Thread by @DrKuba2

@jayohardeeayen sent me to this interesting thread on the impact of #sanctions on the #RussianEconomy. It’s a well thought out and grounded analysis, so no hate even as I nit pick. @IlyaMatveev_ talks trade, currency reserves, globalization, and downstream impact on Russians.

https://twitter.com/ilyamatveev_/status/1503789373069877248

This is a vital observation: Russia relies on imports across a wide range of goods. Much of the Soviet industrial base (back when the economy was closer to autarky) was liquidated in the 90s, and now Russia is an energy/commodities exporter and an importer of everything else.

Here’s data from oec.world breaking down Russian trade by category. First, look at values: giant trade surplus. But also look at the composition - exports are overwhelmingly energy/metals and imports are machinery/electronics/everything else.

Brief aside for anyone familiar with oec.world: what are “commodities not specified” in this context? It’s a huge export basket - is it weapons? Is it crime? Some kind of shrouded economy that we can observe by size impacts but not directly, like dark matter?

Now let’s look at trading partners. Exports are largely to Europe (with Asia a close second), and imports are the mirror image. Don’t just focus on the colors - non-China Asia is very important, so it’ll matter how global the US/EU can make sanctions. The purple is mostly EU.

To look at import vulnerability, I’ve drilled down on four major trading partners that will participate in sanctions: Germany, Italy, France, and the US. Note the volume with Italy - this puts the pre-war economic summit with Italian business leaders in perspective.

Conclusion: oof. Russia will lose major suppliers of important industrial/electronic goods, as well as medicines/medical goods (that will hurt regular Russians). Note that the sanctioning countries will also suffer from these lost exports, but the impact on them will be diffuse.

The fact that sanctions-vulnerable trade is so diversified and concentrated in complex value chains supports @IlyaMatveev_’s take on the damage to Russia - business will not be able to just continue, with the job losses and goods shortages that go with that. BREXIT, but worse.

That damage will be amplified by pulling Russia out of financial systems (including impounding reserves stored abroad), boycotts by multinationals, breaking logistics connections (not just airspace but shipping too). I’ll repeat: oof. @IlyaMatveev_ is right on all that.

And it will be worse than the hits on Cuba/Iran - those economies were ring-fenced prior to 90s globalization and had less exposure to international supply chains, so less dependent on trade. Sanctions have HELD BACK Cuba/Iran, but Russia will be SET BACK, a decade or more.

One question worth asking: why did Russia adopt such a fragile model? Simple: There Is No Alternative. In the 90s, during the shift from socialism, this was the only way to get foreign investment and technology.

And it’s mauled then before: a Yeltsin-era currency crisis triggered an IMF bailout, entrenching the model. Breaking from it would have not only hurt economically, but would have drawn baleful attention at your “rogue state” behavior. files.stlouisfed.org/files/htdocs/p…

One reason for the trade surplus is that Putin wanted to build up a reserve to prevent another crisis like that (it also helps insulate from sanctions). And they have a lot: $630 billion. But thanks to sanctions, about half us sequestered in foreign banks. businessinsider.com/russia-admits-…

Why didn’t they try to recover/convert the USD/EURO reserves before the war? Because that takes a long time, requires a complex and highly visible process. Anyone seeing it would know that war was coming. So now they have a much shorter economic runway.

And yet… just as #Brexit BREXIT didn’t end the UK (or even #BorisJohnson), this war shock IS survivable for Russia. There is enough of an agricultural base to feed everyone, and good planning can extend industrial capacity. The limit is public tolerance for rationing/planning.

Medium-term, Russia can pivot to a “Eurasian” economic world. The #BeltandRoad provides infrastructure - financial and physical - to trade south and east. This is much better than the position of Cuba/Iran, though it invites dependency on China.

The prospects are uncertain because this has never been done before. For Russia, best case is a sudden shock (20% GDP drop or more), followed by a rebound in ~2-3 years with high annual growth. It could make up the hit in 5-7 years and emerge decoupled from the West, bound to PRC

Worst case, it overloads the #BRI, the West forces China to cut off its lifeline (pre-Olympics, the two countries signed a major trade deal), Eurasian alternatives prove inadequate and it ends up like Iran. Not good. But we’ll have to wait and see. FIN

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