In the dramatic days that followed The Russian invasion of Ukraine a year ago, the Russian economy was seriously shaken.
Western allies, led by the United States and the EU, imposed severe sanctions on the country’s financial system. The ruble fell to a record low against the US dollar, the Russian central bank doubled its interest rates and the Moscow stock exchange was closed for several days.
In a statement, EU leaders described “massive and serious consequences” for Russia. Economists have predicted a dizzying fall in GDP. Weeks after the sanctions took effect, the White House said in a statement: “Experts predict that Russia’s GDP will contract by up to 15% this year, wiping out the last fifteen years of economic gains.”
This does not happen. Although the last 12 months have been very difficult for the Russian economy, it has performed much better than expected.
Getting a clear picture is ultimately impossible. The Kremlin classified many key economic data after the invasion and it still does today. The underlying shape of the economy is uncertain. However, it is already evident that the collapse that many predicted has not materialized.
“I think it’s fair to say the economy has contracted a lot less than the 10-15% we were talking about at the start of the war,” Alexandra Vacroux, executive director of the Davis Center for Russian and Eurasian Studies, told Harvard University. said DW.
She estimates that Russian GDP has fallen by 3-4% over the past 12 months. This is broadly in line with estimates from the World Bank, International Monetary Fund (IMF) and Organization for Economic Co-operation and Development (OECD).
Russia’s official statistics agency said this week that the economy contracted by 2.1% in 2022, after predicting a contraction of 12%.
Panic in Moscow
Chris Weafer has worked in Russia for about 25 years as an investment adviser and strategist. He says there was a lot of real panic in Russia about the economy in the first months after the invasion. This was not only due to the sanctions, but also to the fact that many companies were voluntarily leaving Russia.
“There was speculation that the loss of trade and logistics routes would hit manufacturing very hard and that there would be significant job losses. So at that time I was definitely very pessimistic about the outlook for the industry. economy in 2022,” he told DW.
However, he says, by May the situation was “improving rapidly”. “You could see the worst predictions weren’t going to happen.”
Europe continued to buy Russian energy for much of 2022
There are several reasons why the Russian economy has exceeded expectations. One of the main ones is its hydrocarbons, namely oil and gas. The EU did not sanction Russian oil and gas imports in the first months of the invasion, because so dependent on them for its energy needs.
Europe has continued to buy Russian oil and gas for much of 2022, while Moscow has also found new energy trading partners. in China, India and elsewhere. Earlier this month, Russia’s central bank announced a record trade surplus of $227 billion (211 billion euros) for 2022, largely thanks to its colossal energy exports.
“Russia was able to derive almost exceptional revenues from the export of these products at a very high level, because traders in Europe not only continued to buy Russian products, but they started to store them,” says Weafer.
This “windfall” meant that the Russian government was able to significantly limit the impact of Western sanctions on its foreign exchange reserves.
“He was able to use the money to provide subsidies to key industries, employment support, ensure that he continued to fund not only military but also social programs and generally maintain economic and social stability in the country,” Weafer said.
This in turn has helped to keep unemployment low at around 4%, although this figure is significantly skewed by the fact that many people have left the labor force, either because they were recruited into the armed forces, or because they left the country following the invasion.
Another factor that has helped sustain Russia’s economy is that the majority of Western companies continued to operate in the country once the initial clamor to exit the market died down.
Weafer says that while companies such as McDonald’s have come under huge social media pressure to leave, most others have weathered the storm. “Especially the ones that are important to the economy, like big taxpayers or revenue generators or especially big employers, they’ve been much, much slower to leave.”
Old sanctions, new markets
Another reason for the robustness of the Russian economy has to do with the sanctions themselves. Vacroux says sanctions have still not met expectations in countries like Venezuela, Iran and Russia itself.
“The fact is that sanctions are most effective just before they are imposed,” she says. “When you have the threat and you say, if you do X, we’re going to sanction Y, and then the actor stops to think, like, is it really worth doing X? And maybe the sanctions have an effect. But once Russia invades Ukraine, then you really don’t have any leverage.”
Then there’s the fact that the Kremlin has been used to dealing with sanctions for almost a decade, since its annexation of Crimea in 2014.
Russia’s central bank, experienced in crisis management, took decisive steps to shore up its financial system in February and March 2022. Rising interest rates helped stave off a run on banks as the interest rate The country’s inflation was gradually declining.
Weafer says a decade of sanctions means the country’s banks have been subjected to intensive stress tests while the country has also become relatively self-sufficient in key industries, particularly food production.
Another major factor in Russian economic resilience is strengthening its trade ties with China and India. Trade between the countries has boomed while Russia has also been able to increasingly benefit from so-called “parallel imports”, whereby Western products now find their way to Russia via third countries such as China, India and others across Central Asia.
Vacroux says China is “the big winner”pointing out that while trade between the countries has exploded, Moscow’s dependence on Beijing has also increased.
“China doesn’t really care about Russia,” she says. “It’s 3% of Chinese trade. But Russia now cares a lot about China. And the good thing about that for us is when China says, ‘You can’t use nuclear weapons in Ukraine. you really have to listen.”
2023: Another story?
Expectations for the Russian economy in 2023 vary. The IMF recently said that it expects the country’s economy to grow by 0.3% in 2023, although others forecast a drop in GDP of around 2%.
Europe has succeeded in largely shedding its dependence on Russian energy over the past 12 months. However, so far there is little evidence to suggest the bloc’s price cap sanction on Russian oil – introduced in December – is working. According to research conducted by The EconomistRussian crude oil sales remain strong, driven by demand from China and India.
Weafer believes that the new EU sanctions,which began on February 5 and targets diesel and other refined products, is a potentially key moment.
“There is a huge question mark over how much money Russia will make this year exporting hydrocarbons and extractive industries,” he said. “And it will definitely be significantly less than in 2022, that’s for sure.”
Edited by: Kristie Pladson