Monthly Archives: March 2022

Russia’s economy: Sanctions, default and resilience (Based on the Interview given to Deutsche Welle on 16 March 2022)

Anna Grosman was interviewed by Daniel Winter, Senior Editor, DW Business, Deutsche Welle on 16 March 2022. Below are the extended answers prepared for the interview.

1. How is Russia’s economy coping under the strain of sanctions?

Nearly 400 Western companies left Russia or suspended operations; this will have a knockdown effect on the labor market. The Russian government is preparing new legislation which might allow the abandoned assets to be temporarily managed by an external administrator, then sold at auction to a new buyer.

The government took the decision to stabilize the exchange rate of the Russian rouble against the dollar by providing better liquidity to the Russian central bank and decreasing the amount of speculative transactions (that means that the official exchange rate and the market exchange rate would be the same, which is difficult in practice due to extreme volatility of rouble and low liquidity).

Russia will increase its trade flows with China and India; this includes the construction of pipelines to redirect gas from Europe to China (longer-term); oil tankers are easier to redirect, no need for new infrastructure

  • China will try to substitute the market made available by the leaving multinationals with its own products
  • This also means that Russia will rely on China’s payment system and currency
  • Alternatively, Russia will be replacing sanctioned goods with own Russian products and technologies (such as messaging systems, e.g. VK messaging services; subsidies to Russian businesses for developing fast food chains)
  • The government is envisaging to cancel customs tax on critical imported goods for the next 6 months, such as vegetables and grain, food ingredients, pharmaceuticals, textiles, metals, construction materials, and spare parts for aircrafts.

2. What are companies doing to adapt to the sanctions?

  • The hardest part for the business is the increased cost of financing. The businesses will be looking at different types of payments such as cryptocurrencies, gold, renminbi.

3. Is a rapid pivot of supply chains to China realistic? (Or is that something longer term?)

It is not entirely unrealistic since China is already a major trading partner. Chinese brands comprise 60% of the Russian smartphone market, but the rouble devaluation and sanctions may be slowing down the Chinese companies’ abilities to replace their Western counterparts in Russia. China’s sovereign wealth fund and state-owned companies will be the most likely buyers of disposed stakes in Russian assets, especially if they are partially owned by the Russian government.

4. There’s been talk of one or the other side turning off the Russian gas taps to Europe. How serious would this be for the Russian economy?

Russia will increase its trade flows with China; India and Eurasia; this includes the construction of pipelines to redirect gas from Europe to China

5. How serious is Russia’s debt situation right now?

The broadcasted interview can be watched here:

Economic implications from sanctions on Russia

  • The previous sanctions following the Russia/ Ukraine crisis in 2014 had a limited effect on the Russian economy: the Russian sanctions imposed on European and American food imports resulted in about an 8 times stronger decline in trade flows than those imposed by the EU and the US on exports of extraction equipment. The difference in sanctions’ effectiveness was attributed to the limited retroactivity of Western sanctions, which allowed some exemptions, according to a recent study.
  • Current sanctions also have exemptions, such as exports of gas energy.  Current sanctions by US, Canada, UK, EU, Switzerland,  Japan, South Korea, Australia, New Zealand (as of 2 March 2022) are against Russian banks which have operations abroad, large businesses, state-owned assets, payments using Swift network, the foreign assets of the Russian political and business elite, the foreign listings of Russian firms, access to financing in the countries imposing the sanctions, limiting access for the Russian Central Bank to its foreign reserves, shutting down access to European ports, and deposits by Russian nationals in the EU of over EUR100,000.
  • A number of US (Apple, Ford, Boeing, Walt Disney, Warner Bros), UK (BP) and EU (Volvo, Renault) multinationals are ceasing their trade with Russia, citing the economic and reputational effect of sanctions on their activities.
  • The governments are also using pressure on their state-owned multinationals (cf. Equinor) and sovereign wealth funds (Norway’s Government Pension Fund) to dispose of their assets in Russia; therefore the use of discreet power by the states on Russia will intensify.
  • Russia will react to current sanctions by rediverting its trade flows to Asia and Eurasian Economic Union, and away from countries that have already previously imposed sanctions on Russia, according to a statement being prepared by the Ministry of Economic Development (Минэкономразвития).
  • The Russian businesses have strong connections to the Russian government, with many firms directly or indirectly controlled by the state, through ownership, board representations, or informal connections.
  • President Putin met with business leaders and urged them to support the Russian economy through this period, and to find the tools that would allow sustaining production and employment. The Russian firms have already experienced dealing with restrictions and sanctions in 2014, with some businesses starting locally producing goods previously provided in Russia through foreign exports, or choosing new trading partners.
  • The Russian economy is stronger than in 2014, but the current sanctions are expected to have a stronger impact than the previous sanctions in 2014. The Central Bank, for the first time since 2013, reported a liquidity deficit, due to cash withdrawals following the fall of rouble.
  • Russia is also imposing sanctions on the West: Russia bans coupon payments to foreigners holding rouble bonds; forbids foreign money transfers from Russia by non-residents over $5000 towards 43 ‘unfriendly’ countries.