Current state of the Russian economy under the influence of western sanctions

Nowadays Russia is experiencing a slowdown in the economic development mainly due to international sanctions imposed on the country from the USA and the EU in response to the Crimean crisis. As Russia refused to engage in noninterference in internal affairs of the Ukraine required by Western countries, this political crisis led to deterioration of economic and political relations between Russia and members of G8, including their allies and partners. When Russia approved the annexation of the Crimea to the Russian Federation in March 2014, the USA became the initiator of the economic sanctions applied against Russia. Under pressure and great influence of the USA, the EU had to do the same thing as members of the EU feared that they would have substantial economic losses if they didn’t take the side of the USA. As a result of these actions, Russian economy started stagnating and its GDP growth rate slowed down.

Both the EU and the USA drew up a list of the government officials and businessmen whose assets and bank accounts will be blocked, and these people won’t be able to get visas and enter Western countries. Sanctions were also applied against large Russian companies which were prohibited to trade their bonds, borrow money from foreign companies and restricted in their right to provide long term loans and make investments. Moreover, the import of high tech equipment needed to extract oil and gas from deep Arctic mines in Russia was banned. Finally, military cooperation between Russia and many western countries (particularly, the USA) was stopped. In response to the sanctions from the USA and the EU, Russia also began imposing many restrictions on foreign entities and their actions. Firstly, Russia published the sanctions applied against foreign government officials. Secondly, Russia put embargo on import of certain types of agricultural products, raw materials and foodstuffs which are produced in countries that applied sanctions against Russia. These include the USA, the EU, Canada, Australia and Norway.

The sanctions damage Russian economy greatly due to restrictions on import of high technologies, free access of Russian banks to cheap foreign credit resources and reduction of inflow of foreign capital and investments which can result in the increase in tax burden inside the country. Moreover, many key Russian companies (Gazprom, Novatek, Rosneft, Lukoil) operating in gas and oil industry are having troubles in maintaining profitability as most sanctions affected oil sector which is vital for Russia. These entities have to reduce their investment programs and seek for financial help from government. Russia also suffers from its embargo as it lacks many cheap imported products which are subject to embargo, and 30% of Russian families can’t provide themselves with sufficient amounts of food as many cheap foreign products have disappeared and overall level of prices increased because of inflation which rose up to 8%. Another negative impact of sanctions on the Russian economy has to do with the devaluation of the ruble: in the second half of 2014 Russian ruble was one of the most rapidly falling currencies in the world. While rate of exchange of the ruble was $35,44 on 1st of August 2014, today it’s already $47,39 and national currency continues to fall. Weak ruble contributed much to the rising inflation and massive outflow of capital outside Russia of approximately $110 billion since the beginning of 2014. To fight rising inflation and strengthen ruble central bank is reducing the quantity of money in the economy using monetary policy tools and as a result interest rates banks charge for loans rise. On the other hand, sanctions can help Russian economy to get out of crisis in the following way. They can become a stimulus for development of backward agricultural sector. Also Russia can redirect its market on Asia and Latin America where losses from sanctions will be offset by mutual trade with China and Brazil.

As for the rest of the world, members of the EU suffer from the reduction of oil and gas import from Russia, world’s main supplier of these natural resources on international market. Moreover, Russia is Europe’s second largest buyer of foodstuffs and raw materials so after sanctions and Russia’s embargo policy a large share of profit is lost for European countries. To reduce losses from the sanctions, the EU plans to use its anti-crisis fund of 400 million euros. Countries whose economies were hurt the most include Germany, France and Italy. Germany didn’t expect that the GDP growth rates of its economy will fall by 0,2% in the second quarter of 2014. This slowdown in the development of German economy is believed to be temporary only if sanctions including Russian embargo policy are abolished. Germany is one of the first countries that admit the fact that sanctions against Russia and the Ukrainian crisis pose serious ricks to world economy and it’s better to maintain stability and peace in Europe rather than lose many percentage points of GDP growth. French economy also falls into crisis as many (around 6000) French companies work with Russian purchase orders and because of sanctions employment will drop. France also suffers from Russian embargo on import of agricultural products as Russia is France’s main market for trade of fruits (apples and pears) and this year supplies of fruits from France have decreased. Instead France started redirecting its exports to inner European market, however losses are still incurred. Italy is also hurt by the sanctions as it’s highly dependent on Russian oil (Norway and the USA are alternative exporters of oil but their reserves won’t be enough to cover Italian demand). Both countries (Russia and Italy) cooperate with each other in furniture trade, investment and financial sectors, tourism. Imposition of sanctions led to deterioration of this cooperation and decline of Italian economy.

Unfortunately, it’s hard to predict when sanctions will be abolished. As recent G20 summit shows, none of members of G20 wanted to support Russia and gap between Russia and western countries even widened. Moreover, the Russian president was treated in a cold way and later he returned to Moscow before the summit actually ended. Of course, one of the main issues discussed during the meeting was the Ukrainian crisis, and it seems that unless the situation is not stable there, the USA and Europe will not consider the abolition of sanctions although both sides realize that economies of countries involved in this crisis are hurt to a large extent by sanctions. The only thing Russia can do for now is to concentrate on weak sides of the national economy and look for ways to develop and modernize them. Sanctions also caused economic rapprochement between Russia and Asian and Latin American countries (China, Brazil) which support Russia in the Ukrainian crisis and are not engaged in applying sanctions.