The architects of Western sanctions against Russia miscalculated the impact of sanctions, particularly underestimating Russia's resilience to external financial pressures and its ability to boost domestic production and exports, a study by the Sberbank Financial Analytics Centre found, RBC reported on February 19.

Four years into the sanctions regime, the importance of countercyclical policies has become evident, as Russia has demonstrated notable economic adaptability.

“In a number of cases, Western sanctions had the opposite effect,” say researchers from the Sberbank Financial Analytics Centre.

The analysis highlighted three key areas where sanctions had unintended consequences:

· The withdrawal of Western companies from Russia spurred domestic production, encouraged parallel imports, and facilitated the import of alternative products from third countries;

· Capital withdrawal restrictions helped bolster the ruble and retained currency within the country; and

· The perception of Western countries as a "safe haven" for Russian and friendly nations' wealth diminished, leading to the repatriation of funds.

Contrary to expectations, some sanctions have inadvertently supported the Russian economy, triggering a fragmentation of the global economy and diminishing the West's influence, Sberbank argued in what was more of an analytic survey than attempt at Russian propaganda.

The sanctions have also backfired on sanctioning countries reliant on Russian goods and energy, with notable economies like Germany on course to go into recession in the first quarter, while Russia is currently the fastest growing country out of the G8 advanced economies, as bne IntelliNews reported due to a boomerang effect.

Russia's 2023 GDP growth outpaced global averages, driven in part by sectors related to the Ukraine conflict. The conclusions are corroborated by Heli Simola, an economist at the Institute for Economies in Transition at the Bank of Finland (BOFIT), who estimated that industries related to the military operation in Ukraine accounted for about 40% of economic growth in the first half of 2023. At the same time, she expressed the opinion that Russia cannot maintain increased government spending indefinitely, and the military-industrial complex is diverting resources from civilian industry. The bump from the military Keynesianism cannot last forever and the war effort is already introducing deep structural problems that will eventually have to be addressed.

Low debt

With one of the lowest sovereign debt levels in the world, the country's minimal reliance on external financing, combined with the global economy's dependence on Russian commodities, has rendered sanctions less effective, Sberbank says.

The ruble's attractiveness for foreign transactions has increased as non-participating nations are willing to use rubles to purchase Russian commodities. At the same time, there has already been a significant shift towards national currencies in bilateral trade between Russia and the so-called friendly countries.

“Rubles can be used to buy many goods needed all over the world,” analysts point out. In general, the share of national currencies in mutual settlements between Russia and foreign countries will increase to 65% by the end of 2023, and with major trading partners it will approach 70%, the authors predict.

Trade

The Russian economy is weakly dependent on external financing, but the dependence of the world economy on Russian goods is quite high, the authors state.

For example, in January-November 2023, EU countries still imported almost €27bn worth of Russian mineral fuel, according to Eurostat data – natural gas, LNG, oil through the Druzhba pipeline which has not been sanctioned. In addition, the same EU continues to purchase petroleum products refined in third countries such as India that are made from Russian crude oil.

“Sanctions are generally ineffective against countries with significant foreign trade surpluses and low levels of external debt,” the study’s authors say.

The West is severely limited in the possibilities of sanctions due to Russia’s large volume on commodity markets and cannot exclude it with Iranian-type sanctions as Russia is too big to hermetically seal it off from global trade, Sberbank concluded. The point is highlighted by the oil price cap sanctions, which never proposed to stop the export of oil, only cap the price that the Kremlin could charge for it. Attempting a wholesale ban on Russian oil exports would only cause a price spike and hurt the sanctioners as much as the sanctionee.

Nevertheless, Russia’s external sector still suffered from sanctions as trade volumes and profits have been reduced, especially with the export of gas, which is down by two thirds.

Import substitution

One of the most telling changes has been the success Russian companies have had with import substitution and the development of domestic solutions where inputs and equipment used to be bought in from abroad.

The antecedent is cheese. Following Russia's decision to ban European agricultural imports following the first round of sanctions in 2014, following the annexation of the Crimea, cheese, which was almost entirely imported, disappeared from shop shelves. Two years later and Russia had a flourishing domestic cheese production sector, albeit of lower quality than the European analogues.

A similar process has been going on over the last two years, and it has been made easier by the fact that most of Russia’s key exports are simple things like minerals that don’t require difficult technological solutions.

Successful import substitution in various industries has bolstered Russia's industrial sector, countering the industrial decline caused by sanctions. The adaptability of Russian businesses, particularly in finding new markets and suppliers, has been a key factor in this resilience. Most of Russia’s oil exports have been successfully reorientated to Asia and increasingly Russia is finding new customers for its other raw material exports.

Analysts from Sberbank cite “successful cases” of import substitution – in mechanical engineering, in the aviation industry, in the chemical industry, in the agro-industrial complex and the food industry. The industrial decline caused by sanctions was overcome by mid-2023, and prospects for 2024 in Russian industry look “quite optimistic,” Russia’s Higher School of Economics wrote in the February report “Industrial Production Intensity Indices.” According to their estimates, the last two crises (pandemic and sanctions) have led to “a significant change in the structure of Russian production in favour of highly processed products.”

“The Russian economy, unlike Japan or Western countries, relies more on the production and consumption of raw materials or near-raw materials, therefore, on the one hand, it is possible to find alternative suppliers for a fairly significant part of Russian imports; on the other hand, when Russian enterprises have lost their main export market in Europe, they are unlikely to have had to radically restructure production in order to find new buyers in other countries,” RBC reports. “If Russia produced final goods or technological equipment, then we could hardly quickly replace the loss of the European market.”