Increased US Sanctions on Russia Will Have Limited Influence on Its Economy

Recently, President Trump formally signed a bill imposing sanctions on Russia, putting an end to a discussion that had lasted for several days. No matter the extent to which Trump did it because he had no other alternative or the extent to which Russia would be disappointed, the decision to carry out a new round of sanctions is final. Although this will impart a lasting blow, I foresee that the Russian economy, which has had its fill of hardships, will not likely sink into extreme misery again.

This bill resulted from Russia’s suspected interference in the U.S. election last year, as well as the Ukraine crisis before that. Mainly, the bill added sanctions on key fields of the Russian economy such as energy, the military and banks, including the sale of weapons and the export of energy sources. Russian institutions and individuals suspected of interfering in the election are also listed therein. This bill is thought to be the broadest and most comprehensive measure on sanctions against Russia that the U.S. has implemented since 2014.

It is necessary to acknowledge that the shadow remaining over Russia from the last wave of broad sanctions has not yet entirely disappeared. In 2014, the United States and the European Union initiated strict economic sanctions on Russia’s finance, national defense and energy activities. With the twofold blow of the sanctions as well as the steep fall in global oil prices, Russian exports fell substantially, the ruble depreciated by a big margin, the inflation rate soared, excessive capital outflow became a serious issue and the economy entered into a long-term decline. Over the past three years, with much struggling, the Russian economy has made a slow recovery. In the fourth quarter last year, it finally once again showed positive growth. However, its status nowadays is still shifting.

Nevertheless, I predict that the influence of the new sanctions bill on the Russian economy will pale in comparison to that last round of sanctions. Having had to temper itself for the past three years, the Russian economy has basically already adapted to and gradually absorbed the negative impact of those sanctions, while the new round of sanctions being carried out do not in essence differ greatly from the previous ones. In addition, for Russia, which relies heavily on oil revenues, the direct negative effects of the sanctions on the economy will be much smaller than that of fluctuations in oil prices.

Recently, the market has been relatively calm in response to the new sanctions bill. On the day that the sanctions were signed, the value of the ruble against the U.S. dollar fell slightly. Afterward, because the price of oil increased, it returned to its usual value, and now is already mostly stable. Alexei Pogglov, chief of Credit Suisse and a scholar of economy, has expressed that he has not yet observed any direct negative impact of the new sanctions bill on the ruble, and that although the limitation within the new sanctions of tightened financing conditions on trade could lead to decreased fluidity in the U.S. dollar on the market, it will not have any real negative impact on the ruble.*

In fact, since the second half of last year, many macroeconomic indices of Russia, including the exchange rate of the ruble, have continued to change. The ruble has steadily increased, rising 14 percent compared to the beginning of last year. The inflation rate has decreased by a wide margin, recently falling within 4 percent of the target range. Russia’s revenue structure has also changed somewhat; in the first quarter of this year, its non-energy revenue accounted for nearly one-third of its tax revenue, rising to 60 percent. Furthermore, growth in foreign investment in Russia during the first quarter exceeded the level of growth in Russia’s gross domestic product, demonstrating that the Russian economy has recovered and is entering a new phase.

These days, it is well-known that the Russian economy continues to stabilize and progress along a path of slow growth. The Russian Ministry of Economic Development predicts that this year, the Russian economy will grow by 2 percent. The World Bank predicts 1.5 percent. The other day, the International Monetary Fund also issued a report, which as of last week predicted that Russia’s economic growth in 2017 would be 1.4 percent.

In addition, another advantage to Russia worth considering is that, in the last round of sanctions, Russia was under pressure from all sides from the United States and the European Union, whereas the situation this time is completely different.

Since Congress passed the new bill last week, the European Union has expressed trepidation several times. It claims that these sanctions might influence its energy independence because the U.S. might carry out sanctions against energy industries relevant to Russia, which would include its own industries. Many of Germany’s government officials have also publicly made known their opposition to the new U.S. sanctions, saying that they are just a front for the U.S. to push its own interests in the energy field. They also stated that they would not stand for the new U.S. sanctions against Russia affecting EU industries. The Chairman of the European Commission, Jean-Claude Juncker, has even stated that if the U.S. sanctions against Russia do not take into consideration the interests of the EU, the EU would reserve the right to take “adequate measures” in the following days.

From this, it seems that the European reaction to the sanctions might in fact give Russia a ray of hope. The EU is highly dependent on Russia’s energy supply; the extent to which the European and Russian economies are interlinked far exceeds that of the U.S. and Russia. Thus, the new bill will very likely force Europe to expend many more costs than the U.S., which will, without doubt, exacerbate tensions between the two. To Russia, which was excluded from the global market for many years and now urgently needs to find opportunities to cooperate with it, the support of a huge client like the EU is vital.

However, although its influence will be limited, the signing of the new bill means that Russia’s hope for an early end to sanctions has been shattered, which is still no small negative impact. To the Russian economy, which has just recently managed to get back on its feet from amid a great morass, the steps it has to take to force its way out from said morass just got a little more difficult.

*Editor’s note: A search to verify the name Alexei Pogglov, or Alexei Bogorov as cited in the original article, failed to establish the identity of this individual. Thus, while the information here is translated accurately, it could not be independently verified.

About this publication

Be the first to comment

Leave a Reply