Will US sanctions force Putin to negotiate in Ukraine?

MoscowThe Kremlin's reaction in The announcement of new US sanctions against Russia's two largest oil companies, Rosneft and Lukoil, has stuck to the usual script. "We feel safe and stable, despite any losses that may occur," declared Vladimir Putin, who has no intention of changing his roadmap in the war in Ukraine. "This is an attempt to pressure Russia, but no self-respecting country decides anything under pressure," he added.

The Russian president has warned Donald Trump that this is an "unfriendly act" that "harms Russian-American relations," could destabilize the global energy market, and lead to a general increase in gasoline prices. Former Russian president Dmitry Medvedev has been more forceful, stating that this is an "act of war" that reminds Russia that the United States "is the adversary." However, Putin continues to support dialogue and wants to understand the White House leader's cancellation of the Budapest summit as a "postponement." "For me and for the American president, it would be a mistake to approach it lightly and leave this meeting without the expected result," he insisted.

But even if Putin doesn't give in, he doesn't hide the fact that the sanctions will affect the Russian economy. Rosneft and Lukoil produce around 55% of Russia's oil. This sector, along with gas, accounts for a quarter of the federal budget. Energy revenues have been migrating for months due to falling prices, rising logistics costs, and exchange rate volatility. Moreover, since the summer, The Ukrainian campaign of attacks against oil refineries and terminals, supported by the Pentagon, was the final straw.

At the beginning of the year, oil and gas revenues were estimated to represent 5% of Russian GDP, but this figure has since been revised downwards. According to Russian experts, the new restrictions will lead to a drop in export earnings and a decrease in GDP. "It's not a severe blow, but it's noticeable," notes economist Yelena Ustyuzhanina, who explains that "new intermediaries will emerge," resulting in lower profits for Russian producers.

Much of the success of these sanctions depends on whether Trump manages to pressure India and China to stop buying Russian fuel, the Kremlin's way of circumventing Western restrictions. The experience of Gazprom Neft, Russia's third-largest oil producer, which was the victim of similar measures in January, shows that the lack of secondary sanctions has left the way open for trade through the so-called Russian shadow fleet (ships operating without a flag) and opaque transactions.

War is expensive

Be that as it may, any instrument that means the Kremlin loses a source of income This will result in greater difficulties in financing the war effort.. If in 2021 the Russian government allocated 22% of its budget to the military, it now allocates 40%, almost 8% of GDP. Furthermore, the conversion of the civilian economy into a military economy, which has been essential to navigate without collapsing during more than three and a half years of war, is showing signs of exhaustion.

In an article in the magazineForeign Affairs, economist Alexander Prokopenko, who worked at the Russian Central Bank until 2022, warns of the "dilemma" Putin faces: cutting defense spending will trigger "an economic collapse," but maintaining current levels will "perpetuate stagnation."

The sanctions have also cut off supplies of key weapons components from Europe and the United States. The Russian state has had to become completely dependent on China.But according to experts, it cannot become competitive again in the long term. "Russia can make up for its losses over the next two or three years, but fully restoring its army will take much longer," says Prokopenko. One of the options Putin is considering is to further militarize the economy. This would not only mean converting civilian industries and paying the price of attracting new workers to the war industry, but would also threaten already strained consumer goods factories. A step in that direction could entail the closure of companies and the rationing of some everyday products. In short, more sacrifices for the Russian population. "From Putin's perspective, the potential rewards (subjugating Ukraine and eroding NATO) may justify the gamble," adds the economist.

A survey this week by the government sociological center VTSIOM concludes that 69% of Russians are willing to tighten their belts to win the war because "they feel responsible for their homeland."