Russia: How is the world’s most sanctioned economy doing?

Six months into the Ukraine war, the world’s most sanctioned country, Russia, seems relatively comfortable surfing the tidal wave of Western sanctions aimed at swamping its economy.

That is the case at least for now, with the full impact of the sanctions and their “moving targets” expected to be fully felt by Moscow over the coming months.

For now, though, many are asking the same question: Just how sustainable is the resilience displayed so far by the Russian economy?

The Russian Central Bank is projecting a 4%-6% recession in 2022, a volte-face from its pre-war forecast of 3% growth.

The figure, however, is much better compared to the earlier prediction of an 8%-10% contraction this year.

The bank’s massive interest rate cut last week was another clear indicator that the recession is expected to be much shallower than initially feared.

Russia has slashed its key rate by 150 basis points to 8%, well above market forecasts of a reduction of 50 basis points, pushing interest rates below the pre-war level to boost domestic demand.

‘Economic downturn possibly less deep’

“Incoming data indicates that the economic downturn will be more prolonged in time and possibly less deep,” Elvira Nabiullina, governor of the Russian Central Bank, told reporters in Moscow after last Friday’s rate decision.

The bank expects the economy to return to growth by 2024.

In June, Russia’s annual inflation declined to 15.9% from 17.1% in May, seemingly in line with the Central Bank’s latest estimate of an annual inflation rate of 12%-15% in 2022, a downward revision from the April forecast of 18%-23%.

The economy is obviously backed by fiscal stimuli and a soaring price of oil that has helped it weather the impact of sanctions.

Russia has run a huge current account surplus due to import bans, accelerating the de-dollarization of its economy and driving the appreciation of the ruble.

With strict capital controls and trade imbalances, the ruble was at 58 against the dollar in late July, well above pre-war levels and the all-time low of 150 touched in March.

The consumer confidence index, however, plummeted to minus 31 in the second quarter, the lowest point since 2014.

The fall came after it plunged to minus 21 in the first quarter, the lowest reading since 2009.

Russia’s automotive sector has also taken a big hit from the import ban, with new car sales sliding by 82% year-on-year to 27,761 units in June.

‘Russian economy not near collapse’

While sanctions have definitely hurt the Russian economy, the damage is not serious enough for Moscow to consider leaving Ukraine, let alone worry about a possible economic collapse, according to Kerim Can Kavakli, an academic at the Bocconi University in Italy.

“I don’t believe the Russian economy is near collapse,” he told Anadolu Agency, delving into what he identified as the two main reasons for Moscow’s ability to withstand Western sanctions.

For one, he explained, Russia continues to make money from international trade, as major economies such as China, India, and Saudi Arabia have not joined the West’s push for sanctions.

“Russia is able to find new buyers for its oil and gas, and the rise in oil prices has helped it further. Russia continues to earn money from trade,” he said.

However, he said, Western sanctions may have a greater impact in the medium-term since Russia has been expelled from global production chains and finds itself unable to procure high-tech commodities from other countries.

“This means that, in the future, Russian companies like Gazprom may face difficulties in replacing their machinery or producing high-technology products,” Kavakli said.

Another factor is that there are definitely more sanctions in the offing against Russia.

Germany, one of the biggest buyers of Moscow’s coal, has pledged to end imports of Russian coal by Aug. 1 and oil by Dec. 31.

Along with the UK, the EU is set to phase out Russian oil imported by sea by the end of 2021.

Last month, G7 countries announced plans to ban the import of Russian gold, a major export that rakes in tens of billions of dollars for Moscow, while the EU will follow suit.

With its estimated 331 tons in 2020, Russia ranked second in terms of global gold output, accounting for 9% of the world’s total.

Kavakli, however, does not expect any of this to change the Russian government’s behavior.

“Its economy has suffered a lot of damage, but (President Vladimir) Putin’s regime can remain in power while passing on the economic pain to ordinary people,” he said.

In other words, if ordinary Russians experience a 20% decline in their well-being, the Russian elite, who matter more for Putin’s political survival, may suffer much less than 20%, he explained.

For Kavakli, it is clear that as long as Putin “wants to keep a piece of Ukraine, sanctions are unlikely to change the outcome.”

“Several other countries – Cuba since the 1960s, Iran since 1979, Iraq between 1991-2003 – have endured equally severe sanctions because their authoritarian governments were able to stay in power while their economy weakened,” he said.