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Russia’s economy holds up in the face of sanctions – but will it last?

The Russian economy has held up surprisingly well despite Western sanctions designed to cripple it – with the ruble becoming the world’s best-performing currency so far this year. Rising oil prices have once again proved a boon to this fossil fuel dependent economy. Underneath, however, supply shortages are beginning to take a heavy toll in some sectors.

Russian ruble increased to a seven-year high against the dollar on the Moscow stock exchange on Monday as the currency clouded expectations for the best performing currencies in the world this year.

Vladimir Putin was eager to emphasize this in his address to the International Economic Forum in St. Petersburg, hitherto a symbol of post-Soviet Russia’s economic ties to the West, on June 17. The “blitzkrieg” of Western sanctions was “stupid,” the Russian president said. But they have “failed”.

Along with allies like the UK, Australia and Japan, the US and EU imposed colossal sanctions on Russia for its February 24 invasion of Ukraine, including the unprecedented freeze of some $300 billion in Russian foreign exchange reserves, which Moscow believed was would be an insurance policy. against western pressure.

But while the Russian economy is holding up well, analysts say the worst is yet to come for Moscow.

A week after Russia invaded, triggering a swift storm of sanctions, the ruble had fallen to its all-time low against the dollar and the euro. By depriving Russia of that colossal arsenal of foreign exchange reserves, the West robbed it of a fundamental means of maintaining the value of its currency.

However, the Russian Central Bank responded by raising interest rates to 20 percent and imposing drastic capital controls on businesses and citizens alike.

The rising ruble shows that the Russian Central Bank is succeeding. The coin’s high value is “undeniably a political boon” for Russia, said economist Julien Vercueil, co-president of INALCO University in Paris. “At the beginning of the war, Moscow really feared a financial panic that would lead to runaway inflation and permanently undermine people’s confidence in the ruble. They have averted that risk for the time being.

“On the other hand, the current value of the ruble is so high that products made in Russia are not competitive in price with foreign competitors,” continued Vercueil. “That could complicate the import substitution policy Putin has asked for.”

The gift of oil

Periods of high oil prices have long provided Moscow with a bonanza. It enabled the USSR to hide its economic weakness and provide its citizens with an unprecedented standard of living under Leonid Brezhnev in the 1970s and under Putin in the 2000s, who restored the Russian economy to health after the catastrophe of the 1990s.

This phenomenon is playing out again, with hydrocarbons still accounting for more than 60 percent of the country’s fossil fuel-rich exports.

Amid rising oil prices, Russia received €93 billion in fossil fuel exports during the first 100 days of the war, according to a report by the Helsinki-based Center for Energy and Clean Air Research published in June.

Despite all the loud talk in EU capitals – and for all the pressure exerted by Kiev – the report found that the EU accounted for 61 percent of Russia’s hydrocarbon exports, worth about €57 billion.

Germany has been a major importer of Russian gas since Brezhnev was in the Kremlin. Accordingly, Berlin rejected an EU ban on Russian gas imports in early April.

However, the EU has included a gradually imposed embargo on Russian crude oil and petroleum products in its sixth round of sanctions passed in early June, with a view to cutting these imports by 90 percent by 2023.

Russia accounts for more than 11 percent of global oil production, so the EU embargo threatens to push the price further at a time of rampant inflation. But the ban will be a powerful weapon for the EU against Moscow, said Philippe Waechter, head of economic research at French financial services firm Ostrum Asset Management.

“This is an absolutely crucial measure, because it is oil that will enable Russia to stand its ground in this war,” Waechter said. “People talk a lot about Russian gas because Europe is very dependent on it and that gives Russia significant leverage. But oil makes Russia three times more money than gas, so [the EU] can really make a difference here.”

Threats to Production

The Russian financial services sector has so far cushioned the impact of Western sanctions. But much of the manufacturing sector has been hit hard, especially the auto industry, which saw an extraordinary 78.5 percent year-over-year drop in auto sales in April.

This was the result of the departure of international companies such as Mercedes-Benz, Volkswagen and Renault and indeed the western embargo on electronic components at a time of global shortages.

In a context of “very strong” post-Covid demand for manufactured goods, some Chinese factories are “still operating at a slow pace, for example in the Shanghai region, which is still affected by the pandemic,” Waechter noted.

“For other major Asian electronic component manufacturers such as Japan, South Korea and Taiwan – which have very good relations with the West – supplying components to Russia is not exactly a top priority,” he added.

Facing the same supply disruptions, the Russian airline industry has also faced the EU, US, UK and Canada closing their airspace to Russian aircraft, significantly disrupting air traffic and skyrocketing Russian ticket prices.

Nevertheless, official figures for April show that it is not only sectors like oil and mining that are doing relatively well in Russia – they recorded a small year-on-year production decline of 1.6 percent and 2.1 percent respectively – but also the pharmaceutical and beverage industry. industries that showed double-digit growth.

But Vercueil questions whether Russia’s economic resilience is sustainable. “At the moment official figures do not show a sharp general decline in production; the initial impact of sanctions has been more or less absorbed, despite a significant rise in inflation,” he said. “But in the medium to long term, Russia’s decoupling from Western economies will have serious consequences for its standard of living and technological capabilities. The relationship with some Asian countries can limit the damage, but in my opinion it will not be enough to fully compensate the damage.”

“Russia is dampening stock today, but what about its ability to recover?” Waechter added. “This war not only monopolizes state revenues, it also robs Russia of the technology transfers that Western companies provide. This represents a major innovation gap that Moscow will find difficult to catch up unless it significantly increases its reliance on China.”

Russia’s economy ministry said in May it expects a recession from 7.8 percent to 8.8 percent in 2022, before returning to growth the following year through a “structural transformation” across the economy. That would be the largest annual drop in the country’s GDP in the past two decades.

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© Graphic studio France Médias Monde

This article has been translated from the original into French.

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