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Russia’s isolation from global markets is draining its economy and will destroy its status as an energy superpower, experts say

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  • Russia’s isolation from the West is a disaster for the long-term health of its economy, experts told Insider.

  • Trade isolation limits what Russia can import, making production more expensive.

  • Russia’s situation will also greatly reduce its status as an energy superpower.

Russia’s resistance to sanctions surprised experts in the early months of the war in Ukraine, but there are growing signs that deepening isolation will result in a withered economy for years to come and a greatly diminished status as an energy superpower.

Since absorbing the early blows of Western sanctions, Russia has largely retaliated by closing off the West, trading exclusively with “friendly” countries and strengthening partnerships with nations that can handle doing business with the pariah state.

It has had some success wreaking havoc with its weapons of energy trade, recently cutting off gas flows to Europe’s key Nord Stream 1 pipeline while selling its remaining fuel supplies to buyers such as China and India. Energy sales in those two countries brought Russia over $24 billion in the first three months of the war alone.

But beneath Putin’s defiant display of resilience, signs are building that Russia will pay a high price for isolation in the long run, says Yury Gorodnichenko, an economist at UC Berkeley.

“What they’re proposing to do is a recipe for long-term stagnation,” Gorodnichenko told Insider, pointing to other isolated nations with the world’s weakest economies, specifically North Korea, Afghanistan and Cuba.

Russia’s isolation really began in 2014, worsening its economic position ahead of the invasion of Ukraine. The country recorded a GDP of $1.78 trillion in 2021, down from $2.06 trillion seven years earlier. The International Monetary Fund estimates that GDP will fall by another 6% this year.

“What’s happening is that.” [isolationism] reduces the number of products that [Russia] can buy,” said Jay Zagorski, a professor of markets at Boston University. “He can only buy Indian agricultural goods, he can only buy Chinese goods, things like that. And when you limit yourself to one particular country, you often end up not getting the highest quality or the best price.”

This means that Russia’s ban on the “enemy” US dollar – which accounts for 88% of global foreign exchange transactions – is a huge barrier, allowing sellers to charge a premium and make imports more expensive.

Since the war, trade with countries that introduced sanctions has decreased by 60 percent, and with countries that have not been sanctioned by 40 percent, noted economist Paul Krugman in a recent text, referring to data from the Peterson Institute for International Economics.

Fading energy advantage

All this has a particularly strong impact on Russian energy exports.

Last year, oil and gas sales accounted for 45% of Russia’s GDP, according to the International Energy Agency. However, increasing and sustaining energy production in the long term depends on being able to purchase the machinery and technology needed to power the industry, most of which is produced in the west.

“A lot of oil field exploration equipment and machinery is extremely high-tech. We’re talking about GPS systems and robots that control things deep underground. It’s not just a bunch of guys with a big pipe and a bunch of hammers,” Zagorski said.

The inability to invest in that technology will be a major obstacle to Russian dominance of the energy market in the future, especially as energy-scarce Europe spends billions to increase production over the next decade.

It is also compounded by the fact that Russia now sells its oil to select buyers. This earned countries like China and India deep discounts on Russian oil – and the ability to sell the oil and gas to other buyers for a profit. This not only reduces Russia’s energy revenues, but also forces the nation to cede much of its power in the oil market, Gorodnichenko said.

This is perhaps one of the reasons why Russia is quietly recording its losses from the war. Russia’s finance ministry does not publish monthly reports, but internal documents reviewed by Bloomberg revealed Russia suffered billions in “direct losses” from Western sanctions, and its budget surplus fell by 137 billion rubles, or $2.1 billion, in August.

“The fact that they don’t release a lot of economic data suggests that they know there are costs, but they would like to hide the extent of those costs,” Don Hanna, an economist at UC Berkeley, told Insider. “All this is aimed at covering up the consequences of the invasion of Ukraine on the Russian economy.”

Read the original article on Business Insider

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