When Russia invaded Ukraine in February last year, the international community slapped a raft of sanctions on it. They froze the assets of wealthy and powerful Russian citizens and restricted their ability to travel. They restricted the sale of Russian raw materials and energy and worked to prevent Russia from getting its hands on various kinds of defense and information technologies. And they imposed financial sanctions on Russian banks and curtailed Russia’s access to foreign capital and financial markets.
Many western corporations followed up on these government-imposed sanctions with so-called self-sanctioning, whereby companies restricted or halted commercial relations with Russia and Russian firms. The effect, on paper, appeared to be a set of measures that struck at the heart of Russia’s economy. Forecasts in the spring of this year predicted a drop in GDP of at least 7-8% (and possibly as much as 11%) for 2022. Prices were expected to rise by 20-25%. Foreign direct investment by corporations was forecast to fall as much as 25-28%t over the year.
However, Russia stood to the ground and not much impact has been felt by its economy. Complementing the sentiments, Russian President Putin used the SCO platform to send a message of defiance to the West, saying “Russia counters all these external sanctions, pressures and provocations and continues to develop as never before”.
Putin’s address to a virtual Shanghai Cooperation Organization summit was his first to an international meeting since last month’s mutiny in Russia. He backed trade accords between SCO nations in local currencies – seen as an attempt to blunt sanctions. The 2023 SCO summit is taking place virtually, under India’s leadership.
Although, Putin has made several public appearances since the Wagner mercenary group staged a short-lived mutiny in late June, but this was the first time he’d been seen with a group of international leaders.
“I would like to thank my colleagues from the SCO countries who expressed support for the actions of the Russian leadership to protect the constitutional order and the life and security of citizens,” he told the summit in a televised address from the Kremlin in Moscow.
Putin added that more than 80% of trade between Chinese and Russian people was in roubles and yuan, and urged other SCO members to follow the same process. He also welcomed Russian ally Belarus’s application to become a permanent member of the SCO next year.
Summit host Indian PM Narendra Modi called on members to boost trade, connectivity and tech co-operation, among other things.
What went wrong with Western Sanctions?
Initially the western sanctions were looking like a catastrophic impact on Russian economy, but they were unable to put any substantial impact due to certain reasons. The most important reason was the defensive act of Central Bank of Russia, which designed and executed the “Fortress Russia” policy, aimed at protecting the Russian financial system.
The system did take a big hit early on, as sanctions on Russia’s central bank assets were much stronger than expected, reducing its bank reserves by 40%. However, the system recovered in few weeks and the bank continues to hold large amounts of foreign currency — as much as $600 billion — for potential intervention in the currency and debt markets. And even though Russian banks lost access to the SWIFT financial transfer system, they still seem able to get the cash they need to operate, as various other channels continue to enable Russian banks to interact with the outside world. In other words, despite some big shocks, the central bank has kept Russia’s financial system intact and prevented a collapse of the wider Russian economy.
Russia is less reliant on imports than most of its contemporaries and economies. Although, initially some sectors such as manufacturing of transportation equipment, chemicals, food products and IT services were highly exposed. They felt the heat of sanctions as Russia was struggling to import the key requirements. Still, despite the initial shock, Russia pivoted quickly, and began importing more goods from nations like China, Belarus and Turkey, which are not participating in the sanctions regime.
Sanctions on Russian exports have been even less successful. Many countries have stopped buying certain goods from Russia, but the flow of key commodities continues largely unabated. And roaring inflation has only helped Russia in this area: Bruegel estimates that, rather than falling, Russia’s export income has risen by more than 40% to roughly $120 billion year-to-date because of higher prices, and is likely to stay that high through the end of the year. The largest contribution to this comes from natural gas, which is still in high demand throughout Europe, and which, unlike coal, oil and other petroleum products, has not been sanctioned.
This shrinkage in imports and swelling of exports means that Russia’s trade balance looks extremely healthy. The surplus for January-September stood at $198.4 billion == roughly $120 billion higher than for the same period in 2021, and more than double the previous record in 2008.
Russia’s currency appears to be in equally good shape. When sanctions were first imposed, the ruble dropped from about 70-75 to the dollar to close to 140 to the dollar. By April, however, the exchange rate had returned to below pre-invasion levels. Today the ruble fluctuates at about 60 rubles to the dollar.
In the end, we can say that what Russian President Putin said from the dais of SCO is absolutely true. Western countries were thinking that these sanctions will cripple the Russian economy and they may be able to force Russia to have some sort of compromise on Ukraine issue. They were in impression that Russia will fall and NATO will succeed in its agenda. But, their strategy has fall flat on their face, as Russian has only emerged stronger against its adversaries.