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Why Western Sanctions Against Russia Failed

By Simes Dimitri – Sputnik – February 24, 2023

Sanctions were meant to deliver a swift and devastating blow to the Russian economy, one that would take years to recover from. Much to the dismay of Western politicians, however, not only did Russia survive the sanctions storm, but it has the potential to emerge even stronger than before.

During a speech in Poland last year, US President Joe Biden boasted that sanctions had reduced the Russian ruble to “rubble” and confidently predicted that the Russian economy was on “track to be cut in half.” French Finance Minister Bruno Le Maire went even further, declaring that the West would bring about Russia’s economic “collapse.”

“We are waging total economic and financial war on Russia,” he told a French broadcaster last March. “The economic and financial balance of power is totally in favor of the European Union, which is in the process of discovering its own economic power.”

Despite these loud promises, the Russian economy contracted by a mere 2.5 % last year – a decline considerably smaller than those experienced during the 1998 financial crisis (5.3%) and the 2008 Great Recession (7.9%). In a report published last month, the International Monetary Fund forecast that Russian economic growth would outpace that of Germany and the United Kingdom in 2023.

Nor did sanctions succeed in turning Russia into a global pariah. A recent report by the University of St.Gallen in Switzerland found that only 8.5% of European and G7 companies had divested from Russia between February and November 2022. At the same time, Russia’s trade turnover with non-Western economic powers such as China, India, Turkey, and Indonesia soared.

Earlier this month, EU foreign policy chief Josep Borrell was forced to admit that the West’s sanctions strategy was not going according to plan. “It is true that the Russian economy has not collapsed and that the GDP is not what has been forecast, and it is true that last year it got extraordinarily high revenues that came from oil and gas,” he said during a speech at the European Parliament plenary session.

How was Russia able to overcome an unprecedented sanctions blitzkrieg? To answer that question, Sputnik News spoke with economists and Russian businesspeople in industries ranging from agriculture to information technologies. They told us that Western sanctions were headed for failure from the very beginning because they were built on a distorted view of the Russian economy.

Our interlocutors emphasized that although sanctions undoubtedly created economic challenges for Russia in the short and medium term, they also presented a powerful opportunity to revive domestic industry and scientific potential, as well as establish new partnerships with Asian, Middle Eastern, Latin American, and African economies.

Failed Strategy

In the weeks and months following the start of Russia’s special military operation in Ukraine, the US and the EU rolled out some of the most expansive sanctions packages in recent memory. Western governments pressured the SWIFT global payment system into expelling several of Russia’s largest banks, barred Russian ships and airplanes from entering their ports and airspace, and imposed export controls aimed at restricting Russia’s access to various advanced technologies and key production components.

Although this sanctions barrage initially caused the Russian ruble to dip in value and inflation to spike, the shock-effect proved to be short lived. Within weeks, the ruble recovered all of its pre-conflict value and then some. Likewise, inflation reached a peak rate of 17.8% in April 2022 and then began to steadily decline, hitting 11.8% in January 2023 (a rate less than many countries in central and eastern Europe). Contrary to the expectations of many Western economists, Russia’s unemployment rate not only did not increase, but actually hit a post-Soviet record low of 3.7% in December 2022.

Despite the new financial and logistical restrictions against Russian exporters, foreign trade contacts also remained strong. Russia’s current account surplus – which measures the difference between a country’s trade outflows and inflows – reached a record high of $227.4 billion last year, an 86% increase from 2021.

Why did such unprecedented sanctions deliver such unimpressive results? Jacques Sapir, an economist at the Paris-based School for Advanced Studies in the Social Sciences, told Sputnik that the main reason was because they were based on false premises about the size and resilience of the Russian economy. A large part of the problem, he explained, was that American and European policymakers were looking at the wrong statistics.

The main metric used in the West to measure the Russian economy is nominal gross domestic product (GDP), which is calculated by simply converting its value in rubles into US dollars. Sapir argued that nominal GDP underestimated the strength of the Russian economy because it failed to account for purchasing power parity (PPP), which adjusts for differences in costs across countries. He noted that whereas Russia’s nominal GDP was comparable to Spain’s, its GDP based on PPP was roughly the same level as Germany’s.

Another key factor was the fact that the Russian economy was far less based on services than its Western counterparts. Sapir explained that although services could serve as an important source of economic growth during peacetime, they inevitably took a backseat to the manufacturing and commodities sectors during times of geopolitical turmoil. He noted that Russia still maintained a sizable industrial base and was a leading global supplier of natural gas, oil, rare earth metals, and agricultural products.

“Russia has a very specific place in the world markets and, therefore, attempting to isolate such a country would inevitably lead to an international economic catastrophe,” he said. “Unsurprisingly, a lot of countries would never agree to join efforts aimed at isolating Russia because they need trade with Russia.”

Sapir also said that the West underestimated Russia’s ability to find alternative suppliers for various types of machinery and key components used in production. He noted that although Russian imports fell substantially during the second quarter of 2022, they rebounded during the third and fourth quarters. “Russia is now importing more or less the same quantity of products that it was importing by the end of 2021,” he said.

This relatively quick recovery was due to Russia reorienting its trade flows from Europe to Asia, especially China, Sapir explained. Another important factor was that Russian companies had become fairly adept at circumventing Western sanctions with the help of counterparts in third-party countries. As a result, many European and American goods were still finding their way into the Russian market.

Rebirth of Industry

Sanctions have the potential to become a blessing in disguise for Russia, according to Konstantin Babkin, president of the Rostelmash, one of Russia’s largest agricultural equipment manufacturers.

Decades of economic integration with the West had caused Russia to sacrifice some of the industrial potential it inherited from the Soviet Union, Babkin argued. Instead of manufacturing airplanes and trucks from start to finish as it once did, Russia began to import such complex machinery from the West.

The Western sanctions imposed last year have created an urgent need for Russia to rebuild its industrial base. During a speech before the Federal Assembly on Tuesday, President Vladimir Putin declared that Russia needed to reorient its economy from selling raw materials to the West to developing its own advanced technologies and equipment.

Babkin told Sputnik that Russia possessed all the necessary conditions to support an industrial revival — immense natural resource wealth, vast swathes of available land, a market of 150 million people, and strong scientific institutions capable of training the next generation of innovators.

The main thing needed to translate Russia’s economic potential into reality is strong government support for domestic manufacturers, he said. Some of the policy measures Babkin recommended include lower interest rates and taxes, as well as new tariffs.

“Many countries have already reached the physical or spatial limits of their development – there are no more markets left to conquer, no more fields left to sow, no more opportunities for expansion. That’s why much of the modern world is experiencing such a crisis” he said. “Russia is one of the few countries, perhaps even the only country, that has plenty of room to develop further. We can grow many times over if we rely on our resources, ourselves, and our civilization.”

Sources: Public data, vedomosti.ru, forbes.ru, cbr.ru

Some Russian companies are already moving to fill newly-created niches in the domestic market. Last November, the Russian manufacturing sector experienced its largest expansion in over five years, according to a business survey by the S&P Global financial analytics firm. A surge in domestic demand was the primary driving force behind the increased output and employment.

Babkin noted that after the West imposed sanctions against Russia in 2014 over the reunification of Crimea, the share of Russian-made agricultural equipment on the domestic market jumped from 25% to 65%. He argued that the current round of sanctions could provide a similar impetus to resurrect Russian aircraft and automobile production.

“Today, the priority task in civil aviation is to launch the serial production of fully Russian-made passenger aircraft, without any foreign components, as quickly as possible” the United Air Corporation, a Russian aerospace company that is part of the Rostec state corporation, told Sputnik. The company explained that the decision of Western airliner giants Boeing and Airbus to exit the Russian market last year was forcing domestic manufacturers to not only step up aircraft production, but also start making their own engines and other key components.

For its part, the United Air Corporation plans on manufacturing 500 aircraft by 2030 to help replace Russia’s existing fleet of foreign planes, which will be gradually retired. One of its most promising projects is the MC-21, a next-generation passenger aircraft that is already in production. The main advantage of the MC-21 is its cutting-edge composite wing, which provides the plane with superior aerodynamics.

Technological Sovereignty

One of the central objectives of Western sanctions is to suffocate Russian technological innovation. When Biden unveiled the first Ukraine-related sanctions package last year, he promised that the US and its allies would impair Russia’s “ability to compete in a high-tech 21st century economy.” The technological aspect of sanctions has only become more important since then. Although Western politicians now admit that sanctions have failed to collapse the Russian economy, they still express hope that technological restrictions will stunt Russia’s progress in the long run.

That is an assumption challenged by many Russian scientists and entrepreneurs. Evgeny Nikolaev is a project manager at Health Test, a Russian company that is working to develop a machine-learning program that will help doctors to diagnose Alzheimer’s Disease in patients during the earliest stages of its development. The technology, which has no foreign analogues, is currently undergoing clinical tests at a Moscow hospital, after which it will be distributed to other medical institutions in the Russian capital.

Nikolaev said that Western sanctions have not had any meaningful impact on the project’s development, noting that all the “necessary reagents and consumables could be replaced with domestic ones or obtained through parallel importation.” At the same time, he emphasized that Russian scientists did not need foreign sponsorships in order to make breakthroughs. He noted that government institutions such as the Moscow Department of Health and the Moscow Innovation Cluster were offering the project significant support in terms of product development and practical application.

A similar argument was advanced by Valentin Makarov, president of the Russian Software Developers Association (RUSSOFT). He told Sputnik that Russia had two advantages it could rely on to keep innovating despite Western sanctions. The first was Russia’s strong scientific education, which has a legacy of excellence dating back to the Czarist-period. Additionally, Makarov argued that Russia was well positioned to build new technological partnerships with non-Western economies such as China and India.

Ironically enough, sanctions had provided Russian software and cybersecurity systems with an opportunity to show their resilience in the face of unprecedented external pressure.

“Following the start of the special military operation, we saw a manifold increase in cyber attacks against Russian systems, a ban on the use of foreign software, and the termination of support licenses for this software,“ he said. “Despite everything that happened, Russian systems continued to work as before. It turned out that giant American corporations, which dominate the global information technologies, cannot destroy the operation of these Russian systems. This showed everybody that Russia has the capacity for technological sovereignty.”

According to Makarov, the world was on the brink of a new technological order – one centered on artificial intelligence and cyber-physical systems. Instead of remaining a junior partner in the Western-led technological ecosystem, Russia needed to seize the initiative and develop its own ambitious, revolutionary projects in coordination with its allies.

One promising idea, Makarov said, was for Russia to spearhead the creation of a new Eurasian digital financial payment system. Such an initiative would not only facilitate greater regional trade, but also shield its members from Western sanctions and other forms of economic pressure.

“We cannot become leaders in the new technological order by continuing to sell oil and gas to the world market and then using those profits to buy technological systems developed by other countries,” he said. “If we do not focus on developing our own systems, in cooperation with partners from friendly countries of course, then that means we will again be dependent on someone else. Russia has a huge number of specialists capable of creating new technologies that will change the world, so we must take advantage of that.”

February 24, 2023 - Posted by aletho | Economics, Timeless or most popular | China, European Union, France, India, Russia