Sanctions cushioning Russia from virus-caused economic shocks

MOSCOW — Six years ago, the U.S. and the European Union slammed the door on Western bank loans for Russian companies, starving the country’s oil and banking industries of financing. The harsh measures were intended to punish Russia for military interventions in Ukraine and Syria and for meddling in the 2016 U.S. election to help Donald Trump.

Paradoxically, however, those sanctions — and the policies Russia enacted in response — prepared the Kremlin for what came this month: a universal dislocation of the global economy from the COVID-19 pandemic and an oil price war that led to a collapse in oil prices and the revenues that Russia relies upon to support social spending.

Far from being a basket case, Russia enters the crisis with bulging financial reserves, its big companies nearly free of debt, and all but self-sufficient in agriculture. After Russia was hit with the sanctions, President Vladimir Putin’s government and companies adapted to isolation and were virtually forced to prepare for economic shocks like the one hammering the global economy today.

“Russia will be a bit better off than other countries because of its experience, because of sanctions and because of reserves,” said Vladimir Tikhomirov, chief economist for BCS Global Markets, referring to the roughly $600 billion in gold and hard currency reserves the country has amassed.

To be sure, Russia has taken a hard hit from the collapse of oil prices, with its national currency, the ruble, losing about 20% of its value in recent weeks. Oil and natural gas account for about 60% of Russia’s exports.

It is still too early to predict how outbreaks of the virus will spread and how various governments will respond. Given the state of Russia’s ramshackle and underfunded health care system, the COVID-19 outbreak could be catastrophic. With the state’s tight grip on the news media, many Russians suspect that the Kremlin could be hiding the scale of the problem or the extent of preparedness, hampering an effective response.

Still, some countries, Russia among them, seem better positioned than others. For Russia, that is linked to the Western sanctions.

Take, for example, a 2014 sanction limiting loans from Western financial institutions to a maximum of three months. Russian companies responded by paying down their debt so that total government and corporate foreign debt in Russia fell to $455 billion at the start of this year from $713 billion in 2014. By contrast, Western companies have taken advantage of low interest rates to run up trillions of dollars in debt in the past decade.

“Russia over the past six years has been living with a hostile foreign environment because of sanctions,” Mr. Tikhomirov said. When the virus threat passes, he said, “it’s possible things will come back to life faster in Russia than in other countries because there won’t be the negative drag of debt.”

The Russian government Thursday published its plan to contain the virus and maintain economic activity. It said that all pneumonia patients would now be tested and that the country was making 100,000 test kits a day.

The plan revised rules for paid sick leave so that companies must pay an advance when an employee goes on leave. It will dip into the National Welfare Fund, the main sovereign wealth fund, to pay bonuses to medical workers.

Russia has 55,000 hospital beds available to treat COVID-19 patients and 40,000 ventilators, which are critical in treating the sickest patients, the statement said. By Friday, Russia had reported 199 cases of COVID-19.

For now, Russia is relying on quarantines and contact tracking without major lockdowns. But measures to halt the virus’s spread will likely bring Russia’s economy to a halt, as they have elsewhere, as companies send employees home. At that point, Russia’s treasure chest of hard currency will be of little help.