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Fuel tanks wait in lines outside Gazprom Neft, a Russian energy company, in December 2022. (EPA/Yonhap)

At a four-story house in the Swiss resort of Davos, the words “India’s largest economy Maharashtra” and “Welcome to Maharashtra” are written on the red balcony. The building was purchased by India’s Maharashtra state for their participation in the World Economic Forum, also known as the Davos Forum, held here every year.

Until last year, this house was known as the “Russia House.”

Maxim Oreshkin, who served as Russia’s economy and trade minister and a top advisor to President Vladimir Putin, and Sibur, a chemical company owned by Putin’s close aide Gennady Timchenko bought the building and began operations there in 2018.

However, the house’s fate changed after Russia invaded Ukraine. At a morning meeting held at the building on Jan. 19, Ukrainian President Volodymyr Zelenskyy held a conversation with US CNN broadcaster Fareed Zakaria. In another room, Ukraine’s deputy prime minister met with US tech company Palantir to praise data software that helped Ukraine fight Russian troops.

Next month marks the one-year anniversary of the start of Russia’s war. In response to Putin’s Russia, which rekindled outdated imperial ambitions to attack its neighbors and commit war crimes, the international community gave Ukraine weapons — or money to buy weapons — and issued sanctions against Russia.

The support for Ukraine has been neither consistent nor prompt, and the sanctions against Russia have yet to have much effect. If one only looks at numbers, the Russian economy has not crumbled as per the West’s wishes. There were predictions that its GDP would decrease by 8%-10%, but, in fact, it only decreased by 3%-4%.

Russia had been facing sanctions since before the war, and as such has a system of self-sufficiency in place. State-run companies and major banks conducted stress tests in preparation for international payments and foreign accounts being blocked and suppliers being cut off.

According to numbers given by Reuters, Chinese cars accounted for one-third of the Russian automobile market, making up for the gap left by the withdrawal by Western companies. Starbucks branches were replaced by “Stars Coffee” stores, indicating that only the names of brands have changed. Shelf and aisles in many grocery stores remain plentifully stocked, demonstrating that life is continuing as per usual.

This is largely due to the rise in energy prices brought about by the war. Russia earned US$164.2 billion between January 2022 to November 2022 by selling oil and gas. This is 30% higher than what they earned at the same time in 2021. But what if the war goes on?

Gazprom, Russia’s state-owned energy corporation, hit a record net profit of 2.5 trillion rubles in the first half of 2022, and Russia took half of that profit. However, analysts say that profits in the latter half of the year would have been close to zero.

Oil prices are on the decline. Brent crude oil soared to US$140 a barrel in Europe in March 2022, just after the war began, but it was down to half that by the end of the year, at US$70.

On top of that, the G7, the European Union, and Australia set a “price ceiling” for oil in December 2022, saying that they would not pay more than US$60 per barrel. Two weeks later, Russian Finance Minister Anton Siluanov worried that Russia’s oil and gas earnings could drop by 24% while the budget deficit would rise more than the initial estimate of 2% of GDP.

According to an analysis by the Wilson Center, a private US think tank, the Russian government’s income decreases by 1 trillion rubles every time oil prices fall by US$10 per barrel.

The ruble has plummeted, and the threat of inflation has increased. Just before the war, Russia’s interest rate was at 20%. The central bank cut interest rates throughout 2022 before halting the cut in October as concerns over inflation grew. The ruble is likely to fall again in 2023. War expenditure is increasing.

Last year, the Russian government’s total expenditure exceeded 30 trillion rubles, more than initially estimated. Military spending was set at 3.5 trillion rubles, but it seems likely that it has been easily exceeded.

Lack of finances can be made up by using sovereign wealth fund money and loans — measures that Russia’s finance minister himself has advocated. However, even if the sovereign wealth fund is large, it certainly isn’t a free money tree. Last year, 2 trillion rubles were drawn from sovereign wealth funds for the sake of government spending, and the bulk of the money (1.5 trillion rubles) was spent during the last month of the year.

In addition to raising taxes on Gazprom, the government also raised dividends received from state-owned companies such as Sberbank and Rosneft, and dipped into the public’s pension funds.

Still, the lack of war funds was made up by issuing bonds. Last year, the Russian government collected more than 3 trillion rubles by selling government bonds. Most of the sales were made in the fourth quarter of 2022. As the supply of floating-rate bonds was increased to facilitate procurement, they’re already making up close to 40% of all bonds.

According to the Putin administration’s three-year fiscal plan, the total spending of 2023 will be on par with that in 2022, but where they will be spending the money has changed. The budget for the security sector has increased from 24% of the budget to 33%. The “secret budget,” which is expected to be added to war expenditures, has increased from 16% to 22.4% There have also been reports that some areas treat conscripted soldiers as volunteers so as to reduce the cost of equipment for mobilized soldiers.

The Russian government claims that industrial production did not decrease in 2022, but that is because they included arms production and military spending in those numbers. Automobile production has almost halved. Some report that since 300,000 people aged 22 to 50 were dragged into war, the GDP has decreased by 0.5%.

It is said that 500,000 to 1 million people have left Russia since the war began, which means that the loss of labor and intellectual property will have a greater impact in the long run. Russians are having to shoulder the political responsibility for Putin’s failure to stop the war by being punished with economic stagnation.

To borrow the words of Foreign Policy, “the world economy no longer needs Russia.”

In 2021, 83% of Russian gas went to Europe and about half of federal revenue came from that gas. Back then, Russia had an important place in the energy sector of the global supply chain. Now, it’s a different story.

Europe relied on Russia for 40%-45% of its gas, but in 2022, that number fell to 7%-8%. Putin tried to keep Europe in check by holding energy supplies hostage, but Europe managed to weather through this winter all the same.

In 2016-2021, Europeans spent, on average, 17.5% of their reserved gas over the course of a month and a half in the winter. According to the Wilson Center in the US, the amount of gas used in the first winter after the war has decreased to 12.5%. Europe is choosing to move faster toward green energy, and Russia has decided to neglect the European market.

Russia is in an inferior position in the oil market as well. India, China and Turkey bought the Russian oil that Europe did not buy. These countries imported the oil at a much cheaper price than Brent crude, with a price difference of more than US$30 per barrel. Russia’s Urals oil price is said to be US$50 a barrel, but it actually trades at around $38, which is half the price of Brent crude.

Russia is continuing to decline. Russians are getting used to the reality of economic isolation, and the world is learning that an “economy without Russia” is actually possible.

By Koo Jeong-eun, international affairs journalist

Please direct questions or comments to [english@hani.co.kr]