Why aren't economic sanctions working against Russia?

According to IMF's forecast, Russia will continue to grow, despite heavy sanctions

Currently Russian Federation is the most sanctioned country in the world, with a record number of more than 19,000 international sanctions. Yet, according to the International Monetary Fund, Russia’s economic growth is expected to reach 2.6 percent in 2024, a substantial rise in the forecast from an earlier estimate of 1.1 percent. This growth is greater than that of the US (projected at 2.1 percent), Europe's largest economy-Germany (0.5 percent), United Kingdom (0.6 percent), and even Japan (0.9 percent). So, it is ironically bigger than in the vast majority of countries that have imposed sanctions against Russia.

Out of this, natural questions arise: Why is Russia’s economy rising, despite sanctions? Do economic sanctions even work? What is the long-term outlook of Russia’s economy? These and many other questions, I will answer in this post.

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Why is Russia’s economy rising?

Despite being the most heavily sanctioned country in the world, Russia’s expected growth is bigger than previously expected. Currently, Russia is the most sanctioned country in the world, with a record-high number of 19,282 sanctions (as of February 2024), falling behind is Iran with 5,011 sanctions, Syria with 2,844 sanctions, North Korea with 2,171 sanctions, Belarus with 1,454 sanctions, and Venezuela with 747 sanctions.

What the data shows is that the economy of Russia has stabilized and that it is pushed primarily by industrial-military spending, which is the main reason for this increased short-term growth. An additional reason is the fact that incomes have been rising so strongly last year and are projected to continue to rise this year as well, which is driving up consumption. This growth is not the usual sustained economic growth, which we usually look for in healthy economies. These two factors, military-industrial spending, and increased consumption are the two greatest forces pushing the Russian economy, and they will continue to do that for several years, provided that the oil-tax income remains roughly where it is today.

What has been happening in Russia is called military Keynesianism, and it recalls in certain respects the boom in America, which ended the Great Depression at the end of the 1930s, as a result of increased military spending. That is of course a viable way to increase your economic growth, taking that you have the necessary resources from the sale of oil and gas to do that. A real question is if this type of economic growth can be turned into sustained economic growth when the war in Ukraine ends. This question is impossible to answer because, at this point, we just don’t know, but it would be a mistake to assume that Russia can’t do that.

There have been suggestions made that Russia is seeing the growth of its economy to this extent because of the upcoming elections in March and that it would decrease that spending as the elections are finished. There is no evidence to suggest that this is true. Russia has good economic growth because of the effectiveness of its institutions in managing the economy of the country. Last year Russia made 140 billion in trade surplus and almost 80 billion in current account surplus. At the current level of oil prices, there is no reason why it can’t repeat such high numbers this year as well.

Are sanctions working in the case of Russia?

The short answer is NO! But the real question should be if economic sanctions have ever achieved their means. Sanctions were always imposed with the intent of hurting the economy, and thereby decreasing the living standard of the population of the sanctioned country, to start an uprising and ensure a regime change. If we take a look at the graph above, we can see a list of sanctioned countries by the West, and in none of those countries has there been any success in toppling the government.

The difference between sanctions against those countries and Russia is the fact that the sanctions were successful in affecting negatively those economies, whereas they showed no success in the case of Russia. One of the reasons for this is the fact that the global economy has changed over the years. China has become a world superpower, and India is not far away as well. As long as those countries are willing to continue to trade with Russia, buy Russia’s energy, and supply Russia with various critical products, the West’s ability to strangle Russia’s economy is heavily reduced, unless it succeeds in imposing a naval blockade on Russia, but that would be an act of war.

What we can see is that Russia is out-competing the West when it comes to the production of artillery shells and Russia’s spending budget is not running out of savings. It is running budget deficits of less than 1% this year, and the critical source of the budget is the number of oil and gas exports, which are holding quite well. It is also not the case that Russia is burning through its stockpile of money and is going to end up in a difficult situation in the next couple of years. The financial reserves are staying intact and Russia is running down its debts.

The sanctions seldom work to deliver on what was the declared intention. In this case, the declared intention was to force Russia into a difficult economic situation, so that it would force the Kremlin to reassess its actions in Ukraine and to ultimately stop them. That hasn’t happened, and the reason for that is that Russia is such an important exporter of hydrocarbons and other materials, which are in high demand in places like China, India, and other Asian markets. There are no signs that this will end anytime soon.

Although Russia is not in a comfortable position to be able to diversify the economy, ensure sustainable economic growth, and address the demographic issues that were its focus before the war in Ukraine, it is, however, in a comfortable position to pay its bills and fund the budget requirements.

Where is Russia’s economy headed?

If this situation continues, Russia will slip into economic stagnation, as its economy becomes more and more reliant on industrial-military spending. The narrative in Moscow is that such a scenario will not occur, and they are looking for cooperation within the expanded BRICS+ format, which has seen an increase in the number of its members as of January this year. The goal of Russia and China will be to bring even more countries into this group and to use that format as an alternative to the previous system of economic governance, which was dominated by Western nations. It is far too early to say if that will work, or how long it will take for it to work, but Moscow has viable options on which it can focus in the future. The most critical component of Russia’s economy in the future will continue to be its export of oil, and if the prices remain high, then it will undoubtedly continue to grow.

Additionally, 85 percent of Russia’s trade is conducted in currencies of BRICS+ countries, particularly in the UAE Dirham. This suggests that Russia has moved substantially from the US Dollar and Euro, and is continuing to create a new bloc of countries, one which will be almost entirely independent from the Western bloc.