Why sanctions on Russia don't cause its economy to derail

“Russia is a gas station masquerading as a country,” said the late US Senator John McCain in 2014. “It is kleptocracy, it is corruption. It is a nation that depends on gas and oil to maintain its economy, and that is why economic sanctions are important,” said the American politician in the year in which the Kremlin illegally annexed Crimea and lit the spark in Donbas. At that time symbolic sanctions were applied to Russia. A decade later, almost two years after the war, the batteries of restrictions used against Russia for the total invasion of Ukraine are much harsher, but they have not made the country succumb as was said, although they have curbed its war potential. The big threats for 2024 are inflation and the devaluation of the ruble.

Those words from McCain continue to bother the Russian Government. The spokesperson for the Russian Foreign Ministry, Maria Zajárova, recalled them again this week, stating that it was a “Russophobic” statement, and accused the United States of “being a more complex gas station: one with an integrated money printer” ( in reference to its monetary policy).

In the opinion of economist Vladislav Inozémtsev, founder of the Moscow Center for Postindustrial Studies, McCain's simplification sums up the great mistake made with the sanctions. “The main mistake of Western experts and politicians has been to create fairy tales that the entire Russian economy is state-owned,” says this independent expert on the other end of the phone before continuing: “Sanctions were applied assuming that it was a completely state-run economy.” flexible and would therefore collapse quickly. But it was a mistake, because the Russian economy is largely a market economy.”

Russian military spending is around 6% of gross domestic product (GDP), approximately the same percentage as during the first term of former US President Ronald Reagan, from 1981 to 1985. “And no one would say that the North American economy was a war economy,” he says. emphasis Inozémtsev, who emphasizes that the Russian public sector is concentrated in large companies with enormous budgetary income, but in terms of employment very small.

Unlike the collapse of the USSR and its planned economy, “Russian private companies have looked for a way to survive the sanctions and have launched new sales channels and supply chains,” adds Inozémtsev. For example, through illegal imports by non-Western countries.

Russian authorities expect growth of around 3.2% of GDP this year. “3% is an insufficient growth rate, it should be higher, everyone understands this, many differences must be compensated,” the spokesman for the Russian president, Dmitri Peskov, recently acknowledged.

The Russian rating agency AKRA – the Western ones no longer operate in the country – agrees with the Kremlin's forecast for 2023, but Russian growth expected to stagnate up to the range of 0.5%-1.3% next year, compared to the 1.4% predicted by the Russian Government. One of the reasons, the inability to find workers (unemployment is 2.4%) due to military mobilization and the exodus of Russians and immigrants due to the war. Another, inflation and high central bank interest rates. “Household savings will most likely increase,” the company warns.

“For now I wouldn't expect many upheavals in the coming year. The minimum wage will increase by 18.5%, construction advances by the Government. Subsidies. Putin wants to expand the preferential mortgage program. That is, everything suggests that there is a lot of money in the economy, and that will boost public spending and support economic growth,” warns Inozentsev, although cautiously: “If there are no surprises because we do not know what Putin will do after the elections. Maybe he will announce a new mobilization, maybe the war in Ukraine will intensify.”

Janis Kluge, economics expert at the German Institute for International and Security Affairs, concludes in A detailed analysis published by the think tank Riddle that 2024 will be the litmus test of the Russian system after two years, 2022 and 2023, saved thanks to the reserves accumulated before and the extra income obtained at the beginning of the invasion thanks to the shock in international gas and oil prices that the offensive provoked.

“2022 was a historically beneficial year for Russia, the economy is not always fair,” says Kluge. In addition, the sharp devaluation of the Russian currency since the second half of this year (from 66 rubles per dollar to 90 now) due to the low inflow of dollars and euros has helped the coffers of the Kremlin, which pays its citizens in rubles. , and has thus solved (and by reorienting its market to India and other countries) the cap on the price of Russian oil imposed by the West. “These are the reasons why the Ministry of Finance estimates that the real deficit in 2022 and 2023 has been 0.7% and 2.7% of gross domestic product. The situation clearly worsened in 2023,” says Kluge.

Expenses and income have increased 10% over forecast this year. The expenses, around 33 billion rubles, will be definitively known this December, the month in which a large proportion of them are executed, but income has also increased to 28.7 billion rubles. Comparing them in euros makes no sense because an average Russian salary, 52,000 rubles in summer -532 euros-, according to the country's main bank, Sberbank, has greater purchasing power in the Russian market than outside.

The problem for the Kremlin is that this devaluation may benefit its military budget, but at the same time increases pressure on its population. “35% of the products or the resources to produce them are imported,” emphasizes Inozentsev. “The limit for the ruble to fall and inflation not to increase has been exhausted. The authorities will do everything in their power to maintain the exchange rate at the current level. Unless they want serious inflation, which is what they fear,” says the economist, who estimates an exchange rate of 115 rubles per dollar this year if the situation is stable.

However, the Kremlin does not have everything under control: despite the OPEC+ cuts, in recent months, and spurred by the Gaza war, the Brent barrel has fallen from almost 100 dollars to 75. “Russia has become a lot more vulnerable to the fluctuations of oil,” says Kluge. “If prices fall, the ruble will be drastically devalued and it will be increasingly difficult to defend the currency,” he says before emphasizing that this would entail huge spending cuts: “And in a time of rising military spending, any fiscal consolidation will be even more painful for the population.”

The Russian Government expects to end the year with official inflation of 8%. According to the Rosstat statistics agency, prices of consumer goods have increased by 6.7% between January and October. However, a study by the Romir expert platform places the real increase in the price of the shopping basket in that period at 20.4%, and at 47.9% since the start of the war in February 2022.

The Kremlin has imposed its monetary policy on the Russian central bank. Although the organization claimed that the devaluation of the ruble is due to the demand for dollars and euros, it has followed orders and raised interest rates to 16%, the last percentage point last week. Likewise, it has also taken risks such as lending rubles to the Government with funds frozen by the West as counterparty. In total, the money supply has increased by arou
nd 23% since the war began.

In the opinion of experts, some sanctions have worked (the airline industry has only produced a couple of Superjet-100 planes this year and in December its airlines have had a serious air incident practically every day), while others, such as those of the hydrocarbons, have served their objectives only half-heartedly. “What McCain said about gas stations was terrible,” says Inozémtsev.

“In fact, a big mistake was made here because a gas station is something very necessary, everyone passes by it every day. If I thought it was possible to deal a hard blow to exports with sanctions, I was quite naive,” says the Russian economist, who concludes that “each new sanctions package provokes more and more controversy and less and less effect, which is why it would put an end to to these talks and would focus on financial and military support for Ukraine.”

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