Location: Russia
Russian Central Bank Assets and EU’s Next Steps
On May 8th, the Stockholm Institute of Transition Economics (SITE) and the Stockholm Centre for Eastern European Studies (SCEEUS) will co-host a roundtable discussion on “Russian Central Bank Assets and the EU’s Next Steps.” The event will feature invited guest speaker Nigel Gould-Davis from the International Institute for Strategic Studies (IISS).
Discussion Theme
During the Swedish EU Presidency, seizing Russian assets held in Europe was a priority. This work has yielded some results, but the issue is moving forward internationally, with US, Canada and the UK taking a forward-leaning approach. In view of the upcoming G7 meeting in June, it is imperative for the EU to unite in thinking creatively about the 300 billion currently held in the EU. To support Ukraine, what are the next steps for the EU in making use of Russian Central Bank assets?
Speaker
Nigel Gould-Davis is a Senior Fellow at the International Institute for Strategic Studies (IISS) and forefront figure in the field of EU managing frozen Russian assets.
The roundtable will be moderated by Torbjörn Becker, Director of SITE.
Registration by Invitation
Admission to the round table discussion at the Stockholm School of Economics (SSE) is by invitation only. Please contact site@hhs.se if you have any questions regarding the event.
This event is organized by the Stockholm Institute of Transition Economics (SITE) and the Stockholm Centre for Eastern European Studies (SCEEUS).
KSE Institute: Further Weakening of Russian Macroeconomic Stability Will Require Additional Measures
The KSE Institute has recently released its March Russia Chartbook titled “Further Weakening of Russian Macroeconomic Stability Will Require Additional Measures.” The chartbook examines Russia’s current economic landscape, highlighting key trends and challenges. Notably, Russia’s foreign trade has stabilized at a new post-sanctions baseline, characterized by reduced exports and a notable recovery in imports. Meanwhile, on the fiscal front, escalating expenditures are contributing to an uptick in the budget deficit.
As macroeconomic buffers continue to diminish, policymakers face increasingly limited maneuverability. The withdrawal of war-related fiscal stimulus is anticipated to unveil underlying vulnerabilities within the economy. Additionally, Russia’s shadow fleet is experiencing heightened scrutiny, with tanker designations by OFAC proving to be an effective strategy. Despite these developments, there remains a pressing need for further measures to undermine Russian macroeconomic stability and curtail its capacity for military engagement.
To read the whole of KSE Institute’s latest Russia Chartbook, visit the presentation by Benjamin Hilgenstock, Senior Economist, Yuliia Pavytska, Manager of the Sanctions Programme, and Vira Ivanchuk, Research Analyst.
To access the entire KSE Institute’s latest Russia Chartbook, download the presentation by Benjamin Hilgenstock, Senior Economist, Yuliia Pavytska, Manager of the Sanctions Programme, and Vira Ivanchuk, Research Analyst.
How Has the War in Ukraine Affected Sentiments in Russia?
On the 26th of March, Professor Olle Hammar from Linnaeus University will deliver a presentation on his working paper titled “How Has the War in Ukraine Affected Sentiments in Russia?” at SSE, with the option to attend online via Zoom.
Working Paper: How Has the War in Ukraine Affected Sentiments in Russia?
The researchers investigate how the war in Ukraine has impacted opinions and sentiments in Russia. Utilizing survey data from Gallup World Poll and the Levada Center, they scrutinize the effects on political support for Putin, attitudes towards the West, subjective well-being, optimism about the future, and migration aspirations. Their primary focus lies on assessing the repercussions of the full-scale invasion in February 2022 and the military mobilization of young men in September 2022. Additionally, they incorporate data on Russian casualties to explore potential regional heterogeneity within Russia.
About the Speaker
Olle Hammar is an Assistant Professor at the Department of Economics and Statistics at Linnaeus University and a Researcher at the Institute for Futures Studies in Stockholm. He is also affiliated with IZA, IFN, UCFS, UCLS, and UIL. Previously, he worked as a postdoctoral researcher at IFN and as a visiting scholar at UC Berkeley and Columbia University. He holds a Ph.D. in economics from Uppsala University.
Join the Seminar
If you wish to participate in the SITE Seminar at SSE or join online via Zoom, access to the seminar will be granted exclusively through invitation. To express your interest in attending, kindly reach out to site@hhs.se. Please adhere to the following instructions:
- In the subject line, type “SITE Seminar: [INSERT SEMINAR TITLE]”
- Specify your affiliation and field of interest.
- Additionally, indicate your preference for attending either in person or online.
For confirmed participants, a Zoom link will be shared via email prior to the event, along with comprehensive instructions.
Social Mobility in Times of Revolutions and Regime Changes
On the 22nd of March, Professor Andrei Markevich from the University of Helsinki will deliver a presentation on his working paper titled “Social Mobility in Times of Revolutions and Regime Changes: Persistence of Elites in 20th Century Russia” at SSE.
Working Paper: Social Mobility in Times of Revolutions and Regime Changes: Persistence of Elites in 20th-Century Russia
How much do radical changes of social order affect the persistence of elites? To address this question, we analyze the impact of the 1917 Russian Revolution, measuring the spread of Tsarist elite surnames among Soviet and modern Russian elites. We document a quicker decline of elite representation at the start of the Soviet era, but mostly for political and military outcomes during Stalin’s reign. Over the longer haul (1914-2022) we find that, despite a series of post-revolutionary shocks during the 20th century, elite persistence was substantial and very similar for elites from different backgrounds. However, the persistence rate of 0.5 is smaller than the multi-generational estimates Gregory Clark finds for other countries (0.7-0.8). We provide suggestive evidence that family traits and within-elite social capital generated persistence. We also document a substantial contribution of Soviet anti-elite repressive policies to the loss of social status before WWII.
About the Speaker
Andrei Markevich is a university lecturer at the University of Helsinki (Finland) and a professor (on leave) at the New Economic School (Moscow, Russia). He studies the economic history of Russia, Eastern Europe, and North Eurasia. The development of the Russian Empire and the Soviet Union in the 18th–20th centuries is at the center of his research. He focuses on the interconnections between institutions and economic growth, the political economy of state socialism, and the long-run consequences of history.
He has published in international refereed journals, including the American Economic Review, Review of Economics and Statistics, European Economic Review, Journal of Economic Literature, Journal of Economic History, Journal of Development Economics, and Journal of Public Economics. The paper on Russian national income in 1913-1928 was awarded the Russian National Prize in Applied Economics in 2011. He was a Marie Curie Research Fellow at the University of Warwick from 2005 to 2007 and a national research fellow at the Hoover Institution, Stanford from 2014 to 2015.
Join the Seminar
If you wish to participate in the SITE Seminar at SSE or join online via Zoom, access to the seminar will be granted exclusively through invitation. To express your interest in attending, kindly reach out to site@hhs.se. Please adhere to the following instructions:
- In the subject line, type “SITE Seminar: [INSERT SEMINAR TITLE]”
- Specify your affiliation and field of interest.
- Additionally, indicate your preference for attending either in person or online.
For confirmed participants, a Zoom link will be shared via email prior to the event, along with comprehensive instructions.
Sanctions on Russia: Getting the Facts Right
The important strategic role that sanctions play in the efforts to constrain Russia’s geopolitical ambitions and end its brutal war on Ukraine is often questioned and diminished in the public debate. This policy brief, authored by a collective of experts from various countries, shares insights on the complexities surrounding the use of sanctions against Russia, in light of its illegal aggression towards Ukraine. The aim is to facilitate a public discussion based on facts and reduce the risk that the debate falls prey to the information war.
Sanctions are a pivotal component in the array of strategies deployed to address the threat posed by Russia to the rule-based international order. Contrary to views minimizing their impact, evidence and research suggest that sanctions, particularly those targeting Russian energy exports, have significantly affected Russia’s macroeconomic stability [1,2,3]. Between 2022 and 2023:
- merchandise exports fell by 28 percent,
- the trade surplus decreased by 62 percent,
- and the current account surplus dropped by 79 percent (see the Bank of Russia’s external sector statistics here).
Although 2022 represents an extraordinarily high baseline due to the delayed impacts of energy sanctions, the $190 billion decrease in foreign currency inflows during this time has already made a significant difference for Russia. This amount is equivalent to about two years of Russia’s current military spending, or around 10 percent of Russia’s yearly GDP, depending on the figures. Our estimates suggest that Russia’s losses due to the oil price cap and import embargo alone amount to several percent of its GDP [3,4]. These losses have contributed to the ruble’s continued weakness and have forced Russian authorities to sharply increase interest rates, which will have painful ripple effects throughout the economy in the coming months and years. Furthermore, the international sanctions coalition’s freezing of about $300 billion of the Bank of Russia’s reserves has significantly curtailed the central bank’s ability to manage the Russian economy in this era of war and sanctions.
Sanctions Enforcement
Addressing the enforcement of sanctions, it is crucial to acknowledge the extensive and continuous work undertaken by governments, think tanks, and the private sector to identify and close loopholes that facilitate sanctions evasion. Suggesting that such efforts are futile, often with arguments that lack solid evidence, potentially undermines these contributions, and furthermore provides (perhaps unintended) support to those advocating for a dismantling of the sanctions regime. We do not deny that several key aspects are facing challenges, from the oil price cap to export controls on military and dual-use goods. However, the path forward is to step up efforts and strengthen the implementation and enforcement – not to abandon the strategy altogether. Yes, Russia’s shadow fleet threatens the fundamental mechanism of the oil sanctions and, namely its reliance on Western services [4,5,6]. However, recent actions by the U.S. Treasury Department have shown that the sanctioning coalition can in fact weaken Russia’s ability to work around the energy sanctions. Specifically, the approach to designate (i.e., sanction) individual tankers has effectively removed them from the Russian oil trade. More vessels could be targeted in a similar way to gradually step-up the pressure on Russia [7]. While Russia continues to have access to many products identified as critical for the military industry (for instance semiconductors) [8], it has been shown that Russia pays significant mark-ups for these goods to compensate for the many layers of intermediaries involved in circumvention schemes. Sanctions, even when imperfect, thus still work as trade barriers. In addition to existing efforts and undertakings, companies which help Russia evade export controls can be sanctioned, even when registered in countries outside of the sanctioning coalition. Furthermore, compliance efforts within, and against, western companies, who remain extremely important for Russia, can be stepped up.
The Russian Economy
Many recent newspaper articles have been centered around the theme of Russia’s surprisingly resilient economy. We find these articles to generally be superficial and missing a key point: Russia is transitioning to a war economy, driven by massive and unsustainable public spending. In 2024, military spending is projected to boost Russia’s GDP growth by at least 2.5 percentage points, driven by a planned $100 billion in defense expenditures [9]. However, seeing this for what it is, namely war-spending, raises significant concerns about the sustainability of this growth, as it eats into existing reserves and crowds out investments in areas with a larger long-term growth potential. The massive spending also feeds inflation in consumer prices and wages, in particular as private investment levels are low and the labor market is short on competent labor. This puts pressure on monetary policy causing the central bank to increase interest rates even further, to compensate for the overly stimulating fiscal policy.
Further, it is important to bear in mind that, beyond this stimulus, the Russian economy is characterised by fundamental weaknesses. Russia has for many years dealt with anaemic growth due to low productivity gains and unfavourable demographics. Since the first round of sanctions was imposed on Russia, following its illegal annexation of Crimea in 2014, growth has hovered at around 1 percent per year on average – abysmal for an emerging market with catch-up potential. More recently, current sanctions and war expenditures have made Russia dramatically underperform compared to other oil-exporting countries [10]. Moreover, none of the normal (non-war related) growth fundamentals is likely to improve. Rather, the military aggression and the ensuing sanctions have made things worse. Hundreds of thousands of Russians have been killed or wounded in the war; many more have left the country to either escape the Putin regime or mobilization. Those leaving are often the younger and better educated, worsening the already dire demographic situation, and reinforcing the labor market inefficiencies. Additionally, with the country largely cut off from the world’s most important financial markets, investments in the Russian economy are completely insufficient [11].
As a result, Russia will be increasingly dependent on fossil fuel extraction and exports, a strategy that holds limited promise as considerations related to climate change continue to gain importance. With the loss of the European market, either due to sanctions or Putin’s failed attempt to weaponize gas flows to Europe, Russia finds itself dependent on a limited number of buyers for its oil and gas. Such dependency compels Russia to accept painful discounts and increases its exposure to market risks and price fluctuations [12].
The Cost of Sanctions
Sanctions have not been without costs for the countries imposing them. Nonetheless, the sanctioning countries are in a much better position than Russia. Any sanction strategy is necessarily a tradeoff between maximizing the sanctioned country’s economic loss while minimizing the loss to the sanctioning countries [9], but there are at least two qualifications to bear in mind. The first is that some sanctions imply very low losses – if any – while others may carry limited short term losses but longer term gains. This includes the oil-price cap that allows many importing countries to buy Russian oil at a discount [3], and policies to reduce energy demand, which squeezes Russia’s oil-income [13]. These policies may also initially hurt sanctioning countries, but in the long term facilitate an investment in energy self-sufficiency. Similarly, trade sanctions also imply some protection of one’s own industry, meaning that such sanctions may in fact bring benefits to the sanctioning countries – at least in the short run. The second qualification is that, in cases where sanctions do imply a cost to the sanctioning countries, the question is what cost is reasonable. Russia’s economy is many times smaller than, for instance, the EU’s economy. This gives the EU a strategic advantage akin to that in Texas hold’em poker: going dollar for dollar and euro for euro, Russia is bound to go bankrupt. Currently, Russia allocates a significantly larger portion of its GDP to its war machine than most sanctioning countries spend on their defense. That alone suggests sanctioning countries may want to go beyond dollar for dollar as it is cheaper to stop Russia economically today than on a future battlefield. This points to the bigger question: what would be the future cost of not sanctioning Russia today? Many accredit the weak response from the West to the annexation of Crimea in 2014 as part of the explanation behind Putin’s decision to pursue the current full-scale invasion of Ukraine. Similarly, an unwillingness to bear limited costs today may entail much more substantial costs tomorrow.
When discussing the cost of sanctions, one must also take into account Russia’s counter moves and whether they are credible [14]. Often, they are not [3, 15]. Fear-inducing platitudes, such that China and Russia will reshape the global financial system to insulate themselves from the West’s economic statecraft tools, circulate broadly. We do not deny that these countries are undertaking measures in this direction, but it is much harder to do so in practice than in political speeches. For instance, moving away from the U.S. dollar (and the Euro) in international trade (aside from in bilateral trade relations that are roughly balanced) is highly challenging. In such a trade, conducted without the U.S. dollar, one side of the bargain will end up with a large amount of currency that it does not need and cannot exchange, at scale, for hard currency. As long as a transaction is conducted in U.S. dollar, the U.S. financial system is involved via corresponding accounts, and the threat of secondary sanctions remains powerful. We have seen examples of this in recent months, following President Biden’s executive order on December 22, 2023.
One of Many Tools
Finally, we and other proponents of sanctions do not view them as a panacea, or an alternative to the essential military and financial support that Ukraine requires. Rather, we maintain that sanctions are a critical component of a multi-pronged strategy aimed at halting Putin’s unlawful and aggressive war against Ukraine, a war that threatens not only Ukraine, but peace, liberty, and prosperity across Europe. The necessity for sanctions becomes clear when considering the alternative: a Russian regime with access to $300 billion in the central bank’s reserves, the ability to earn billions more from fossil fuel exports, and to freely acquire advanced Western technology for its military operations against Ukrainian civilians. In fact, the less successful the economic statecraft measures are, the greater the need for military and financial aid to Ukraine becomes, alongside broader indirect costs such as increased defense spending, higher interest rates, and inflation in sanctioning countries. A case in point is the West’s provision of vital – yet expensive – air defense systems to Ukraine, required to counteract Russian missiles and drones, which in turn are enabled by access to Western technology. Abandoning sanctions would only exacerbate this type of challenges.
Conclusion
The discourse on sanctions against Russia necessitates a nuanced understanding of their role within the context of the broader strategy against Russia. It is critical to understand that shallow statements and misinformed opinions become part of the information war, and that the effectiveness of sanctions also depends on all stakeholders’ perceptions about the sanctioning regime’s effectiveness and long run sustainability. Supporting Ukraine in its struggle against the Russian aggression is not a matter of choosing between material support and sanctions; rather, Ukraine’s allies must employ all available tools to ensure Ukraine’s victory. While sanctions alone are not a cure-all, they are indispensable in the concerted effort to support Ukraine and restore peace and stability in the region. The way forward is thus to make the sanctions even more effective and to strengthen the enforcement, not to abandon them.
References
[1] “Russia Chartbook”. KSE Institute, February 2024
[2] “One year of sanctions: Russia’s oil export revenues cut by EUR 34 bn”. Center for Research on Energy and Clean Air, December 2023
[3] “The Price Cap on Russian Oil: A Quantitative Analysis”. Wachtmeister, H., Gars, J. and Spiro, D, July 2023
[4] Spiro, D. Gars, J, and Wachtmeister, H. (2023). “The effects of an EU import and shipping embargo on Russian oil income,” mimeo
[5] “Energy Sanctions: Four Key Steps to Constrain Russia in 2024 and Beyond”. International Working Group on Russian Sanctions & KSE Institute, February 2024
[6] “Tracking the impacts of G7 & EU’s sanctions on Russian oil”. Center for Research on Energy and Clean Air
[7] “Russia Oil Tracker”. KSE Institute, February 2024
[8] “Challenges of Export Controls Enforcement: How Russia Continues to Import Components for Its Military Production”. International Working Group on Russian Sanctions & KSE Institute, January 2024
[9] “Russia Plans Huge Defense Spending Hike in 2024 as War Drags”. Bloomberg, September 2023
[10] “Sanctions and Russia’s War: Limiting Putin’s Capabilities”. U.S. Department of the Treasury, December 2023
[11] “World Investment Report 2023”. UNCTAD
[12] “Russia-China energy relations since 24 February: Consequences and options for Europe”. Swedish Institute of International Affairs, June 2023
[13] Gars, J., Spiro, D. and Wachtmeister, H. (2022). “The effect of European fuel-tax cuts on the oil income of Russia”. Nature Energy, 7(10), pp.989-997
[14] Spiro, D. (2023). “Economic Warfare”. Available at SSRN 4445359
[15] Gars, J., Spiro, D. and Wachtmeister, H., (2023). “Were Russia’s threats of reduced oil exports credible?”. Working paper
Disclaimer: Opinions expressed in policy briefs and other publications are those of the authors; they do not necessarily reflect those of the FREE Network and its research institutes.
Russian Wheat Policies and Georgia’s Strategic Trade Policies
Russia is known for periodically halting its grain exports to impact global wheat prices. This has become a significant policy concern in recent years, most notably during the Covid-19 pandemic and in the wake of Russia’s war in Ukraine. Georgia heavily depends on wheat imports, and over 95 percent of its wheat has historically been sourced from Russia. Despite Russia’s periodic bans and restrictions on wheat exports occurring every 2-3 years, Georgia is yet to effectively diversify its sources of wheat imports. This policy brief analyses the impact of Russia’s most recent wheat policies on Georgia’s wheat market, examines Georgia’s response, and provides policy recommendations in this regard.
In June 2023, the Georgian government introduced a temporary import duty on wheat flour imported from Russia in response to requests from the Georgian Flour Producers Association. The association began advocating for an import duty after Russia, in 2021, imposed a so-called “floating tariff” on wheat which made it relatively more expensive to import wheat in comparison to wheat flour. As a result of the “floating tariff” on wheat, wheat flour imports skyrocketed and almost fully substituted wheat imports. Eventually, many Georgian mills shut down and local wheat producers struggled to sell domestically produced wheat. Such an increase in flour imports raises the risk of completely replacing domestically produced flour with flour imported from Russia.
To address the above, the government has implemented a temporary import duty of 200 GEL (75 USD) per ton on wheat flour imported from Russia (the average import price ranges between 225 USD/ton and 435 USD/ton). In turn, millers have agreed to purchase 1 kilogram of wheat from Georgian farmers for 0.7 GEL (0.3 USD). This policy measure is in effect until March 1, 2024.
The Georgian Flour Producers Association advocates for an extension of the temporary import duty beyond March 1, 2024, to uphold fair competition in the wheat and flour market. According to the Georgian Flour Producers Association, an extension is desirable due to the following (Resonance daily, 2024):
- Under the import duty, fair competition between wheat flour and wheat has been restored, and Georgian mills have resumed their operations.
- Following the government intervention, farmers have successfully sold over 50,000 tons (on average half of the annual production) of domestically produced wheat. The Ministry of Environmental Protection and Agriculture has reported a 60 percent increase in local wheat production over the past two years, with expectations of sustained growth.
- Wheat imports have resumed, with Georgia importing 20,000 to 25,000 tons of wheat monthly, while prior to the government intervention, the average monthly wheat imports amounted to 15,337 tons (in 2022). Additionally, 8,000 to 12,000 tons of wheat flour, on average, are also imported monthly, while in the absence of government intervention, wheat flour imports surged to over 15,000 tons (in 2022).
- Post-intervention, the price of 100 kilograms of first-quality flour has remained stable, ranging from 45 to 49 GEL. Consequently, the price of bread has not increased but remains steady.
- The import duty has generated an additional 20 million GEL in government revenue.
- Through the efforts of the mills, the country now enjoys a steady and strategically managed supply of wheat, in accordance with UN recommendations. Coupled with the seasonal harvest of Georgian wheat, this ensures complete food security in any unforeseen critical scenario.
While many arguments support the decision to preserve the import duty on wheat flour, in order to make an informed decision on that matter, it is essential to thoroughly assess production, trade and price dynamics in the wheat market in Georgia. Additionally, to design adequate trade policy measures, one has also to consider the issue in a broader perspective and assess the risks associated with a high dependency on Russian wheat, especially given Russia’s history of imposing wheat export restrictions.
Russian Policy on the Wheat Market
Russia has long been one of the dominant players on the global wheat market, and its periodic decisions to halt grain exports have heavily affected international wheat prices (see Table 1). This concern became especially stringent in recent years, during the Covid-19 pandemic and Russia’s war in Ukraine.
Table 1. Russia’s policy interventions in the wheat market and their estimated impact on wheat prices, 2007-2023.
Source: United States Department of Agriculture, 2022.
The Government of the Russian Federation.
The Kansas City Wheat Futures, The U.S. Wheat Associates.
One of Russia’s most recent interventions in the wheat market is its withdrawal from the Black Sea Grain Initiative – an agreement between Russia, Ukraine, Turkey, and the United Nations (UN) during the Russian invasion of Ukraine on the Safe Transportation of Grain and Foodstuffs from Ukrainian ports. While Georgia doesn’t directly import wheat from Ukraine and isn’t immediately threatened by famine, Russia’s export policies regarding wheat have raised significant food security concerns in the country. Georgia heavily depends on wheat imports from Russia, with over 95 percent of its wheat historically being sourced from there. Despite Russia’s recurrent bans and restrictions on wheat exports every 2-3 years, Georgia is yet to successfully diversify its import sources.
The Georgian Wheat Market in Figures
Domestic Production
Historically, Georgia’s agricultural sector has struggled to achieve a large-scale and sufficient wheat production due to the prevalence of small-sized farms. However, over the past decade, Georgian domestic wheat production has shown significant growth (see Figure 1). This growth has been particularly sizeable in recent years, with production increasing by 32 and 53 percent in 2021 and 2022, respectively, as compared to 2020.
Figure 1. Wheat production in Georgia, 2014-2022.
Source: Geostat, 2024.
Such increase in local production positively contributes to the self-sufficiency ratio, which increased from 7 percent in 2014 to 22 percent in 2022, in turn implying higher food security levels.
Wheat Imports
Before the introduction of Russia’s floating tariff on wheat, wheat flour imports to Georgia were almost non-existent. However, after the floating tariff was imposed on wheat, imports of wheat flour increased more than 20 times – from 743 tons in January 2021 to 15,086 tons in May 2023 – peaking at 23,651 tons in August 2022 (see Figure 2). At the same time wheat imports declined by almost 60 percent, from 29,397 tons in January 2021 to 12,133 tons in May 2023, with the smallest import quantity being 2,743 tons in May 2022 (as depicted in Figure 2).
Figure 2. Georgian wheat and wheat flour imports, 2021-2023.
Source: Geostat, 2024. Note: Imports include meslin (a mixture of wheat and rye grains).
After the introduction of the temporary import duty on wheat flour in June 2023, wheat imports have picked up, although not reaching the levels seen in 2021. Similarly, wheat flour imports have declined while remaining at higher levels than in 2021. This indicates a change in Georgia’s wheat market dynamics. Historically, Georgia predominantly imported wheat; now it imports both wheat and wheat flour. This shift must be considered in future policy design, as it has implications for domestic wheat farmers and mills.
The continued wheat flour imports, despite the temporary import duty imposed by the Georgian Government can likely be attributed to a smaller price gap between wheat and wheat flour import prices (see Table 2).
Table 2. Average import prices of wheat and wheat flour in Georgia, 2021-2023.
Source: Geostat, 2024.
In 2021, prior to Russia’s introduction of a floating tariff on wheat, the import price of wheat flour in Georgia was 24 percent higher than the import price of wheat. After the introduction of the floating tariff, importing wheat became more expensive, and the import price gap between wheat flour and wheat decreased to 22 percent by the end of 2021. Subsequently, in 2022, this gap further narrowed, and by the first half of 2023, the import price of wheat flour was 5 percent lower than the import price of wheat. This significant decrease in the price gap resulted in nearly full substitution of wheat imports with wheat flour imports. After the introduction of the import duty on wheat flour and as international wheat prices declined, a marginal positive price gap has reappeared, amounting to just 1 percent. As it stands, importing wheat flour remains more advantageous than importing wheat.
Price Effects
Russia’s floating tariff on wheat led to increased bread and wheat flour prices in 2021-2022. In June 2022, bread prices experienced the most significant surge, increasing by 36 percent, while wheat flour prices reached their peak in September 2022 with a year-on-year increase of 41 percent (see Figure 3). The primary reason for this was the record increase in wheat prices, leading to a corresponding surge in wheat flour prices in 2022. This spike occurred as the world price of wheat reached its highest point in five years.
Figure 3. Annual change in bread and wheat flour prices, 2021-2023.
Source: Geostat, 2024.
Nevertheless, in 2023 bread and wheat flour prices decreased, indicating that the import duty on wheat flour did not lead to increased prices. This could partially be explained by the fact that mills pay farmers 0.5 GEL/kg, which is lower than agreed price of 0.7 GEL/kg. Another and more crucial factor is the decline in global wheat prices. They began their descent in June 2022 and have since maintained a downward trajectory. This decrease, combined with increased local production, has so far acted as a barrier to any new bread and wheat flour price increases.
The Way Forward
The question that must be addressed is whether the import duty on wheat flour imported from Russia should be extended.
The import duty may have contributed to increased local production as higher import duties can incentivize local businesses to invest in expanding their production capacity or improving their technology to meet an increased demand. It is however essential to note that the impact of import duties on local production varies depending on the level of domestic competition, the availability of inputs (high quality seed, fertilizer etc.), technological capabilities, and government policies beyond import duties (such as investment incentives, infrastructure development, and regulatory environment). Additionally, import duties can also lead to retaliatory measures from trading partners, affecting overall trade dynamics – potentially incurring unintended consequences. Therefore, while import duties can contribute to an increased local production under certain conditions, it is just one of many factors influencing production dynamics.
Secondly, as previously detailed, the import duty has so far not resulted in increased bread prices. However, the effect of an import tariff on retail prices depends on various factors, including elasticity of demand and supply, market, competitiveness, and the extent to which the tariff is passed on to consumers by importers and retailers. Since demand for bread is inelastic, one has to keep in mind that the importers and retailers can fully pass on the increased cost from an import tariff to consumers.
Given that the floating tariff and the import duty make wheat and wheat flour imports to Georgia more expensive, one should expect future bread price increases. This unless international wheat prices continue to decline and/or producers agree to reduce their profit margins or make supply chain changes. Therefore, an extension of the import duty might be a suitable solution in the short and medium-term, but it should not be seen as a permanent solution.
To limit the risks of food scarcity in Georgia in the long run, it is essential to design strategies helping the country to reduce its dependency on Russian wheat and wheat flour. Some measures to achieve this objective may include:
Further supporting local production. Encourage investment in domestic agriculture to increase the productivity and quality of wheat production in Georgia. This can be achieved through subsidies, incentives for modern farming techniques, and access to credit for farmers.
Improving the quality of local production. Currently, most of the domestically produced wheat is unsuitable for milling into wheat flour. A significant portion of domestically produced wheat is of poor quality and instead used for feeding livestock. It is essential to invest in research and development to improve the quality of domestically produced wheat. This includes developing wheat varieties that are resistant to diseases and better suited for local growing conditions.
Seeking alternative markets for import diversification. One alternative for Georgia may be to focus on the Kazakh and Ukrainian markets (once the war is over) and negotiate possible ways to decrease the cost of transporting wheat to Georgia with state and private sector representatives.
Reducing the Georgian dependence on Russian wheat imports requires a multifaceted approach that addresses various aspects of agricultural policy, trade diversification, and domestic production capacity.
References
Resonance daily. (2024). The Association of Wheat and Flour Producers of Georgia requests an extension of the import tax on imported flour. https://www.resonancedaily.com/index.php?id_rub=4&id_artc=197847
Disclaimer: Opinions expressed in policy briefs and other publications are those of the authors; they do not necessarily reflect those of the FREE Network and its research institutes.
Trending? Social Media Attention on Russia’s War in Ukraine
Russia’s invasion of Ukraine is one of the most important geopolitical events of the 21st century. For almost two years, international news outlets have been covering the war, often providing daily or even hourly updates. But what is the level of public interest and public engagement in countries around the world? When does the war capture an international audience’s attention and what are the events that supplant it? This brief uses data on X (formerly Twitter) trends in 62 countries to address these questions.
The competition for attention is a defining feature of our information landscape. From the relentless stream of social media updates to the myriad of news articles vying for our clicks, individuals are constantly bombarded with information, each competing for a slice of their limited attention. Amidst this cacophony of voices, certain topics rise to the forefront, capturing the collective consciousness and dominating public discourse.
Russia’s war in Ukraine has, for obvious reasons, commanded significant media coverage over the past two years. It has been described as a hybrid war, where conventional military tactics are increasingly combined with non-traditional methods. This includes an information war, fought with narratives to manipulate people’s perceptions, spread falsehoods, or enlist support. To a large extent, this information war has taken place on social media. On the one hand, social media platforms have been used to spread disinformation and propaganda. For example, we’ve seen the spread of false narratives about the causes of the war, the actions of the different parties involved, and the suffering of the Ukrainian people. But on the other hand, social media has also been used to counter this disinformation, with fact-checking initiatives and grassroots efforts to promote accurate information.
This policy brief analyses the prominence of the war in social media discourse. While the content on traditional media outlets provides a snapshot of the supply of information, platforms like X/Twitter offer a unique window into the broader population’s demand for that information and how they evolve over time. Whether or not hashtags related to Russia’s war in Ukraine are trending in a given country, depends not just on the public’s interest in the war relative to other events in the news, but also on the level of interest relative to sport, music, television, and cats. By tracking the prevalence of trending hashtags, we can gain insights into the public’s engagement with Russia’s war in Ukraine, going beyond traditional media narratives and high-level governmental discussions to uncover the conversations and sentiments that shape broader public opinion.
The X/Twitter data suggest that in most countries, social media attention in the Russian war on Ukraine has been short-lived and sporadic. On February 24, 2022, Ukraine-related hashtags were trending in 100 percent of the countries in our dataset. Two weeks later, on March 9, 2022, they were trending in only 3 percent of the countries. We find that geographical proximity to the conflict is a strong predictor of social media interest. Related hashtags trend most frequently in Eastern, Central and Northern Europe. We also document spikes in interest around events that link a country to the war in Ukraine: announcements of military assistance or visits by Ukraine’s President Volodymyr Zelenskyj. Finally, we compare the hashtags trending in NATO countries to those trending in countries that either sided with Russia or abstained from voting in a critical UN resolution and show significant differences between the two groups.
Data and Methodology
The source for our dataset is archive.twitter-trending.com – a website that records trending hashtags on X/Twitter across countries and over time. We scrape this website to collect (i) the five highest volume topics in each country on each day and (ii) the five longest-trending topics in each country on each day (these two categories can overlap). Our sample consists of the 62 countries available on the website and covers the timeframe July 2021 to December 2023. From this, we construct a country-by-day panel dataset with 55,862 observations.
We identify 11 topic categories that collectively account for the overwhelming majority of trending topics related to Russia’s war in Ukraine. These topics and their relative frequency are shown in Figure 1. The three dominant categories are “Ukraine”, “Russia” and ”Putin”. We use Google’s translation software to translate non-English tweets which account for a significant fraction of the dataset.
Figure 1. Frequency of hashtags in 11 category topics.
Note: This chart shows the number of times topics assigned to our 11 war-related categories were among the top five longest trending topics (in orange) or the top five highest volume topics (in blue) in any country on any day in our dataset. The source are data scraped from archive.twitter-trending.com
Figure 1 shows that it is more common for war-related topics to be among the highest volume topics on a given day than among the longest trending topics. This suggests that these topics attract a lot of interest in a narrow timeframe (e.g. when news breaks) but are relatively less likely to remain prominent over a whole day. Despite this difference, we find that the distinction between highest-volume and longest-trending does not affect any of the patterns we observe when comparing across countries or time. For simplicity, the results shown below all use the highest-volume measure.
It is important to acknowledge the limitations of the X/Twitter data. Firstly, the population actively using X/Twitter is not representative of the overall population. Secondly, the composition of users may differ across countries which complicates cross-country comparisons. Trending hashtags provide an indicator of public interest that is informative only because we do not have high frequency, nationally representative surveys that are comparable across countries. Finally, we are only able to observe the top-five hashtags in a country on any given day. In principle, a war-related topic could increase in absolute volume from one day to the next, while still being crowded out of the top five.
Geographic Variation in Attention
Social media attention to the war in Ukraine varies greatly across countries. The map in Figure 2 shows the proportion of days when any hashtag from the considered categories was among the top-five most tweeted, for each country in the database since the start of the war. Interest has, on average, been higher in Europe as well as in Anglo-Saxon countries. In contrast, other regions of the world exhibited less sustained interest, as indicated by the lower frequency of related hashtags among the top-five most tweeted topics.
Figure 2. Prevalence of war-related hashtags.
Note: The map shows the share of days on which war-related hashtags (in our 11 categories) were among the top five highest volume topics on X/Twitter between 24/02/2022 and 18/12/2023. Countries in white are not among the 62 countries in the dataset. The source are data scraped from archive.twitter-trending.com
To some extent, this heterogeneity is explained by distance. Figure 3 plots the frequency of war-related trends against geographical proximity to the conflict zone (represented by the distance from each country’s capital to the city of Kharkiv in eastern Ukraine, a major point of focus during the ongoing war). The relationship is clearly negative, suggesting that physical distance from the crisis reduces the intensity of online discourse and public interest. Unsurprisingly, the number of related trends is highest in countries directly or indirectly involved in the conflict – Ukraine, Russia, and Belarus – as well as in Latvia which borders both Russia and Belarus.
Figure 3. Frequency of war-related hashtags and distance from Kharkiv.
Note: The chart shows the log of the distance from each country’s capital city to the city of Kharkiv in km on the x-axis and the logged frequency of war-related topics among the top five highest volume topics in that country between 24/02/2022 and 18/12/2023 on the y-axis. The source are data scraped from archive.twitter-trending.com
Variation in Attention Over Time
Over the past two years, the war has sustained a relatively high intensity. By contrast, global attention on X/Twitter has been more sporadic, spiking around specific events. This is shown in Figure 4, which plots the day-to-day variation in the number of battle events as recorded by the Armed Conflict Location & Event Data Project (ACLED) (in blue) as well as the share of countries where war-related tweets are trending (in orange). Attention was highest at the time of the invasion in February 2022 and the days of the Wagner Group rebellion in June 2023. Overall, the correlation between twitter trends and conflict intensity is positive but relatively weak.
Figure 4. Frequency of war-related hashtags and intensity of conflict.
Note: The chart shows the number of daily battle events in Ukraine as classified by ACLED on the left axis (in blue) and the share of countries where war-related topics were trending on the respective day on the right axis (in orange). The sources are ACLED’s Ukraine conflict monitor and data scraped from archive.twitter-trending.com
Attention also reacts to other major global events. Figure 5 compares the number of top-five trending hashtags related to the categories of interest in each country on two specific dates: February 24, 2022, the day of Russia’s full-scale invasion of Ukraine, and October 7, 2023, the day of a Hamas terror attack on Israel. On the day of the Russian invasion, the majority of countries in our sample exhibited the highest value. In contrast, on the day of the Hamas attack, related hashtags were trending almost nowhere outside Ukraine and Russia, indicating that global attention and engagement with this new ongoing crisis significantly overshadowed the focus on the situation in Ukraine. This shift in attention demonstrates how breaking news can capture the public’s interest and divert focus from ongoing crises, affecting the level of engagement on social media and potentially influencing the global response and discourse surrounding these events.
Figure 5. Map of prevalence of war-related hashtags on two different dates.
Note: The maps show the share of the top five highest volume topics on twitter related to Russia’s war on Ukraine. The map on the left shows 24/02/2022 – the day of Russia’s invasion. The map on the right shows 07/10/2023 – the day of a Hamas terror attack on Israel. Countries in white are not among the 62 countries in the dataset. The source are data scraped from archive.twitter-trending.com
While some events impact attention globally, others affect the salience of the conflict for a specific country. Figure 6 shows that people pay more attention to the war when there is a tangible connection to their own country. The panel on the left shows that war-related topics were more likely to trend in a country around the days where the country announced an aid package for Ukraine (military, financial or humanitarian). It shows an increasing trend in the preceding days and a peak on the day of the announcement. The panel on the right shows that war-related topics were more likely to trend in a country around the days of a visit from President Zelenskyj. This effect is large in magnitude but only lasts for around three days.
Figure 6. Likelihood of hashtags trending in relation to country-specific event.
Note: The charts show variation in the share of countries where at least one war-related topic was among the top five highest volume topics on days relative to a specific event. In the left chart, day 0 represents the day on which a country’s government announces an aid package for Ukraine. In the right chart, day 0 represents the day on which President Zelenskyj arrived in a country for an official visit. The source for these charts are: (i) the Kiel Institute’s Ukraine Support Tracker (Trebesch et al., 2023), (ii) Wikipedia’s list of official visits by President Zelenskyj and (iii) data scraped from archive.twitter-trending.com
While the events above act as drivers of attention, it is also interesting to consider what causes war-related topics to drop out of the top five trending topics. We distinguish between two reasons why war-related hashtags could stop trending: (i) a loss of interest that results in a reduction in the absolute number of related tweets (ii) the rise of other topics that displace war-related tweets from the top five. Figure 7 focuses on days where war-related topics dropped out and compares the volume of tweets on the last day where they were in the top five, to the threshold they would have had to surpass in order to make the top five on the subsequent day. In cases where the threshold is lower than the previously observed volume of tweets (a ratio of less than 1), the topic would have kept trending had it sustained its volumes, and one can conclude there was an absolute loss of interest. In cases where the ratio is greater than one, it is possible that the topic sustained its previous volume of tweets but was crowded-out by the rise of a new trending topic. Figure 7plots the histogram of this ratio. 73 percent of the cases are in the first category (loss of attention) and 27 percent are in the possible crowding out category. This provides further evidence to suggest that attention to the war on social media is typically fleeting.
Figure 7. Loss of attention vs crowding out.
Note: The sample are country-days where war-related topics were among the top five highest-volume topics but then dropped out of the top five the next day. The chart provides a histogram of the ratio of the threshold for making the top five on the subsequent day to the highest volume of tweets of a war-related topic. Values below 1 (in blue) indicate that the volume was above the next day’s threshold and the topic declined in absolute terms. Values above 1 (in orange) indicate that the volume was below the next day’s threshold. The source are data scraped from archive.twitter-trending.com
We also examine the content of discussions on the first day after war-related hashtags drop out of the top five. The word cloud in Figure 8 suggests that on such days, people primarily discuss entertainment topics like music and football.
Figure 8. Word cloud of hashtags trending on days war-related categories drop out.
Note: The figure provides a word cloud of trending topics on country-days where no war-related topic was among the top five highest volume topics, but at least one war-related topic had been in the top five on the previous day. The source are data scraped from archive.twitter-trending.com
Content and Context of War-Related Discourse
In addition to providing insight into the level of engagement, hashtag analysis can also reveal the content and context of popular discourse surrounding the war. By examining words trending on the same days as those from our 11 categories, we can gain a better understanding of the topics people are discussing and how the conversation varies across different regions. Figure 9 illustrates this through word clouds, showing the language used in NATO countries on the left and in countries that abstained or voted against the United Nations General Assembly Resolution ES-11/1 on the right. This resolution, dated March 2, 2022, condemned the brutal invasion of Ukraine and demanded that Russia immediately withdraw its forces and comply with international law.
This exercise allows us to compare the dominant themes and narratives in these two groups of countries and observe any differences in public perception and discourse regarding the conflict. The prevalence of cryptocurrency and NFT (non-fungible tokens) references in the word cloud on the right is suggestive of how economic interests and alternative financial systems could be relevant for the positions of countries that abstained or voted against the resolution, and how this might affect their involvement or response to the conflict. On the left, words like “NATO”, ”Biden”, and ”Trump” clearly stand out, suggesting that these topics are central to the discourse on the war in NATO countries. This could indicate a focus on geopolitical alliances, international cooperation, and the role of key political figures in shaping the response to the conflict. Interestingly, “Putin” is very prominent in the left word cloud while “Russia” and “Russian” are more prominent on the right. This could indicate that Putin is seen and discussed as the primary antagonist in NATO countries.
Figure 9. Word cloud of hashtags in NATO countries vs Russia-friendly countries.
Note: These word clouds represent topics that trend on days where at least one war-related topic is trending in the respective country. The cloud on the left shows NATO countries. The cloud on the right shows countries that either abstained or voted against United Nations General Assembly Resolution ES-11/1. The source are data scraped from archive.twitter-trending.com
Conclusion
This brief uses X/Twitter trends as a barometer of public interest in Russia’s war in Ukraine. We show how attention fluctuates over time in response to developments in the conflict, to other breaking news, and to local events that make the conflict salient for a domestic audience. We also provide descriptive evidence on the variation across geographical regions and among different groups of countries. Additionally, we analyse the instance where Ukraine-related topics stop trending and find suggestive evidence that this is typically due to a gradual loss of interest rather than crowding out by new distracting trends.
Public attention and engagement drive policy in democratic countries, and the sustained support of its democratic allies is vital for Ukraine during this critical time. Understanding the patterns and influences of public attention is crucial for developing effective strategies to sustain engagement and support. This can be achieved for example by regularly highlighting the ongoing significance and bearing of Russia’s war against Ukraine, even as other events dominate the headlines. Emphasizing the impact of the conflict on individuals and communities, as well as its broader implications for international relations and global security, can help sustain public interest and engagement.
References
- ACLED. Ukraine Conflict Monitor. https://acleddata.com/ukraine-conflict-monitor/
- Trebesch, C., Antezza, A., Bushnell, K., Bomprezzi, P., Dyussimbinov, Y., Frank, A., Frank, P., Franz, L., Kharitonov, I., Kumar, B., Rebinskaya, E., Schade, C., Schramm, S., and Weiser, L. (2023). The Ukraine Support Tracker: Which countries help Ukraine and how? Kiel Working Paper, 2218, 1-75.
- Twitter Trending Archive. Scraped on ##/12/2023. https://archive.twitter-trending.com/
Disclaimer: Opinions expressed in policy briefs and other publications are those of the authors; they do not necessarily reflect those of the FREE Network and its research institutes.
Addressing the Impact of War on Human Capital and Higher Education in Ukraine
On February 6, 2024, the Stockholm Institute of Transition Economics (SITE) and the Friends of KSE initiative partnered with the Nordic Ukraine Forum to host an event, aiming to examine and bolster the vital cause of higher education in Ukraine.
During this occasion, the spotlight shifted to the crucial impact of war on human capital and higher education in Ukraine. Participants delved into the indispensable role of human capital in shaping Ukraine’s future, particularly in its pursuit of prosperity within the European Union.
A focal point was the Kyiv School of Economics (KSE), lauded for its pivotal role in educating Ukraine’s future leaders and providing essential policy analysis amidst the challenges of war. Alongside SITE and the Stockholm School of Economics (SSE), KSE highlighted initiatives supporting Ukrainian students and academics, emphasizing the necessity of investing in human potential.
Representatives from Swedfund and the Nordic Ukraine Forum stressed the importance of fostering collaborations and seizing opportunities in Ukraine. The event underscored the collective effort required to preserve and nurture Ukrainian human capital, crucial for successful post-war reconstruction.
Video Recording and Photos
Participants
- Tymofiy Mylovanov, President of the Kyiv School of Economics
- Nataliia Shapoval, Chairman of the Kyiv School of Economics Institute
- Alina Zubkovych, Head of Nordic Ukraine Forum and Visiting Professor from KSE
- Katarina Hägg, Chief Executive Officer of SSE Executive Education
- Anders Olofsgård, Deputy Director of SITE
- Stefan Falk, Director of Swedfund Project Accelerator
- Volodymyr Kykot, student representative from SSE
- Alina Kotliarova, student representative from SSE
- Lesia Rublevska, student representative from SSE
- Torbjörn Becker, Director at SITE
How to Undermine Russia’s War Capacity: Insights from Development Day 2023
As Russia’s full-scale invasion of Ukraine continues, the future of the country is challenged by wavering Western financial and military support and weak implementation of the sanction’s regime. At the same time, Russia fights an information war, affecting sentiments for Western powers and values across the world. With these challenges in mind, the Stockholm Institute for Transition Economics (SITE) invited researchers and stakeholders to the 2023 Development Day Conference to discuss how to undermine Russia’s capacity to wage war. This policy brief shortly summarizes the featured presentations and discussions.
Holes in the Net of Sanctions
In one of the conference’s initial presentations Aage Borchgrevink (see list at the end of the brief for all presenters’ titles and affiliations) painted a rather dark picture of the current sanctions’ situation. According to Borchgrevink, Europe continuously exports war-critical goods to Russia either via neighboring countries (through re-rerouting), or by tampering with goods’ declaration forms. This claim was supported by Benjamin Hilgenstock who not only showed that technology from multinational companies is found in Russian military equipment but also illustrated (Figure 1) the challenges to export control that come from lengthy production and logistics chains and the various jurisdictions this entails.
Figure 1. Trade flows of war-critical goods, Q1-Q3, 2023.
Source: Benjamin Hilgenstock, Kyiv School of Economics Institute.
Offering a central Asian perspective, Eric Livny highlighted how several of the region’s economies have been booming since the enforcement of sanctions against Russia. According to Livny, European exports to Central Asian countries have in many cases skyrocketed (German exports to the Kyrgyzs Republic have for instance increased by 1000 percent since the invasion), just like exports from Central Asian countries to Russia. Further, most of the export increase from central Asian countries to Russia consists of manufactured goods (such as telephones and computers), machinery and transport equipment – some of which are critical for Russia’s war efforts. Russia has evidently made a major pivot towards Asia, Livny concluded.
This narrative was seconded by Michael Koch, Director at the Swedish National Board of Trade, who pointed to data indicating that several European countries have increased their trade with Russia’s neighboring countries in the wake of the decreased direct exports to Russia. It should be noted, though, that data presented by Borchgrevink showed that the increase in trade from neighboring countries to Russia was substantially smaller than the drop in direct trade with Russia from Europe. This suggests that sanctions still have a substantial impact, albeit smaller than its potential.
According to Koch, a key question is how to make companies more responsible for their business? This was a key theme in the discussion that followed. Offering a Swedish government perspective, Håkan Jevrell emphasized the upcoming adoption of a twelfth sanctions package in the EU, and the importance of previous adopted sanctions’ packages. Jevrell also continued by highlighting the urgency of deferring sanctions circumvention – including analyzing the effect of current sanctions. In the subsequent panel Jevrell, alongside Adrian Sadikovic, Anders Leissner, and Nataliia Shapoval keyed in on sanctions circumvention. The panel discussion brought up the challenges associated with typically complicated sanctions legislation and company ownership structures, urging for more streamlined regulation. Another aspect discussed related to the importance of enforcement of sanctions regulation and the fact that we are yet to see any rulings in relation to sanctions jurisdiction. The panelists agreed that the latter is crucial to deter sanctions violations and to legitimize sanctions and reduce Russian government revenues. Although sanctions have not yet worked as well as hoped for, they still have a bite, (for instance, oil sanctions have decreased Russian oil revenues by 30 percent).
Reducing Russia’s Government Revenues
As was emphasized throughout the conference, fossil fuel export revenues form the backbone of the Russian economy, ultimately allowing for the continuation of the war. Accounting for 40 percent of the federal budget, Russian fossil fuels are currently mainly exported to China and India. However, as presented by Petras Katinas, the EU has since the invasion on the 24th of February, paid 182 billion EUR to Russia for oil and gas imports despite the sanctions. In his presentation, Katinas also highlighted the fact that Liquified Natural Gas (LNG) imports for EU have in fact increased since the invasion – due to sanctions not being in place. The EU/G7 imposed price cap on Russian oil at $60 per barrel was initially effective in reducing Russian export revenues, but its effectiveness has over time being eroded through the emergence of a Russia controlled shadow fleet of tankers and sales documentation fraud. In order to further reduce the Russian government’s income from fossil fuels, Katinas concluded that the whitewashing of Russian oil (i.e., third countries import crude oil, refine it and sell it to sanctioning countries) must be halted, and the price cap on Russian oil needs to be lowered from the current $60 to $30 per barrel.
In his research presentation, Daniel Spiro also focused on oil sanctions targeted towards Russia – what he referred to as the “Energy-economic warfare”. According to Spiro, the sanctions regime should aim at minimizing Russia’s revenues, while at the same time minimizing sanctioning countries’ own costs, keeping in mind that the enemy (i.e. Russia) will act in the exact same way. The sanctions on Russian oil pushes Russia to sell oil to China and India and the effects from this are two-fold: firstly, selling to China and India rather than to the EU implies longer shipping routes and secondly, China and India both get a stronger bargaining position for the price they pay for the Russian oil. As such, the profit margins for Russia have decreased due to the price cap and the longer routes, while India and China are winners – buying at low prices. Considering the potential countermoves, Spiro – much like Katinas – emphasized the need to take control of the tanker market, including insurance, sales and repairs. While the oil price cap has proven potential to be an effective sanction, it has to be coupled with an embargo on LNG and preferrable halted access for Russian ships into European ports – potentially shutting down the Danish strait – Spiro concluded.
Chloé Le Coq presented work on Russian nuclear energy, another energy market where Russia is a dominant player. Russia is currently supplying 12 percent of the United States’ uranium, and accounting for as much as 70 percent on the European market. On top of this, several European countries have Russian-built reactors. While the nuclear-related revenues for Russia today are quite small, the associated political and economic influence is much more prominent. The Russian nuclear energy agency, Rosatom, is building reactors in several countries, locking in technology and offering loans (e.g., Bangladesh has a 20-year commitment in which Rosatom lends 70 percent of the production cost). In this way Russia exerts political influence on the rest of the world. Le Coq argued that energy sanctions should not only be about reducing today’s revenues but also about reducing Russian political and economic influence in the long run.
The notion of choke points for Russian vessels, for instance in the Danish strait, was discussed also in the following panel comprising of Yuliia Pavytska, Iikka Korhonen, Aage Borchgrevink, and Lars Schmidt. The panelists largely agreed that while choke points are potentially a good idea, the focus should be on ensuring that existing sanctions are enforced – noting that sanctions don’t work overnight and the need to avoid sanctions fatigue. Further, the panel discussed the fact that although fossil fuels account for a large chunk of federal revenues, a substantial part of the Russian budget come from profit taxes as well as windfall taxes on select companies, and that Russian state-owned companies should in some form be targeted by sanctions in the future. In line with the previous discussion, the panelists also emphasized the importance of getting banks and companies to cooperate when it comes to sanctions and stay out of the Russian market. Aage Borchgrevink highlighted that for companies to adhere to sanctions legislation they could potentially be criminally charged if they are found violating the sanctions, as it can accrue to human rights violations. For instance, if companies’ parts are used for war crimes, these companies may also be part of such war crimes. As such, sanctions can be regarded as a human rights instrument and companies committing sanctions violations can be prosecuted under criminal law.
Frozen Assets and Disinformation
The topic of Russian influence was discussed also in the conference’s last panel, composed of Anders Ahnlid, Kata Fredheim, Torbjörn Becker, Martin Kragh, and Andrii Plakhotniuk. The panelists discussed Russia’s strong presence on social media platforms and how Russia is posting propaganda at a speed unmet by legislators and left unchecked by tech companies. The strategic narrative televised by Russia claims that Ukraine is not a democracy, and that corruption is rampant – despite the major anti-corruption reforms undertaken since 2014. If the facts are not set straight, the propaganda risks undermining popular support for Ukraine, playing into the hands of Russia. Further, the panelists also discussed the aspect of frozen assets and how the these can be used for rebuilding Ukraine. Thinking long-term, the aim is to modify international law, allowing for confiscation, as there are currently about 200 billion EUR in Russian state-owned assets and about 20 billion EUR worth of private-owned assets, currently frozen.
The panel discussion resonated also in the presentation by Vladyslav Vlasiuk who gave an account of the Ukrainian government’s perspective of the situation. Vlasiuk, much like other speakers, pointed out sanctions as one of the main avenues to stop Russia’s continued war, while also emphasizing the need for research to ensure the implications from sanctions are analyzed and subsequently presented to the public and policy makers alike. Understanding the effects of the sanctions on both Russia’s and the sanctioning countries’ economies is crucial to ensure sustained support for the sanction’s regime, Vlasiuk emphasized.
Joining on video-link from Kyiv, Tymofiy Mylovanov, rounded off the conference by again emphasizing the need for continued pressure on Russia in forms of sanctions and sanctions compliance. According to Mylovanov, the Russian narrative off Ukraine struggling must be countered as the truth is rather that Ukraine is holding up with well-trained troops and high morale. However, Mylovanov continued, future funding of Ukraine’s efforts against Russia must be ensured – reminding the audience how Russia poses a threat not only to Ukraine, but to Europe and the world.
Concluding Remarks
The Russian attack on Ukraine is military and deadly, but the wider attack on the liberal world order, through cyber-attacks, migration flows, propaganda, and disinformation, must also be combatted. As discussed throughout the conference, sanctions have the potential for success, but it hinges on the beliefs and the compliance of citizens, companies, and governments around the world. To have sanctions deliver on their long-term potential it is key to include not only more countries but also the banking sector, and to instill a principled behavior among companies – having them refrain from trading with Russia. Varying degrees of enforcement undermine sanctions compliant countries and companies, ultimately making sanctions less effective. Thus, prosecuting those who breach or purposedly evade sanctions should be a top priority, as well as imposing control over the global tanker market, to regain the initial bite of the oil price cap. Lastly, it is crucial that the global community does not forget about Ukraine in the presence of other conflicts and competing agendas. And to ensure success for Ukraine we need to restrain the Russian war effort through stronger enforcement of sanctions, and by winning the information war.
List of Participants
Anders Ahnlid, Director General at the National Board of Trade
Aage Borchgrevink, Senior Advisor at The Norwegian Helsinki Committee
Torbjörn Becker, Director at the Stockholm Institute of Transition Economics
Chloé Le Coq, Professor of Economics, University of Paris-Panthéon-Assas, Economics and Law Research Center (CRED)
Benjamin Hilgenstock, Senior Economist at Kyiv School of Economics Institute
Håkan Jevrell, State Secretary to the Minister for International Development Cooperation and Foreign Trade
Michael Koch, Director at Swedish National Board of Trade
Iikka Korhonen, Head of the Bank of Finland Institute for Emerging Economies (BOFIT)
Martin Kragh, Deputy Centre Director at Stockholm Centre for Eastern European Studies (SCEEUS)
Eric Livny, Lead Regional Economist for Central Asia at European Bank for Reconstruction and Development (EBRD)
Anders Leissner, Lawyer and Expert on sanctions at Advokatfirman Vinge
Tymofiy Mylovanov, President of the Kyiv School of Economics
Vladyslav Vlasiuk, Sanctions Advisor to the Office of the President of Ukraine
Nataliia Shapoval, Chairman of the Kyiv School of Economics Institute
Yuliia Pavytska, Manager of the Sanctions Programme at KSE Institute
Andrii Plakhotniuk, Ambassador Extraordinary and Plenipotentiary of Ukraine to the Kingdom of Sweden
Daniel Spiro, Associate Professor, Uppsala University
Adrian Sadikovic, Journalist at Dagens Nyheter
Kata Fredheim, Executive Vice President of Partnership and Strategy and Associate Professor at SSE Riga
Lars Schmidt, Director and Sanctions Coordinator at the Ministry for Foreign Affairs, Sweden
Disclaimer: Opinions expressed in policy briefs and other publications are those of the authors; they do not necessarily reflect those of the FREE Network and its research institutes.
Cognitive Dissonance on Belarus: Recovery and Adaptation or Stalemate?
A closer look at the Belarusian economy over the recent year, produces two initially competing narratives. The first one emphasizes that tough sanctions have led to a deadlock for the Belarusian economy. The second one stresses that output losses have turned out to be much lower than expected, and that the economy has displayed a rather high degree of adaptability – securing an early and rapid recovery. This policy brief shows that these narratives are not mutually exclusive but rather elements of the same bigger picture. A short-term focus gives the impression that the current stance is ‘more good than bad’. This reflects the fact that output has recovered and almost reached historically high levels, made possible due to a combination of exports protection mechanisms and compensatory effects on output. However, this does not eliminate the disappointing medium- and long-term prospects for the country. On the flip side of the immediate survival of the Belarusian economy is the country’s economic and political stalemate. This includes the lack of opportunities for future sustainable growth and Belarus’ enormous and continuously growing dependence on Russia. Within this stalemate, stagnation is the best plausible scenario. At the same time, much worse scenarios, both economically and politically, are also highly likely. Ultimately, breaking the deadlock is the only way to a better future for Belarus.
The Belarusian Economy and the Changing Narratives
About 1.5 years ago, Western countries introduced tough sanctions against Belarus, punishing the Lukashenka regime for its role in Russia’s invasion of Ukraine. This gave rise to a huge uncertainty regarding Belarus’ economic prospects. A FREE policy brief published about a year ago (Kruk & Lvovskiy, 2022) presented a model-based estimate of a potential rock-bottom for the Belarusian economy in the new environment, which amounted to 20 percent of output losses. The authors however argued that actual output losses might be significantly lower given Russia’s support and policy responses, which were unaccounted for in the model. At the same time, downside risks and a lack of output consistency seem to have become permanent traits of the Belarusian economy.
Expectations of a large and prolonged recession in Belarus prevailed into mid-2023. International institutions (IMF, World Bank) and rating agencies (S&P, Fitch Ratings) mainly expected a recession in Belarus up to 10 percent 2022-2023. The reality has however turned out to be quite different with the recession being relatively contained and short-lived. The output losses between the peak (Q2-2021) trough Q3-2022 amounted to 6.8 percent. In Q4-2022 a recovery began, and in Q3-2023 the economy had almost fully recovered, reaching nearly the same levels as in Q2-2021 (see Figure 1). Further, in terms of average real wages and household consumption, the situation appears to be even more positive. The real average wage reached its pre-war level in Q1-2023 and has since displayed record high levels, and household consumption follow a similar trend (see Figure 1).
These dynamics have given rise to a new narrative. As of lately, the Belarusian economic situation is at times treated as ‘more good than bad’. Further, most international financial institutions currently forecast a continued weak recovery growth in the coming years (EBRD, 2023; IMF, 2023; Izvorski et al., 2023).
Figure 1. Real GDP, Average Real Wages, and Real Household Consumption (index, seasonally adjusted, 2018=100).
Source: Author’s estimations based on Belstat data.
Factors Behind the Recent Recovery Growth
The underlying reasons for the recovery growth can be divided into two groups: (i) export protection mechanisms under sanctions and (ii) positive shocks and compensatory effects on output.
Export protection mechanisms under sanctions are twofold. Firstly, the Belarusian regime turned out to be somewhat successful in adjusting to the new sanctions-environment. This partly due to a somewhat geographical U-turn of Belarusian exports, underpinned by new logistics and payment schemes. The best example of this turn is the re-orientation of oil product exports from the EU and Ukraine to Russia (Kharitonchik, 2023). Moreover, some exports to traditional markets, which were challenged by logistics and payment barriers rather than sanctions, were secured by crossing these barriers. The best such example is the recovery of potash fertilizer exports to China, Brazil and India. Since early 2023 these displayed a rapid recovery due to Belarus finding logistic solutions through Russian sea ports instead of EU ports, and by using railway transportation.
Secondly, the practices of sanctions evasion may also have played a significant role. The scope of sanctions evasion is however difficult to assess due to its secretive nature. Moreover, the difference between avoiding and evading sanctions is not always clear.
Export protection mechanisms allowed Belarus to cushion actual export losses, making them transitory (see Figure 2). Actual losses in exports were close to the rock-bottom scenario estimates for only a couple of months. Instead of an expected level shift in exports by roughly 40 percent (from the pre-war level), exports displayed a recovery trajectory. Hence, what was modelled as a permanent shock in Kruk & Lvovskiy (2022), turned out to be transitory.
Figure 2. Physical Volume of Exports (index, seasonally adjusted, 2018=100).
Source: Author’s estimations based on Belstat data.
One important aspect to mention is that part of this recovery is due to oil-product exports taking place already in 2022 (Kharitonchik, 2023). In Kruk & Panasevich (2023) the authors show that the oil-refinery industry is of extreme importance for the entire Belarusian economy. Due to inter-industrial linkages, the oil-refinery industry indirectly accounts for about 11 percent of Belarus’ output, despite its modest direct contribution to the GDP (slightly more than 1 percent). Hence, due to protecting these exports (and the corresponding production of oil products), a large amount of output losses was avoided. A similar situation unfolded also for potash fertilizer exports and the chemical industry producing them (although inter-industrial linkages and effects on output are much weaker for that industry).
Besides export protection mechanisms, the recovery of exports and output stem largely from various positive and compensatory effects on output Some of them arose from Belarus’ and Russia’s respective regimes responses to sanctions, and from Russia’s readiness to support Belarus. Others are classical external positive shocks (to no degree related to sanctions) while some are a combination of both. They include: (i) increasing energy (gas) subsidies from Russia, (ii) a prolonged period of extra-high price competitiveness, especially in the Russian market, (iii) expanded access to the Russian market, (iv) other forms of Russian support (debt restructuring, budget transfers, new loans), (v) favorable trade conditions and export prices (apart from on the Russian market), (vi) a (macro)economic environment that allow for more room for domestic economic policy interventions.
Taken together, these positive output drivers largely contributed to curbing the recession in 2022 and to the output recovery in 2023. A straightforward decomposition of the actual output growth path is unfeasible (due to the close interconnection of export protection mechanisms and output drivers, and the lack of available statistics). However, approximating the actual path in a model environment results in the following: between Q2-2021 and Q3-2022, about 12 percent of losses due to sanctions (taking into account the export protection mechanisms) and a deprivation of the Ukrainian market, and 5.2 percent of gains due to output shocks, resulted in actual output losses of 6.8 percent. Later in 2023, due to increasing effects from the export protection mechanisms, the sanctions-related output losses shrank to about 6.6 percent, while output shocks expanded output by roughly the same level. This allowed output losses to be zeroed out, i.e. the level of output in Q3-2023 was almost identical to Q3-2021.
An Economic Stalemate
Is the ‘more good than bad’ economic situation sustainable? Does the recent recovery mean that Belarus has overcome the major challenges to the economy? The short answer is no. Even with short-term thinking, there are still numerous downside risks. Sanctions still form a permanently challenging environment for the Belarusian economy, putting exports and output in jeopardy. The export protection mechanisms are not persistent, and they largely depend on Russia’s political will to support them. Moreover, the updated logistics and payment chains may also be vulnerable and sensitive to changes in the sanctions’ environment, and short-term trends in external prices. The aforementioned positive output effects are short-term by their nature and there are indications of them starting to fade already in 2023 (BEROC, 2023). Hence, even short-term projections for 2024 are challenging: the output growth is expected to weaken significantly or even fade away, while inflation spikes and financial destabilization risks are high (BEROC, 2023). Therefore, a return to a stagnant economic environment appears to be the most plausible short-term outlook.
The medium-term outlook seems even worse. According to Kruk (2023), the Belarusian macroeconomic balance (a) is very fragile, (b) is subject to numerous and huge downside risks, and (c) cannot be secured by macroeconomic policies because of the structural weaknesses in their design and the lack of room for maneuver. This means that even the existing weak long-term growth potential cannot be realized in the medium term, while the likelihood of recessions, inflation spikes and financial destabilization is high.
Re-shifting focus to a long-term and international perspective makes the viewpoint ‘more good than bad’ appear inconsistent. First, the long-term growth potential for Belarus, which was very weak even before the sanctions, keeps on worsening. This as adverse supply shocks and a deterioration of the productivity determinants continue eroding it (Kruk & Lvovskiy, 2022). Estimations of the growth potential (that rely on historical time series) are mainly within the range of 0-1 percent per annum. However, even such disappointing estimates might be optimistic bearing in mind the current political and sanctions-related risks and uncertainty (absent in the historical data). This makes stagnation the best possible long-term outlook, although it cannot be guaranteed.
Second, despite the milder recession and rapid recovery, the well-being gap between Belarus and its EU neighbors keeps on expanding (see Figure 3).
Figure 3. Well-being in Belarus vs the average among its EU neighbors (Latvia, Lithuania, Poland), 1990-2022, in percent.
Note: The GDP per capita PPP in 2017 constant international dollars is considered as well-being. The average well-being for EU Neighbors is the simple average in GDP in Latvia, Lithuania, and Poland.
Source: Author’s estimations based on World Bank data.
The average well-being in Belarus (measured in GDP per capita in constant international dollars) vs. that among its EU neighbors reached an (almost) historically low level in 2022. After attaining a level of well-being of roughly 75 percent of the average in Latvia, Lithuania, and Poland in the early 2010s, the well-being in Belarus has fall to about 52.5 percent, almost as low as in the mid-1990s. Given the economic stagnation as the most likely outlook, this means that the country will, in relative terms, keep on getting poorer in comparison to its EU neighbors.
A Political Stalemate
The hypothetical way out of the economic stalemate is more or less obvious. For instance, there is somewhat of a consensus among Belarusian economists about strengthening the long-term growth and securing macroeconomic stability (see Daneyko & Kruk, 2021; Kruk, 2023, for an overview of a collective view from a group of Belarusian economists). This vision, however, clashes with the views of the Lukashenka regime, which has inhibited its implementation throughout decades. Hence, democratic transition, or at least deprival of power of the Lukashenka regime has long appeared to be a highly likely precondition for moving away from the stalemate.
This, however, has changed in the last couple of years. The Belarusian economy’s dependence on Russia has moved from large to absolute. Prior to 2022, Russia was an important market for Belarusian exports (about 40 percent), the single energy supplier, and de facto the lender of last resort. To date, Russia’s role has expanded dramatically. The share of exports to Russia has increased up to about 65 percent. Moreover, the majority of the remaining 35 percent is exported with the assistance of or through Russia, using Russian infrastructure. Therefore, it would be fair to argue that Russia in some form “controls” roughly 90 percent of Belarusian exports. Further, being Belarus’ sole energy supplier, Russia has increased its significance for Belarus through expanded energy subsidies. The size of the energy subsidies reached a historical high in 2022, and the mechanism of the energy subsidies has become a cornerstone for macroeconomic stability in Belarus. Furthermore, Russia has turned out to be the only effective creditor for Belarus. Overall, Russia has accumulated a significant number of tools to undermine Belarus at any given moment.
A democratic transition or at least deprival of power of the Lukashenka regime might therefore not be sufficient preconditions for breaking the economic deadlock. Even if domestic political will to do so should emerge, the risk that Russia will successfully suppress it using the above outlined economic tools is very high. Hence, apart from a democratic transition, the way out of the economic stalemate requires a way out of the political stalemate. This seems to only be possible through either a politically weakened Russia, and/or an external political force, allied to the Belarusian democratic forces, and strong enough to suppress Russia.
Conclusions
Recently, the narrative on the Belarusian economy has changed. The prevailing expectations of a large and prolonged recession has been substituted by expectations of a gradual recovery. The narrative ‘the jig is up’ has somehow been crowded out by the ‘more good than bad’ viewpoint on the Belarusian economy. However, these narratives are not mutually exclusive. Behind the current ‘more good than bad’ viewpoint on the Belarusian economy, a severe economic and political deadlock prevails. Moreover, future economic and political deadlocks are the actual price being paid for the recent survival and recovery of the Belarusian economy.
From a positive perspective, the economic and political deadlock means that the country is likely to, at least, be bogged down in stagnation. Belarus’ total dependency on Russia makes the country hostage to Russia’s political preferences and country-specific risks. Should Russia decide to exert further economic and/or political influence over Belarus, it is likely to succeed. Consequently, any economic downturn faced by Russia would automatically impact Belarus.
From a normative perspective, breaking the economic and political deadlock might be the only solution, and for this, the order might matter. Prior to 2020 there was a widespread opinion that breaking the economic deadlock must be prioritized, and that it could – in turn – break the political deadlock. As of now, the tables have turned. The current order postulates the political deadlock comes first, as it seems to be the only way of breaking the economic stalemate. However, breaking the political deadlock appears to require external political will.
With these conclusions in mind, the recent Belarusian democratic forces’ manifest regarding Belarus’ EU membership aspiration, deserves attention (BDF, 2023). At first, such aspiration might appear schizophrenic given the actual political situation inside of the country. However, taking a Belarusian EU membership serious (within the EU and among Belarusians) might be the answer to Belarus’ political and economic deadlock. From this perspective, the task for the Belarusian society is thus to convince EU counterparts that this is not madness, but rather a feasible solution. It is rather evident why this solution is both desirable and feasible for the Belarusian society. The main question to be answered is therefore whether, and why it would be desirable and feasible for the EU.
References
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- Kruk, D., & Lvovskiy, L. (2022). Belarus Under War Sanctions (Policy Brief Series). FREE Network. https://freepolicybriefs.org/2022/10/17/belarus-under-sanctions/
- Kruk, D., & Panasevich, V. (2023). Industrial linkages in the Belarusian economy and their role in the macroeconomic landscape (86; BEROC Working Paper Series). BEROC. https://beroc.org/publications/working_papers/mezhotraslevye-vzaimosvyazi-v-belarusi/
- National Statistical Committee of the Republic of Belarus (Belstat). https://www.belstat.gov.by/en/
- The World Bank. https://databank.worldbank.org/source/world-development-indicators
Disclaimer: Opinions expressed in policy briefs and other publications are those of the authors; they do not necessarily reflect those of the FREE Network and its research institutes.