Why is the Russian economy holding up against Western sanctions?

The Russian economy is resisting. Far from the “collapse” predicted by French Finance Minister Bruno Le Maire after the first waves of Western sanctions following the outbreak of the Russian invasion of Ukraine, Moscow’s GDP contracted by only 2.1% in 2022, according to the Russian statistics service Rosstat. The Russian economy is even projected to grow by 0.3% in 2023, according to the International Monetary Fund (IMF).

“We have ensured the stability of the economic situation and protected our citizens,” said Russian President Vladimir Putin on February 21 in his state of the nation address, adding that the West had failed to “destabilise Russian society”.

The apparent resilience of the Russian economy is primarily due to the surge in oil and gas prices in 2022, which compensated for the drop in the volume of exports – a reduction of around 25% for gas.

Previously one of Russia’s main trading partners, the EU managed to reduce its imports of Russian natural gas by 55%, with the aim of undermining Moscow’s ability to finance its offensive in Ukraine. To remedy the deficit, Russia turned to new buyers, including Turkey, India and China in particular. Gas deliveries to the latter through the Power of Siberia gas pipeline increased by 48%, according to the Russian Deputy Prime Minister Alexander Novak.

>> Read more: Putin unveils new gas deal with China’s Xi as Moscow locks horns with the West

As Russia’s war in Ukraine enters its second year, the arms industry has also contributed to economic activity. “The metallurgical industry has seen a sharp increase in production. This is an obvious sign that certain branches of the military-industrial complex have succeeded in adapting. For example, there are factories in the Urals that operate 24 hours a day,” says David Teurtrie, senior lecturer in political science at the Catholic Institute of Vendée in Western France.

Another strong sector of the Russian economy, according to President Putin, is the agricultural sector. “By the end of the agricultural year, that is, by June 30, 2023, we will be able to bring the total volume of grain exports to 55-60 million tonnes,” said the Russian president.

‘We are used to problems’

Gas, oil, finance, trade, technology… all sectors of the Russian economy have been affected by successive waves of Western sanctions. However, Russian companies are adapting. Excluded from the SWIFT system, a secure messaging system that facilitates rapid cross-border payments, the banks depend on intermediaries to circumvent the sanctions.

Western goods are easily imported through third countries such as Kyrgyzstan, Armenia or Georgia, border countries at the heart of a parallel trade circuit which supplies Russian industry.

The food industry was also able to rebound through the emergence of local players which replaced Western brands, like Pepsi or Coca-Cola.

“Since the beginning of capitalism in Russia, we have experienced at least four major crises. We are used to problems and, to be honest, these are not the worst we have faced,” said Yuri Saprygin, an entrepreneur from the city of Kaluga, in central Russia, contacted by France 24.

Faced with Western sanctions, Saprygin was forced to replace parts from Europe and Taiwan with Russian and Chinese components. “It was not easy, but we never stopped our activity,” said the businessman whose company sells medical equipment to laboratories.

Not all sectors are suffering in the same way. Highly dependent on electronic imports, the technology sector is bearing the brunt of Western sanctions on semi-conductors, essential for the military and aeronautical industries, and even for the automotive sector.

A tapered economic situation?

Russia’s automotive sector is one of the industries that has struggled the most under the weight of sanctions. According to the Association of European Businesses (AEB), nearly a million fewer cars were sold last year compared to 2021, representing a reduction of 59%. The figure says a lot about the impact of the sanctions but also about the loss of Russian citizen’s purchasing power, who suffered like all Europeans from high inflation. While inflation in Russia rose to nearly 12% throughout the past year, it should be limited to between 5% and 7% in 2023, according to the Central Bank of Russia.

The situation is therefore far from idyllic. Especially since some observers and politicians doubt the official statistics provided by Russia. Reacting to Russian GDP figures, French President Emmanuel Macron said on Tuesday that “Russia’s economy is suffering a lot”, adding he “does not believe” Moscow’s “propaganda”.

Some important indicators, such as foreign trade data, are no longer published. “Probably to prevent the West from claiming the effectiveness of sanctions,” said Agathe Demarais, global forecasting director at the Economist Intelligence Unit in the journal Foreign Policy.

In addition, more than 300,000 men have been called up to fight in Ukraine and hundreds of thousands of Russians have reportedly fled the country over the past twelve months. This situationcould weigh on the productivity of the country over the long term. “Besides the sanctions, it is probably this aspect which penalised the Russian economy the most in the second part of the year because it was mainly educated and wealthy Russians who emigrated,” said David Teurtrie.

Is the worst yet to come?

While the Russian economy is still standing, it seems to be durably weakened and the situation could get worse. Some sanctions have not yet been felt by the economy, but time will tell. This is the case of sanctions on oil, the primary source of revenue for the Russian federal budget.

Since December, an EU embargo on Russian crude oil came into force in December. It was accompanied by a price cap on barrels delivered through maritime routes. Since February 5, the same mechanisms apply to refined oil products.

These embargoes could considerably penalise the country’s budget. According to data from the Centre for Research on Energy and Clean Air (Crea), the EU has paid EUR84 billion to Russia for its oil since the invasion of Ukraine.

“This is only the beginning. Sanctions on Russia are more of a marathon than a sprint”, said Agathe Demarais. “In the coming months, Moscow will need to solve an impossible equation to finance the war in Ukraine, while keeping social subsidies high enough to avoid unrest”.

“Lower oil prices have definitely had an impact on the Russian budget, but the markets will stabilise,” cautioned David Teurtrie. According to the researcher, Russia remains far from being economically crippled as the West had hoped and still has ways of pushing back against the sanctions: enormous financial reserves and “relatively low debt, which offer it a significant borrowing capacity”.

 

 

This article was translated from the original in French.