Putin Has Been Preparing for Western-Led Sanctions for Nearly a Decade

  • Russia has been preparing for sanctions since 2014, after annexing Crimea.
  • Moscow has already been hit with a series of Western-led sanctions following the annexation.
  • Since then, Russia has protected itself with various measures.

Economists have been predicting an implosion of President Vladimir Putin’s economic regime since the West hit Russia with sweeping sanctions for its invasion of Ukraine. But three and a half months into the war, Russia resisted – Putin announced on June 7 that inflation had slowed and unemployment had remained stable.

It helps that Russia is an energy powerhouse that still shows exceptional sales revenue thanks to soaring oil prices. Even without an energy windfall, Russia could in the short term be immune to sanctions. Indeed, the country has shielded itself from sanctions since 2014, when it was also hit with a series of trade restrictions after illegally annexing Crimea to Ukraine.

Putin has “remade the Russian economy into a fortress” to withstand external shocks, Veronica Carrion, economics researcher at the American Bankers Association (ABA) wrote in an ABA Banking Journal article on June 13.

Some experts have questioned the reliability of Russian statistics since the start of the war. “The Russian government clearly has an interest in trying to hide the economic impact of Western sanctions,” said Andrew Lohsen, a fellow in the Europe, Russia and Eurasia program at the Center for Strategic and International Studies.

Even if the economy holds up as well as it looks, Russia could still end up running out of time when the commodity rally stalls and the West’s escalating sanctions eat away at the system. But for now, the country is showing unexpected resilience thanks to a series of measures, such as bolstering its reserves and weaning off foreign capital.

Here’s what Russia did to try to sanction its economy.

Moscow has increased its reserves and stockpiled gold

Prior to the invasion, Russia held the world’s fifth-largest currency and gold reserves, worth around $630 billion, according to the Bank of Finland’s Institute for Emerging Economy. “This stock can cover the government’s balance sheet and support the ruble,” Carrion wrote.

Russia has lost access to about half of that amount due to sanctions, the country’s finance minister said in March. But there is still plenty of physical gold hidden in the country – which is also the world’s second largest producer of the precious metal.

Russia’s gold holdings have tripled since 2014, and they’re all stored in home safes, according to the central bank. The United States has sanctioned Russian transactions using gold, but that would not prevent “opportunistic countries” from doing business with Moscow, Carrion wrote.

Russia is also continuing to increase some reserves in the form of its emergency funds – thanks to a windfall from its oil and gas sales. In April and June, it added $12.7 billion to its emergency reserves. These funds will be used to ensure stable economic development despite the sanctions, Reuters reported on June 9, citing a Russian government statement.

Russia weaned itself off foreign capital and repaid its debt

Beyond savings, Russia has weaned itself off foreign capital by aggressively paying down its debt over the past eight years, Gian Maria Milesi-Ferretti, senior economics researcher at the Hutchins Center on Fiscal, wrote on March 3. and Monetary Policy. is now a net creditor in international markets, he added.

“Vladimir Putin is allergic to borrowing money,” Andrew Weiss, a Russian expert at the Carnegie Endowment for International Peace, told NPR’s “Money Planet” in February. “He’s not looking to use the banking system in Russia or access to Western capital to make Russia great.”

Russia’s external debts are quite low. The government owed about $39 billion in foreign currency obligations by the end of 2021, JPMorgan estimated. By comparison, Greece defaulted on 205.6 billion euros ($277.5 billion) of sovereign debt in 2012.

As for Russia’s overall national debt, it is only 17% of GDP, well below triple digits for many developed countries and mostly denominated in roubles. So the country “doesn’t really need to borrow,” Anton Tabakh, chief economist at Russian ratings agency Expert RA, wrote on the Carnegie Endowment for International Peace website on June 15. The US national debt is about 130% of GDP, per Statistics.

The biggest problem Russia currently faces is paying off its foreign debts due to the restrictions caused by the sanctions, Tabakh added. Once this problem is solved, Russia and its companies will be able to repay their debt, and the country’s own resources “should be sufficient to cover the needs of the budget, banks and companies”, he added.

Russia turns to economic self-sufficiency

Russia is turning in on itself as it has become an international pariah – but, as a huge producer of raw materials, its economy will not completely collapse – even if growth will be slow and weak, said Hassan Malik, Principal Sovereign Analyst at Boston. management consultancy Loomis Sayles.

“Russia is one of the few countries in the world that can commit to autarky,” Hassan told Insider. He was referring to the notion of economic self-sufficiency. The country is a major producer of crude oil, natural gas, wheat, and metals like nickel and palladium.

To counter an exodus of international companies that have taken their goods and services with them, Russian entities have taken over the businesses and are replacing their products with local offerings.

For example, the city of Moscow and a Russian state-backed group have taken over the operations of French automaker Renault in the country for the nominal sum of 2 rubles (3.5 cents). They plan to revive a Soviet-era car brand with the manufacturing facilities, city mayor Sergei Sobyanin said in a blog post.

But Russia’s economic situation will remain very difficult. Putin himself said on June 9 that replacing imports with locally produced goods “is not a panacea”, AFP reported. He said Russia would seek new trading partners and continue to develop its own industries for “critical technologies”.

The scale and scope of the current sanctions go far beyond those imposed in 2014, so they “will impose very significant costs on the Russian economy,” Milesi-Ferretti wrote in her March 3 post.

The Russian economy is expected to contract by 8.5% in 2022, with a further decline of 2.3% in 2023, according to projections by the International Monetary Fund in an April report. It would be the biggest decline in the economy since the years following the fall of the Soviet Union in 1991.

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