Do sanctions against Russia work?
Do sanctions against Russia work?
After the Ukraine revolution (Euromaidan Revolution or Revolution of Dignity), the pro-Western government replaced the pro-Russian president Viktor Yanukovych. Russia felt threatened that Ukraine might join NATO; their bases would be close to the Russian border; it would lose its naval base in Crimea, and that would threaten its presence in the Black Sea… and Russia acted quickly-using its special forces and with the support of the local militia, Russia was able to capture Crimea swiftly, fast and bloodless. There was no resistance from the Ukrainian forces, they were too weak, because of several facts- some of them were locals and supported Russia, lack of clear orders of the government in Kyiv, low morale and unwillingness to fight. After capturing Crimea, Russia quickly organized a referendum “Do citizens of Crimea want to join Russia?”. Due to the fact, that most locals were pro-Russian supporters and always had desires to join Russia and the presence of the Russian army… the result was expected-Crimea joined Russia.
At the same time, the first insurgency movements in Eastern Ukraine by pro-Russian separatists rose, who saw what happened in Crimea and had the same desire to join Russia. The new government in Kyiv sent the army against them and Russia started unofficially to support them-with supplies, weapons, people… The USA and the EU were angry that Russia was violating international law and supported the insurgency in Eastern Ukraine and put economic sanctions against the country.
The sanctions hit the Russian economy hard and were one of the reasons for the fall of the ruble and the Russian financial crisis (2014–2015). Now, six years later, let’s see how sanctions are affecting Russia or the country manages to handle them?
-GDP
Russia was hit hard by the sanctions, GPD fell from $2297.1 billion in 2014 to $1287.7 billion in 2016. Sanctions were one of the main reasons to cause the devaluation of the Russian currency and the fall of the GDP. The country needed three years to recover- in 2015 and 2016 were the first signs, but it couldn’t reach the level of the economy from 2013. So, in terms of economy, western sanctions hit hard Russia. This was not the only reason-the prices of the oil fell, and this also played a role in the economy’s decline.
-Annual growth
Yes, sanctions hit Russia hard, but if we analyze the data well, we see that they are not the only reason. From 2013(one year before sanctions), Russia had a very low annual growth of only 1.8%. This shows that Russia has a structural problem that needs to be fixed. The sanctions just accelerated this effect.
In 2015, the economy declined with 2.3%, in the next years, the results were better-0.3% in 2016 and 1.6% in 2017, but Russia was on the verge of stagnation. The results in the next years proved this- 1.1% in 2019 and 1.9% in 2020[1].
In summary, sanctions affect the Russian economy, but the structural problems played a major role too.
-GDP per Capita
Surprisingly, the hit on the incomes was not so hard in comparison with the fall of the economy.
After the hit in 2014, Russia recovered the GDP per Capita, reaching $11729.10 in 2018, the highest level in their history. Russia is close to the world average GDP per Capita, reaching 93% of it[2].
-Unemployment rate
The unemployment rate is constantly dropping except for two periods-Russian financial crisis in 1998 and the crisis in 2009–2010(post effects of Great economic crisis, war with Georgia and the fall of the price of oil). Despite these events, unemployment is decreasing. The western sanctions changed little in the picture-there was a slight decrease in unemployment, reaching 6% in 2015, but in the next years, drop again to 4.6% in 2019.
Sanctions didn’t change the big picture-the the unemployment rate is dropping. Yes, because of the sanctions, the unemployment temporarily increased up to 6%, but later decreased again, reaching the lowest point in the history of modern Russia.
-Debt to GDP
Debt to GDP is one of the best indicators that shows how much in debt is one country. The debt itself is not dangerous, but the ratio to GDP can make it risky for the economy of the country. The general rule is one debt must reach no more than 60% of the GDP. Debt that is exceeding 100% GDP is considered dangerous which can lead the country to default.
The current debt of Russia is one of the lowest in the world and the Western sanctions changed nothing and much lower in comparison with the Western countries. After the default on its debt in 1998, Russia strengthened its economy and decrease its debt. The only way that the sanctions affected the debt was in 2014 (Western sanctions) with 14.4% but then the debt decreased to 13.5% in 2017.
-Government budget
Sanctions did temporary damage to the Russian budget, forcing them to be in budget deficits in the next four years. Just in 2018 and 2019, it was on surplus again, 2.7% in 2018 and 1.8% in 2019.
Russian governments manage their budget well, spending less than their economy produces.
The biggest financial deficits were in extreme times-The financial crisis in Russia in 1998 (-6.26%) and 2009(post effects of the Economic crisis) with 7.9%.
-Government bonds
Government bonds are one of the indicators of how stable is one economy and how investors have trust in their economy.
We can easily spot here the effects of the sanctions against Russia. They reached one of the highest points after the fall of the Soviet Union and remained us for other crises in recent years- The crisis in 1998, when Russia declared a default on its debt, the interest rate was over 16% and 2008–2009. They represent the World economic crisis (2007–2008), the war of Russia with Georgia (2008) and the plummeting price of Urals heavy crude oil, which lost over 70% of its value. Interest rates had reached almost 16%.
Because of the sanctions and the fall of the oil prices, bonds reached a little over 16%, putting the economy and the banking system at risk. Due to the wise policy of the Central Bank of Russia, they stabilized the economy and in 2016, the bonds sharply decreased.
Now, the current bond rate is 6.21%-still high for a modern economy, but one of the lowest levels after the fall of the Soviet Union the trend shows that it will continue to fall.
Russian ruble
If there is a victim of Western sanctions, the Russian ruble is the main suspect. Even during previous crises, the ruble was not so hard hit than the sanctions. They devaluated the ruble significantly, reaching 80 rubles for a dollar (for several minutes even was 100 rubles for a dollar). With the wise policy of the Central Bank of Russia, it was stabilized to 70:1 ruble. In recent years, the ruble reached even 60:1, but now it is 61.99.
Six years after the sanctions, the ruble can’t recover its pre-crisis level and there is no obvious trend to do this but to remain around 55–60:1 ruble. Cheaper currency stimulates the export but destroys the personal saving of local population.
-Oil price
As we mention that the sanctions affect the economy… but are they the only one reason?
The problems in the economy started in 2014… and we can see what happened with the price of the oil. 2014–2016 was the hardest time for the Russian economy. During this time, it is the sharping fall of the price of the oil-from $113 in 2014 to $36 in 2016[3]… no surprise why the economy was so much affected. The combination of sanctions and the low price of oil was one of the main reasons for the decline in the economy. When the prices started to rise over $70 in 2018, the economy recovered reaching 2.3%, the highest annual growth from 2013.
With or without sanctions, the Russian economy depends on the current price of the oil.
But how does Russia depend on its oil and gas?
When we see the graphic[4], the answer is obvious- nearly half of the budget is funded because of oil&gas revenues (46%). The future drop of the oil prices will damage the budget further and the bad news for Russia is that in the future, the world will be less dependent on natural resources, because of the latest technological advancement- electric panels, cars, trucks, ships, planes…In such a scenario, the budget will be hurt severely if the economy is not diversified. Russia had around 20–30 years to do this-enough time if there is enough willingness for action and reform to transform the economy from exporting mainly natural resources to exporting high-technological products.
-Business climate
Doing business is one of the best tools to see how is the business climate in one country.
Sanctions were something that hit hard Russia, but from the other side, it was a great motivation for reforms and changes. Since 2014(The year, when the sanctions were implemented) Russia did serious reforms, and the result is a higher position in the ranking of Doing Business. From 92 place in 2013 to 28 place in 2020[5]. Significant success for six years- sanctions and low prices of the oil were a great motivator for reforms.
-Inflation rates
Again, a clear example, why sanctions affected Russia so much-in 2014–2015 when the sanctions were implemented, the inflation reached a new height of 16% inflation. After the proper action of the Russian Central Bank, the inflation rate dropped, reached 3% in 2019. On such level, the inflation is under control, and a little inflation is healthy for one modern economy.
Despite sanctions, which are still in place, Russia stabilized its inflation, reached one of the lowest in modern history with the trend to become even lower.
-FDI(Foreign Direct Investment)
FDI (Foreign Direct Investments) is one of the best indicators of how healthy one economy is and how investors are trusting and believing in the future of this country. After reaching almost $70 billion FDI in 2013, the sanctions followed by higher inflation and devaluation of the ruble pushed away investors and FDI dropped rapidly-only $6.852 in 2015. In the next years, FDI increased, reaching $32.538 in 2016 and $28.557 billion in 2017. Another blow was in 2018 when they reached only $8.784 billion[6].
The fact that the first and the second-largest economies in the world (The USA and the EU) had a valid sanction against Russia restricted future investments to reach pre-crisis levels.
When Western countries and Russia reach a political agreement and the sanctions are lifted, we can expect the level of FDI to increase.
Conclusion
Without a big surprise, the sanctions of the USA and the EU (followed by the major powers like Canada, Australia, and Japan) against Russia affected its economy- the GDP fell, the economy fell first in recession and then in stagnation. Several years later, Russia couldn’t fully recover from the sanctions and its annual growth is less than the world one. The level of FDI is also low, and the main reason is sanctions; the Russian ruble couldn’t recover the level before sanctions. On the other hand, some sectors were hit but recovered. Russian budget is now again under control and the times of the fiscal deficit are over; government bonds are also on track and they recovered, reaching one of the lowest points; inflation rate also was one of the problems of Russia-reaching 16%, but managed to recover and now is under control (3%); the unemployment rate was hit hard but quickly recovered.
Surprisingly, some sectors took almost no damage- the debt to GDP remained low, the highest point that has been reached was 14.4% but later returned to 13.5%; the unemployment rate was only hit slightly but quickly recovered; the business climate improved. Because of the sanctions, Russia was motivated to make reforms and climb from 92 place in 2013 to 28 place in 2020.
Sanctions were the turning point for the decline of the economy, but there were other factors- like oil prices which dropped significantly and the business climate which was closer to the African countries than to the European ones. Russia survived the worst part, and the economy is back on track, there is no risk of recession, but because of the sanctions that are still in place and the dependence of natural resources, without solid and quick reforms the risk from stagnation is real.
Source:
[1]https://www.imf.org/external/datamapper/NGDP_RPCH@WEO/RUS available 01/2020
[2]https://tradingeconomics.com/russia/gdp-per-capita available 01/2020
[3]https://www.macrotrends.net/1369/crude-oil-price-history-chart available 01/2020
[4]https://www.minfin.ru/en/statistics/fedbud/ document “Consolidated budget of the Russian Federation” available 01/2020
[5]https://russian.doingbusiness.org/content/dam/doingBusiness/country/r/russia/RUS.pdf 01/2020
[6]https://data.worldbank.org/indicator/BX.KLT.DINV.CD.WD?locations=RU available 01/2020
