The Sanction-Proof Resilience of the Russian Economy
Since 2014, the United States and European Union have imposed economic sanctions on Russia in response to the Russian annexation of Crimea and military intervention in Ukraine; attempted killings of double agents such as Sergei Magnitsky, Sergei Skripal, and Boris Nemtsov; and the downing of Malaysian Airlines Flight 17 over Ukraine in July of 2014. These sanctions, along with a subsequent fall in oil prices have imposed a heavy toll on the Russian economy, causing a Russian recession, a crash in the value of Russia’s currency, the ruble, and Russian economic output declining between 1.0-1.5 percent.
However, despite the initial negative consequences these sanctions have had on the Russian economy, post-2014 Russia has become more economically resilient and has weathered the pain of the imposed sanctions better than expected. The resilience of the Russian economy can be seen in rebounding economic growth, an accumulation of reserves and budget surpluses, as well as continued trade with Europe and the shift in markets for Russian exports from the primarily eastern nations not sanctioning Russia.
Despite the Russian economy going through a recession from 2014-2015, economic growth has slowly rebounded. The recession ended in 2015 with the Russian economy growing at an albeit small rate of .3 percent in 2016. In 2017, Russian economic growth increased to 1.5 percent and then in 2018, economic growth increased to 2.3 percent exceeding expectations. In 2019, the World Bank expects economic growth to be 1.2 percent and between 1.6 and 1.8 percent between 2020 and 2021.
While these estimates predict a declining economic growth rate from 2018, it still indicates the resilience of an economy that was able to continue growing despite suffering from major economic sanctions.
This economic recovery and resilience in the face of major sanctions occurred due to Russia being able to cut interest rates, stabilize the Ruble, and decrease inflation while also benefiting from a recovery in oil prices. These policies undertaken by the Russian government puts Russia on a firmer footing when dealing with economic sanctions.
Russian economic resilience is also aided by Russian government budget surpluses and the accumulation of financial reserves. In 2018, the Russian government recorded a budget surplus of around 3 percent of Russian G.D.P., the first budget surplus for the government since 2011. In 2019, the budget surplus increased to 3.8 percent of the G.D.P. with Russian government spending at the lowest level in five years.
While this budget surplus was accomplished by the rise in oil prices in 2018 and cautious behavior by policymakers in regards to spending, the commitment by the Russian government to save excess revenues from oil exports rather than divert money to governmental expenditures enhances Russian economic stability. The government is currently in a more financially secure position to manage the cost of sanctions and Russian banks are now more confidently able to rely on Russian governmental deposits because of the surplus which improves the health of the balance sheets of banks in the Russian financial system.
Additionally, Russian financial reserves have steadily increased since the imposition of sanctions. In 2019, Russian reserves of international currency rose to $530 billion, making it the country with the 4th largest currency reserves in the world. It is expected that these reserves will increase to nearly $600 billion by 2021. This massive amount of financial reserves means that Russia can fully cover all foreign and domestic debt which enhances Russian financial stability and allows it to subsidize exports that contribute to Russian economic resilience against sanctions.
Furthermore, Russia has continued to maintain substantial trade with European nations that have sanctioned Russia as well as pursuing new commercial opportunities with Asian nations. In 2017, despite three years of sanctions imposed by European countries, Russian exports to European markets have increased, with exports to France increasing by 26.5 percent, exports to Germany increasing by 19.5 percent, and exports to Italy increasing by 17.3 percent.
Moreover, Russian dependence on Europe for exports have declined as Russia has managed to successfully increase exports to Asian countries. Europe’s share of Russian exports has declined from 55.4 percent in 2006 to 45.8 percent in 2016 while Russian exports to Asian markets have increased from 9.8 percent in 2006 to 21.5 percent in 2016.
The continued substantial trade between Russia and European nations despite years of sanctions as well as the increase in trade ties with Asian countries showcase the continued sustainability of Russian trade ties and its export industries despite sanctions seeking to decrease Russian international trade.
Sanctions on Russia to change its behavior and foreign policy have not yielded many results. The economic sanctions have failed to impose a meaningful cost on Russia because of Russian economic resilience.
Despite sanctions, Russia has managed to achieve sustainable economic growth, accumulate budget surpluses and financial reserves, and maintain meaningful trade with European countries while also increasing trade ties with Asian countries.
These factors enhance the economic resilience and stability of the Russian economy which improves Russia’s ability to resist current sanctions and minimize the consequences from any future sanctions. U.S. policymakers, if they seek to change Russian foreign policy and behavior, can’t rely on economic sanctions to produce meaningful change in Russian policy and will likely need to pursue other policies to change Russian behavior.
Nawal Ali is a second-year International Relations major in the School of International Service. He is an Editor of Foreign Affairs for the Agora.
Image courtesy Vlad Vasnetsov, Creative Commons