Is Russia’s economy bouncing back from Western sanctions?

Moscow has been ‘surprisingly resilient’ so far, but disaster may be around the corner

Vladimir Putin and Defence Minister Sergei Shoigu attend the Victory Day parade in Red Square
Vladimir Putin and his defence minister Sergei Shoigu attend the Victory Day parade in Red Square
(Image credit: Contributor/Getty Images)

Russia’s economy has so far been able to fend off collapse and could even survive an EU-wide embargo on oil imports, experts have warned.

Aided “by capital controls and high interest rates”, The Economist said “the rouble is now as valuable as it was before Russia’s invasion of Ukraine”. And despite forecasts of economic collapse, Moscow is “keeping up with payments of its foreign-currency bonds”.

As Vladimir Putin massed troops on the border with Ukraine, much was made of whether Russia’s “fortress” economy would be capable of withstanding Western sanctions. So can Moscow ride out the sanctions storm?

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Crisis averted?

Despite “​​predictions of doom” for Russia’s economy, Foreign Policy said that oil exports to countries such as India and Turkey have “actually risen” since Putin gave the order for an invasion. Meanwhile, “its financial sector is so far avoiding a serious liquidity crisis”.

The “real economy” is showing signs that it is “surprisingly resilient too”, The Economist said. Most “measures of Russian economic activity are largely holding up”, with Russian citizens seemingly still “spending fairly freely on cafés, bars and restaurants”.

In mid-April, the nation’s “central bank lowered its key interest rate from 17% to 14%”, a signal that “a financial panic which began in February has eased slightly”. Russia’s economy is “undoubtedly shrinking”, the paper said.

But early “predictions of a GDP decline of up to 15% this year are starting to look pessimistic”.

Fuel in the tank

The sanctions against Moscow “may work in the long run”, Foreign Policy reported. But “for now many of the same countries that are sanctioning Russia are still seriously undercutting their efforts by buying energy” from Moscow.

“Putin is continuing to make at least a billion dollars a day selling oil and gas, and the lion’s share is from Europe,” Edward Fishman, a former Europe specialist at the US State Department, told the magazine.

“Individual European countries are sending military assistance to Ukraine but it’s dwarfed by payments they’re making to Russia for oil and gas.”

This could all change if the EU delivers on its pledge to ban imports of Russian oil.

But Sergey Aleksashenko, the former deputy governor of Russia’s central bank, told the Financial Times (FT) the ban is in reality “not very powerful”, as large increases in the price of oil will counteract the costs of losing the European market.

Russia’s state budget “is heavily dependent on revenues from oil exports”, the FT said, “which accounted for 45% on its total income in 2021”. But the government will continue to “break even if Russian producers can sell their oil for $44 per barrel or more”.

For the moment, it appears sanctions have “made that possibility more, not less, likely”, the paper added, with Russia’s “key crude blend, Urals, trading at $70 a barrel”.

Long-term damage

Moscow’s economy “seems to be holding up better than initially expected”, said Peter Rutland, a professor of government at Wesleyan University in Connecticut. Amid “unprecedented sanctions and an exodus of Western companies”, the rouble has “recovered all of its earlier losses” and “billions of dollars” are flowing into Moscow through energy sales.

But writing on The Conversation, Rutland said that “Russia’s apparently robust financial situation is something of a chimera”, one that “masks the real pain being experienced by Russians and stress on the economy”.

Russian individuals and companies are “encountering shortages of a wide range of goods”, he said, including “pharmaceutical supplies, such as asthma inhalers, and drugs for Parkinson’s disease”. And the picture is “particularly grave in the information technology sector”, which is “dependent on imported hardware and software”.

While the economy is holding firm, “the future looks bleak for Russian citizens”, he added, “who will continue to bear the brunt of the sanctions”.

That Russia’s economy will not collapse entirely is also not a given. It is already “teetering on the brink of default”, The Telegraph said, and worryingly for the Kremlin, which has “averted disaster for now”, is increasingly “at the mercy of US officials”.

Moscow “hasn’t yet buckled under the West’s financial firestorm”, the paper added. “But the long-lasting blow of a default could be coming soon.”

Putin may devise a way of turning Russia into “a permanently state-sanctioned economy”, like, for example, Iran or North Korea, Vox said. But the longer Western sanctions remain in place the worse life in Russia will be, the news site added – and citizens with “the least power may be punished the most”.

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