will take years.

At the end of the day, the only strategy that would accommodate the current actions undertaken by the Russian government is the attempt to lift sanctions through gas blackmail. For now, it would appear that the majority does not believe in the significance of losing gas profits; however, even if Russia was to keep them, they would do little to prevent the imminent collapse if the current pressure persists. The budget spending situation is consistent with this interpretation: thus, the government suggests achieving a game-changing technological breakthrough on short notice despite unprecedented research spending cuts and the refusal to fund innovations.

Early in September, two publications highlighted the dead end where Russian officials have found themselves: both the “non-friendly” Bloomberg and the loyalist Vedomosti. According to the American outlet, the government presented a “secret report” with a pessimistic prognosis: the economy will not bounce back to its prewar level until 2030 or later, rock bottom is nowhere in sight, and the downward spiral cannot be stopped. The second piece argues that the government and the Bank of Russia are hesitating between two paths: upping public spending or encouraging private initiatives. Both options appear highly challenging because the former requires an ambitious investment that exceeds current resources and the latter requires a drastic improvement of the investment climate, which was an unattainable objective even before the war. At present, the conflict with the West and the rapid “Sovietization” of society make offering any guarantees to businesses even harder.

The Russian government has found itself at an economic impasse. Bouncing back to the prewar level will not be possible until 2030

In the absence of a solution, the Kremlin is doing what it does best: appointing responsible officials. Thus, to promote the Minister of Industry and Trade Denis Manturov, who oversees the import substitution effort, to deputy prime minister, the government hastily brought State Duma deputies back from their vacation in July. This weird episode is a perfect illustration of Russia’s mainstream approach to state governance: the failure of unrealistic development plans is explained by the negligence of responsible officials, and new appointees build more castles in the air.

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