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“Video by Professor JK Galbraith, on the gifts that western sanctions have provided to Russia.”

It was an interesting, and well informed take on the effect of sanctions.

But...

It was about an article that he wrote early in 2023, about the initial effects of sanctions.

During the first year of this invasion (2022), Russian revenues surged, as oil, and especially natural gas prices surged. Gas was still flowing through NordStream. Mandatory restrictions on Russian oil and gas had largely not yet been put in effect. That party is long since over, as total Russian oil and gas revenues are now down nearly 2/3rds from 2021 (before this invasion).

The natural gas market to Europe (80% of Russian natural gas exports in 2021), is going away for good, as new infrastructure has already been completed to import more than enough new LNG to replace all that used to come from Russia, long term contracts (10-20 years) have been signed with new suppliers, and NordStream is flooded and rusting away on the sea bed.

That gas cannot physically be delivered to other customers, because the physical infrastructure does not exist to do so. Even the next new pipeline long planned for China (Power of Siberia 2, which was planned to start flowing in 2030, with a small fraction of Europe’s former volume) is now on hold, because Chinese funding has been withheld.

Pre-2022 invasion, refined petroleum products exports (Gasoline, Diesel, Kerosene, Jet fuel etc.) used to produce more total revenue for Russia than crude oil exports (which have a much lower profit margin per unit). At the very end of the period Professor Galbraith analyzed (December 2022), sanctions against Russian refined products began to be put in place (not fully until March of 2023).

Russia had built huge surplus refining capacity over many decades. It was a major employer and a major component of Government revenues. That industry is now in crisis, with the Russian Government having had to ban exports of gasoline completely. More than a third of Russian refining capacity has become redundant over the last year due to reduced throughput, and a major demolition program of drone strikes since January 2024 has begun against those facilities, as far from Ukraine as St. Petersburg (1,000 km).

For the most part, actual sanctions against Russian oil and gas, as opposed to voluntary reductions, were not imposed until after the timeframe considered in Prof. Galbraiths’ article, and during his study period, Russia had enjoyed an exceptional one time windfall from a temporary price surge.

Even during that period of surging revenue, war costs induced a “wartime” budget deficit on the Russian Government. Costs have risen significantly since then, and profits from oil and gas, in total, are now down about 2/3rds from 2021 (before this war), vs. the increase during the study period. Russia’s Government revenue in 2021 was more dependent on oil and gas revenue, than was Saudi Arabia’s.

Russia has made up for the wide gap by taxing oil and gas industries to the point of de facto nationalization, liquidating assets in their National Wealth Fund and gold reserves, cutting social spending like health care and education, and printing rubles at a more expansionary pace than we printed dollars during COVID. More widespread tax hikes across the economy are reportedly planned for after the election this Sunday.

The official interest rate in Russia is 16%. The ruble has become nearly a dead currency outside of Russia, and the Chinese Yuan now accounts for about half of loans in Russia, up from less than 4% before the current invasion. Chinese auto companies now dominate the auto market in Russia, with the four top selling models being Chinese (from none of the top five in 2021). Russia is not going from a Western colonized economy to an independent Russian economy, but rather to a Chinese colonized economy.

Russia has instituted programs modeled on the Communist Chinese, for stimulating their property sector, to pump up their macro GDP numbers in the near term, causing Chinese-like dislocations to develop in the Russian real estate market. The percentage of mortgages that are underwater (outstanding loan is higher than the current market value), where the owner is paying 80% or more of their income to meet payments, has skyrocketed.

Yes, there was a short term initial windfall, in the transfer of ownership of many business facilities in Russia from Global multi-national corporations, to new Russian owners. But rather than best of breed world beaters, those facilities will now be operated by those mafiosi with the best ties to Putin’s gang. The resulting corruption and inefficiency will be a drag on financial performance and quality.