- Russia has been preparing for sanctions since 2014, after it annexed Crimea.
- Moscow was already hit by a range of Western-led sanctions after the annexation.
- Since then, Russia has been protecting itself through a variety of measures.
Economists have been predicting an implosion of President Vladimir Putin’s economic regime since the West hit Russia with sweeping sanctions over its invasion of Ukraine. But three-and-a-half months into the war, Russia has been holding up — with Putin announcing on June 7 that inflation has slowed and unemployment has held steady.
It helps that Russia is an energy powerhouse that’s still posting bumper sale revenues thanks to soaring oil prices. Even without an energy windfall, Russia could in the near-term be buffered from sanctions. That’s because the country has been sanction-proofing itself since 2014 when it was also hit with a raft of trade restrictions after it illegally annexed Crimea from Ukraine.
Putin has “refashioned the Russian economy into a fortress” to weather external shocks, wrote Veronica Carrion, an economic researcher at the American Bankers Association (ABA) in an ABA Banking Journal post on June 13.
Some experts have cast doubt on the reliability of Russian statistics since the start of the war. “The Russian government obviously has an incentive to try to hide the economic impact of Western sanctions,” said Andrew Lohsen, a fellow in the Europe, Russia, and Eurasia Program at the Center for Strategic and International Studies.
Even if the economy’s holding up as well as it appears, Russia could still eventually run out of time when the commodities rally stall and as the West’s intensifying sanctions gnaw their way through the system. But for now, the country is showing unexpected resilience from a range measures, such as padding up its reserves and weaning off foreign capital.
Here’s what Russia has been doing in attempts to sanction-proof its economy.
Moscow has been padding up reserves and stashing up gold
Before the invasion, Russia held the world’s fifth-largest foreign currency and gold reserves pile worth about $630 billion, according to the Bank of Finland Institute for Emerging Economics. “This stockpile can cover the government’s balance sheet and support the ruble,” wrote Carrion.
Russia has lost access to about half of that amount due to sanctions, the country’s finance minister said in March. But there’s still lots of physical gold stashed up in the country — which is also the world’s second-largest producer of the precious metal.
Russia’s gold holdings have tripled since 2014, and they are all stored in vaults at home, according to the central bank. The US has sanctioned Russian transactions using gold, but that wouldn’t stop “opportunistic countries” from doing business with Moscow, wrote Carrion.
Russia’s also continuing to pad up some reserves in the form of its emergency funds — thanks to a windfall from its oil and gas sales. In April and June, it added $12.7 billion to its emergency reserves. These funds will be used to ensure stable economic development amid sanctions, Reuters reported on June 9, citing a Russian government statement.
Russia has been weaning itself off foreign capital and paying down debt
Beyond saving up, Russia has been weaning itself off foreign capital by aggressively paying down debt over the last eight years, wrote Gian Maria Milesi-Ferretti, a senior economics studies fellow at the Hutchins Center on Fiscal and Monetary Policy on March 3. The country is now a net creditor on the international markets, he added.
“Vladimir Putin is allergic to borrowing money,” Andrew Weiss, a Russia expert at the Carnegie Endowment for International Peace, told NPR’s “Money Planet” in February. “He’s not looking to use the banking system in Russia or access to Western capital to make Russia great.”
Russia’s foreign debts are pretty low. The government owed about $39 billion in foreign currency bonds at the end of 2021, JPMorgan estimated. In comparison, Greece defaulted on 205.6 billion euros ($277.5 billion) in sovereign debt in 2012.
As for Russia’s overall national debt, it’s just at 17% of GDP — well below triple-digit figures for many developed countries and mostly denominated in rubles. So, the country “doesn’t really need to borrow,” wrote Anton Tabakh, chief economist at Russian ratings agency Expert RA on the Carnegie Endowment for International Peace website on June 15. US national debt is at about 130% of GDP, per Statista.
The biggest problem Russia has now is paying its foreign debts because of restrictions caused by sanctions, added Tabakh. Once that’s solved, Russia and its companies will be able to pay down its debt, and the country’s own resources “should be sufficient to cover the needs of the budget, banks and corporations,” he added.
Russia is turning inwards to economic self-sufficiency
Russia’s turning inward as it has become an international pariah — but, as a huge producer of commodities, its economy won’t crumble entirely — even though growth will be slow and low, said Hassan Malik, a senior sovereign analyst at Boston-based investment management consultancy Loomis Sayles.
“Russia is one of the few countries in the world that can engage in autarky,” Hassan told Insider. He was referring to the notion of economic self-sufficiency. The country is a major producer of crude oil, natural gas, wheat, and metals like nickel and palladium.
To counter an exodus of international companies that have taken their goods and services with them, Russian entities have taken over the firms and are substituting their products with homegrown offerings.
For instance, the city of Moscow and a Russian state-backed group took over French carmaker Renault’s operations in the country for the nominal sum of 2 rubles (3.5 cents.) They plan to revive a Soviet-era car brand with the manufacturing facilities, the city’s mayor, Sergei Sobyanin, said in a blog post.
But Russia’s economic situation will still be very tough. Putin himself said on June 9 that substituting imports with locally produced goods “is not a panacea,” the AFP reported. He said Russia will look for new trading partners and continue developing its own industries for “critically important technologies.”
The breadth and scope of current sanctions go far beyond those imposed in 2014, so they will “will impose very severe costs on the Russian economy,” wrote Milesi-Ferretti in his March 3 post.
Russia’s economy is expected to shrink 8.5% in 2022, with a further decline of 2.3% in 2023, the International Monetary Fund projected in an April report. That would be the economy’s largest decline since the years following the fall of the Soviet Union in 1991.