Economist on Russia’s economy: “The sanctions have failed”

Economist on Russia’s economy
“The sanctions have failed”

Russia’s economy is growing again, salaries are rising. According to economist and Russia expert Vasily Astrov from the Vienna Institute for International Economic Studies, the state and companies have adapted at an impressive speed to the war of aggression against Ukraine and the Western sanctions. The plan to force Putin to give in with sanctions did not work out. Russia is waging a costly war. The country has been cut off from much of the global economy and financial markets by sanctions, yet the Russian economy is said to be growing significantly this year. Can such figures and forecasts be trusted?

Vasily Astrov: Overall, yes. The Russian economy shows a really impressive development. After a slight recession last year, it has recovered and adapted surprisingly quickly to the sanctions. However, the dynamics in the different sectors of the economy are very different.

Vasily Astrov is an economist at the Vienna Institute for International Economic Studies.

(Photo: WIIW/Jorit Aust)

In which areas are things going well?

In all areas that are directly or indirectly related to warfare. It’s not just weapons production that’s in full swing. The Russian textile industry, for example, and food production also benefit. The sanctions have also triggered substitution effects. Goods that can no longer be imported from the West are being replaced primarily by imports from China and other countries, but sometimes also by domestic products. Domestic tourism, for example, is booming. Because travel to Europe, among other places, is hardly possible anymore.

In which areas of the economy are there problems?

First and foremost there is oil and gas exports. Russia now sells its oil mainly to Asia instead of Europe, albeit at lower prices. It is more difficult to find alternatives for gas, since most of it is exported via pipelines. Overall, Russia has lost around a third of its export earnings, mainly due to lower energy exports. For the state budget, this means a drop in tax revenue from this area by around half.

How do the trade sanctions work beyond that?

Very different. Some consumer goods imported from the West before the war continue to enter the country via third countries. iPhones, for example, which Apple no longer sells directly in Russia, are bought by Russian companies in other countries in order to then resell them in Russia – although these products are of course significantly more expensive. Other goods are being replaced by alternative products from China, for example. This can be observed with cars, for example. The sanctions for importing capital goods are more serious. High-tech components from the West, for example for telecommunications equipment, cannot always be replaced by Chinese products. And with a huge gas turbine for a power plant, I can hardly disguise the fact that the destination country is Russia, even when importing it via a third country.

What does all this mean for the Russian population? Does economic output grow with prosperity despite war and sanctions?

You have to differentiate here too. The middle class definitely feels the sanctions. They vacationed in Europe before the war and bought Western branded goods that are no longer available or only available to a limited extent. The poorer classes, on the other hand, feel positive effects, at least economically. Real wages, that is, even after deducting inflation, are rising significantly. Because war and sanctions have led to a major labor shortage, forcing companies to pay employees better. Economically weak regions also benefit financially from the fact that many men go into the army. Because the military pays very good wages compared to the normal income in these regions. All of this means that private consumption in Russia has recovered quickly after a brief slump at the beginning of the war.

This economic development in Russia is particularly surprising for observers in the West. Where is the misconception? What was the crucial misjudgment?

There are probably several aspects that were misjudged. On the one hand, the West probably did not expect that the majority of countries would not support the sanctions. It was probably clear that China would not participate. But in the case of India, Brazil and other emerging countries, one had probably hoped for more cooperation. And in fact it is the case that even with Turkey even a NATO state does not participate in the sanctions, but intensifies its trade with Russia. In addition, it is probably the case that the adaptability of the Russian economy was underestimated compared to countries that were subject to similar sanctions. Russia is simply much larger and more economically developed than Iran, Venezuela or North Korea. The Russian economy therefore has more internal sources of growth and opportunities for diversification. The Russian economy cannot be compared to the Soviet one. Russia is a true market economy. The entrepreneurial spirit, especially of small and medium-sized companies, has made it possible to set up alternative supply chains for many sanctioned supply chains comparatively quickly. And last but not least, the Russian state has been preparing for possible sanctions since 2014 at the latest. For example, he has invested in currency and financial reserves and reduced debt.

The good economic development is apparently based, among other things, on these reserves and the possibility of the Russian state to increase its expenditure for the war, although it has lost a considerable part of its income. Is that sustainable? How long can Russia hold out?

The budget deficit should worry the Russian government in the medium term. The reserves, such as the assets of the Russian sovereign wealth fund, are finite. The state can borrow from local banks, but the interest rates are high, most recently at around eleven percent. In the long term, after a few years, the situation is likely to become more difficult. But even that does not mean that a collapse of the Russian economy is to be expected.

That is, the idea of ​​using sanctions to force Russia to end the war failed?

Yes, overall the sanctions have largely failed. The only thing that has really hurt Russia so far has been the European embargo on oil imports. The restrictions on the delivery of certain high-tech capital goods could also lead to Russia being technologically left behind in the long term. But that’s not nearly enough to get Putin to give in.

Max Borowski spoke with Vasily Astrov.

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