The true impact of a year of war on Russia's economy | DW Business Special

welcome to this DW

business

special

asking what a

year

of war has done to the Russian

economy

. I'm Rob Watts in Berlin and I'm pleased to say that I'm joined by Professor Jeffrey Sonnenfeld, whose research into the economic

impact

of the war on Russia has made it something of a viral sensation over the past

year

and we're delighted to have him back with us. Professor Sunfeld, it has been a great year for you and, of course, for Ukraine and Russia. Thank you so much. Yes, we have been. quite busy, but we certainly do not have the pearl and suffering feeling of Ukraine.

It is amazing the national character that has come to the surface as we have seen them overcome these political divisions and breaks in character. corruption and systems and things to unify a nation like we have rarely seen before, that is, that altruism is incredible, of course, the leadership of President Zalewski, but everywhere you look in the nation, there is a remarkable sense of resolve and, without However, we too have been on the sidelines and in a much more comfortable situation, we have had our team of 40 volunteers working virtually 24/7, trying to keep up with the constant changes in chronicling the unparalleled departure of over a thousand major multinational companies from Russia is outraged by this attack on a peaceful sovereign nation and the civil atrocities that are embarrassing to Russia and then the economic

impact

on Russia, in fact, well, we'll talk about all those countries that have left and the big company. that you and your team have taken in trying to map out which companies are still there and what aren't, but first let's focus on the state of the Russian

economy

right now and a good starting point is to look at the GDP, so what has been ? waging a war and being the recipient of international sanctions on Russia's growth, according to Russia's government statistics agency, the economy contracted only 2.1 percent last year, which is much better than expected, and The World Bank in April projected 11 losses for the year, so looking ahead, the International Monetary Fund expects the Russian economy to grow this year, although in reality only 0.3 so, Professor Sonnenfeld, let's just address that the fall in Russian GDP last year was nothing like some had predicted and that there could be a growth again this year, so Russia is bearing the sanctions, no and as much as I love you and you are the best interviewer in the media , everything you said is false and not because you intend to promote anything that is less than the complete truth, uh.

You are repeating credible sources that have been completely misled. You heard it here first. The world banks. You are talking about the IMF and the World Bank. So how come they were wrong? The World Bank and IMF information that you are innocently presenting is completely incorrect because it is directly, as you quoted Rostad, what do we know since we last spoke? Rostadt has had a leadership change three times, why would that be? three times until they find devices, they will do Putin's orders since the last time we spoke all the key information about Russia that to be a member of the World Bank and the IMF they must present, they are not presenting and the heads of the IMF, the World Bank won't tell you this, but you have no idea what Russia's real imports and exports are, because in the second quarter of '22 they stopped reporting it, we don't know about direct and distant investments, we don't know about any.

Of the metrics that are required to be a participant in the IMF and the World Bank, all they get are made up numbers, so the reason Putin has survived economically is due to only two reasons: a lie, it's propaganda, He wakes up in the morning and chooses. takes a GDP number and publishes it in the IMF and the World Bank canonized that they credit it without one and we went and met with the senior leaders of the IMF team twice and in fact we have spoken with their Economists who, by the way, are largely Russians and, by the way, what do you know?

They repeat exactly what Rostadt says, well, literally it's not virtually, they literally ask Putin. How would you like us to make Russia look like there are but there are alternative sources? uh, also about that, so investigations have been done, for example, oh, there are no alternative sources that verify this in all the alternative sources where Russia is the buyer and we go to the seller. Russia is the seller, we go to the buyer and all the third parties confirm what they have that the Russian economy is in a tailspin, there is nothing to support them other than the fact that Aeroflot, the airline, is back in operation, nothing else supports their false data, but they are publishing false data and repeating themselves in a circular fashion.

A century ago, the American humorist Mark Twain once said that a lie goes around the world and comes back before the truth can put on its shoes to be recycled by the same media sources of false information and that is what is happening here there is no similar support Professor what what what you say that is a more likely figure for Russia's growth during 2023 than because it is 0.3 growth I can't make up the number just because the world because Putin makes up a number doesn't mean that I have the license to do it too, so do we.

I don't know, we do know that all key industrial sectors are down. We know that the automotive industry is going down, not 10 20 30 40 80 70. They are down 99 99. We know that the retail industry has fallen 65. This is told to us by everyone who is selling in Russia buying in Russia we can see all the sectors, sure there is some smuggling, there are some electronics that come in through some third country, that is random smuggling, you can wait three months and pay a premium of 60, you get a replacement screen for your iPhone, you can't run a sector major industrial based on intermittent supply and exorbitantly inflated prices, so now they are in trouble, the labor force problem, which is another made up number about unemployment that no one, none of their viewers will have realized until this point , which none of my academic colleagues understood until recently, is that before the war, the majority of the Russian workforce already worked for the government or state-owned companies, now it is even more so for IBM engineers laid off if they did not flee to neighboring countries.

In countries like George or Uzbekistan they are employed sweeping streets in Russia, so they have tried to absorb people by placing them on the public payroll. Well, how do you pay for that? Well, it's eating up some foreign currency reserves that you had and that's it. decreasing and it is also cannibalizing, that is the second reason besides propaganda why it exists, it is harvesting, it is cannibalizing, but we can send you photographs of thousands of refrigerators destroyed to harvest chips for military use for weapons purposes, but they are industries. Our seed money is being harvested the same way people are paid to stay employed.

They are just taking them out of other

business

es and trying to prop them up. It is not a sustainable economy. He has deficits and with the World Bank professor. I can't tell you who finances it, there is no one who is buying dead Russia so that a deficit cannot be generated. Yes, we can talk a little bit more about how President Putin might be controlling the message about the Russian economy and exactly the type of information that he's trying to spread and we can talk about that particularly this week because President Putin gave a speech on the state of the union a few days ago coinciding with the anniversary of its invasion of Ukraine.

We insisted that the West had failed in its attempt to undermine the Russian economy, let's take a quick look at what he said: the Russian economy turned out to be much stronger than the West had thought thanks to the joint work of the government, Parliament, the bank of Russia, regional governments and, of course, the business community and labor communities, we ensured the stability of the economic situation, protected citizens, saved jobs, prevented market shortages and shored up the financial system, someone felt who is Vladimir Putin trying to convince that this is what the Russian people do. He already has the Russian people on his side or he is trying to convince the global community that sanctions have not worked.

He is testing both audiences. You're right. It's an excellent question meant to reassure his increasingly anxious one. population that has experienced record unemployment and mass wartime deaths due to the fact that he did not get the three day victory that they say they are going to have and at best they are stagnating and losing ground in Ukraine and the fact that they are losing and he wants to wear down the resolve of all the allies, uh, that it's a waiting game, he thinks it's a war of attrition that he can win by convincing the rest of the world that their efforts to stop him are not succeeding , they are succeeding, we know that they are losing half a billion dollars a day in energy, the people who say, well, India and China are buying the oil that the West doesn't buy anymore, we wish they would buy more, why, because the price They are paying for oil is so low that Russia is losing money on every gallon.

Right now, it costs Russia $45 a barrel to extract it from the ground and another ten or twelve dollars to ship it to India or China. Because it has been going on for another month, what it is costing is an important issue. I mean, we're definitely going to address the energy situation because we absolutely have to in a few minutes. Professor Sun and Feel, but that's just a little bit of a return to What President Putin was saying then was a recognition of the Central Bank of Russia and what he has done to prop up the ruble.

I mean, the ruble is stronger against the dollar than it was immediately before the war, but that tells the whole story no, it's another fake number there's no one you can put uh your program that can tell you that they've exchanged the ruble it's not a exchange-traded currency so you can't compare it to any currency if it's frozen it's a series of Fiat signals it's something we haven't seen anything like this in over a century it's a fake number you can't there isn't even a black market in Rupal said advise any finance listening right now we will verify this for you you cannot get a value in a Rupal because you cannot exchange it you cannot exchange it no one wants to buy rupees I you, if your life or mine depends on it, we cannot name a single non-Russian company that is going to do business that wants to do business in rupals eh, it is, no, no, we don't know what the value is, it certainly hasn't been improved, it hasn't, the next question I might ask is what is it? the one he has.

It is still not explained why the stock market has not reached zero, but once again, foreign holdings are frozen, they cannot sell more than they already sold, so it is down 60, but not one hundred percent. because the foreign assets cannot be sold, foreign owners of Russian assets cannot sell their holdings, but the government has frozen the numbers, so any number that is thrown out is a false number and there is no source they can give me . That has contrary evidence, evidence is where your research comes in, right? I mean the lack of, you know, reliable figures coming out of Russia, so you and your team, the US Treasury Department, the Treasury Secretary herself, uh.

Janet Yellen, US Commerce Department Secretary General Gina Raimondo and Secretary of State Anthony Blinken have all said that we have changed the narrative on this and that not even the US government realized realized that international institutions were simply recycling Putin's policies. numbers, so now everywhere you go in the US government you will see that they now know that the Russian economy is failing and they recognize that our numbers were correct and that the IMF and the World Bank are just recycling propaganda from Russia. whether unknowingly or knowingly, okay, professor, stay with us. I just want to talk a little bit about the research that you and your team at the Yale School of Management have been doing to track which companies have pulled out of Russia, so the compiler list there are over 1,400 companies on that list and on On that list there are more than a thousand companies that have in some way restricted their operations in the country beyond what the sanctions require, which include brands like McDonald's Starbucks and others that you can now see on the screen who have completely left Russia, so Also companies that have reduced their current presence in Russia, including Volkswagen and Sony, the owner of Google, Alphabet is also reducing its operations in Russia and Professor Sonenfeld's performance team has also tracked more than 240 countries that are so Lo They set about digging and maintaining entire operations in Russia, including Germany's Siemens toilets and a few others, you can see Air China there, but more than 240 of them, so Professor Sonnenfeld generating and maintaining that list must have been a Huge task for you and your team.

Does the existence of thelist itself has been enough to influence the decisions of some of those companies? Yes, thanks for asking. There's a US Supreme Court Justice named Louis Brandeis who about 80 years ago said that sunlight is the best antiseptic, yes, and like us. He got into this because the first ones who retired in February or the 24th of last year told us that they were very upset because the academic media, my line of work and theirs were getting mixed up, confusing the good guys with the fakers, the people who moved boldly versus those who issued platitudes, it's just saying atmosphere, although our hearts and minds are with the Ukrainian people, here's a dollar fifty. go buy you a third of a cup of coffee they weren't doing anything so we created a rating system of a b c d and f uh and uh that rating system is calibrated every night, we review the companies and we evaluate them and we look at the top 1,400 companies, more Of a thousand of them have completely retired, they are A or bees and that has been quite powerful, but initially most of them were G and F, but since they had the focus of public scrutiny on them through customer comments , comments from investors, employees.

According to the comments, there has been a mass exodus six times that of South Africa in 1988. And of those F, as they are called in your study, basically the ones who are digging in and maintaining their operations as if they already knew that. the war basically wasn't happening, uh, 240, whoever there was, would you expect to see any of them change their stunts? I mean, we've been at war for a year now, are those people going to scam? Those companies? I'm going to continue to investigate a great question because there are some who were investigating at the US Paper Company.

International Paper initially denied that they had an active state and it turns out that they had the controlling state interest in the largest paper manufacturer, huh. and they finally got out, they even had their own management team, it was half of the management team of that company, they all got out, and similarly, the American company, Coke Industries Koch, stubbornly stayed there, they too finally pulled out. and they've gone from F to A, which is a pretty notable move, so we've seen some positive moves that way. I'm sorry to say that we have seen some companies move in the opposite direction as well and they are not happy with us, but now, uh, you are the first to know that the Carlsberg breweries have just downgraded, that they had announced that they would withdraw and, in fact, never They completed a sale, but they also did not close their operations and continue to reap their income and to feed Putin's war machine despite the platitudes they issued and were frankly disappointed with Heineken, that is, they are putting their profits in a reserve account under warranty in Russia, but they are still operating there and have not.

I didn't find a buyer unlike ABM Bev who just completely closed their operations so yes we are seeing there has been a movement but the massive stampede was actually in March and April and now we see a slow movement in most the cases. of this will go towards more companies pulling out, you know, we heard Heineken earlier this week say that they had been unable to find a buyer and that they now hope to sell their business at a loss if they do, but it is the case that Well, they should accept a loss, right? Not only should they accept a loss, they should accept a full write-off and it won't cost them a cent.

We have and have published this research in ssrn. In the academic journals of the Social Science Research Network, also in the Washington Post and elsewhere, we have shown the names of the companies, but also the quantitative research of the hundreds and hundreds and hundreds of companies that have withdrawn for complete; actually, it benefited them versus those 400 companies that we left and we hurt them that it is reducing operational risk reducing financial risk reducing reputational risk that there is actually no gap between the interests of shareholders and the interests of other stakeholders and the character of the firm and this is at least one case where We're doing the right thing, uh, it's financially rewarded.

Doing good and doing well are not antithetical to each other and it is surprising that Heineken, of all the companies I used to use as a good example, did not recognize this much sooner, for example, Royal Dutch. Shell or BP or Exxon went out of business completely and immediately and BP wrote off nine billion dollars uh uh immediately uh and what happened they were hugely rewarded almost two and a half times in the financial markets, so it turned out that it didn't cost them anything you don't look at an investment in terms of what it costs you look at what the performance is the performance eclipses whatever they invested in their corporate character and their reputation it's hard to do business in Russia right now it's not a smart place to be, they have problems paying people, they have problems getting parts, they have problems getting paid, let alone the cost of their corporate character, places like Heineken, Unilever or Phillips, it's baffling that they are still there .

Well, Professor Simon Val, I just want to move on to something that you raised a little bit earlier and that is the fact that you know that a major source of income for Russia's war machine is its oil sales to the rest of the world. The EU and G7 have tried to limit that by putting a cap on the price it is willing to pay for a barrel of Russian oil. However, Russia managed to export 8.2 million barrels of oil per day to world markets in January, a reduction of approximately 160,000 from the previous figure. war levels Asian markets are offsetting a drop in European Union consumption and I think Professor Sonnenfell is going to question that in a moment, however Moscow's oil revenues have definitely declined, according to the International Energy Agency, says Russia earned 36 percent less. in the first month of 2023 compared to the previous year, so let's talk to Professor Sunfeld about that, what do I mean?

Has the West failed to hit Russia where it really hurts in its energy exports? If there is anything that has been more effective than kyiv. fighting back has been a full frontal assault on Russia's energy business Russia has become an economic afterthought Russia is by no means an economic superpower in the world uh its uh its economy, people used to say it's smaller than Italy, of course, is now smaller than Chile and That's not just to belittle the character of Italy or Chile, they just don't walk Putin's style or suggest that there is some big neighborhood bully, why, in fact Does Russia have two thirds of its economy coming from the energy business?

Now we know that no one needs Russian gas. Europe. 86 percent of EU gas was arriving at this time last year when we spoke. 86 percent came from Europe from Russia. Now it is less than seven percent and could go to zero. and it doesn't matter, eh, it's that a permanent change can also Russia ever regain the EU as the main market for its oil and gas, no, if you talk to the Baltic nations, Latvia, Lithuania, Estonia, who were never fooled so Germany and others fell in love. Russia, in short, a Russian dependency, they will say that you should never have counted on uh uh looking at Nordstrom one or the province of Nordstrom is also uh that they uh and now I think Germany actually recognizes what Germany did, which is another of The miracles of last year is Germany uh uh thanks to Germany they have built six Mega conversion plants and terminals to receive National Liquefied Gas most energy analysts either because of uh their lack of information or their unwillingness to tell it in television and in um in media circles talk about their own book, there was a hysteria late last spring that wrongly drove up oil and gas prices.

In fact, it is liquefied natural gas that has only been on the market since 2015 2016. It is a century-old technology, but it recently became a major successful industry in the last eight years is that it is not included in most analysts' equations, has turned out to be a huge source of shippable energy, so now Norway and the United States individually provide more than Russia did in its heyday and now. Algeria and others are also joining the equation, there are 12 other nations with LNG at very competitive prices. LNG prices fell by around 70 percent in the last year period, so it is becoming more and more affordable and LNG is being converted thanks to Germany and some Iberian conversion plans pre-existed, but these huge and big ones that Germany built they built it so fast that I would have thought it was Chinese companies that built it and who could imagine that they could build something that fast and now that it is converted from the Sun, the way it travels and sends a solid basically like liquid again in the form of vapor to pass through pipelines throughout Europe, all Putin has are gases in the form of vapor, it is natural gas when he with his bravado says and that we will simply leave. to pivot and sell it to India and China, you can't why because you don't have the pipeline network again.

The IMF, the World Bank and most economists at major universities did not realize that Asia needs the um. The Russian pipeline network that they don't have will take six years to build and there hasn't been a shovel dug or a dog dug in to start building because they're not going to try. They couldn't do it in six years, so it's a big problem. Most of Russia's gas is going nowhere in terms of Russia's oil. We would like Indian China to buy more. It's so cheap. We, the G7, the United Kingdom. The EU and the US have encouraged a price cap of 60 because that's where Russia is basically just above breakeven right now.

Russia is losing for every gallon of every barrel they produce, it costs them forty-five forty-six dollars per barrel. Extracting it cost the Saudis only 22 and most other OPEC nations only 20 25 per barrel. Russia is so inefficient, so outdated in its technology that it cost them much more to get it out of the ground, but then you have to add more to it. than another 10 or 12 dollars in shipping for the extra month it takes to go to India or China by barge, so that's professor, sorry to interrupt you, but um, to what you're saying here and what I want you to say.

The only thing I want to ask you is to look in your crystal ball because you are talking about how Russia is going to make money, in the future, where we first talked to you, maybe 10. months ago and everything is very different. I mean, the European energy sector is unrecognizable from where it was then for the next 12 months next year, if the war continues, what should we be watching for when it comes to the Russian Economy, well, we are going to see a greater number of idle workers on the streets that we had even in April.

We had, on the economic side, the mayor of Moscow until he was silenced, admitting that in April, uh, all things reported this. hundreds of thousands of idle workers were on the streets with nothing to do we are going to see that increase equally dramatic it is a conservative estimate that 3 million highly sophisticated Russians have fled the country we know this is not an exaggerated number because it was released again in April had already reported that 700,000 had left, well where did they go? They went to Georgia, Moldova and neighboring nations, but I just had a meeting with the Uzbek ambassador to the US and they have almost half of it. a million people from Russia, sophisticated IT professionals have fled from Russia to Uzbekistan and the Tashkent industrial park has exploded, so we're not seeing no capital coming into Russia, uh, and there's nothing for Russia to sell to the world market, nothing but raw materials, uh.

They don't have finished products. The only value-added product they bring to the world is cyber terrorism. I don't think anyone wants to buy. The only thing they had was food. Fuel and metals. We now have alternative sources. for all those commodities, they were like Americans as a colony in a mercantile system and maybe they are becoming a vassal state of China and what we are seeing despite the headlines with China right now we are seeing that China does not care It matters to surpass Russia for its resources, but they also realize that they don't need Putin, no one in the world needs Russia, but it's okay if China and India use Russia for supplies and keep global market prices a little low, but Russia does not make money on anything they sell and Russia and India, which of course are not signatories to the price caps, are profiting from them, taking advantage of them because they also have no interest in paying Putin more , so they are paying the same prices as the price signatories. and, frankly, in the eyes of the West it is too low, we would like Putin to earn a little more money to continue producing, butIf you're losing a dollar or two a barrel right now, there's no incentive for you to produce. oil at all, that's a problem, they're very inefficient, okay, Professor Jeffrey Steinberg of the Yale School of Management.

Thank you very much for joining us again for another DW business

special

. It's always great to have you on um and I'll be able to talk to you. See you again at some point and we'll see if any of your predictions for next year come

true

or not. Thank you very much to those of you who have been watching, it has been great to have you with us if you liked this. Much more from the DW business team here on the DW News YouTube channel. Be sure to check it out, maybe you'll see us there.