Russia stands at a crossroads. It can either stand still and witness further economic decline or use the sanctions as a stimulus for growth, modernization and business innovation. In any case, ahead lies the unknown.
An employee in the office of RTS stock exchange. Photo: RIA Novosti
It is necessary to distinguish between the short- and long-term impact of Western sanctions. The “tomorrow” effect is not great. The sanctions are designed so as not to affect the flow of oil and gas to Europe and payment in the other direction. This means that all foreign exchange earnings are secure, which keeps Russia so far financially robust.
In the five-month period from January to May of this year, Russia’s trade surplus grew by 10 percent to almost $100 billion, as the Federal State Statistics Service claims. This might indicate that business has so far the means to repay all foreign currency debts.
And we might have a chance to fix Russia’s finances. Big business has become too enamored of foreign money. Our financial engine has been kept artificially shallow and provincial. But now we have a reason to do something about it. Imports are set to drop, and if the Russian authorities will be smart enough, the economy might grow, partially as a result of import substitution.
The sanctions might lead to the shake-up of Russia’s economy that was needed for a long time. But all this will only happen if those at the top see them as a reason to boost domestic demand and supply.
However, the sanctions will bite harder in the long term. The official policy of the EU and the U.S. is to squeeze Russia out of Europe’s energy market, on top of a “technology boycott.” In addition, Russia will be shut off from external financing for some time. It's a tough challenge, and will be difficult to cope with. Some vital sectors of the economy are 50-80 percent dependent on imports. In many respects, our reliance on imports of equipment, technology, medicine, and consumer goods has exceeded the critical point.
Russia stands at a crossroads. The best response would be to modernize, release the potential of business and the middle class, increase incentives for growth, and do everything possible to attract foreign direct investment and new technologies.
And then there are some less positive responses, like closing down shop and making a move toward command economy. This road leads nowhere, except to huge losses for the public. Another bad choice would be to stand still. This would lead to a limbo between war and peace, meandering, bombardment by taxes and top-down pressures, and the state tightening its grip on everything.
In any case, ahead lies the unknown. There is no doubt that fault lines will appear over the coming years. Temporary reconciliation with Western countries may be possible, and the sides may take a step back from the brink of conflict. But the wounds inflicted by the events in Ukraine are deep. Restoring Russia’s former level of integration in the international community could take 10-15 years. On the other hand, if we become stronger as an economy, do whatever it takes to modernize and catch up while remaining open and market-based, we can improve our quality of life.
This reality may not please some, but it is reality.
Could sanctions against Russia cut the global economy off at the knees? The answer is no. If they were spontaneous and introduced as a single package, the result could be a collapse of financial markets worldwide. But the process is extended in time – it affects small pieces of the global economy, and does not strike at the EU’s chief source of stability: flows of raw materials from Russia. Western companies on the receiving end have had time to adapt by reducing credit limits to Russia and renegotiating deals with other contractors. Global growth will follow the crisis, with no regard for isolated squabbles.
It’s a different matter if the political risks around Ukraine continue unabated, and the conflict escalates. In such case, even the “raw materials bridge” between Russia and the EU could be targeted, leading to bursts of financial instability and enormous strains throughout the economic structure of the EU.
The sanctions and the Ukrainian situation are part of what is commonly called geopolitics. World “order” is always a fight between rivals. Today a multipolar world is emerging, and countries are battling for influence. The ultimate balance of power is yet unknown.
In any case, the winner will be the one with more ideas and energy, more creativity and freedom, and higher living standards. In that regard, Russia will have to step up to the plate. It needs to attract, not lose people to Europe, Asia, or wherever. If and when Russia accounts for as much as 8 percent of global GDP, instead of today’s current level of 2.8 percent, it will be a different story.
The opinion of the author may not necessarily reflect the position of Russia Direct or its staff.
Read another view: Russia still defiant against sanctions, but for how long?