When Russia annexed Crimea in 2014, the US and the EU responded by imposing economic sanctions on the Putin administration. Up to date, the country has been punished with several other sanctions for different reasons. These sanctions have mixed results, but overall, they have affected the Russian economy negatively. The economic benefits realized from this standoff are marginal and short-term. This paper discusses the consequences of the sanctions on the Russian economy by focusing on the oil and gas sector.
The Sanctions
The first sanctions came in 2014 after Russia invaded Ukraine and annexed Crimea. In July 2014, the US, the EU, Canada, and other countries were involved during the initial stages of the crisis. In 2015, the EU extended its sanctions to January 2016 (Hunter 2016). In 2018, the US imposed sanctions on 9 firms and 21 individuals. On February 13, 2019, the US reiterated that it would hold Russia accountable for the Salisbury incident involving the use of chemical weapon against international law provisions.
Future sanctions are likely to focus on the Salisbury attack (Troianovski 2018). Additionally, the US and Canada have open-ended sanctions in place, which are likely to continue into the future. The first class sanctions bar some state-owned companies from accessing Western financial markets. The nature of second and third classes of the sanctions restricts exportation of high-technology oil exploration equipment and military and dual-use goods to Russia respectively.
Economic Reaction
Macro/micro Level
By the time the sanctions were imposed in 2014, the oil and gas sector was going through turbulent times due to falling fuel prices. Therefore, at a microeconomic level, the sanctions aggravated this problem by limiting foreign financing for companies in this industry. Additionally, firms in the oil and gas sector were denied access to sophisticated oil exploration and production technologies (Cooper 2014).
At the micro level, these factors worked together to slow down business by constraining any form of anticipated growth of total factor productivity. However, the sanctions weakened the country’s currency, which boosted exports and promoted energy companies that trade in dollars while investing in rubles. At the macro level, the Russian GDP dropped by 2.4 percent by 2017, while the overall negative effect on gross capital inflow over 2014–2017 was estimated at approximately $280bn” (Gurvich & Prilepskiy 2015, p. 359).
However, Dreger, Fidrmuc, Kholodilin, and Ulbricht (2016) argue that it is difficult to separate the GDP decline caused by the sanctions from that resulting from low oil prices. Compared to the sanction, oil prices seem to have a higher impact on the GDP. Kholodilin and Netšunajev (2019) posit, “One possible reason why the sanctions have this quite negligible effect on the real GDP of the euro area is a change in the net exports of the euro area” (p. 49). Therefore, at both macro and micro levels, the sanctions have not affected the Russian economy significantly.
Adaptations Today
In a bid to survive the sanctions, Russia came up with countermeasures to cushion itself against an impending economic crisis. The first strategy was to ensure macroeconomic stability by maintaining low levels of government debts and limiting deficits (Ananyev, Sergi & Vaslavskiy 2018). Since Putin 1999 when the current president rose to power, the country has been focusing on this strategy as a way of securing economic stability (Neuenkirch & Neumeier 2015).
Currently, the government is stashing its budget surplus coupled with boosting its reserves as mitigation and safeguard measures for economic stability. The current high oil prices have facilitated this process significantly. Additionally, the country is avoiding privatization and other risky economic reforms with the aim of securing a vibrant economy and attracting more foreign direct investments. The devaluation of the ruble is also playing an important role as an adaptation to the sanctions.
The country sells its oil and gas in dollars (Nelson 2017). Therefore, sharp ruble devaluation ensures that the government gets more money from goods traded in dollars, thus balancing any deficits that may have emerged due to the sanctions. Even though this strategy increased inflation, the government retained the required financial stability, and thus the economy has not suffered significantly. Finally, the Bank of Russia has reduced the cost of credit, thus encouraging borrowing to sustain the economy.
Future Adaptations
The US has hinted that it will impose more sanctions on Russia moving into the future. Therefore, the country needs to prepare for tough economic times. In preparation for this inevitability, the government is focusing on stability as opposed to growth. This goal is being achieved by having stringent fiscal consolidation to ensure macroeconomic stability in case of a new crisis (Tyll, Pernica & Arltová 2018).
For instance, the country is currently stockpiling gold, which is expected to act as a hedge against isolation in the future. The rising oil prices have rejuvenated the country’s foreign currency reserves, and the “once-depleted National Wealth Fund is now reportedly back up to about $75 billion” (Weir 2018, para. 15). Russia is also diversifying its international trade partners, and it is now strengthening its bilateral relations with China – major oil consumer. Additionally, the Bank of Russia is expected to continue easing credit as a countermeasure to the sanctions and stabilization of the economy.
Risks
By focusing on stability as opposed to growth, Russia is risking its long-term economic development prospects. The sanctions have isolated Russia, which is detrimental especially given the benefits of international economic and fiscal integration in the wake of globalization (Korhonen, Simola & Solanko 2018). The sanctions will lead to increased lost business opportunities, slow modernization, and cause infrastructural underinvestment.
Additionally, the high inflation rates force consumers to cut spending, and the tough economic times may lead to social instability and other crises (Smeets 2018). Locals are not in a position to start businesses under such circumstances. Therefore, while at the macro level the country is surviving the sanctions, at the micro level Russians are suffering, which might lead to instability.
Opportunities
One of the outstanding opportunities for Russia during this period is to continue reaping from the devalued ruble and rising oil prices. Energy exports make around 40 percent of the country’s revenue, which means the government will get more money from this standoff (Chilkoti 2018). Due to increased monetary inflows, companies in the oil and gas sectors are enjoying high share values (Rapoza 2017). Additionally, Russia can take this opportunity to diversify its bilateral trade portfolio and move away from Western countries to focus on Asia and Africa. This aspect will strengthen the country’s economy and allow Putin to pursue his geopolitical ambitions.
Conclusion
The sanctions against Russia have entered the fifth year since the initial ones were imposed in 2014 following the annexation of Crimea. Overall, the sanctions have not benefited any side. Russia’s economy has suffered, albeit marginally, at the macroeconomic level. On the other hand, the US and the EU have not achieved their goals of forcing the Putin administration to observe international laws in its dealings. However, at the microeconomic level, Russians are suffering from high inflation rates. The government has responded to the sanctions by ensuring macroeconomic stability and diversifying its bilateral trade, especially to China. However, Russia cannot afford to live in isolation, as the sanctions are threatening its long-term economic development.
References
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