The Russian economy has recovered from the sanctions, Bloomberg reports. In the fourth quarter of 2023, its growth exceeded all expectations. These processes indicate the limitations of the measures introduced by the West.
Russia’s economic growth and rising consumer demand, backed by strong government spending, have allowed a whole range of businesses – from banks to the auto industry to airlines – to not only survive but, in some cases, even grow despite US and European restrictions designed to sink the country’s economy.
On Wednesday, the Federal Statistics Office said annual growth accelerated in the third quarter from 4.9 per cent to 5.5 per cent. The result – the fastest pace of growth in more than a decade, excluding a brief blip when Russia lifted a quarantine after a coronavirus pandemic – exceeded the expectations of all economists surveyed by Bloomberg.
This rapid recovery shows the limitations of the sanctions, which US President Joe Biden said were supposed to cut the Russian economy in half and turn the ruble into “rubble” as punishment for starting a war in Ukraine in February 2022. President Vladimir Putin has strengthened ties with countries such as China and India as the European Union has severed trade ties with Russia, including oil and gas imports, through several sanctions packages.
The ruble hit a record low immediately after the fighting began, but soon regained its footing. Last month, the government reintroduced partial currency controls after it fell back below the 100 roubles per dollar mark. However, a rebound soon followed and the ruble performed best among emerging market currencies last month.
Although Russia has managed to avoid economic collapse, the government continues to drain resources to support public spending. In parallel, there has been a flight of foreign investors, and domestic businesses are finding it increasingly difficult to keep pace with technological innovation in the face of international isolation.
The Russian banking sector is perhaps the clearest example of how the economy has weathered the blow of sanctions. Russia’s largest bank, state-owned Sberbank, which, along with other major players in the country’s market, was placed on the US and EU list and disconnected from the Swift international payment system, will post record ruble profits this year.
Chief Executive Officer Herman Gref, who’s sanctioned by the US, the EU and the UK, said:
“Most likely, this year will indeed be the most successful in history for us.”
And Sberbank is far from unique in this. The banking sector’s nine-month cumulative profits have already surpassed the previous annual record set in peaceful 2021. After falling to almost zero in the first year of the conflict, bank profits could reach more than 3 trillion rubles ($33 billion) in 2023, said Valery Piven, managing director of Russian rating agency ACRA.
That is three times higher than the central bank’s original estimates for this year. The jump is due to a credit boom, a weakening ruble and low reserves. Authorities said on Wednesday they would not extend a number of measures to support banks next year because lenders are fairly stable and profitable. Next year is also expected to be “quite successful” for banks, according to ACRA.
After two consecutive quarters of growth, the Russian economy is almost back to its preconflict levels, having virtually levelled the blow from sanctions.
The fiscal stimulus that fuelled this turnaround will continue – in part because Russia has been able to divert oil supplies elsewhere and bypass the $60 price ceiling set by the G7 and the EU.
Energy exports have maintained a crucial source of revenue for the government, leaving the budget in better shape than officials had forecast, despite rising military spending. Government spending will continue to stimulate the economy, the Finance Ministry’s document on the budget policy framework for 2024-2026 says, and has already allowed “not only stabilising the situation, but also successfully and quickly adapting to new conditions”, Bloomberg reports.
At the beginning of the fourth quarter of 2023, Russia’s economy appears to have recovered, exceeding initial expectations. Marcel Salikhov, president of the Institute for Energy and Finance in Moscow, said:
“Russia’s economy is likely to return to potential growth rates of around 1% of GDP, which would be quite a good scenario in the current environment.”
Another factor in the recent recovery is that Russia has been able to find new sources of imports or, in some cases, replace them entirely, said Stanislav Murashov, an economist at Raiffeisenbank in Moscow. He noted:
“Russian business is managing to apply very non-standard solutions. We don’t yet see any severe deficit.”
Although volumes have recovered, the market structure has completely changed. China now accounts for up to 80% of new car imports, and Chinese brands have taken over half of the entire Russian car market in less than two years, according to the Avtostat analytical agency.
Russia’s AvtoVAZ controls another segment of the market. The concern reported a 59 per cent increase in production in the first seven months of the year, as well as the best sales volumes in a decade – despite restrictions on component supplies. In September, the US added AvtoVAZ to its sanctions list.
Having lost access to a number of international routes, Russian airlines have started to develop domestic flights in the world’s largest country by area. To date, they have already achieved Putin’s 2018 goal of 50 per cent of flights bypassing Moscow – and ahead of schedule, as the original deadline was 2024. Thus, passenger traffic has recovered due to the development of domestic airlines, according to Bloomberg.
The growth in domestic air travel, even though authorities have closed airports in tourist towns in southern Russia due to the fighting in Ukraine, owes much to government support, the Transport Ministry said in response to a Bloomberg enquiry.
According to the ministry, despite the sanctions pressure, international air travel is “intensively developing”: in the first nine months of 2023, passenger traffic increased by almost 30% compared to the same period a year ago. Russia has air links with 37 countries, with 59 foreign carriers providing services, the ministry said.
However, Boeing and Airbus aircraft are still widely used in air travel, so the industry has to find alternative mechanisms to maintain and repair its fleet, whether at home or abroad. This year, Aeroflot sent its first aircraft to Iran for maintenance.
While some industries have adapted to the restrictions, living under sanctions comes at a cost to the Russian economy, Olga Belenkaya, an economist at Finam in Moscow, said. She noted:
“Russia has found workarounds for most sanctions, but still is suffering losses due to increased costs of logistics, limited access to equipment and technologies, and deteriorating quality of technological solutions.”
