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 Russia's economy I'm Rob watts in Berlin and I'm pleased to say I am joined by Professor Jeffrey sonnenfeld whose Research into the economic impact of War on Russia has made him something of a viral sensation over the past year and we're pleased to have him back with us Professor sunfeld it's been a heck of a year for you and of course for Ukraine and Russia uh thanks so much yes I uh we've been quite busy but we certainly don't have any of the sense of Pearl and suffering of of the Ukraine's uh the it is amazing the national character that has come to the uh surface as we have seen them overcome these political divides and and character breakdowns of corruption and systems and things to unify uh a nation as uh We've rarely seen before uh that's uh that selflessness is is incredible of course president zalewski's leadership but wherever you look in the nation it's it's a remarkable sense of resolve and yet we too have been on the sidelines and in a far more comfortable situation we've had our team of 40 volunteers working pretty much 24 7 trying to keep up with constant changes on chronicling uh the exit of the unparalleled exit of a thousand plus uh major multinational companies from uh Russia in Outrage over this uh attack on a peaceful Sovereign Nation and the civilian atrocities that are shameful by Russia and then the economic impact on on Russia indeed well we will talk about all of those countries that have left and the the heck of an undertaking that you and your team have taken in trying to chart which companies are still in there and are not but let's first get stuck into the state of the Russian economy right now and a good place to start with that is looking at GDP so what has been waging a war and being on the receiving end of international sanctions done to Russia's growth well according to the government statistics agency in Russia rostat the economy contracted by just 2.1 percent last year that is far better than predicted with the World Bank back in April projecting an 11 loss for the year then looking ahead the international monetary fund expects the Russian economy to grow this year actually albeit by just 0.3 so Professor sonnenfeld let's just tackle that the fall in Russian GDP last year was nothing like some had predicted and there might be a return to growth this year so is Russia weathering the sanctions no and as much as I love you and you're the finest interviewer in the media everything you said is untrue and not because you are intending to promote anything that's less than the full Truth uh you're you're repeating credible sources who have been completely duped you've heard it here first the world Banks you're talking about the IMF and the World Bank here so so how have how have they got the wrong end of this the World Bank and the IMF information that that you're innocently uh presenting is completely wrong because it is directly as you cited off rostad what do we know since the last time we spoke rostadt has had a change of leadership three times over why would that be three times over they until they they find apparatches they will do uh Putin's bidding the uh since we last spoke all of Russia's key information that to be a member of the World Bank and IMF they are required to submit they are not submitting and the heads of the IMF the World Bank won't tell you this but they have no idea what Russia's actual imports and exports are why because by Q2 of 22 they stopped reporting it we don't know about far and direct investment we don't know about any of the the metrics that are required to be a participant in the IMF and the World Bank all they're getting is invented numbers so the reason Putin has survived economically are for only two reasons one lies it's propaganda he wakes up in the morning and picks up a picks a GDP number and puts it out there in the IMF and the World Bank canonized that they credential it without one and we've gone in and met with the senior leaders of the IMF team twice and we've actually talked to their Economist who happen to be largely Russian by the way and what do they know they repeat exactly what what rostadt says well just it is literally not virtually it's literally asking Putin How would you like us to make Russia look there's but there are there are alternative sources uh as well on that so there's research that's been done for example oh there are no alternative sources that verify this every alternative Source where Russia's the buyer and we go to the seller Russia's the seller we go to the buyer and all third parties confirm what we have that the Russian economy is in a tailspin there's nothing that supports them other than the fact that aeroflot the airline is back up and running nothing else supports their false data but they're pumping out false data and it gets repeated in a circular fashion the U.S humorist a century ago Mark Twain once said a lie goes around the world and back before the truth can put on its shoes so it gets recycled by the same media sources false information and that's what's happening here there's no support similarly Professor what what what would you say is a more likely figure for Russia's growth during 2023 then because this is 0.3 the growth I can't invent the number just because the world because Putin invents a number doesn't mean that I have the license to do it as well we don't know we we do know that every key industrial sector is down we know the Auto industry is down not 10 20 30 40 80 70. they're down 99 99 we know the retail industry is down 65 we get this from everybody who's selling into Russia buying from Russia we can see every sector sure there's some smuggling that takes place there's some electronics that get in through some Third Country uh which is which is random smuggling you can you can wait three months and pay a 60 premium you get a replacement screen for your iPhone you can't run a major industrial sector based on intermittent Supply and exorbitant inflated prices so they're in trouble now the workforce issue which is another invented number on unemployment what nobody uh none of your viewers will have realized till this point and none of my academic colleagues understood till recently is that before the war most as Russia's Workforce was already working for the government or for state-owned Enterprises now it's even more so those laid off IBM Engineers if they didn't flee to neighboring countries like like George or Uzbekistan they're employed uh sweeping streets in Russia so he's tried to absorb people by putting them on the pay on the public payroll well how does he pay for that well he's eating into some foreign currency reserves he's had and that's dwindling and also he's cannibalizing that's the second reason other than the propaganda that he exists he's harvesting he's cannibalizing but we can send you the photographs of thousands of refrigerators being torn apart to to harvest chips for for use in military for weapons purposes but Industries are they're seed capital is being harvested as same with paying people to stay employed they're just taking them out out of you know other businesses and try trying to prop them up it's not a sustainable economy he's running deficits and what with the World Bank Professor I can't tell you is is who is funding it there's nobody that's that that is buying Russian dead so you can't run a deficit yeah we can talk a bit more about how President Putin might be controlling the message on the Russian economy and the exactly the sort of information that he is trying to put out there and we can talk about that particularly this week because President Putin gave a state of the union speech a few days ago coinciding with the anniversary of his invasion of Ukraine in it he did insist that the West had failed in its attempt to undermine the Russian economy let's just 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 the regional governments and of course the business community and labor communities we ensured the stability of the economic situation protected citizens save jobs prevented Market shortages and propped up the financial system someone felt who is Vladimir Putin trying to convince there is it the Russian people does he have the Russian people on side already or is he trying to convince the the global community that the the sanctions haven't worked he's trying both audiences you're exactly right it's an excellent question he wants to um to uh to reassure his increasingly anxious population that has uh experiencing uh record unemployment and massive wartime deaths because of uh the fact that he did not have the three-day victory that they claim they are going to have and they're at best stalemated and losing ground uh in Ukraine uh and the fact that they're losing and he wants to wear down the 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 stall him are not succeeding they are succeeding we know that he's losing a half a billion dollars a day on energy people who say oh well India and China are buying the oil that that the West is no longer buying we wish they'd buy more why because the the price they're paying for the oil is so low that their Russia is losing money on every gallon right now it costs Russia 45 a barrel to uh extract it from from the ground and another ten dollars or twelve dollars to ship to India or China because it takes a month longer so what it's costing it's an important issue I mean we're definitely going to go into the the energy situation because we absolutely have to in a few minutes Professor sun and felt but that's just just a little bit back to what President Putin was saying then he was giving a shout out to the Central Bank of Russia and and what it's done to manage to prop up the ruble I mean the ruble is stronger against the dollar than it was in the immediately before the war but does that tell the full story no it's another fake number there's there is nobody that you could put on uh your show that could tell you they've traded the ruble it's not an exchange traded currency so you can't match it up against any currency if it's frozen it's a number of signs by Fiat it's something we haven't seen anything like this in over a century it's a fake number you can there's not even a black market in Rupal said tell any finances listening right now we'll verify this for you you can't get a value on a Rupal because you can't exchange it you can't trade it nobody wants to buy ruples I you if your life or my life depends on we can't same name a single non-russian company that's going to conduct business that wants to conduct business in rupals uh it's it it's it has no no we don't know what the value is it certainly has not been enhanced it's not you could the next question you could ask which you haven't yet is how come the stock market hasn't gone to zero but once again uh the foreign Holdings are frozen you can't sell out any more than they've already sold so it's it's Fallen 60 but not a hundred percent because the the foreign assets can't be sold the the owners of the foreign owners of Russian assets can't sell their Holdings but the government has frozen the numbers so any number that's thrown out there is a false number and there's no source that you can give me that has a a a a a counter uh evidence the evidence is this is where your research comes in isn't it I mean the lack of uh you know of reliable numbers coming out of Russia then you and your team U.S treasury Department the Secretary of the Treasury herself uh Janet Yellen uh the U.S Commerce Department General the secretary Gina raimondo and the Secretary of State uh Anthony blinken have all said that we've changed the narrative on this that even the US government didn't realize that that the international institutions were just recycling Putin's numbers so now anywhere you go in the U.S government you'll see that they now know the Russian economy is failing and they recognize that our numbers were right and the IMF and the World Bank uh we're we're just recycling propaganda from Russia either unwittingly or knowingly okay Professor stay with us I just want to talk a bit about uh the research in you and your team at Yale School of Management have been doing keeping track of which companies have pulled out of Russia so the compiler list there's more than 1400 companies on that list and on that list are over a thousand companies who have in some way curtailed their operations in the country Beyond just what's demanded of them by sanctions that includes Brands like McDonald's Starbucks and others who you can see on the screen now who have exited Russia completely then thou also the companies who have scaled back their present presences in Russia among them are Volkswagen and Sony Google owner alphabet is all also dialing down its operations in Russia and Professor sonenfeld's yield team have also tracked over 240 countries who are as they put it digging in and maintaining full operations in Russia among them Germany's Siemens healthineers and a few others you can see there Air China but over 240 of them so Professor sonnenfeld generating and maintaining that list must have been an enormous undertaking for you and your team has the existence of the list itself been enough to influence the decisions of some of those companies uh yes thanks for asking there is a U.S uh Supreme Court Justice named Louis Brandeis who around 80 years ago said that sunlight is the best antiseptic yeah and as we got into this because the early movers that pulled out on February or 24th of last year told us they were most upset that the media and academics my line of work and your line of work were conflating confusing the good guys with with the fakers the people who were bold movers versus those who were issuing platitudes it's just saying atmospherics though our hearts and minds are with the Ukrainian people here's a dollar fifty to go buy yourself a third of a cup of coffee that they weren't doing anything so we created a grading system of a b c d and f uh and uh those that grading system is calibrated every night we go through the companies and evaluate them and looking at the 1400 major companies over a thousand of them have completely pulled out is either A's and bees and that's been quite powerful but initially most of them were G's and F's but as they had the spotlight of public scrutiny on them through the customer feedback investor feedback employee feedback there's been a mass Exodus six times that of the one in South Africa in 1988. and of those F's as they're called in in your study basically the ones who are digging in who are maintaining their operations as as if uh you know that the war wasn't basically happening um of them 240 whatever of of them that there are would you expect to see any of them change their stunts I mean we're already a year into the war now are those people going to con are those companies going to continue to dig in a great question because there are some that were digging in the U.S Paper Company International Paper was initially denying that they had an active State and it turns out they had the controlling State stake in the largest a large paper maker uh and uh they did ultimately exit uh they even had their own management team was half of that company's management team they've all exited uh and similarly uh the U.S company uh Coke Industries Koch was uh stubbornly staying in there they too did now eventually pull out and they've gone from F to a which is a pretty remarkable move so we've seen some move positively that way we have I'm sorry to say seen a few companies move the other way too uh and they're not happy with us but we've just now uh you're the first to know this just downgraded Carlsberg breweries which had announced they were pulling out and in fact never completed a sale but it also didn't shut down their operations and they continue to harvest their revenues and to fuel Putin's war machine to despite the platitudes that they issued and were frankly disappointed in with Heineken that is saying they're putting their uh their profits in a reserve escrow account in Russia but they're still operating there and they haven't found a buyer unlike ABM Bev which just completely shut down and shut of their operations so uh yeah we're seeing we're seeing there's there's been a movement but the mass Stampede was really in March and April and now we see trickling movement most of it going towards uh more companies pulling out you know we did hear from Heineken earlier this week saying that they hadn't been able to find a buyer and they now expect to to sell their business at a loss if if they do so but is it the case that well they should be accepting a loss wouldn't they should not only be accepting a loss they should accept a complete write down and they won't cost them a penny we have and we've put this research out in ssrn the social science research Network scholarly journals also in the Washington Post and elsewhere we've actually shown naming the companies but also showing the quantitative research of the hundreds and hundreds and hundreds of companies have pulled out completely it actually benefited them against those 400 companies that stayed in and hurt them that it's reducing operational risk reducing Financial Risk reducing reputational risk that it is actually there's no gap between the interests of the shareholders and the interests of other stakeholders and the character of The Firm doing and this is at least one case we're doing the right thing uh is is rewarded financially doing good and doing well are not antithetical to each other and it's surprising that Heineken of all companies which I used to use as a good example didn't recognize that far earlier for example Royal Dutch Shell or or BP or Exxon they they shut down out completely and immediately and BP wrote down nine billion dollars uh uh right away uh and what happened they're rewarded enormously almost two and a half times over in the financial markets so it turned out not costing them anything you don't look at an investment in terms of what it what you what it costs you take a look at what the return is in the return dwarfs 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 trouble paying people they have trouble getting parts they have trouble getting paid uh let alone the cost of their corporate character places like Heineken or Unilever or or Phillips it's bewildering that they're still there okay Professor Simon Val I just want to move on to something that you raised a little earlier earlier on and do that is the fact that you know a major source of income for Russia's war machine is it's sales of oil to the rest of the world however the EU and G7 have sought to limit that by capping the price that it's willing to pay for a barrel of Russian oil nevertheless Russia still managed to export 8.2 million barrels of oil per day to world markets in January that's down 160 000 thereabouts on pre-war levels Asian markets are making up for a drop in uptake from the European Union and I think Professor sonnenfell is going to challenge that in a moment however moscow's oil revenues are definitely down according to the International Energy agency it says that Russia made 36 percent less in the first month of 2023 compared to a year earlier so let's speak to Professor sunfeld on that um what's I mean has the West failed to hit Russia where it really hurts in its energy exports if you if there's anything that's been more effective than than Kiev defending itself it has been the full frontal assault on Russia's energy business Russia has become an economic afterthought Russia is in no way an economic superpower in the world uh their uh their economy people used to say is smaller than Italy it's course smaller than Chile now and that's not just to disparage the character of Italy or Chile they just don't go around with Putin's swag or suggesting that there's some big tough uh neighborhood bully why in fact uh the Russia is two-thirds of its economy was coming from the energy business we now know that nobody needs uh Russia's gas Europe 86 of the eu's gas was coming this time last year when we had we spoken uh 86 percent was coming from Europe from Russia now it's it's less than seven percent and it go it could go to zero and be inconsequential uh is that a permanent change as well can Russia ever regain the EU as a as the major market for its oil and gas no if you talk to the Baltic Nations Latvia Lithuania Estonia who never fell for what Germany and others fell for a a a Russian a short a Russian dependence they'll say you should never have counted on uh uh looking at Nordstrom one or the province of Nordstrom too is uh that they uh and now I think Germany recognizes in fact what Germany did which is another one of the Miracles of the last year is Germany uh uh thanks to Germany they have built six Mega conversion plants and terminals to receive liquefied National Gas most energy analysts either by uh their lack of information or their unwillingness to tell it on TV and in in um in in media circles talking their own book there was a hysteria late last spring driving up oil and gas prices wrongly is in fact liquefied natural gas which has only been commercialized since 2015 2016. it's a century-old technology but only became a major successful industry recently in the last eight years or so is that it's not figured into most of the analyst equations is that's turned out to be an enormous source of energy it can be shipped so now Norway and the U.S provide individually provide more than Russia did at its peak and now Algeria and others are also adding to the equation there are 12 other nations with very competitively priced LNG lng's prices fall around 70 percent in the period of time this last year so it's becoming more and more affordable and the LNG gets converted thanks to Germany and some Iberian Peninsula conversion plans that pre-existed but these massive large ones that they built Germany built it so fast you would have thought they were Chinese companies that built it and who could imagine they could build something this fast and it and now that gets converted from the the Sol the form that it travels and shipped a solid basically as as liquid back into into vapor form to go through pipelines throughout Europe all Putin has is vaporform gases it's natural gas when he with his bravado says and that I we're just going to Pivot and sell it to India and China he can't why because he doesn't have the network of pipes again the IMF the World Bank and most economists at major universities missed that they didn't realize that that Asia needs the the um the network of pipelines uh from Russia that they don't have it'll take them six years to build it and there hasn't one been one shovel dug uh one one trenched dog uh to begin 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 goes nowhere in terms of Russia's oil we would like uh Indian China to buy more of it it's so cheap we the the the the the G7 um the UK the EU uh the US have all uh encouraged a 60 price cap because that's where Russia is at basically just above break even right now Russia is losing uh on every every gallon of every barrel that they produce it cost them forty five forty six dollars a barrel to extract it costed Saudis only 22 and most other OPEC nations only in uh 20 25 a barrel Russia it's so inefficient so uh uh Antiquated in their technology that it cost them way more to pull it out of the ground but then you have to add on to that another 10 or 12 dollars in shipment to go the extra month that it takes to go to India or China uh by barge so that's professor sorry to interrupt you but um to what you're you're saying here and what I want you to just I want to ask you to do here is sort of look into your crystal ball here because you're talking about how Russia is going to you know go about making its money uh in the the time to come we first spoke to you maybe 10 months ago and everything is so very different I mean the European energy sector is unrecognizable from where it was was back then over the next 12 months the next year if the war continues what do we need to keep an eye out for when it comes to the Russian economy uh well we're going to see increased numbers of idled workers on the streets we had even in April we had uh as an economic side we had the mayor of Moscow until he was silenced admitting by April uh toss of all things reported this hundreds of thousands of idle workers were in the streets with nothing to do we're going to see that increase uh equally dramatically it's a conservative estimate that 3 million highly sophisticated Russians have fled the country uh we know uh that this is not exaggerated number because toss itself Again by April had already reported 700 000 have left well where have they gone they've gone to Georgia Moldavia and neighboring Nations but uh I just had a meeting with the ambassador to uh to the U.S from Uzbekistan and they have almost a half a million people from Russia sophisticated I.T professionals have fled Russia for Uzbekistan and the Tashkent industrial park has been soaring so we're seeing not just no Capital go into Russia uh and there's nothing that Russia sells to the world marketplace nothing other than raw materials uh they're they they don't have any finished goods the only value-added product that they bring to the world is cyber terrorism that I don't think anybody wants to purchase all they had was food Fuel and metals we now have alternative sources for all those Commodities they were like American like a colony in a Mercantile system and they're becoming perhaps a vassal state to China and what we're seeing despite the headlines with China right now we're seeing that China doesn't mind topping Russia for its resources but they too realize they don't need Putin nobody in the world needs Russia but it's fine if China and India use Russia for sourcing and keep global market prices down a bit but Russia is making no money on anything they sell and Russia and India which of course are not signatories to the price caps they're benefiting from them they ride the coattails on them because they have no interest in paying more to Putin either so they're paying the same prices as the signatories of the price caps and frankly in the in the eyes of the West it's too low we would like Putin to make a little bit more money so he still keeps producing but he's if he's losing one to two dollars a barrel right now there's no incentive for him to produce oil at all that's that's a problem they're so inefficient okay Professor Jeffrey Steinberg from uh Yale School of Management thank you so much for joining us again for another DW business special it's always great to have you on um and I will get to speak to you again at some point and we'll see whether or not any of your predictions for the next year come to fruition thanks a lot to you who've been watching it's um been great to have you along with us if you have enjoyed this there's plenty more from the DW business team here on the DW news YouTube channel make sure you do check it out maybe I'll see you over there

Channel: DW News

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Length: 28min 21sec (1701 seconds)

Published: Thu Feb 23 2023