Russian Economy Presses on Despite Sanctions

Russia’s foreign debts are declining as the government relies on currency reserves to pay down state company debts to foreign creditors. Economic sanctions appear to have no major impact on the Russian economy, only affecting six percent of the business sector.

Russia’s foreign debts are declining as the government relies on currency reserves to pay down state company debts to foreign creditors. Economic sanctions appear to have no major impact on the Russian economy, only affecting six percent of the business sector.

President Obama may have been listening to the wrong people when he said the Russian economy was “in tatters” during his last State of the Union address. The Peterson Institute for International Economics alluded to Mother Russia’s potential economic calamity by highlighting a 26 percent decline in currency reserves when to compared to 2014. But this analysis fails to acknowledge that the government is paying down its foreign debts, and state corporations are using any remaining debt as a way to avoid taxation. Companies with foreign loans can place any profits in lucrative tax shelters abroad, and if western sanctions stop the companies from making payments, loan extensions are possible. Either way, it’s a win-win for monolithic state-sponsored corporations in Russia.

Russia Adjusts in the Wake of Low Oil Prices

Western experts also predicted that low oil prices would bring Russia to its knees. According to the Gaidar Institute, Russian GDP will only contract by 2.7 percent in 2015, even if oil prices fall to $40 a barrel. Currently, Brent crude is trading at around $60. While it is true that lower oil prices have placed the Russians in a precarious position, the country’s energy export income will only drop as far as the dollar is concerned. The country’s export value will grow under a weak ruble because Russia’s central bank allowed the currency to fall as much as 40 percent in value against the dollar in the past six months.

A higher export value means that the country no longer needs oil prices to be $100 or more to meet its budget obligations. A weakened ruble has reduced costs for domestic oil producers, and low oil prices translate into tax relief on the Russian energy sector. In reaction to sanctions and dipping oil prices, allowing the ruble to falter is part of an overall plan on the part of the central bank to foster economic growth in the future and lower the country’s dependence on imports.

Sanction Effects on the Russian People

Western leaders hope that a squeeze on the Russian economy will force the public to rise up and oppose President Vladimir Putin. But the latest poll from the non-partisan Levada Center shows that Russians support Putin by 86 percent in February, a slight uptick from 85 percent from the previous month. Russian living standards have declined due to rising inflation, but the overwhelming pressure from the West has galvanized the masses around their leader.

Putin Still Faces Uphill Battle

Despite Putin’s weathering of the financial storm, he still faces strong domestic opposition. And in the wake of opposition member Boris Nemtsov’s assassination, all eyes are on Putin, even though there is no evidence of his involvement in the murder. Mikhail Khodorkovsky, a fierce Putin opponent and former oligarch jailed on charges of fraud and tax evasion, stated that a further weakening of the economy would embolden Putin’s enemies to make moves against him, with the help of western powers if necessary. But let’s not forget Putin’s strong approval numbers and Russian nationalism. Any perceived western interference in Russian affairs could provoke public backlash against Putin’s political enemies. For now at least, Putin and the West are at an economic stalemate.