What you see here is a chart of Russia’s foreign currency earnings in April each year since 2007. Usually, Russia earned around 6.7 Billion U.S. dollars more than it spent. However, last April,

the numbers did not collapse… To the contrary, they increased sevenfold.

In other words, Russia is now making more money than ever.

But, how the h*** was it able pull that off?

And does that mean that Russia can now easily afford to fight a longer war in Ukraine?

Russia’s Money Makers

To understand how Russia can make so much money, we first need to understand how ‘making money’ is different for a country than for people like you and me.

You see, a country like Russia consists of a lot of people, businesses and indeed the government. Now, whenever any of these actors spend money on imports, or other things, money leaves the country.

Economist refer to these money flows as capital outflows.

On the other hand, if Russians export goods or services, they earn foreign currency.

Economists refer to these types of money flows as capital inflows.

The chart that you saw at the beginning showed that Russians are now collectively making more money than they spend. Capital inflows were bigger than capital outflows.

So, the country was effectively making money and this is what economists call a current account surplus.

And this news worried many because it could use that foreign money that it accumulates to buy more military equipment to potentially keep fighting longer in Ukraine.

But, whether or not that worry justified , depends a lot on what generates this current account surplus.

You see, if Russia’s is making more money from booming exports, that mean that this is something that will continue in the future and that sanctions are not working. On the other hand, it could be that that money surplus is just a sign that Russia can no longer import the crucial technologies, machines and military equipment that it needs to keep on fighting.

What’s more, Russia stopped publishing most of its detailed trade data after the war.

I guess, we’ll have to do a little bit of digging.

Russia Strong?

So, has Russia’s export industry, paradoxically, boomed after sanctions?

To find out, we first need to establish what Russia’s main exports actually are.

If you look at the composition of Russian exports in 2020, you will see that 37% of all of its export revenue come from Oil. Roughly 6% comes from gas 4% from coal, and only 53% from all other exports.

Just for comparison, let’s have a look at the export composition of the United States. While it rivals Russia for oil and gas exports, the diversified character of its economy means that it these categories only account for roughly 12% of its economy.

This is why Russia’s economy is sometimes mockingly referred as a glorified gas station.

But, for waging a war, it doesn’t really matter what brings in the money. As long as the money keeps coming in.

Anyway, if Russia indeed earned more from energy exports, then there can only be two possible explanations for this: either the volume of its exports went up or the price of its exports went up. Most of my non-Russia sources confirmed that the volume of both oil and gas flowing to Europe via pipelines has contracted by roughly 10-20%.

What’s more many oil shipping companies have voluntarily refused to ship Russian oil to other countries until….

The Greek fleet stepped in.

And as a consequence, Russian oil shipping volumes are now up a little bit. Although, they are selling at discounted prices compared to the rest of the world, these prices are still higher than what Russia used to sell for.

Similarly, when Russian liquefied natural gas was boycotted by Japan and Korea, India stepped in to buy it at a discount. So, sanctions do hurt Russian oil sales. But, the price that they get are still higher thanks to the war. What’s more, Europe is not buying at a discount.

What’s more I can confirm from personal experience that oil and gas prices in Europe are sky high.

And that can explain why Russia is now earning roughly twice as much from its energy exports to Europe. Finally, the latest numbers point to a big increase in Russia’s overall export revenues to …. you guessed it China.

So, is it indeed Russian export strength and therefore can Russia keep paying for the war?

Yes, that is definitely part of the story. But, it’s not the whole story. After all, both oil and gas prices have been at this price point before and then Russia didn’t report these record surpluses.

So, perhaps the missing link could be that Russia’s current account surpluses are just an indicating that can no longer import crucial good and services from the west?

Russia weak?

Sadly here again, I was hindered by the fact that Russian customs stopped reporting crucial import statistics after the war. Luckily, whatever Russia is importing, someone else it exporting. And here research revealed that Russia is now importing almost forty percent less less from all of its crucial import partners, including China. And sure, while Russia is fairly self-sufficient in food, minerals, and other necessities, it is highly reliant on the import of advanced products such as medicine and machines.

And, if that would only mean that Russians aren’t able to upgrade their phone anymore, that wouldn’t necessarily impact its war paying or waging abilities, now would it?

However, these numbers might also reflect that the Russian military is struggling to buy replacement equipment.

Sure, then you could say. But, Joeri, they have the raw materials. They have the blueprints. They can just make this stuff themselves.

Well, this is called import substitution and Russia has been trying this ever since 2014

But so far Bank of Finland research revealed that it has not been very succesfull.

Final thoughts

So, what’s really behind Russia impressive current account surpluses?

The boringly nuanced answer is that it is both an increase in export revenue , not due to rising volume. But, due to prices and a at the same time it’s a massive decline in crucial imports.

But, does this mean they can afford a long war?

Well, from a monetary perspective, yes… yes they can. But, that money might ironically be rather useless because they cannot buy and produce the stuff that they actually need to fight that war.

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