- Russia has been preparing for sanctions since 2014 after annexing Crimea.
- Moscow was already hit by a series of western sanctions after the annexation.
- Since then, Russia has taken a variety of measures to protect itself.
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Economists are predicting an implosion in President Vladimir Putin’s economic regime since the West imposed sweeping sanctions on Russia over its invasion of Ukraine. But three and a half months into the war, Russia has held its ground – with Putin announcing on June 7 that inflation has slowed and unemployment has remained stable.
It helps that Russia is an energy powerhouse that’s still generating record revenues thanks to rising oil prices. Even without unexpected energy gains, Russia could be protected from sanctions in the short term. The country has been sanction-proof since 2014, when it was also hit by a string of trade restrictions after illegally annexing Crimea from Ukraine.
Putin has “built the Russian economy into a fortress” to withstand external shocks, Veronica Carrion, an economics researcher at the American Bankers Association (ABA), wrote June 13 in the ABA Banking Journal.
Since the beginning of the war, some experts have questioned the reliability of Russian statistics. “The Russian government obviously has an incentive to try to hide the economic impact of Western sanctions,” said Andrew Lohsen, a fellow in the Europe, Russia and Eurasia program at the Center for Strategic and International Studies.
Even if the economy holds up as well as it appears, Russia could eventually run out of time as the commodity rally falters and the West’s tightening sanctions gnaw through the system. But for now, the country is showing unexpected resilience through a range of measures including bolstering its reserves and withdrawing foreign capital.
Here’s what Russia has been trying to do to sanction-proof its economy.
Moscow has increased reserves and stashed gold
Before the invasion, Russia held the fifth-largest pile of foreign exchange and gold reserves in the world, worth about $630 billion, according to the Bank of Finland Institute for Emerging Economics. “This stockpile can cover the government’s balance sheet and support the ruble,” Carrion wrote.
Russia has lost access to about half of that sum because of sanctions, the country’s finance minister said in March. But there’s still plenty of physical gold in the country — which is also the second-largest producer of the precious metal in the world.
Russia’s gold holdings have tripled since 2014, and they’re all being stored in vaults at home, according to the central bank. The US has sanctioned Russian transactions in gold, but that wouldn’t stop “opportunistic countries” from doing business with Moscow, Carrion wrote.
Russia also continues to build up some reserves in the form of its contingency funds thanks to a windfall from its oil and gas sales. In April and June, it increased its emergency reserves by $12.7 billion. These funds will be used to ensure stable economic development despite the sanctions, Reuters reported on June 9, citing a statement by the Russian government.
Russia has weaned itself from foreign capital and repaid debts
Russia has weaned itself from foreign capital beyond saving by aggressively repaying debt over the past eight years, wrote Gian Maria Milesi-Ferretti, senior economics studies fellow at the Hutchins Center on Fiscal and Monetary Policy on March 3. The country is now a net creditor in international markets, he added.
“Vladimir Putin is allergic to credit,” Andrew Weiss, a Russia expert with the Carnegie Endowment for International Peace, told NPR’s Money Planet in February. “He’s not trying to use Russia’s banking system or access to Western capital to make Russia great.”
Russia’s foreign debt is quite low. JPMorgan estimated that the government owed about $39 billion in foreign currency bonds at the end of 2021. By comparison, Greece defaulted on 205.6 billion euros ($277.5 billion) in public debt in 2012.
As for Russia’s total public debt, it is just 17% of GDP – well below the three-digit figure for many developed countries and mostly expressed in roubles. So the country “doesn’t really need to borrow,” Anton Tabakh, chief economist at Russia’s Expert RA rating agency, wrote June 15 on the Carnegie Endowment for International Peace Statistics website.
The biggest problem Russia is currently facing is paying off its foreign debt due to sanctions restrictions, Tabakh added. Once that is resolved, Russia and its companies will be able to service its debts, and the country’s own resources “should be sufficient to meet budgetary, banking and corporate needs,” he added.
Russia is turning inward to economic self-sufficiency
Russia is turning inward as it has become an international outcast – but as a giant commodity producer its economy will not collapse entirely – even if growth will be slow and subdued, said Hassan Malik, a senior government bond analyst at Investment-based Boston management consultancy Loomis Sayles.
“Russia is one of the few countries in the world that can commit to self-sufficiency,” Hassan told Insider. He referred to the concept of economic self-sufficiency. The country is a major producer of crude oil, natural gas, wheat and metals such as nickel and palladium.
To counter an exodus of international companies that have taken their goods and services with them, Russian companies have taken over the firms and replaced their products with domestic offerings.
For example, the city of Moscow and a Russian state-backed group took over French automaker Renault’s operations in the country for the nominal amount of 2 rubles (3.5 cents). They plan to revive a Soviet-era car brand with the manufacturing facilities. the city’s mayor Sergei Sobyanin said in a blog post.
But the economic situation in Russia will continue to be very difficult. Putin himself said on June 9 that replacing imports with locally produced goods was “not a panacea,” AFP reported. He said Russia will look for new trading partners and continue to develop its own industries for “crucially important technologies”.
The breadth and reach of the current sanctions far exceed those of 2014, so they “will impose very heavy costs on the Russian economy,” Milesi-Ferretti wrote in his March 3 post.
Russia’s economy is expected to contract by 8.5% in 2022, with a further 2.3% contraction in 2023, the International Monetary Fund predicted in an April report. That would be the biggest contraction in the economy since the years after the collapse of the Soviet Union in 1991.