How Biden’s sanctions are funding Putin’s war against Ukraine

On February 24, 2022, the first day in the new chapter of the Putin’s aggression against Ukraine, President Biden pledged to destroy the aggressor with his package of ‘severe’ sanctions:

Today, I’m authorizing additional strong sanctions and new limitations on what can be exported to Russia. This is going to impose severe costs on the Russian economy, both immediately and over time. We have purposefully designed these sanctions to maximize the long-term impact on Russia and to minimize the impact on the United States and our Allies…Twenty-seven members of the European Union, including France, Germany, Italy — as well as the United Kingdom, Canada, Japan, Australia, New Zealand, and many others — to amplify the joint impact of our response. I just spoke with the G7 leaders this morning, and we are in full and total agreement.  We will limit Russia’s ability to do business in Dollars, Euros, Pounds, and Yen to be part of the global economy.  We will limit their ability to do that.  We are going to stunt the ability to finance and grow the Russian military… We’ve already seen the impact of our actions on Russia’s currency, the Ruble, which early today hit its weakest level ever — ever in history…

When Biden was asked whether he was confident that the sanctions would be as devastating as Russian missiles, he responded with: “Yes…. He [Putin] is going to begin to see the effect of the sanctions… They are severe sanctions.”

Finally, President Biden invited participants of the press conference and the whole world to check the results of his actions: “Let’s have a conversation in another month or so to see if they’re working…”

The total number of U.S. sanctions against Russia since February 22, 2022, has reached an impressive 2,201. The European Union also imposed 10 packages of sanctions against Russia, including nine packages during 2022. The total number of sanctions imposed by Western countries since February 2022 reached 11,575, making Russia the world record holder.

Now, over a year after Biden’s speech, the results of the his sanctions policy are in.

In February-March 2022 the White House and many economic organizations and experts were predicting a sharp decline in the real size of the Russian economy as a result of the Biden sanctions. The European Bank for Reconstruction and Development (EBRD) projected a 10% shrinkage in the Russian economy, which would constitute the country’s deepest recession for almost 30 years. Goldman Sachs forecasted a 10% contraction, Capital Economics projected a 12% contraction, while the Institute for International Finance predicted an even more damaging 15% plunge.

All those forecasts did not materialize. In fact, according to the Russian statistical agency, Russia’s real GDP in 2022 decreased by only 2.1%. Such a decline coincides with the country’s mildest 2015 recession (2.0%) and is much weaker compared to the output decline during other Russian crises over past three decades: -2.7% in 2020, -5.3% in 1998, -7.8% in 2008, and cumulative decline of 40.2% from 1991-1996.

Moreover, the recession period turned out to be quite short. The industrial output contraction measured by Moscow’s Higher School of Economics, lasted only three months – from March to May 2022, during which it declined by only 4.4%. In May of 2022, industrial production stabilized and then started to slowly grow. From May 2022 to February 2023, it grew at annualized rate 2.0%.

But the most shocking fact was that while real GDP decreased slightly (by 2.1%), its value in dollar terms according to the IMF data, grew by 20.6% and reached a record level in the Russian history of $2,215 billion.

It might be the first time in the world history when, numerous packages of “comprehensive sanctions from the hell” designed to harm an aggressive state, resulted in GDP (in dollar terms) not falling, but increasing by more than a fifth. In dollar terms Russia’s GDP ranked 11th in the world in 2020, but in 2022 ranked 8th.

Despite Western states freezing part of Russian international reserves – according to Russian Minister of Finance Anton Siluanov and head of the Russian Central Bank Elvira Nabiullina, around $300 billion– Russia’s international reserves were barely affected by sanctions. As of February 18, 2022, they stood at $643 billion. 14 months later, on April 14, 2023, they are still quite comfortable at $600 billion. The current size of reserves ensures solid stability of Russia’s monetary and financial system.

The main reason for a spectacular failure of President Biden’s and others’ predictions is the type of sanctions imposed and the character of overall economic policies the White House is pursuing.

The Western sanctions implemented both in February 2022 and regularly since then have been directed most exclusively against Russian imports and almost did not touch Russian exports, including the energy sector. Since Biden’s team has implemented insane energy and climate policies, the lack of energy supply on the world market raised oil prices, allowing the Kremlin to sustain its export of oil, oil products, and natural gas while enjoying with record high energy prices.

As a result, Biden’s sanctions against Russia, along with its energy and climate policies led to the sharpest increase in the Russia’s trade and current account balances. The latter grew from $105 billion to the $227 billion level.

The flood of foreign exchange proceeds into Russia in 2022 is unprecedented. The export of goods and services from Russia last year grew by 19.8% and reached $592 billion, a record high. Growth was also at a record high at 42.8% in revenues from export of oil, oil products, and gas, which amounted to $384 billion, averaging more than $1 billion per day.

Huge foreign exchange revenues pushed the Ruble exchange rate up, and instead of falling down, as it was predicted by Biden back in February 2022, it has appreciated by 7.2% – from 73.7 Rubles per dollar in 2021 to 68.4 in 2022, thus becoming one of the world’s best performing currencies last year.

The combination of all these factors caused Russian GDP in dollar terms to grow by $379 billion. The financial resources at the Kremlin’s disposal have increased enormously. The revenues of the Russian consolidated budget in 2022 ballooned by $107 billion and reached $760 billion, expenses grew by $171 billion and reached the record high in Russian history – $810 billion.

The growth of dollar values of GDP, government revenues, and government spending allowed Putin to significantly increase Russia’s military spending. While official data on military spending has not been published since February 2022, available estimates of their annual size range between $150-180 billion, which constitutes an increase of 2.5-3 times compared to $60 billion in 2021.

The $90-120 billion rise in military spending last year has been comfortably financed by windfall profits that resulted from the Biden administration’s policies.

Russia’s Finance Minister Anton Siluanov did not hide his satisfaction with the extra revenues caused by the international environment: “the military special operation in Ukraine requires huge financial resources,” thanks to “additional oil and gas revenues” they are “directed to… priority measures.”

A significant increase in dollar GDP allowed the Kremlin to increase military expenditure while avoiding drastic cuts in government spending on most of other items. As a result, the average real wage in Russia decreased by only 1.1%, while the size of retail trade turnover declined by only 6.7%. Thus, the Russian population has experienced no serious impact from the full-scale war unleashed by the Kremlin against Ukraine and, to some extent, on Europe and the U.S. as well.

At the same time, Ukraine’s GDP, according to the IMF’s April report, decreased by 30.3% in real terms, by 24.3% in dollar terms (by $49 billion) and now amounts to only $152 billion.

Therefore, the economic potentials’ ratio between Russia and Ukraine substantially worsened for Ukraine. In 2021 Russia’s GDP was 9 times larger than Ukraine’s, in 2022 this ratio increased to almost 15 times.

The Biden team’s sanctions policy has resulted in a significant increase in the economic and financial potential of the aggressor, with a simultaneous reduction in the economic and financial potential of the victim of the aggression. It allows the aggressor to count on endless continuation of a war of attrition, which – with such tangible assistance from the White House – he hopes to win.

The strategy of successful defense of Ukraine, as well as of European allies and the U.S. itself in a long war of attrition requires a fundamental change in the Biden administration’ sanctions policy.