Russia shrugs off sanctions
The West’s punishment of Russia for invading Ukraine has not had the intended consequences. Why not? Simon Wilson reports
What’s happened?
Russia’s economy is continuing to stabilise and display striking resilience in the face of the Ukraine war and Western sanctions. Last month the IMF increased its GDP growth forecast for Russia to 2.6% this year, a big jump from the 1.1% it had been predicting last October, and a rate that outpaces the G7. Meanwhile, the big worry – rampant inflation fuelled by massive military spending and labour shortages – appears to be stabilising at around 7.5%, and some forecasters expect it to fall to 4% before long. That hasn’t led to a cut in interest rates: the central bank has kept its headline rate steady at 16%. But policy makers are “clearly hoping that underlying price pressures continue to soften in the coming months, which we think could open up the door for easing” in the third quarter, says Liam Peach of Capital Economics.
Why is Russia proving so resilient?
Mostly because energy revenues have held, because the Kremlin has ramped up defence spending, and because sanctions have had less effect than expected. Last year, Russia’s energy revenues reached RUB8.8trn – a decline of about a quarter from the all-time high in 2022, but above the average of the past ten years. Meanwhile, a third of the state budget (RUB9.6trn in 2023 and RUB14.3trn in 2024) is being spent on the war effort and social payments to soldiers and bereaved families. That’s a threefold increase in defence spending compared with 2021 – and amounts to “military Keynesianism”, says Vasily Astrov of the Vienna Institute for International Economic Studies. “The regime is resilient because it sits on an oil rig,” says Elina Ribakova of the Peterson Institute. “The Russian economy now is like a gas station that has started producing tanks.”
Will this last?
In the long run, it’s not sustainable, says Martin Sandbu in the Financial Times. Redeploying resources towards war just “camouflages the underperformance of the ordinary economy”. The rest of industry has stagnated: car production, for example, is down a third. In other words, Russia’s rising GDP looks “real” enough, but the aggregate figure reflects a radically “changed composition of economic activity” – and even then, on Russia’s own numbers, it has still barely caught up with its pre-invasion level. “War economy, yes. Broad resilience, not so much.”
But why aren’t sanctions working?
In some ways, they are – in the sense that they’ve helped force Putin to cannibalise the rest of the economy to feed his war machine. After Russia’s invasion in February 2022, the West blocked transactions with its central bank and froze $300bn in Russian sovereign assets. Western countries also banned the transport of Russian crude oil using Western services (including shipping and insurance) above a price cap of $60 a barrel. Since then, a total of around 16,000 additional sanctions have been introduced – more than 11,000 aimed at individuals; 4,600 at entities including financial institutions; and a few hundred at named ships and aircraft. These have damaged the economy in important ways, restricting access to advanced technologies in transport and communication, and making it harder to build energy infrastructure.
Yet they haven’t crippled Russia?
No, for several reasons. The main one, says James Surowiecki in The Atlantic, is that the sanctions remain limited in scope, and they are not global. Even the West is still doing plenty of business with Russia: it exempted some banks, continued buying some oil, and a little under half of European exports to Russia are under sanction. Meanwhile, the world’s secondbiggest economy, China, is “not only not participating in the sanctions but is actively helping weaken their impact”. Trade between the two countries hit $240bn last year, a 64% surge since 2021, before the war. Russia exported half its oil and petroleum to China, becoming China’s top supplier. And imports from China have surged 60%, including a steady stream of cars and electronics. Now, more than half of goods imports come from China, more than twice the share before 2022. Meanwhile, other economies, including Turkey, India, the UAE and Central Asian countries, have helped Russia circumvent trade sanctions by allowing trans-shipments of Russian oil and the import of important high-tech and other products.
What are the other reasons?
Russia was well prepared to weather sanctions, says Surowiecki – in part because it dealt with them before, after the 2014 seizure of Crimea. By 2022, Russia had low levels of sovereign debt, a large currentaccount surplus (it’s a net exporter) and had built up a national wealth fund. Also, the nature of its exports – commodities rather than manufactured goods – are in its favour. It doesn’t make much stuff that Westerners want to buy, so cutting off access to those markets “isn’t a big deal”. More broadly, Russia’s financial and monetary policy response – strict capital controls; exchangerate controls that compel counterparties to deposit foreign currency in the Russian financial system; doubling interest rates – has helped stabilise the rouble and the financial system as a whole.
“The regime is resilient because it sits on an oil rig”
What can the West do?
It must decide if it is serious or not about defeating Russia in Ukraine, says Edward Lucas in The Times. German exports to Russia have plunged, but exports to transit countries such as Kazakhstan, Armenia and Kyrgyzstan have mysteriously rocketed. “Britain, shamefully, is the biggest insurer of Russia’s international oil trade, to the tune of more than £100bn in the first 18 months of the war.” The firms concerned are doing nothing illegal: our government allows them to rely on “attestations” that the cargoes comply with the G7’s price cap. Meanwhile, Russia is still importing millions of dollars’ worth of nitrocellulose, vital in making ammunition, from Nato countries and their partners.