March 23-Despite four years of sanctions, the Russian economy appears stronger and more immune to sanctions from the United States and the European Union.

As tensions continue to rise and new sanctions go into effect, many Russians who adapted to trade restrictions with the West appear to shrug off the threat of new measures. The economy now grows at a rate of 1.7 percent, having fully recovered from its recession.

It is worth asking, what effect the sanctions are having on the Russian economy? In the following article, the Global Economic Report looks at the ways the country overcame sanctions to resume economic growth.

Four Years of Sanctions

Since Russia annexed the Crimea from the Ukraine in 2014, it has faced sanctions from the European Union and the United States. In March of 2014, EU sanctions restricted financial dealings of and travel by 150 people and 38 entities. Another round of EU sanctions that year targeted specific Russian economic sectors and limited access to the EU capital markets. Both rounds of sanctions are scheduled to continue through September 15 and July 31, 2018. Furthermore, the EU restricted bilateral and regional cooperation with Russia.

At the same time, U.S. sanctions directed U.S.-based financial institutions to freeze assets of Russian-related individuals, banks and businesses and block transactions with certain sectors of the Russian economy, namely financial services, energy, metals and mining, engineering and defense. It also banned investments in and trade with the Crimea region.

Imports & Exports

Overall, Russia’s trade declined significantly.

With the energy sector hit by sanctions and the global price of oil historically low, Russian exports of fuel and mining products fell by more than 50 percent from 2013 to 2016.  (See chart below.)

Merchandise exports fell by nearly half, from $522 billion in 2013 to $282 billion in 2016. Services industries also saw a loss of income from exports, dropping from $70 billion in 2013 to $50.5 billion in 2016.

Merchandise imports also declined, from $341 billion in 2013 to $192 billion in 2016. Manufacturing products and machinery imports declined significantly, as well as transportation equipment and agricultural products. (See chart on imports below.)

Source: World Trade Organization

Russia Insulates Itself from Sanctions

As trade declined, many in the country looked for ways to insulate their economy from the impact of sanctions. Military spending increased, household spending declined, and the agricultural sector grew.

In traditional Soviet-planning style, the government promoted an import-substitution program and began developing subsidies for products that could be exported. Some Kremlin officials called for establishing an internal system of credit to finance economic modernization programs.

“With the sanctions, the European countries and the United States are clearly telling us that we can no longer rely on foreign investment, so the state is the only source, which can give the necessary amount of credit to the economy,” said Sergei Glazyev, a Russian presidential aide, in a meeting with the Russian National Congress.

The Economy Recovers

By 2017, the Russian economy had fully recovered. An International Monetary Fund staff concluded its review of the economy, saying a cyclical recovery was gaining pace and economic growth hovered near 2 percent. Furthermore, inflation fell below 4 percent, the currency stabilized, and the banking system gained strength.

With that, the central bank had a green light to pump more cash into the system.

Debt & Demand

By Summer 2017, investment money poured into the country.

Russia sold sovereign debt at the lowest interest rates in the country’s history — 4.25 percent for 10-year Eurobonds and 5.25 percent for 30-year Eurobonds — as reported by the Financial Times. According to Andrei Soloviev, the head of the Russian state-run investment bank that organized the deal, most of the investors were American.

Import Substitution

Meanwhile, the domestic agriculture industry boomed in the wake of the Western sanctions and Russian retaliatory measures that restricted imports of European products.

“Around Russia, farms, fields, greenhouses and fertilizer factories are thriving as consumers turn to domestically-produced food, helped by the worst relations between Moscow and the west for a generation,” the Financial Times reported on September 4, 2017.

Food and agricultural companies invested billions of dollars in land, greenhouses and production facilities. They quickly gained market share in Russia and looked beyond their own borders for consumer markets.

Earlier this month, Russian Prime Minister Dmitry Medvedev appeared triumphant.

“We have reached self-sufficiency in some areas faster even than we expected. And we have moved forward very quickly in other fields,” Medvedev said in February. “We used to have to buy poultry meat from Europe and America, but now we export it.”

By March, Medvedev declared the economic crisis to be over. “Well, we could say today that our economy has to a considerable extent overcome the consequences of the 2014-2015 crisis.”

Putin Warns Against Getting Too Attached to ‘Temporary Tool’

The import-substitution program appeared to be running so well that Russian President Vladimir Putin warned Russian entrepreneurs against getting too used to it.

“The idea of import substitution is not, in and of itself, universal and is not what we should be aiming for in the long run,” Putin told women entrepreneurs earlier this month. “This is an extremely important thing.”

Putin said the import substitution program was a “temporary phenomenon” meant to “balance out the current situation.” He said Russian producers need to produce goods for the global market, not just the Russian market, and that meant competing on price and quality against global goods.

Putin also hinted towards a possible end to the retaliatory measures — and perhaps the sanctions themselves. “I think it would be wrong if we were to restrict our enterprises, companies with access to foreign markets,” Putin said, according to news wires on March 7.

Although it appeared to indicate economic relations with the West might improve, other signs pointed in the opposite direction.

New Sanctions in 2018

In some ways, relations between Russia’s relations with the West only got worse. Not only are there ongoing flashpoints in Syria and Ukraine, tensions arose over interference in domestic politics and security.

Russian-United Kingdom relations fell to a new low following a nerve-agent attack against a former Russian agent and his daughter in England. Though Russia denies responsibility, E.U. and U.S. leaders appeared united behind the United Kingdom’s assertion that the Kremlin was behind the attack.

Meanwhile, U.S.-Russian relations remain mixed. In warming overtones, U.S. President Trump called Putin earlier this week to congratulate him on extending his presidential term. According to a read out of the call, the two leaders discussed “mutual national security concerns and challenges.”

Earlier this year, however, the U.S. Justice Department issued a formal indictment against Russian individuals and businesses involved in Russia’s disinformation campaign against the United States.

In reprisal, the U.S. Treasury Department issued new sanctions March 15 against 19 Russian individuals and five entities, including the Internet Research Agency, based in St. Petersburg, Russia. The sanctions list includes 13 individuals charged in a U.S. Justice Department Special Council indictment centering on spreading false information and holding contentious rallies.

Sanctioning ‘The Chef’

Among others, the new sanctions target Yevgeniy Viktorovich Prigozhin, who is known as Putin’s chef. Prigozhin is also thought to be an instrumental figure in carrying out the state’s geopolitical objectives, including in the Ukraine and the United States. According to a U.S. Treasury Department statement, Prigozhin materially funded the Internet Research Agency and Concord Catering.

Treasury had previously designated him in 2014 as part of its sanctions on senior Russian government officials in general following Russia’s involvement in Ukraine and its annexation of Crimea.

Looking for Impact

Despite the political and media attention around the new sanctions, it is not clear they have any major effect or have led banks to actually freeze assets of the Russian nationals named. In fact, it is hard to estimate what  impact the new U.S. sanctions have.

Asked about the new sanctions by Russian media, Prigozhin, Putin’s chef, appeared dismissive and unconcerned. He said he would not be affected because he did not have any business interests in the United States, according to a BBC news story.

“I have been sanctioned maybe three or four times – I’m tired of counting, I can’t remember,” Prigozhin said. “I don’t have any business in the United States or with Americans. I’m not worried by this. Except that now I will stop going to McDonald’s.”

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About Author

Patti Mohr is an independent journalist living in North Carolina. She has a Master's Degree in International Commerce and Policy from George Mason University and a Bachelor's Degree in Political Science and a certificate in journalism from the University of Cincinnati. After spending 12 years working in Washington, D.C., Patti moved to North Carolina where she consulted clients with their resumes and began working in property management. She continued to work on research and writing on an independent basis and conceptualized the structure for a media organization that would support independent journalism. Patti's lifelong dream is to pursue a career in writing about international relations. She has a strong belief in the fundamentals of journalism, namely the pursuit of truth, the maintenance of independence from sources, and in the verification of information. She is a reliable researcher with strong analytical and problem-solving skills.