This is how the West strangles Putin's economy

The Russian military failure in the Ukraine has contradicted almost all predictions.

First came the humiliating defeat at the gates of kyiv.

Then came the incredible dying blitzkrieg as the attempt to encircle Ukrainian forces in the east, supposedly more favorable terrain, has turned into a slow-motion war of attrition.

What is important about this second Russian setback is that it interacts with another big surprise: the extraordinary—and, in some ways, puzzling—effectiveness, at least for now, of Western economic sanctions against the Putin regime, sanctions that are working an unexpected way.

As soon as the war began, there was much talk of putting economic pressure on the invading country.

Most of the discussions focused on ways to cut off Russian exports, especially sales of oil and natural gas.

Unfortunately, however, significant moves on that front have been embarrassingly rare.

The Biden administration has banned imports of Russian oil, but this will have little effect if other countries don't follow suit.

As a result, Russian exports have held up, and the country appears to be on track for a record trade surplus.

This being the case, is Putin winning the economic war?

No, he's losing it.

This growing surplus is a sign of weakness, not strength, since it mainly reflects a drop in the country's imports, something that even analysts who have the favor of the State say is weighing down its economy.

Indeed, Russia is making a lot of money selling oil and gas, but it is finding it hard to use it to buy what it needs, which apparently includes critical components used in making tanks and other military equipment.

Why does Russia apparently have so much trouble buying goods?

Part of the answer is that many of the world's democracies have banned a whole range of items from being sold to it: weapons, of course, but also industrial components that can, directly or indirectly, be used to produce them.

However, this cannot be all, because, apparently, Russia has been left without access to imports even from countries that have not imposed sanctions.

Matt Klein of

, calculates that in March the exports of the democracies allied with Russia had fallen by 53% with respect to their normal levels (and the first indications suggest that in April they fell even more).

But it is that the exports of the neutral or pro-Russian countries, including China, had fallen almost the same: 45%.

In part, this could reflect, as Klein indicates, the fear, also on the part of non-allied countries, of "being on the bad side of sanctions".

Imagine that you are the CEO of a Chinese company that relies on components produced in South Korea, Japan, or the United States.

If you closed deals with Russia that could be seen as aiding Putin's war, wouldn't you be concerned that sanctions would be imposed on you as well?

Penalties to the Russian financial system, such as the freezing of central bank reserves and the exclusion of some major private banks from international payment systems, could also be complicating imports.

Hard currency may be flowing into Russia, but using it to buy goods abroad has become difficult.

You can't do modern business with suitcases full of $100 bills.

Now, it is possible that, over time, Russia will find alternative solutions that avoid Western sanctions.

But time is something that Putin does not seem to have.

As I said, everything indicates that the war in Ukraine has become a war of attrition, and it seems unlikely that Putin will win it.

Russia has suffered huge losses of equipment that it will not be able to replace soon, while Ukraine is receiving a lot of material from the West.

It would not be surprising if this conflict ended, and not in Putin's favor, before Russia found a way around Western sanctions.

One final remark: the effect of the sanctions against Russia provides a graphic, albeit terrifying, demonstration of something economists often try to draw attention to, though rarely succeed in getting across: imports, not exports, they are the crucial element of international trade.

In other words, the benefits of trade should not be measured in terms of the jobs it creates and the income it generates for exporting companies, whose workers, after all, could be dedicated to something else.

Rather, the benefits of trade are derived from the useful goods and services that other countries provide to the citizens of the host country.

And recording a trade surplus is not a "profit";

if anything, it means that you are giving the world more than you receive, getting only IOUs in return.

Yes, I know that, in practice, these statements have qualifications.

Trade surpluses can sometimes help boost a weak economy, and while imports make a country rich, they can displace and impoverish some workers.

But what is happening in Russia illustrates the essential truth of these observations.

The Russian trade surplus is a sign of weakness, not strength;

the country's exports are (unfortunately) holding up well despite its status as a pariah state, but its economy is being crippled by the import blockade.

And that, in turn, means that Putin is losing both the economic and military wars.

Paul Krugman

Exclusive content for subscribers

read without limits

subscribe

I'm already a subscriber