Site icon News-EN

The Russian economy is growing, but can it sustain?

e1fea8abdd5dd54a866750345f8b3354


(Getty Images)

The large-scale Russian invasion of Ukraine in February 2022 not only sparked 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 had been frozen, its economy cut off from the global financial system and energy exports under attack.

I recall 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 that the Russian economy could withstand the pressure.

Faced with the prospect of economic collapse, the Kremlin would be forced to retreat and withdraw its troops. Wouldn’t it?

Twenty-seven months later, the war rages on. Far from being paralyzed, the Russian economy is growing. The International Monetary Fund predicts that Russia will achieve economic growth of 3.2% this year. Caveats aside, that’s still more than any of the world’s advanced economies.

“Debilitating” sanctions have not led to shortages in stores. The shelves of Russian supermarkets are full. It is true that rising prices are a problem. And not everything that used to be for sale still is: a series of Western companies left the Russian market in protest against the invasion of Ukraine.

But many of their products still find their way to Russia via different routes. If you look carefully, you can still find American cola in Russian stores.

CEOs from Europe and America may no longer be flocking to Russia’s annual economic showcase event, but organizers of the St. Petersburg International Economic Forum (once called Russia’s Davos) claim delegates from more than 130 countries and territories are taking part.

Instead of collapsing under the weight of Western sanctions, the Russian economy has developed new markets in the East and South.

All this allows Russian officials to boast that efforts to isolate Russia politically and economically have not succeeded.

“It seems that the Russian economy has managed to adapt to very unfavorable external conditions,” said Yevgeny Nadorshin, senior economist at PF Capital. “Without a doubt, sanctions have seriously compromised the working mechanism of the economy. But a lot has been restored. Adjustment is taking place.”

Workaround

Does this mean that sanctions have failed?

“The big problem has been our understanding of what sanctions can and cannot do,” said Elina Ribakova, a senior fellow at the Peterson Institute for International Economics.

“It’s not like you flip a switch and Russia disappears. What sanctions can do is temporarily throw a country off balance until it finds a way around the sanctions, until it finds alternative ways to bring in shipments or sell its oil. We are exactly in that area where Russia has found a solution.”

Moscow has shifted its oil exports from Europe to China and India. In December 2022, leaders of the G7 and the EU introduced a price ceiling plan aimed at limiting the revenue Russia gets from its oil exports by trying to keep them below $60 per barrel. But Western experts admit that Russia has been able to circumvent this quite easily.

(Getty Images)

The price ceiling story highlights a dilemma for the US and its partners.

Recognizing that Russia is one of the largest players in the global energy market, they have sought to maintain Russian oil flows to prevent increases in energy prices. The result is that Moscow is still making money.

“In a sense, we refused to sanction Russian oil appropriately,” Elina Ribakova concludes. “This price cap is an attempt to have our cake and eat it too. The priorities are allowing Russian oil onto the market and reducing Russian revenues. And unfortunately, when these two priorities come into conflict, the former wins. That allows Russia to generate a lot of revenue and continue the war.”

Russia has become China’s largest oil supplier. But Beijing’s importance to Moscow extends far beyond energy exports. China has become a lifeline for the Russian economy. Trade between the two countries reached a record $240 billion last year.

Walking through St. Petersburg or Moscow, you don’t have to be an expert in economics to understand how important China has become to sanctions-hit Russia. Electronics stores here are full of Chinese tablets, gadgets and mobile phones. Chinese car dealers now dominate the local car market.

Not that the Russian car industry is twiddling its thumbs. At a recent business fair in Nizhny Novgorod, Russian Prime Minister Mikhail Mishustin was shown the brand 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?” the Prime Minister asked, apparently irritated by the lack of Russian components.

“We want (the steering wheel) to be Russian,” he said.

Ultimately, however, it is not the auto industry that is driving Russia’s economic growth.

Military spending does that.

Vladimir Putin visits a tank factory in the Urals (Getty Images)

Since Russia launched what the Kremlin still calls its “special military operation” in Ukraine, weapons factories have been operating around the clock and more and more Russians are working in the defense sector.

That has driven up wages in the military-industrial complex.

But spend a lot on the military and there’s less to spend on everything else.

“In the longer term you will destroy the economy,” says Chris Weafer, founder of the Eurasian consultancy Macro-Advisory. “No money goes to 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, “nearly all of that money has been sidetracked to finance the military industrial complex and support stability in the economy.”

More from InDepth

After more than two years of fighting, the Russian economy has adapted to the pressures of war and sanctions. But the US is now threatening secondary sanctions on foreign banks that support transactions with Moscow, creating a whole new set of problems for Russia.

“The arrival of products in Russia has been delayed,” says Chris Weafer. “Spare parts are more difficult to access. Every day there are stories about banks in China, Turkey and the Emirates refusing to handle Russian transactions, whether money coming out of Russia to buy goods or money going back to Russia in payment for oil or other imports. If this is not resolved, Russia will experience a financial crisis in the fall.”

Therefore, it would be wrong to conclude that Russia has overcome sanctions. So far, it has found ways to deal with them, to circumvent them and reduce their threat.

But the pressure on the Russian economy due to sanctions has not disappeared.

BBC InDepth is the new home on the website and app for the best analyzes and expertise from our top journalists. Under a distinctive new brand, we bring you fresh perspectives that challenge assumptions, and in-depth reporting on the biggest issues to help you understand a complex world. And we’ll also be presenting thought-provoking content from BBC Sounds and iPlayer. We start small but think big, and we want to know what you think. You can send us your feedback by clicking the button below.

Exit mobile version