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Russia’s economy is growing, but can it last?
17 hours ago
Steve Rosenberg, Russia Editor, @BBCSteveR
Russia’s large-scale invasion of Ukraine in February 2022 not only provoked international outrage. It also triggered a wave of sanctions aimed at weakening the Kremlin’s ability to wage war against its neighbor.
Russia’s assets abroad have been frozen, its economy isolated from the global financial system and its energy exports targeted.
I remember Western officials and commentators describing the sanctions as “crippling,” “debilitating” and “unprecedented.” With adjectives like these filling the airwaves, the situation seemed clear. There was certainly no way Russia’s economy could withstand the pressures.
Faced with the prospect of an economic collapse, the Kremlin would be forced to retreat and withdraw its troops. Would not be?
Twenty-seven months later, the war continues. Far from being paralyzed, Russia’s economy is growing. The International Monetary Fund predicts that Russia will register economic growth of 3.2% this year. Caveats aside, this is still more than in any of the world’s advanced economies.
“Debilitating” sanctions did not produce shortages in stores. Russian supermarket shelves are full. It is true that rising prices are a problem. And not everything that was for sale still is – a number of Western companies have pulled out of the Russian market in protest against the invasion of Ukraine.
But many of its products still reach Russia via various routes. If you look hard enough, you can still find American glue in Russian stores.
CEOs from Europe and America may no longer be flocking to Russia’s annual economic event – but organizers of this year’s St. Petersburg International Economic Forum (formerly referred to as Russia’s Davos) say delegates from more than 130 countries are attending. countries and territories.
Rather than buckling under the weight of Western sanctions, the Russian economy has been developing new markets in the East and Global South.
All this allows Russian officials to boast that attempts to isolate Russia, politically and economically, have not been successful.
“It seems that the Russian economy has managed to adjust to very unfavorable external conditions,” says Yevgeny Nadorshin, senior economist at PF Capital. “Without a doubt, the sanctions have greatly broken the functioning mechanism of the economy. But a lot has been restored. Adaptation is happening.”
Work around
Does this mean the sanctions have failed?
“The big question was our understanding of what sanctions can and cannot do,” says Elina Ribakova, senior researcher at the Peterson Institute for International Economics.
“It’s not like pressing a button and Russia disappears. What sanctions can do is temporarily unbalance a country until it finds a way around the sanctions, until it finds alternative ways of getting shipments or selling its oil. We are exactly in that space where Russia has found an alternative solution.”
Moscow redirected its oil exports from Europe to China and India. In December 2022, G7 and EU leaders introduced a price cap plan aimed at limiting the revenue Russia earns from its oil exports, trying to keep them below $60 per barrel. But Western experts admit that Russia managed to get around this situation quite easily.
The price cap story highlights a dilemma for the US and its partners.
Recognizing that Russia is one of the biggest players in the global energy market, they tried to maintain the flow of Russian oil to prevent energy prices from rising. The result of this is that Moscow continues to make money.
“In a way, we refused to adequately sanction Russian oil,” concludes Elina Ribakova. “This price cap is an attempt to have our cake and eat it. The priorities are to allow Russian oil to enter the market and reduce Russia’s revenues. And when these two priorities conflict, unfortunately the first one wins. This allows Russia to collect a lot of revenue and continue the war.”
Russia has become China’s largest oil supplier. But Beijing’s importance to Moscow goes far beyond energy exports. China has become a lifeline for the Russian economy. Trade between the two countries reached a record $240 billion (£188 billion) last year.
Walk through St. Petersburg or Moscow and you don’t need to be an economics expert to understand how important China has become to a sanctions-hit Russia. Electronics stores here are full of Chinese tablets, gadgets and cell phones. Chinese car dealers now dominate the local car market.
Not that the Russian auto industry is sitting around doing nothing. At a trade exhibition recently in Nizhny Novgorod, Russian Prime Minister Mikhail Mishustin saw the new version of a classic Russian brand, the Volga. There was only one thing: the new Volga is based on a Chinese car, the Changan.
“Where was this steering wheel made? Is it Chinese? asked the prime minister, apparently irritated by the lack of Russian components.
“We want [the wheel] be Russian,” he said.
Ultimately, however, it is not the automobile industry that drives Russia’s economic growth.
Military spending is doing this.
Vladimir Putin visits a tank factory in the Urals
Since Russia launched what the Kremlin still calls a “special military operation” in Ukraine, weapons factories have been working 24 hours a day and more and more Russians have been employed in the defense sector.
This drove up wages in the military-industrial complex.
But spend too much on the military and there will be less to spend on everything else.
“In the long term, we are destroying the economy”, believes Chris Weafer, founding partner of the Eurasian consultancy firm Macro-Advisory. “There’s no money going toward future development.”
He says that in 2020 there was a lot of discussion about the National Project program, under which $400 billion would be spent on improving Russia’s infrastructure, transport and communications. Instead, “almost all of this money was diverted to finance the military-industrial complex and support the stability of the economy.”
After more than two years of fighting, Russia’s economy has adapted to the pressures of war and sanctions. But the US is now threatening with secondary sanctions foreign banks that help with transactions with Moscow, and this is creating a whole new set of problems for Russia.
“The arrival of products in Russia has slowed down,” says Chris Weafer. “Spare parts are more difficult to access. Every day there are stories of banks in China, Turkey and the Emirates refusing to handle Russian transactions, whether it is money from Russia to buy goods or money going back to Russia in payment for oil or other imports. Unless this is resolved, Russia will face a financial crisis in the autumn.”
This is why it would be wrong to conclude that Russia beat the sanctions. So far, ways have been found to deal with them, bypass them and reduce their threat.
But the pressure of sanctions on the Russian economy has not disappeared.
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