It is now pretty much consensus that the sanctions on Russia have failed. Yet their failure was extremely predictable. Why did Western policymakers think they would work? It appears that they did not undertake a realistic economic analysis. The invasion caught many by surprise, to be sure, but this doesn’t excuse policymakers from not gaming out a sanctions scenario beforehand.
At a macro-level it is not hard to show that the sanctions have failed. You can look at Russian GDP projections from the IMF for 2022 which see the Russian economy contracting by 3.4% – a far cry from the ~50% decline President Biden promised us. Or you can look at falling Russian inflation and interest rates – and compare them to rising inflation and interest rates in the West. Or you can simply look at the looming energy crisis in Europe. Whichever way you cut it, the macro failure of the sanctions is clear.
But what about the micro level? Many Western companies ceased doing business with Russia, which means the structure of the Russian economy will have to change dramatically. One of the most publicised Russian responses was their creation of an alternative to McDonald’s called ‘Vkusno I Tochka’ which translates to ‘Tasty and That’s It’. The company simply cannibalised the restaurants and supply chains McDonald’s was using and changed the name on the sign. Since then, the company has apparently expanded into Belarus.
It was not hard for the Russians to rebrand McDonald’s outlets within the country and keep them operating. All they really lost is the brand. But what about an industry that requires manufacturing and engineering? That should be far more difficult to ‘substitute’ than a restaurant chain. Let’s look at the Russian car market in detail to get a sense of how it has been impacted by sanctions.
The first question to ask is: are Russians unable to buy new cars due to the sanctions? There are plenty of headlines about huge contractions in the Russian new car market, but they are obviously misleading. Why? Because the Russian economy has fallen into recession since the invasion. So some of the contraction of demand for cars is simply due to the larger economic contraction.
Let’s analyse this properly using regression techniques. Below is a linear regression of real GDP on car sales growth between 2010-21. An estimate for car sales growth in 2022 together with an IMF estimate of real GDP growth is included – the orange dot.
What we see is that the orange dot largely ‘fits’ the regression line. This means that some of the decline in car sales is likely due to the recession. But because the dot sits above the regression line, we know that the fall in used car sales is somewhat higher than would be expected from the projected fall in real GDP.
We can use this regression to ‘forecast’ car sales growth based on the relationship between real GDP and car sales growth, given the projected fall in real GDP. And we can compare this to the actual decline in car sales growth.
Here we see the regression predicted that car sales growth would fall around 31% for a 3.4% contraction in real GDP. But the actual fall we saw was around 62%. So we can conclude that around half of the decline in new car sales in Russia was caused by the recession and around half was caused by sanctions targeting the car market.
This fits with some of the more reliable news reports from Russia. For example, Reuters reports that President Putin has admitted there have been some disruptions in the Russian car market and has suggested price caps to ensure that Russian carmakers do not take advantage of the shortage of cars to gouge Russian customers. The head of Avtovaz, one of Russia’s leading carmakers, said the industry had “never before faced such a large-scale and comprehensive challenge”.
How do we evaluate the roughly 30% decline in car sales that we can attribute to the sanctions? As the Russians themselves admit, it has undoubtedly introduced challenges. But a 30% decline is, on balance, not that bad – especially considering that we are not even a year into the sanctions. It seems likely the Russians will get the market for new cars back on track within a year or two.
So one-third of would-be new car buyers will have to delay their purchases for a year or two. Inconvenient, but hardly a nation-destroying crisis – and far less onerous for the average Russian than the energy shortages Europe faces over the next two years.
What about long-term changes to the composition of the Russian automotive market? This, I would argue, is far more interesting to study. As the multipolar world emerges, the changes Russia sees to its automotive market may provide a template for many other countries. The two charts below show the percent of cars sold in Russia that are of Russian and Chinese origin versus the rest, in 2021 and 2022.
Sales of Russian models have increased enormously, doubling as a share of the total and now making up more than half the overall market. The Chinese share of the market has also tripled and now comprises almost a fifth of the total; Chinese models now compete with all other international models.
What Russia is showing is that a country can have a relatively functional car market without relying on Western and Western-aligned car manufacturers. In the coming years, it seems likely that Russian car shortages will cease. But unless something dramatic happens, it seems unlikely that Russians will start buying large quantities of international models again.
By 2030, there is every chance that the car markets in other non-Western countries will look more like Russia’s car market in 2022 than Russia’s car market in 2021. Once again, we see that the sanctions imposed on Russia are self-harming.
In the 1990s, the West used to see its economic influence in countries like Russia as a victory and a show of Western power. This was always the correct view. Now our leaders see the exclusion of Western products from foreign markets as a victory. This is such a muddled view it is almost comical. It is the sort of view that shows how ill-prepared our leadership class are for navigating the new multipolar world.
Philip Pilkington is a macroeconomist and investment professional. You can follow him on Twitter here and subscribe to his Substack newsletter here.
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Anyone who pays £199 pa for a subscription to Nature deserves all they misinformation they get for their money.
Fraud? Sounds more like evil to me
The simply the scientific process statement is very telling. The scientific process is obviously that – regardless of any private opinions of people who do The Science[tm] for a living – work on The Science[tm] needs funding and hence, the sciencers must deliver whatever those who are willing to fund their sciencing want. Only naive people believe sciencing would be an open-ended quest to determine true information about natural phenomena. It’s really about fabricating justifications for political goals those who fund sciencing want to achieve. Preferably with lots of math and tables in them so that laymen both end up suitably impressed and rendered incapable of asking unwelcome question like Is the emperor really clothed?
Yes, giving good slide is essential for masking the truth
The NIH doles out $billions each year in grants to private pharma companies. These same companies give back $millions to NIH scientists as royalties (kickbacks) for inventions these scientists created while at work in NIH labs. Legalised bribery.
The standout message for me is the inefficiency of peer review, whether accidental or deliberate. I have a plan. ALL papers should first appear in preprint and be available for anyone to examine. Then any and all informed analysts can dissect work before it gains the imprimatur of full publication. At present the system only allows post hoc comment, from where the taking down of a paper is far more difficult.
This is such a brilliant idea (I would say that of course) that it will never be adopted.
ISTR a retired editor of “The Lancet” saying that in his (long) experience over 90% of fully peer-reviewed papers eventually proved to be wrong – and a depressing percentage proved to be fraudulent.
In reality, “Peer Review” is no better than allowing students to mark their friends’ exam papers.
The Corruption of science for political purposes. ———We no longer have “Science”. It has morphed into “Official Science”. ——–Scientists working for governments have now become an army of data adjusters providing the excuses for government policy on everything from climate to covid. ———-“Ah yes, science. One gets such wholesale returns of conjecture from such a trifling investment of fact” –Mark Twain. —And boy do governments know that and why they seek to convince us all that since all scientists agree then so should you.
$cientists are now down there with Politicians, Lawyers and Estate Agents in the “honest and trustworthy” stakes.