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Economic Resilience: How Russia’s Economy Thrives Amid Sanctions

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Sanctions
Sanctions

The International Monetary Fund said in April that Russia’s economy is expected to grow 3.2 percent in 2024, faster than all advanced economies this year.

Despite the unprecedented sanctions imposed by Western countries, the Russian economy has not only maintained stable growth but also outpaced the global average growth rate.

What has enabled Russia’s economy to withstand the pressure of sanctions and continue to grow?

VITAL ECONOMIC LIFELINE

Western countries have repeatedly extended the sanctions on Russia since the start of the Russia-Ukraine conflict, expanding embargoes on Russian goods and technological blockades, and forcing hundreds of large companies to exit the Russian market in an attempt to sever its international supply chains.

However, they have failed to fundamentally undermine Russia’s vital economic lifeline — its energy sector.

While the EU has banned imports of Russian coal and seaborne crude oil, the European Commission isn’t proposing an outright ban on imports of Russian liquefied natural gas, which countries including Belgium, France and Spain still purchase in large quantities, as Politico reported.

The United States is also cautious about halting Russian oil supplies because it could lead to a sharp increase in oil prices, resulting in significant disruptions in the international energy market and potentially increasing Russia’s oil export revenues.

The Russian economy has demonstrated a significant degree of adaptability to these Western sanctions and analysts believe that the U.S. government has almost exhausted its options for sanctions against Russia.

Russia’s GDP achieved a 3.6 percent growth in 2023, significantly higher than forecast. Additionally, Russia’s average annual unemployment rate stood at 3.2 percent as of the end of 2023, the lowest since 1992.

Russia can become the fourth-largest economy in the world, provided it maintains sustainable growth of at least 2 percent per year with a gradual acceleration to 3 percent, said Andrei Belousov, Russia’s new defense minister and former first deputy prime minister.

ECONOMIC RESTRUCTURING

As a major global producer of oil and gas resources, Russia heavily relies on energy exports for its fiscal revenue. The worsening geopolitical situation and the sharp increase in sanctions have compelled Russia to adjust its economic structure, aiming to boost the contribution of non-energy sectors to its GDP.

Since 2015, Russia has implemented an import substitution strategy. Initially focused on agro-industrial complexes, this strategy later expanded to areas such as information technology and mechanical engineering.

The sanctions imposed by the West on Russia since 2022 have prompted Russia to expand its countermeasures, said Mikhail Kuzyk, deputy director of the Centre for Industrial Policy Studies of the HSE University in Moscow.

Today, Russian domestic manufacturers have effectively replaced many foreign suppliers that have left the Russian market, especially in sectors like the food industry, heavy machinery and shipbuilding.

Last week, Russian Prime Minister Mikhail Mishustin announced plans to increase the volume of non-resource, non-energy exports by two-thirds.

“The share of local high-tech goods and services created based on our own developments will increase 1.5 times in six years,” he was quoted as saying by Tass news agency.

To counter Western isolation and containment, Russia is also fostering economic and trade cooperation with regional organizations such as BRICS and the Shanghai Cooperation Organization.

“It seems that we are being strangled and pressured from every side, but still, we are the largest economy in Europe,” Russian President Vladimir Putin said at a meeting with entrepreneurs, according to TASS.

RUSSIA’S SWIFT ALTERNATIVE

Among the sanctions imposed on Russia by the West, financial sanctions have had the most profound impact on the Russian economy.

Notably, the freezing of foreign exchange reserves and the expulsion of Russia from the Society for Worldwide Interbank Financial (SWIFT) — a global provider of financial messaging services — have not only caused the ruble to fluctuate but also created significant obstacles for Russia in conducting international trade and financial activities.

To address the challenging issue of cross-border payments, Russia has begun attracting more countries to join the System for Transfer of Financial Messages (SPFS) — Russia’s SWIFT alternative — and promoting the use of local currencies in transactions with multiple countries.

According to a report by the Central Bank of Russia, the share of operations in rubles in export revenue in March increased to 43.9 percent, and in import calculations, it rose to 40.8 percent.

The growing share of the ruble in Russia’s foreign trade settlements indicates increased confidence among foreign trading partners in the currency. Recently, the dollar exchange rate was at about 91 rubles, which is deemed normal by the government.

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