The upshot: Sanctions are already crippling Russia’s long-term economic prospects. But in the short term, it is far from certain that even the implementation of tougher measures could provoke a crisis severe enough to have a serious impact on Russian politics.
“Sanctions haven’t broken the country’s macroeconomic stability,” said Alexandre Abramov, a finance specialist at Moscow’s Higher School of Economics. “But sanctions are cutting off the path to development. In terms of accelerating growth rates, enacting effective structural reforms — sanctions are sapping the country of these possibilities.”
In recent months, the United States has slapped economic restrictions on Russian people or entities on at least six occasions — the targets including cyber contractors, Internet trolls, a Russian bank, business tycoons and a shipping agent in a Far Eastern port accused of servicing North Korean vessels.
The latest move came Tuesday with sanctions against shipping companies accused of selling oil to North Korea. Fresh sanctions over the poisoning of a former Russian spy in England and a new sanctions bill being considered in the U.S. Congress could deliver an even more serious blow.
All that comes on top of sanctions on sectors of Russia’s economy and on individuals that the Obama administration and the European Union put in place after the Ukraine crisis erupted in 2014. In all, the Treasury Department’s Office of Foreign Assets Control lists 491 Russian people and entities, compared with 146 from China and 335 from Iran.
The sanctions have stunted Russian economic growth and sapped the urban middle class of wealth and opportunity. But with unemployment low and inflation in check, the sanctions so far have done little to undermine the country’s fundamental economic stability. Now that even tougher measures seem all but inevitable, the government is hoarding its budget surplus and boosting its reserves to safeguard its economic stability.
In the process, Putin is doubling down on a trade-off that seems likely to help him survive the near-term pain of sanctions while harming Russia’s economic prospects in the longer term. His government is pumping the windfall from higher oil prices into Russia’s rainy-day coffers, while avoiding privatization or other risky reforms that could foster a more vibrant economy and attract investors.
“They’re not working toward the goal of growth,” said Vladimir Milov, economic adviser to opposition politician Alexei Navalny. “They’re working toward the goal of very tough fiscal consolidation so that if there’s a new crisis, they’ll be able to feel confident on the macroeconomic level.”
Russia has an array of resources, economists say, to prevent sanctions from touching off a crisis severe enough to quickly destabilize Putin’s rule. But as the punitive measures pile up — and Putin responds by further prioritizing stability over growth — the country’s long-term development prospects are increasingly being harmed.
“We are not throwing our resources around right now,” Anton Siluanov, Russia’s finance minister, said in a state TV interview last week, touting a surprise budget surplus of 2 percent of gross domestic product. “We understand very well the difficulty of this situation — the potential difficulty — and that we must have a stockpile for stability.”
That stockpile is evident in the billions of dollars being funneled this year into the National Welfare Fund, which supports the pension system, and into the central bank’s international reserves, which reached nearly $460 billion in recent months — a level last seen in 2014. The value of Russia’s gold holdings alone has risen to about $80 billion, almost twice as much as five years ago.
After the International Monetary Fund completed a regular review of the Russian economy in May, the Washington-based organization’s staff cautioned that the country’s income growth has “stalled” and is lagging behind that of other Eastern European countries. But it praised the government as creating a “strong macroeconomic policy framework” that is helping to address rising uncertainty amid “renewed geopolitical tensions.”
The work of central bank chief Elvira Nabiullina, in particular, has drawn international recognition.
“Sanctions, strange as it may seem, steeled the economic wing of the government and taught them to act in sophisticated ways in very difficult situations,” Abramov said.
The Kremlin is considering a more drastic measure to secure its finances. A proposed new tax would raise as much as $7.5 billion a year from mining and other enterprises that have benefited from the falling value of the ruble. A leak revealing the proposal floated by Putin’s top economic adviser drew a rare public pushback from government ministries, where officials fear that such a tax would deliver another damaging blow to the confidence of investors already fearful of state interference.
Lilit Gevorgyan, a principal economist at the research firm IHS Markit in London, says Western sanctions on Russia will cost the country’s economy 0.2 percent in annual economic growth over the long term because of lost business opportunities, underinvestment in infrastructure and slower modernization.
In the short term, Gevorgyan says, the sanctions have a silver lining. Foreign investment and credit have dried up, hitting businesses large and small. But by weakening the Russian currency, Gevorgyan says, sanctions have aided Russian exports and helped energy companies that sell their products in dollars while making their investments in rubles. Putin’s decision in 2014 to strike back at sanctions by banning food imports from the West boosted Russia’s domestic production — to the point that, in dollar terms, Russia now sells more agricultural products abroad than it does weapons.
In Russia, even many critics of Putin’s government are ambivalent about the wisdom of sanctions, arguing that they strengthen the Kremlin’s narrative of a Russia besieged by the United States and undermine the development of a Western-oriented middle class. Milov, the economic adviser to Navalny, said new sanctions would not have a short-term effect. But he said additional measures, particularly ones targeting Russian government banks, as the proposed new congressional sanctions would, could eventually have an impact.
“To expect that ‘their economy will collapse because of sanctions’ is not right — this won’t happen,” Milov said. “Financial sanctions work, but this is a long process. People in Russia must see that Putin’s foreign policy leads to a dead end.”