Three hundred days since the start of its assault on Ukraine Russia seems to be the world's most "renowned" rogue state, facing the largest number of sanctions imposed against it. When the first batch was announced ten months ago – including the seizure of almost $300 billion of its central bank's reserves, termination of air traffic with developed nations, disconnection of the country's leading banks from international clearing systems, and voluntary withdrawal of up to one thousand international corporations – many had predicted Russian economy will collapse this year. But it hadn't. Why and what should one expect further?
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For years, Russia has been depicted as a "gas station masquerading as a country", and this assumption became a foundation for the sanction policies. But even before the war, such an approach neglected at least four important points. First, the experience of Russian financial authorities that had improved significantly since the 2008 crisis; second, both the size and character of the Russian domestic market; third, the intensive economic ties Russia has already established with non-Western nations. fourth, the degree of private enterprises in the Russian economy and the resilience of Russian consumers. There are more issues to take on, but I would argue that the abovementioned assumptions explain quite a lot already.
So, the Western powers envisioned that Russia may be shattered by the steep fall of its national currency as it happened during the economic crises of 1998 and 2009. This was may have been a valid assessment since for an ordinary Russian a devaluation of the ruble by half is the best sign the country is in trouble. But in March 2022, the financial authorities responded by introducing capital controls, banning the dollar cash withdrawals, and requesting the companies to immediately convert their incoming currency proceeds into rubles. As the result, the exchange rate that shot up from 76-78 rubles for 1 dollar in February to 120 (and even 145 in interbank transactions) rubles in March, went back to 80 by mid-April and has been hovering at about 60 rubles for 1 dollar for the past six months. During this time, it should be mentioned, the Chinese yuan replaced the US dollar as the most traded currency at the Moscow Exchange. With the ruble rebounding, the rising inflation was tamed.
The Russian market was thought to be small and vulnerable, but in fact, it proved to be not too dependent on Western supplies. Only several parts were hit hard or almost ruined – aircraft manufacturing (almost non-existent even prior to the war), the automobile industry, and heavy machinery production. But for consumers, there have been few changes since the typical Russian household spends up to 70% of its revenues on food and utilities which were almost unaffected (Russia discontinued food supplies from the Western nations in 2014, so there were few changes on the market in 2022). Most of the office and home appliances are either produced domestically or imported from China and other Asian economies not supporting the sanctions, and the stagnating incomes are taking the purchases of homes and cars out of Russians' priority lists.
The tethering of the Russian economy to the European one has also been overestimated. Had all the events of 2022 happened 20 years earlier, the Russian economy would have died. But now it is supplied by many necessary hi-tech items from China, the needed Western products are coming via Turkey (the Russian government promptly allowed so-called 'parallel imports' making it possible to buy almost any goods bypassing official dealers), and even the Russian oil is now diverted from the European market to China (up 10% since the start of the war), Turkey (an increase of 2.5 fold) and India (9 fold). These days even the oil price cap and the EU embargo aren't the game changers – Russia may lose up to 20% of its oil and 50% of its gas exports next year, but both figures account for 10-12% of their overall output since Russia consumes domestically 35% of its oil and 70+% of its gas.
Last, but not least, the Russian economy is one dominated by private enterprises (except the energy sector and banking), and its owners are doing their best to diversify supplies, cut costs, and to look for new consumers; they are ready even to accept losses for some time to keep their businesses afloat. This differs greatly from the Soviet economy, to which the Russian one has often (and erroneously) been compared by Western analysts. On top of this, the Russian people who improved their well-being enormously in the 2000s, haven't seen much progress since 2012, and President Vladimir Putin turned his rhetoric away from economic issues to geopolitical ones since he returned to the Kremlin. Therefore, most of the people wish only the things were not turning worse and can tolerate another 5-10% decline in their real disposable incomes without being highly dissatisfied with their leadership.
So, I would say that the Russian economy these days is in a unique situation. The sanctions hit its core industries (energy sector, heavy industries, metal processing, and construction) but have left the consumer market almost intact. It means that the main effect of the sanction policies will become evident in two to three years, but not in the short term. Moreover, the Russian federal budget in 2022 got windfall proceeds due to all-time high prices for the energy mix Russia has supplied to Europe. By the year's end, it will be in red for only 2.6-2.8 trillion rubles or 2% of GDP. In 2023, I expect the deficit to double if the war continues but the budget will be easily balanced by the reserves from RUB 11.4 trillion strong National Well-Being Fund and by Finance Ministry domestic borrowing (the bank deposits held by the public, amounting to RUB 37 trillion, not to mention the possibility for direct central bank lending). With the federal spending intact, no one should expect a profound crisis in either 2023 or 2024.
So, my conclusion looks not too promising for those anticipating Russia's economic collapse. The GDP will contract both in 2023 and 2024 by 3-4% each year since no sources for growth could be seen under the current conditions. The government expenses (including financing the war and defense industries) will keep the economic downturn at moderate levels as they eventually prevent GDP from seeing a steeper decline. The disposable incomes will go down by 2-5% annually but the public will tolerate this decline explained by the authorities by a war "the West" has been waging against Russia. I expect the difficulties to mount by mid-2024 if all the sanctions are still in place with the National Wellbeing Fund depleted by the war in Ukraine and by social spending increasing as President Putin seeks re-election in March 2024 – but these days 2024 looks too far to predict any trends.
To sum it up, I would say the assumption Western economic sanctions can change Russia's political imperatives, was misleading from the beginning of this policy – i.e. not from February 2022 but rather from as early as March 2014. Economic sanctions against Russia are as effective as would be trade restrictions vis-à-vis Nazi Germany. To stop Russia's invasion of Ukraine one needs to destroy the Russian army on the battlefield, not cause small troubles for the Russian economy. The Western world should rethink its assessments of Russia's economic resilience, and – last but not least – stop taking seriously those Russian expats who argue that Russia's economic collapse is approaching just because they hate President Putin and dream of his demise.
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