Russia’s economy is growing, but can it last?

Russia’s full-scale invasion of Ukraine in February 2022 not only sparked international outrage. It also triggered a wave of sanctions designed to weaken the Kremlin’s ability to wage war against its neighbour.

Russia’s assets abroad were frozen, its economy cut off from the global financial system, its energy exports targeted.

I can 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 surely no way that Russia’s economy would withstand the pressures.

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

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

“Debilitating” sanctions have not produced shortages in the shops. Russian supermarket shelves are full. True, rising prices are a problem. And not everything that used to be on sale still is – a string of Western companies exited the Russian market in protest at the invasion of Ukraine.

But many of their products still find their way into Russia through a variety of routes. If you look hard enough, you can still find American cola in Russian stores.

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

Instead of folding under the weight of Western sanctions, the Russian economy has been developing new markets in the East and the Global South.

All of which allows Russian officials to boast that attempts to isolate Russia, politically and economically, have not succeeded.

“It looks like the Russian economy managed to adjust to very unfavourable external conditions,” says Yevgeny Nadorshin, senior economist at PF Capital. ”Without any doubt sanctions broke a lot in the mechanism of operation inside the economy. But a lot has been restored. Adaptation is happening.”

Workaround

Does this mean that sanctions have failed?

“The big issue was our understanding of what sanctions can and cannot do,” says Elina Ribakova, senior fellow at the Peterson Institute for International Economics.

“It’s not like flipping a switch and Russia disappears. What sanctions can do is to throw a country off balance temporarily until it finds the way to work around the sanctions, until it finds alternative ways to get shipments, or sell its oil. We’re exactly in that space where Russia has found a workaround.”

Moscow has 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, by trying to keep it below $60 a barrel. But Western experts concede that Russia has been able to circumvent this quite easily.

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

Recognising that Russia is one of the largest players on the global energy market, they have tried to keep Russian oil flowing to avoid hiking energy prices. The result of that is that Moscow is still making money.

“In a way, we refused to properly sanction Russian oil,” Elina Ribakova concludes. “This price cap is an attempt to have our cake and eat it. The priorities are to allow Russian oil on to the market and to reduce Russia’s revenue. And when these two priorities conflict, unfortunately the first one wins. That allows Russia to raise a lot of revenues and continue with the war.”

Russia has become China’s biggest supplier of oil. But Beijing’s importance for Moscow extends far beyond energy exports. China has become a lifeline for the Russian economy. Trade between the two countries hit a record $240bn (£188bn) last year.

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

Not that the Russian automobile industry is sitting twiddling its thumbs. At a business expo recently in Nizhny Novgorod, Russia’s Prime Minister Mikhail Mishustin was shown the brand new version of a classic Russian brand, the Volga. There was just one thing – the new Volga is based on a Chinese car, the Changan.

“Where was this steering wheel made? Is it Chinese?” enquired the prime minister, apparently irritated by the lack of Russian components.

“We want [the wheel] to be Russian,” he said.

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

Military spending is doing that.

Vladimir Putin visits a tank factory in the Urals

Since Russia launched what the Kremlin is still calling its “special military operation” in Ukraine, armaments factories have been working round the clock and more and more Russians have been employed in the defence sector.

That’s driven up wages in the military-industrial complex.

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

“Longer term, you are destroying the economy,” believes Chris Weafer, founding partner of Eurasian consultancy firm Macro-Advisory. “There is no money going into future development.”

He says back in 2020 there was much discussion about the National Project programme, under which $400bn was to be spent on improving Russia’s infrastructure, transportation and communications. Instead, “almost all that money has been side-tracked to fund the military industrial-complex and support stability in 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 secondary sanctions on foreign banks aiding transactions with Moscow, and that is creating a whole new set of problems for Russia.

“Products have slowed down coming into Russia,” 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 deal with Russian transactions, whether it’s 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 have a financial crisis by the autumn.”

That’s why it would be wrong to conclude that Russia has beaten sanctions. Up till now it’s found ways of dealing with them, getting around them, reducing the threat from them.

But the pressure on the Russian economy from sanctions hasn’t gone away.

The post Russia’s economy is growing, but can it last? appeared first on The Namibian.