Russia's Imports Are Surging. Does It Matter?
By some measures, the impact of sanctions has peaked and is now diminishing. But the damage already done may be sufficient, especially in light of the Ukrainians' continued battlefield successes.
Ukrainian forces are winning significant battlefield victories against a demoralized invasion force that lacks training, equipment, supplies, and fresh recruits. But Russian imports of manufactured goods are rebounding rapidly, potentially relieving some of the pressure on the country’s military industry. The question is whether any recovery in production that might be enabled by additional imports would be sufficient to tilt the balance of forces in Russia’s favor. At the moment, the data from Russia itself suggests that the answer is “no”, but I will be sure to continue monitoring the situation closely.
Russia Loses on the Battlefield and Deploys the Gas Weapon
Some estimates suggest that as many as a third of the soldiers sent into Ukraine have been killed, captured, or wounded, with losses disproportionately inflicted on the experienced professionals who were repulsed in the first weeks of the attack. While Russia has three times the population of Ukraine, the government has thus far been unwilling to engage in anything resembling a mass mobilization to replenish the ranks, instead preferring to recruit mercenaries from prison camps. Ivan Krastev suspects that Putin’s reluctance to officially declare war, like his reluctance to impose vaccine mandates, reflects his “fear that such a move would expose his lack of control.”
Instead, the Russian government has slashed natural gas pipeline deliveries to Europe, driving up global energy prices in the hope of destabilizing the domestic politics of Ukraine’s allies.
Cutting gas exports may be less risky than trying to ask Russians to die in an unpopular war, but it nevertheless smacks of desperation. After all, Europeans were the biggest buyers of Russian natural gas—by far—before the invasion. In 2021, 70% of Russia’s gas exports were sent to Europe through dedicated pipelines that took decades—as well as Western expertise and manufacturing capacity—to build. Almost half of Russia’s liquefied natural gas exports also went to Europe. By contrast, Europe got about 40% of its natural gas from Russia.
The problem for the Russians is that, even though there are plenty of customers who might be happy to buy Russian gas if Europeans were out of the market, there is no way to deliver gas to those customers—at least, not for the next decade or two. Russia has neither the liquefaction capacity nor the pipelines to export much more of its gas to Asia. Building that capacity would likely take at least a decade, even with access to Western expertise. Under current circumstances, it might take far longer. In the meantime, Europeans—and people in the rest of the world enduring higher prices for electricity and heating—will adapt by switching to alternatives (including coal) and by reducing total consumption.
The adjustment may prove somewhat painful in the short term, but it should be manageable. (Plenty of people set their thermostats too high in the winter anyway.) Ben Moll has been tracking adaptation efforts at German companies for months. German gas consumption had already dropped more than 20% by July, for example, with minimal impact on total manufacturing production. Longer-term, there is enormous potential for wind and solar power investments in North Africa, which would benefit the hundreds of millions of people who live there as well as the hundreds of millions of Europeans who could purchase surplus electricity production.
Once all of this happens, there will be no going back. Cutting off the gas might hurt Europeans and others today, but Russians will eventually be the ones to pay the price for obliterating their natural gas industry. This dynamic explains why the Putin regime had been unwilling to cut pipeline deliveries to zero until recently. The military historian Lawrence Freedman put it well:
This is in some ways Putin’s last throw of the dice. If this move does not work he has few options left…If Moscow was truly confident that it could hold on to its gains and possibly extend them, it would have kept the gas pipelines open, taking the revenues and giving itself a reasonable chance of holding on to lucrative markets over the long-term. It is a sign of a loss of confidence, even desperation, that as Russia is failing as a military superpower it is jeopardising its position as an energy superpower.
For months, the Russian government had been willing to give European customers valuable physical goods in exchange for nothing more than monetary claims that had been rendered mostly useless by allied sanctions. Why? While some argued that the dollars and euros showing up in Gazprombank accounts were secretly helpful to the war effort, the simpler explanation is that Putin wanted to avoid burning bridges and was anticipating the return of something like normal commercial relations with the democracies. That behavior was also consistent with impressive Russian attempts to honor their international debt contracts in the face of sanctions, another policy that only made sense if Russian policymakers believed they would not remain financial pariahs for very long. Clearly, the calculation has changed.