Sanctions. devastating. Russia

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Outdoor market Neryungri

There appears to be some confusion in mainstream media over the degree to which Western sanctions are impacting Russian industry, economy, and the lives of everyday people more generally. Reports in the Wall Street Journal, Financial Times, and The Telegraph suggest that sanctions are having some effect, but express uncertainty when it comes to the question of just how significant that effect is or if it can be quantified in any sense.

Having recently visited Russia for a conference on oil and mining extractive industries, and having visited a number of large-scale industrial operations, it is obvious to me the effect of sanctions are wide-ranging and having a devastating impact on Russian business and on the people of the country. Our cohort of Western academics at the conference was repeatedly asked “What do you think about the sanctions?” and “How long will the sanctions last?” and “Are the sanctions hurting your economy?” and “What is the media in your country saying about the sanctions?” These questions were broached by local business people, by Russian academics, by state officials, and by everyday people.

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Kolmar head engineer

One example of the impact of sanctions became clear when we visited Kolmar, a coal company operating on the Denisovski deposit near Neryungri, Sakha Republic. The company is part of the Guvnor Group, owned by Russian billionaire Gennady Timchenko. In a tour of the facility the head engineer at Kolmar repeatedly spoke of the impacts of the sanctions, saying that the mine had stopped production because

1) they could not import technology and machinery from the West necessary to extract coal (the mine uses Caterpillar equipment, but has begun to import Chinese equipment) and

2) the export price for coal has collapsed, such that production is unprofitable (in lieu of  production, the company is now focused on opening up further mine shafts and preparing for a return to production)

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Neryungri open pit coal mine

Indeed, Sakha Republic (Yakutia) is predominantly a mining region, and also a region that is keen to move into Arctic oil production. Estimates suggest the Arctic has 22% of global hydrocarbon reserves, the majority of which are on Russia’s continental shelf (Kara sea has biggest known reserves). Exxon and BP, in partnership with Russia state-owned Rosneft, have been probing the Arctic for the last few years, but recent sanctions have meant that Western companies have had to halt operations and are prohibited from selling or sharing offshore technologies with their Russian counterparts.

This is a serious blow to Russia, which lacks know-how in the offshore, and especially so with regard to the extreme conditions of the Arctic. Arctic extractive industries are seen by Russia as the new frontier, and also as an economic boon in an era when conventional sources of oil are increasingly scarce. The pinch of technology sanctions on Russia’s Arctic expansion plans are extremely worrisome for the country in the long-term. Without Western companies like Exxon, and without Western technology, Russia’s Arctic expansion is crippled; while this aspect of the sanctions may not have an immediate economic impact, this is nonetheless a significant concern for Russia.

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Break-even oil price, dollars (Source: Deutsche Bank Markets Research; Economist Intelligence Unit).

It should also be noted that the recent nosedive of the price of a barrel of oil, due to the glut in supply, is a further hit on the Russian coffers, which rely on oil and gas revenues for roughly a third of cash flow. The break-even for Russian oil and gas is roughly $100USD per barrel, and so current prices for crude oil around $80USD is a significant drag on the stricken economy. Sanctions on Russia have already resulted in a flight of capital from the country and a devaluation of the ruble. The combined impact of sanctions and low oil prices have created the perfect economic storm for Russia.

It was apparent from speaking to captains of industry that the sanctions are hurting big business, but there is also an impact on everyday people as well. For example, because Russia has hit back against Western countries by banning the import of dairy products, among others, there is a shortage of such items in Sakha Republic (we couldn’t get butter).

Moreover, in northern and eastern areas of the country that are entirely reliant on imports, the price of food is approaching a level that is prohibitively expensive, such that some commentators have suggested Russia’s tit-for-tat sanctions are backfiring. Indeed, this is what we witnessed in Russia’s far north. Other indicators of the impact on everyday people are inflation rates / the plummeting ruble.

There should be no doubt in anyone’s mind about the degree to which sanctions are hurting Russia. As I said, it was the first topic of conversation at both the extractive industries conference, and a serious cause for concern of business and of everyday people. The important question in my mind is not so much whether the sanctions are having an impact, but rather how long Russia can possibly hope to hold out.

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120 day exchange rate RUB to USD. image from themoneyconverter.com

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