Washington – Alexandra Prokopenko, a non-resident scholar at the Carnegie Russia-Eurasia Center, says the Kremlin has broken a lot of records recently, but not very well. Among the descriptions of Russia is that of the most sanctioned country: since its invasion of Ukraine last year, Russia has been subject to more than 13,000 restrictions. That is more than the restrictions imposed on Iran, Cuba and North Korea combined.
And the Russian analyst adds in a report published by the Carnegie Endowment for International Peace that, nevertheless, the Russian gross domestic product declined by only 2.1 percent in 2022, and even the International Monetary Fund expects that output to grow in 2023, unlike the UK economy, for example.
This allows the Kremlin to describe the sanctions as having no effect, but in fact there is a qualitative and quantitative effect. The sanctions radically changed the way the economic bloc in the Russian government operates.
One of the results of the Russian reaction to the sanctions was Moscow’s strengthening of its relations with countries such as Iran, Turkey, the UAE, Myanmar and African countries.
Prokopenko, a Moscow University graduate who holds a master’s degree in sociology from the University of Manchester, says that despite the state capitalist system prevalent in Russia before the war, its economic policy was largely focused on technological development and diversification of exports away from the country’s dependence on fossil fuels and free movement of head. Relatively free money.
They have now been replaced by capital controls, friend-or-enemy designations, the use of the Chinese yuan for sales, and the militarization of budget spending. And there is no possibility of that changing for a long time to come. Ironically, the sanctions have strengthened Russia’s fortress in the short term by isolating it from global shocks, while weakening it in the medium and long term.
In the aftermath of Russia’s attack on Ukraine last year, the United States and the European Union quickly imposed waves of sanctions in response, freezing Russia’s foreign exchange and gold reserves and restricting the Russian central bank’s ability to use the dollar and euro. It was not surprising that the business community and senior officials in Russia were preparing themselves for the imminent collapse of the economy.
However, the quick reaction of the economic bloc in the government succeeded in mitigating the shock. It restricted the movement of capital, raised the interest rate to 20 percent, and halted the outflow of money from the banking system, which drained more than 2 trillion rubles ($30 billion) in the first two weeks of the war.
The meaning of the absence of serious problems in the banking system was that the Russian economy remained on its feet, and that the panic subsided. However, one of the results of the Russian reaction to the sanctions was an increase in the number of countries that were considered to have taken “hostile” measures towards Russia, and to strengthen its relations with countries such as Iran, Turkey, the United Arab Emirates, Myanmar and African countries.
--Geopolitical considerations will continue to determine Russian trade policy, including supply chains, for the foreseeable future. Consumers will bear the resulting costs in the form of higher prices and lower quality of goods.
On the other hand, Moscow’s relations with its main ally, Beijing, increasingly resemble economic dependence. Trade between the two countries increased by about a third, to reach $190 billion in 2022, according to Chinese customs statistics. Energy commodities account for more than two-thirds of Russia’s exports to China. Russia is the second largest supplier of oil to China. Despite Western sanctions on the supply of semiconductors and chips to Russia, it gets most of its electronic goods and semiconductors from Chinese companies.
Prokopenko explained that the high rate of inflation in the United States and the corresponding rise in interest rates had an impact on the position of American banks, and the collapse of three American banks last March still casts a dark shadow over the markets, prompting analysts to talk about “echoes of a global crisis.” “. On the other hand, the Russian economy – safely cut off from global financial markets due to sanctions – has not been affected.
Prokopenko, who previously worked for the Russian Central Bank, explains that another consequence of Russia’s becoming insulated from global shocks is its increasing dependence on its few remaining external partners. Sanctions affecting the technology sector have already stripped Russia of its ability to develop new overseas energy projects.
It has also restricted its access to turbines and the technology to produce modern oil tankers, locomotives, cars, next-generation communications networks, and other high-tech products, and has kept Russia out of the global debate about artificial intelligence and quantum computing. Therefore, one way or another, the Kremlin will have to lay out any plans for future economic development regarding energy trade.
The constant focus on commodity prices and massive increases in the militarization of state spending (to about a third of the budget) mean that Russia’s economic development will be frozen for a long time to come. Even when the active phase of the war ends, there is no possibility that military spending will decrease for long as any form of Putinism persists.
And the Kremlin will need to replenish its arsenal and prepare for a new war. In any event, the shift from military technology to civilian sectors has never had much success in Russia. Nor can anything good be expected from reverse manufacturing and reverting to outdated technology.
In the last century, Russia pursued an economic policy that relied on trade in raw materials and a bloated military-industrial complex. And I paid a heavy price for this ineffective behavior in the nineties of the last century. Russia appears to be on its way to repeating that mistake.
