“We are going to cause the collapse of the Russian economy.” The Minister of the Economy, Bruno Le Maire, was confident, in March, on franceinfo, when he defended the second wave of European sanctions against Russia in response to the invasion of Ukraine. But the Russian economy has not collapsed, and has even recovered in some sectors. A resilience that is not due to chance.
“Before the war, Russia tried to build an economic fortress”, summarizes with franceinfo Sergei Guriev, economist at Sciences Po. Nevertheless, the solidity of its walls is today put to the test by attacks of an unprecedented intensity, which force it to find new parades. How has the country prepared for the crisis? And how does he adapt to it?
Incomplete economic isolation
Moscow has long been trying to make its economy more independent. “Russia implemented a so-called ‘import substitution’ policy from 2014-2015”explains to franceinfo Caroline Dufy, lecturer at Sciences Po Bordeaux and author of the book The Return of Russian Grain Power (ed. Peter Lang, 2021).
“The idea was to promote the substitution of imports by domestic production, in many areas.”
Caroline Dufy, lecturer at Sciences Po Bordeauxat franceinfo
This policy has had some success, particularly in agriculture. In 2014, Russia imported up to a third of its food, but the embargo on certain European food products, which it imposed after its invasion of Crimea the same year, allowed it to become self-sufficient in wheat and meat, according to David Teurtrie, associate researcher at the Europes-Eurasia Research Center of Inalco, on France Culture.
Moscow has also encouraged the creation of national technological champions, such as the Yandex search engine, and the empowerment of the financial sector. “It has developed its own payment system, Mir, and its own interbank messaging systemexplains to franceinfo David Teurtrie. These technologies have allowed Russian banks to continue to trade with each other smoothly, despite their gradual exclusion [par vagues, au fur et à mesure, depuis le 1er mars] of Swift”, the messaging system used by banks around the world to transmit information related to bank transfers.
But faced with the extent of Western sanctions, this policy quickly finds its limits. Only around 50 foreign banks use the “Russian Swift”, recalls Reuters*, and those that accept Mir bank cards are mainly in small countries according to the company’s official website. (in Russian). Above all, “import substitution” has failed to make Moscow independent in technology, and shortages are looming. For example, the country has authorized the production of cars without airbags because of the lack of components and, to repair its planes, it may need to dismantle others, according to the Russian media. Kommersant (in Russian). The sanctions also cut off the country from the most modern semiconductors (Taiwanese, South Korean or American) which are used in the composition of all advanced technologies, from smartphones to medical devices and weapons.
“Russia is a minor producer of processors, and their performance is very far from that of the most advanced.”
David Teurtrie, associate researcher at the Europes-Eurasia Research Centerat franceinfo
In response, Moscow again encouraged the relocation of production and allowed the import of technology in defiance of Western bans through intermediaries, as reported by Reuters*. But for David Teurtrie, “Any somewhat complex industrial product always calls for foreign components. On advanced technologies, it would take many years of work and significant investments for Russia to develop the necessary know-how.”
The country could also turn to China to replace these components, but according to Sergei Guriev, “Chinese companies are not going to want to replace the most advanced technologies, and especially not deliver military or 5G equipment, for fear of sanctions. They will not be able to do so anyway, because their semiconductors are always behind compared to Taiwanese.
Massive surpluses thanks to the sale of energy
This is the key to the resilience of the Russian economy. Russia sells far more than it buys and therefore receives far more money than it spends. On the one hand, imports from Moscow collapsed by almost 40% between April 2021 and 2022 according to figures from the association of professionals Institute of International Finance (IIF)*, due to international sanctions, uncertainty and health restrictions in China.
But on the other hand, Russian exports have exploded in value, points out on Twitter* this association of major global banks. Fossil fuel sales abroad brought Russia almost $1 billion a day in the first two months of the war in Ukraine, according to calculations by the Center for Research on Energy and Clean Air (Crea)* , compared to around $660 million a day in 2021 according to Bank of Russia figures cited by Reuters*. It could therefore accumulate a record current account surplus of nearly $250 billion in 2022, according to IIF calculations cited by The Economist*.
All this money will not allow Moscow to buy Western goods subject to sanctions. “But it can be used to trade with countries that do not sanction it, especially China”explains to franceinfo Richard Connolly, director of the firm Eastern Advisory Group and specialist in Russia.
A grain of sand has slipped into this well-oiled machine: the European Union adopted a gradual embargo on Russian oil at the end of May. Moscow could suffer from this, since, since the start of the war in Ukraine, the EU has represented 71% of Russian fossil fuel exports, again according to Crea. But Russia has already started looking for other buyers for its hydrocarbons. “The share sold in Asia has been increasing for more than ten years”, emphasizes David Teurtrie. The continent precisely became the biggest buyer of Russian oil for the first time in April, reports Bloomberg*, mainly thanks to China and India. The two giants take advantage of the discount offered by Russia compared to other producers.
“Moscow must offer deep discounts to its customers, as they are taking risks by trading with it.”
David Teurtrie, associate researcher at the Europes-Eurasia Research Centerat franceinfo
Russia could still find it difficult to transfer all its black gold sales to Asia, since its pipelines are mainly directed towards Europe. But since oil can be transported by tankers relatively easily, unlike gas, the impact of the European embargo should be limited, according to Richard Connolly. “He leaves more than six months for both sides to find new partners, and if the price of oil continues to rise, Russian losses will be reduced,” emphasizes the specialist.
Monetary measures that have “frozen” the economy
This is one of the data regularly put forward by the Russian authorities to praise the resistance of the economy: the ruble is worth more and more. It must be said that the disaster scenario was close. At the beginning of the war, the Russian currency lost almost 30% of its value, which threatened to explode the price of imports, inflation, and therefore to cause the ruble to fall into an infernal spiral.
Vladimir Putin feared such a scenario. “Russian elites were traumatized by the Russian financial crisis of 1998, which made the country dependent on Western financial institutions like the IMF”, explains David Teurtrie. Over the years, Russia has therefore accumulated large quantities of foreign currencies, which could be used to support the value of the ruble in the event of a crisis. It has thus constituted one of the largest reserves in the world, with 630 billion dollars stored at the Russian Central Bank* in February 2022.
But this strategy did not work as expected. Almost half of the Russian Central Bank’s reserves were stored in foreign banks, and were therefore frozen by the sanctions.
“It was completely unexpected. The main pillar of the Russian fortress collapsed.”
Sergei Guriev, economist at Sciences Poat franceinfo
The disaster scenario was back. Russia has therefore deployed major means: it has suddenly raised interest rates to encourage Russians to save, and exchanges of rubles with foreign countries have been severely limited. “Monetary policy has been very well conducted”for David Teurtrie, who points out that the value of the ruble has since reached record highs, driven by these measures and the country’s massive trade surplus.
But for Caroline Dufy, “This ‘success’ is completely artificial. It is the result of extremely rigid financial control: companies cannot freely exchange their roubles.” However, a hard currency is not very useful if it cannot be spent anywhere. “Russia brought interest rates back to pre-war levels precisely because these measures threatened to stifle the economy by making credit very expensive”, adds the researcher. The checks allowed Moscow to “freeze the situation”por the German economist Janis Kluge quoted by the American media Grid*, but the respite may not last.
The increase in the minimum wage and pensions announced in May by Vladimir Putin* will not be enough to offset inflation, which could reach 23% in 2022 according to the Bank of Russia quoted by Bloomberg*. Despite the resistance of the currency, the real incomes of Russians will fall. And even if prices rise less rapidly than expected, again according to official estimates from the Bank of Russia*, “this probably hides local shortages”, with products that disappear purely and simply because of the sanctions, underlines Caroline Dufy. “Russia is in a difficult situationsummarizes Sergei Guriev. Not disastrous, but its GDP will fall by 10% in 2022 and even if it recovers, it may not return to its pre-war level until 2027.” The siege of Fortress Russia has only just begun.
* All links followed by an asterisk lead to links in English.