‘None of those sanctions really work effectively’
Years of sanctions have made the Russian economy more resilient
After five years of Western sanctions, the Kremlin appears to be undaunted by their impact. “We actually support full normalisation, especially since none of those [sanctions] really work effectively,” President Putin said last month. “Indeed, this policy causes us problems, but there are benefits, too, and they are also obvious.”
Russia has adapted to Western sanctions due to prudent fiscal policy by the Kremlin, economic adaptation over the years spent under Western restrictions and a fat slice of luck, considers Financial Times. Russia’s economy today looks to be in better shape by many metrics compared to years before sanctions: growth is slower but more stable, exporters have found new markets and importers have discovered domestic alternatives. “Russia’s economy has been far more resilient than many feared back in 2014,” believes Sofya Donets, Russia economist at Renaissance Capital.
Some analysts even consider that Moscow now has more to fear from the removal of restrictions than their expansion. According to an anonymous senior official who advises the Russian Central Bank, the biggest danger to the country’s economy would be if all the sanctions were lifted one day. “There would be a massive inflow of capital, the currency would spike, all the government’s policies would be in tatters. It would be a disaster,” he said.
The restrictions imposed by Western countries prohibit long-term financing for some major corporates and assistance to Russian oil and gas companies for Arctic, shale and offshore projects. Besides, they include travel bans for some prominent Russian individuals. According to James Roaf, head of the IMF mission to Russia, sanctions are holding back both foreign and domestic investment and reducing the country’s international market integration. Economic growth is currently well below the Kremlin’s hopes, and many observers are citing a collapse in foreign direct investment as a major factor. Targeted sanctions have hit some of Russia’s most important industrial groups, while measures curtailing investment and technology transfer to the Russian energy industry have had a medium-term impact not yet seen due to the long gestation period for energy projects.
To counteract the sanctions, Russia’s authorities focused on three key areas. First, they cut public spending and forced banks and major corporates to clean up their balance sheets. Second, trillions of rubles were spent on programmes to create domestic substitutes for imported goods. At the same time, food imports from the EU were banned to stimulate local production. Finally, the government created a national wealth fund to accumulate income from energy exports above a certain level.
As a result, the threatened economic collapse has not occurred. Russia’s government showed a budget surplus in 2018 and 2019 and reduced the country’s total public debt to about 15% of GDP, while international currency reserves are now close to a record peak achieved in 2008. The farming sector is booming as well as agriculture exports. The Kremlin is seeking new friends in Asia and Africa to compensate for the fall in Western trade and investment. After a recent visit to Russia, Roaf credited the current economic situation to Moscow’s “adherence to a sound macroeconomic framework, which supports economic activity by reducing uncertainty, keeping inflation under control and providing confidence in the exchange rate”.