Natalia Orlova: ''With the imposition of sanctions, banks’ external debt has shrank twice''

The chief economist, head of Alfa-Bank’s Macroeconomic Analysis Centre on long-term influence of sanctions against Russia and the world market

Natalia Orlova: ''With the imposition of sanctions, banks’ external debt has shrank twice'' Photo: Maksim Platonov

Economic growth in Russia would be by 0,5% higher if not sanctions. Moreover, they've obtained a status of law since 2016, and approvals of the US Senate and Congress are needed to cancel them. However, there is a positive effect, too: agriculture and mechanical engineering have benefited from sanctions in the long term. They managed redistributed a big share of the domestic market to themselves. Chief economist, head of Alfa-Bank's Macroeconomic Analysis Centre Natalia Orlova told about this at Realnoe Vremya's online conference.

Russia's economy won't benefit from sanctions in the long term

The impact of sanctions on Russia has augmented: specific sanctions against Russian companies were imposed last April. Chief economist, head of Alfa-Bank's Macroeconomic Analysis Centre Natalia Orlova noted in Realnoe Vremya's editorial that it was a signal for markets and the economy that they should have no illusions about the cancellation of the sanction regime and they should consider sanctions as a new reality they will have to be working with in the next years.

Moreover, if not sanctions, economic growth in Russia would be by 0,5% higher. Sanctions also make an impact on the economy's potential growth. At the moment, they are financial, though some sectors of the economy benefited from the impact of sanctions. For instance, a rapid rise in agriculture was linked with the change in the regime of openness of the Russian economy.

Agriculture and mechanical engineering benefited in the short term. They managed to redistribute a big share of the domestic market to themselves. The share of food imports in Russia has reduced from 35% to 20% since 2014. However, Natalia Orlova thinks that it's not merit of sanctions but the impact of counter-sanctions: the Russian reply to restricted import from European countries.

The topic of artificial intelligence, technology breakthroughs has been key in developed economies in the last years. We haven't felt this so far because a technological breakthrough is only expected

''In the long-term, I am sure that a bigger number of sectors will win because the economy of Russia is built in the international economic architecture. And sanctions are blocking this building in. If we have a look at the history of sanctions in the last 50-60 years, as a rule, restrictions have been imposed on trade flows. Relations of the USA and Russia are built by principle of financial sanctions. As the Russian financial market is very deep, it has limited consequences. It's good news for us so far,'' Natalia Orlova noted.

Technological breakthrough and future sanctions

Sanctions might negatively affect Russia's R&D potential when Western companies stop supplying the latest developments or Russian companies aren't able to purchase the latest imported technologies due to expensive import or a weak ruble rate. Then the world economy will use more advanced developments, while Russia will have to create them inside. This can refer to a wide range of spheres, for instance, oil production technologies.

''The topic of artificial intelligence, technological breakthroughs has been key in developed economies in the last years. We haven't felt this so far because a technology breakthrough is only expected. But if technologies really change in the next five years, it's quite possible that we won't get fast access to them,'' Natalia Orlova told.

Russian banks have aggressively reduced their external debt in the last five years. With the imposition of sanctions, banks' external debt has shrank twice: from $200 billion to $80-90 billion

In answer to a question about future sanctions, the expert from Alfa-Bank replied that a lot of repeating bills had been appearing in the USA since last August. Moreover, sanctions are divided into two groups. Some largely make an impact on the whole economy, for instance, proposals to restrict investments in the Russian public debt, business with Russian banks and possible sanctions on energy projects such as Nord Stream 2. These sanctions are just discussed so far, but in case they are imposed, they will have a serious impact on the economy.

The second group of sanctions is less significant and it is about personal restrictions, for instance, because of the Skripals poisoning in Salisbury. There were also discussed restrictions on Aeroflot flights to the USA. At the moment it's unclear if these sanctions become bills, but they are discussed. Reasons to tighten the restrictions are constantly appearing.

With the imposition of sanctions, banks' external debt has shrank twice

Sanctions make the banking sector more self-sufficient. They hit external transactions. In case of Russia, it's impossible to carry out dollar transactions. This is why a tendency for a reduced use of foreign capitals and a greater emphasis on domestic ruble flows has grown in the last years.

''Russian banks have aggressively reduced their external debt in the last five years. Banks traditionally had attracted long funding from abroad before 2014. With the imposition of sanctions, banks' external debt has fallen twice: from $200 billion to $80-90 billion,'' Natalia Orlova said.

We had to create standby systems, and as sanctions are a long story, it's quite possible that Mir system will be used

The second consequences of restrictions: banks have started to pay more attention to the performance of subdivisions that study clients' vulnerability to sanction risks. This to a great extent refers to juridical counter-agents of a bank.

We've had our own payment system. Was there a real threat that Visa and MasterCard could be turned off?

If we look at precedents in other countries, for instance, in Iran, such exclusions from the accounting system happened. We've been building a strategy considering such risks since 2014. We had to create backup systems, and as sanctions are a long story, it's quite possible that Mir system will be used. Now these cards are issued for public organisations by decree,'' Alfa-Bank's expert added.

To support the economy, the state should stay on the sidelines, create rules of the game and allow more competitive companies to appear in the economy. The sanction regime is making consider economic measures as supporting measures rather than measures to develop a competitive economy.

By Yekaterina Gumarova. Photo: Maksim Platonov
Tatarstan