Russia’s Resilient Economy Sees Putin Get the Last Laugh

Russia’s economy may have taken a few hits, but it’s far from being knocked out by the sanctions in the wake Vladimir Poutineaggressiveness, with one expert saying Newsweek that measures to really hurt the Kremlin came eight years too late.

After GDP fell 2.2% in 2022, far less than the 10-15% annual decline some predicted at the start of the war, economists believe that instead of growth, Russia faces to a decline in 2023.

But Putin is not yet shocked by what the American president Joe Biden had threatened would be “economic consequences such as he has never seen”.

More than 3,000 individuals and entities targeted by the United States alone have made Russia the most sanctioned country “in the history of mankind”, according to the economic think tank of the Free Russia Foundation.

With much of its hard currency reserves frozen, sanctions against financial institutions, and the country’s expulsion from the SWIFT international payment system, Russians feared at the start of the war of financial turmoila ruble crash and liquidity shortages.

But the collapse of the economy and a run on the banks similar to what happened in 1998 when Russia defaulted on its debt did not materialize.

This was helped in part by Russia’s central bank moving quickly to close markets, raise interest rates to 20% and restrict currency trading. But Russia has also had the best part of a decade to prepare for sanctions after its illegal annexation of Crimea from Ukraine in 2014.

“If the West had applied all these sanctions in 2014 after Crimea, the economy would have collapsed because it would have been a total shock,” said Chris Weafer, managing director of strategic consultants Macro Advisory Ltd. Newsweek. “But every year preparing and living with sanctions has made them resilient. It’s clearly been much more resilient than expected.”

The capture of Crimea nine years ago prompted European governments to wean themselves off Russian energy dependence, but there was little real action until last year, giving Moscow time to diversify its main exports. China has gone from buying little energy from Russia in 2014 to being its biggest oil and coal customer by 2021.

Weafer said the structure of Russia’s economy also benefits Putin in a sanctions-hit 2022. Relatively unchanged from Soviet times, the state and state-owned enterprises account for about two-thirds of GDP, and SMEs (small and medium-sized enterprises) only about one-fifth.

Although this structure is detrimental to growth, it can act as a stabilizer during tough times, and this has been shown during the COVID shutdown.

“That meant that as the Russian government made more money from its core energy exports, it was able to channel that money into state-owned companies and businesses,” Weafer said. . “It has supported businesses and key parts of the state-related economy and employment.”

Companies that left had to work with the Russian government to ensure that their exits caused no distress to the economy and that ownership was transferred to local management or a local buyer on an ongoing basis.

“The government provided subsidies to ensure there would be no closures in major employers and regions,” Weafer said.

Parallel imports

Parallel imports of unsanctioned goods and trade with countries that have refrained from punishing Russia have had an impact. Russia has also succeeded in moving many products to Asian markets at lower prices such as India, China and Turkey.

“The longer the sanctions regime lasts, the more we will start to see deterioration, but the difference is that we are not going to see a collapse of the Russian economy. I think that threat has now passed,” Weafer said. .

Last month, the International Monetary Fund (IMF) predicted that the Russian economy would rebound slightly this year to 0.3% growth and the following year, even reach growth higher than that of the United States, which led the burden of financially isolating Russia.

Olga Bychkova, economist at Moody’s Analytics, said Newsweek that a stronger growth of the Russian economy than in the United States in 2024 would not be unusual, because after any recession, “emerging economies often grow faster while recovering than advanced economies”.

Labor shortages

However, Bychkova believes the IMF has overestimated the performance of the Russian economy, with Moody’s predicting that it will contract another 1.25% in 2023. This would be due to the full implementation of European Union oil embargoes and the reduction of natural gas exports by stopping deliveries by Russia via the North stream 1 pipeline.

She said growth would pick up in 2024 with modest consumption growth and a marginal recovery in exports as Russia redirects its trade relationship.

“The ability to increase production in the Russian economy is largely constrained by labor market conditions,” Bychkova said, with unemployment at record highs and labor shortages rising in many industries. amid the effects of partial mobilization.

“The Russian economy is still not out of the woods and further contraction is extremely likely,” she added.

This exodus of Russians since Putin’s invasion began, whether to avoid conscription, oppose war or seek better prospects abroad, has shown the disconnect between economic data and the quality of life of the average citizen, said Konstantin Sonin, a Russian-born economist.

A professor at the University of Chicago’s Harris School of Public Policy, Sonin lectured in Moscow the day before the Feb. 23, 2022, invasion. Fearing arrest, Putin’s critic backed out of a planned sabbatical in Russia and returned to Chicago.

“In terms of quality of life, the national economy has suffered a lot. In terms of GDP, it hasn’t suffered much,” Sonin said. Newsweekpointing out that the level of growth was only a rough measure of the health of the Russian economy.

“It’s something similar to Soviet times where there were queues for basic foods and the GDP was quite high because the Soviet Union was investing in military production at huge levels,” did he declare.

“Suppose you are like a doctor and a patient is brought to you who is barely breathing. You measure the temperature and the temperature is good. Does that mean the person is actually healthy? No, it means just that the temperature is not a good indicator of what’s going on.”