- Russia has been preparing to impose sanctions since 2014 after the annexation of Crimea.
- Moscow was already subjected to a series of Western sanctions after the annexation.
- Since then, Russia has taken a variety of measures to protect itself.
Economists predict an internal collapse in President Vladimir Putin’s economic system since the West imposed sweeping sanctions on Russia over its invasion of Ukraine. But after three-and-a-half months of the war, Russia held its ground – Putin announced on June 7 that inflation had slowed and unemployment remained stable.
It helps that Russia is an energy power that continues to generate record revenues thanks to high oil prices. Even without windfall energy gains, Russia can be shielded from sanctions in the short term. The country has been protected from sanctions since 2014, when it was also hit by a series of trade restrictions after the illegal annexation of Crimea from Ukraine.
Veronica Carrion, an economist at the American Bankers Association (ABA), wrote in a June 13 article in the ABA Banking Journal that Putin “built the Russian economy into a fortress” to withstand external shocks.
Since the beginning of the war, some experts have questioned the reliability of Russian statistics. “The Russian government clearly has an incentive to try to hide the economic impact of Western sanctions,” said Andrew Lohsen, fellow in the Europe, Russia, and Eurasia Program at the Center for Strategic and International Studies.
Even if the economy appears to hold up, Russia may eventually run out of time as the rise of commodities falters and tight Western sanctions tighten the regime. But for now, the country is showing unexpected resilience with a range of measures including boosting its reserves and withdrawing foreign capital.
Here’s what Russia is trying to do to impose sanctions on its economy.
Moscow increased reserves and stashed gold
Before the invasion, Russia had the world’s fifth-largest reserves of foreign currency and gold, worth about $630 billion, according to the Bank of Finland’s Institute for Emerging Economies. “This stock could cover the government’s balance sheet and support the ruble,” Carrion wrote.
Russia’s finance minister said in March that Russia had lost access to about half of that amount due to sanctions. But there is still plenty of physical gold in the country – which is also the world’s second largest producer of the precious metal.
Russia’s gold holdings have tripled since 2014, all held in vaults at home, according to the central bank. Carrion wrote that the United States had imposed sanctions on Russian dealings in gold, but that would not prevent “opportunistic countries” from doing business with Moscow.
Russia also continues to build up some reserves in the form of emergency funds thanks to windfall gains from its oil and gas sales. In April and June, it increased its contingency reserves by $12.7 billion. Reuters reported on June 9, citing a Russian government statement, that the funds would be used to ensure stable economic development despite the sanctions.
Russia weaned itself of foreign capital and paid off its debts
Besides saving, Russia has weaned itself off foreign capital over the past eight years through extensive debt servicing. Gian Maria Melici Ferretti, senior economics studies fellow at the Hutchins Center for Fiscal and Monetary Policy wrote March 3. He added that the country is now a net creditor in international markets.
“Vladimir Putin is sensitive to credit,” Andrew Weiss, a Russia expert at the Carnegie Endowment for International Peace, told Money Planet in February. “He is not trying to use the Russian banking system or access to Western capital to make Russia great.”
Russia’s external debt is very low. JPMorgan estimated that the government owed about $39 billion in foreign currency bonds at the end of 2021. By comparison, Greece defaulted on public debt of 205.6 billion euros ($277.5 billion) in 2012.
As for Russia’s total public debt, it is only 17% of GDP – much lower than the three-digit figure of many developed countries and is mostly expressed in rubles. Anton Tabakh, chief economist at the Russian expert RA Carnegie Endowment for International Peace, wrote online June 15 that the country “doesn’t really need to borrow.” The national debt of the United States is about 130% of GDP, according to statistics.
Tabakh added that the biggest problem Russia is currently facing is paying off its foreign debt due to sanctions restrictions. Once this is resolved, he added, Russia and its companies will be able to service their debts, and the country’s own resources will be “sufficient to meet budgetary, banking and corporate needs.”
Russia is heading inward toward economic self-sufficiency
Russia is turning inward because it has become an international pariah — but as a commodity giant, its economy will not collapse entirely — even if growth is slow and moderate, said Hassan Malik, senior government bond analyst at investment-based management consultancy Boston. Loomis Sayles.
“Russia is one of the few countries in the world that can be self-sufficient,” Hassan told Insider. He referred to the concept of economic self-sufficiency. The country is a major producer of crude oil, natural gas, wheat, and minerals such as nickel and palladium.
To counteract the emigration of international companies that took their goods and services with them, Russian companies took over the companies and replaced their products with local offerings.
For example, the city of Moscow and a Russian state-backed group acquired the operations of the French automaker Renault in the country for a symbolic amount of 2 rubles (3.5 cents). They plan to revive a Soviet-era auto brand with manufacturing facilities. The mayor of the city, Sergei Sobyanin, said in a blog post.
But the economic situation in Russia will remain very difficult. AFP reported that Putin himself said on June 9 that replacing imports with locally produced goods “is not a panacea”. He said Russia will look for new trading partners and continue to develop its own industries for “very important technologies”.
The breadth and scope of the current sanctions far exceed what they were in 2014, so they will “impose very high costs on the Russian economy.” Milesi Ferretti wrote in his letter on March 3.
The Russian economy is expected to contract 8.5% in 2022, with another 2.3% contraction in 2023, the International Monetary Fund forecast in an April report. This would be the biggest contraction in the economy since the years after the collapse of the Soviet Union in 1991.
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