My understanding of macroeconomics is limited, and back in the summer I recall that the headlines on the Russia sanctions were mostly negative. They said that Russia, being as big and independent as it is, having the trump cards it does, would remain largely unscathed through Western sanctions, which might ultimately prove counterproductive to the west, not Russia.
Now with the Russian ruble following 20 to 50% depending on the defined peak, another $35 billion in international corporate debt due at the end of December (their biggest bill all year and next), and $130 billion, or 7% of the government budget lost due to sanctions and lowering oil prices, it really does look like Russia is in big trouble.
My question is the following: in a purely economic sense, when will Russia be forced to capitulate or face catastrophe?
I am assuming there is some cut off where they fall into a deep depression and are effectively knocked off the world stage in terms of economic power (becoming something akin to Indonesia on the global stage).
Forced to capitulate – never. It’s a question of how long do they want lower economic performance for political reasons. The answer to that is likely to be “as long as Putin is President.” I can’t remember an international situation he’s ever backed down from.
Instead they will get closer to countries that don’t care, Iran, Turkey, China. Now, none of those countries will be as lucrative to deal with or they would have already been doing all their trade with them. It’s too long to get into it, but essentially you can’t restrict yourself to only a small portion of the countries in the world with money to do robust trade with without losing something. China and Turkey are good countries to do business with, but it’s much better to be doing business with China, Turkey AND the EU and the U.S.
As for how long until catastrophe, I think Russia is facing catastrophe in a generation regardless of anything. It has nothing to do with sanctions or even Putin, but instead it’s a reflection of bad demographics, and a society in which a small cabal of oligarchs is making all the decisions. Russia may need to go through something similar to what happened when the USSR fell, how long off that is I can’t guess with precision but there are lots of reasons to believe it happens regardless of who is in power in the Kremlin.
After the sanctions went online, there was an article on NPR about Russia’s gas/oil pipeline plan with China. The plan had been moving forward slowly; when the sanctions showed up, a 20 year deal was signed in short order.
Basically, if Russia can’t sell it’s gas and oil to western Europe, it’ll sell it to someone else. Energy is a fungible product, so it doesn’t really matter who sells and who buys, as long as someone is buying.
I also read that Russia had to agree to more of China’s terms because of the sanctions. With smaller countries, Russia can go all Darth Vader and say “I’m altering the deal. Pray I don’t alter it further.” Can’t do that with China quite so easily.
Sanctions are bad for both parties, which is a point that I think easily gets overlooked. Now, if many countries sanction one country, the harms are spread around on one side and concentrated on the other, so there may be a useful effect. I read somewhere that gas, for example, would be $.40 a gallon cheaper if we ended all sanctions on Iran.