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

Russia’s full-scale invasion of Ukraine in February 2022 caused more than just international outrage. It also triggered a wave of sanctions aimed at weakening the Kremlin’s ability to wage war against its neighbor.

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

I can remember Western officials and commentators describing the sanctions as “crippling,” “debilitating,” and “unprecedented.” With adjectives like these flooding the airwaves, the situation seems clear. Surely the Russian economy has no way to withstand the pressure.

Faced with the prospect of economic collapse, the Kremlin will be forced to step back and withdraw its troops. Right?

Twenty-seven months have passed, and the war continues. No longer paralyzed, the Russian economy is growing. The International Monetary Fund predicts Russia will record economic growth of 3.2% this year. Be careful, this number is still higher than any advanced economy in the world.

“Debilitating” sanctions do not create shortages in stores. Russian supermarket shelves are full. Yes, price increases are a problem. And not everything that was once sold remains – a series of Western companies have left the Russian market in protest of the invasion of Ukraine.

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

CEOs from Europe and America may no longer flock to Russia’s typical annual economic event – but the organizers of this year’s St Petersburg International Economic Forum (once known as Davos of Russia) announced that delegates from more than 130 countries and territories are participating.

Instead of bearing 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 their efforts to isolate Russia, politically and economically, have not been successful.

“It seems that the Russian economy has tried to adjust to very unfavorable external conditions,” said Yevgeny Nadorshin, senior economist at PF Capital. ”There is no doubt that the sanctions have disrupted many of the mechanisms that work within the economy. But a lot has been restored. Adaptation is happening.”

Does this mean sanctions have failed?

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

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

Moscow has redirected oil exports from Europe to China and India. In December 2022, G7 and EU leaders introduced a price cap plan to limit the revenue Russia earns from oil exports, by trying to keep it below $60 a barrel. However, Western experts admit that Russia could have circumvented this quite easily.

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

Aware that Russia is one of the largest countries in the global energy market, it has tried to maintain the flow of Russian oil to avoid rising energy prices. The result of that is that Moscow still makes money.

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

Russia has become the largest oil supplier to China. But Beijing’s importance to Moscow goes beyond energy exports. China has become the lifeline for the Russian economy. Trade between the two countries reached a record $240 billion last year.

Walking around St Petersburg or Moscow, you don’t need to be an economic expert to understand the importance of China to a Russia under sanctions. Electronics stores here are filled with Chinese tablets, gadgets and mobile phones. Chinese auto dealers now dominate the local auto market.

It’s not that the Russian auto industry is sitting idle. At a recent business fair in Nizhny Novgorod, Russian Prime Minister Mikhail Mishustin was introduced to a completely new version of a classic Russian brand, Volga. Just one thing – the new Volga is based on the Chinese car, Changan.

“Where is this steering wheel manufactured? Is it Chinese?” the Prime Minister asked, seemingly annoyed by the lack of Russian components.

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

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

Military spending is doing that.

Since Russia launched what the Kremlin calls a “special military operation” in Ukraine, weapons factories have been operating around the clock and more and more Russians are working in the international sector. room.

That has boosted wages in the military industrial complex.

But spend more on the military and there will be less to spend on everything else.

“In the long run, you are destroying the economy,” believes Chris Weafer, founding partner of the Asia-Europe consulting firm Macro-Advisory. “There is no money for future development.”

He said in 2020 there were many discussions about the National Project program, in which $400 billion would be spent on improving Russia’s infrastructure, transport and communications. Instead, “almost all of that money was used to fund the military industrial complex and support stability in the economy.”

After more than two years of fighting, the Russian economy has adapted to the pressures of war and sanctions. But the US is now threatening secondary sanctions on foreign banks that facilitate transactions with Moscow, and that is creating a new set of problems for Russia.

“Products entering Russia have slowed down,” said Chris Weafer. “Spare parts are harder to come by. Every day there are stories about banks in China, Türkiye and the United Arab Emirates refusing to process Russian transactions, whether it’s money from Russia to buy goods or money goes back to Russia to pay for oil or other imports. Unless this problem is resolved, Russia will face a financial crisis in the fall.”

That is why it would be wrong to conclude that Russia has bypassed sanctions. So far, people have found ways to deal with them, avoid them, and minimize their threat.

But the pressure on the Russian economy from sanctions has not gone away.

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