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:

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