Russia has spent the past seven years building giant financial defenses, but its economy is unlikely to withstand a coordinated campaign of sanctions from the West.

Europe and the United States are lashing out at Russia after President Vladimir Putin pushed his tanks into Ukraine, in addition to sanctions they had already pledged to impose in response to his decision to recognize the independence of two breakaway regions in Ukraine.

“The view that Russia will not be affected (by sanctions) is wrong,” said Christopher Granville, director at TS ombard consulting, a veteran monitor of Russia. the long term".

Western procedures include:

  • Imposing sanctions and freezing the assets of more Russian banks and businessmen

  • Stop raising money abroad

  • Suspension of the $11 billion gas pipeline project to Germany

  • Limit Russia's ability to acquire high-tech materials such as semiconductors.


Russia has rejected the sanctions on the grounds that they are contrary to the interests of the countries that imposed them, and will not immediately affect an economy that has $643 billion in hard currency reserves, as well as large oil and gas revenues.

These metrics earned Russia the title of a "fortified" economy along with a current account surplus of 5% of GDP and debt of 20% of GDP, among the lowest in the world, and only half of Russia's dollar obligations, down from 80% two decades ago.

These statistics are the result of years of saving since the imposition of sanctions following Putin's decision to annex Crimea in 2014.

According to Granville, the increase in oil prices will provide Russia this year with a windfall of 1.5 trillion rubles ($17.2 billion) in taxes on the profits of energy companies this year.

But he indicated that Russia will pay the price for this kind of self-sufficiency, as it deepens its isolation from the economy, markets and global investment.

"Russia will essentially be treated as a hostile state isolated from global financial flows, investment and the normal economic interactions that build people's living standards, incomes, productivity and corporate profitability," he said.


signs of economic weakness

Signs of economic weakness are already present, as incomes of Russian households are still below 2014 levels.

In 2019, the World Bank estimated the value of annual economic output at $1.66 trillion, which is much lower than its counterpart in 2013, which amounted to $2.2 trillion.

Sergei Guriev, professor of economics at the French University of Sciences PO and former chief economist at the European Bank for Reconstruction and Development, has shown that Russia's nominal GDP per capita - which was double that of China in 2013 - has now fallen.

"Russia was a high-income country in 2013, and was active in negotiations to join the Organization for Economic Cooperation and Development, but now it has returned to the status of middle-income countries," he said.

Russia is also witnessing a dwindling number of foreign investors in it, and a customer survey conducted by JPMorgan showed that foreign holdings of bonds in rubles reached their lowest level in two decades, and investment in stocks never returned to levels before the semi-annexation. Crimea in absolute terms, according to estimates by Copley Fund Research.

The stimulus premium demanded by investors for holding Russian dollar debt rose 13 percentage points over US Treasuries, nearly 3 times the emerging market average.

"Sanctions will force Russia to self-finance more actively, and restrict investments in industry and the military," said Jeffrey Scott, an expert on trade and sanctions at the Peterson Institute for International Economics.


Loss of access to Swift system

Bigger sanctions could include ending Russia's access to the SWIFT global payments system, and a complete ban on investments in Russia.

Loss of access to the SWIFT system will complicate export and import payments and may even prevent the payment of stock coupons, which may lead to technical errors.

JPMorgan expects the sanctions to reduce GDP growth in the second half of 2022 by 3.5%.

The bank added that limited access to foreign capital will prompt oil companies to rely on pre-paid deals and face a higher cost of capital.

The decline in living standards could provoke public discontent, threatening an administration already faced with occasional protests, whose spread could become inevitable.

"Self-sufficiency is not the key to progress," analysts at Berenberg Investment Bank wrote. "Coping with a heavily armed Russia mired in economic decline will remain a major challenge for Europe and the United States for the foreseeable future."