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More than two years ago, the EU imposed its first major package of sanctions against Russia after its invasion of Ukraine – twelve more followed. Nevertheless, the Russian economy continues to grow. How come?
According to the International Monetary Fund (IMF), Russia’s economy will grow faster this year than initially expected. The IMF revised its forecast from January upwards this week from 2.6 percent to 3.2 percent. And next year, the IMF now expects growth of 1.8 percent instead of 1.1 percent. For comparison: The IMF expects Germany’s economy to grow by 0.2 percent this year and 1.3 percent next year.
In view of the EU’s now 13 sanctions packages against Russia, these figures are likely to cause disillusionment in Brussels. The last package was passed in February, and after the death of Alexei Navalny in March, additional people and organizations were added to the sanctions list. Why is the Russian economy still doing relatively well?
Sanctions are avoided
From the perspective of experts, there are several reasons for this. One of the most important is that Russia has now been able to increase imports almost to pre-war levels. Even if, for example, the export volume of EU products to Russia has fallen sharply, Russia has overall managed to obtain most of its goods from other markets. EU exports fell since the beginning of the war in Ukraine at 37 percent of the pre-war level. However, Russian imports from China rose sharply during the same period: more than half of the goods imported into Russia come from China – before the war it was a good 20 percent.
Russian imports increased not only from China: Turkey, for example, tripled its exports to Russia, and Armenia even increased it tenfold. According to experts, this is a clear sign in these countries that EU sanctions are being circumvented in this way – especially so-called dual-use itemsfor example electrical components that can be used both civilly and potentially for military applications.
According to a study by the French university IÉSEG School of Management, the share of EU exports of sanctioned goods to “Kremlin-friendly” states increased from October 2022 to September 2023 by more than 80 percentwhile in the same period EU exports to Russia fell by 95 percent.
Prices are rising Parallel imports
“We have very strong evidence that suggests that sanctions are being evaded, especially for goods that are important for military purposes,” says Feodora Teti, deputy head of the ifo Center for Foreign Trade. Similar to the EU, there are no internal borders between the countries of the Eurasian Economic Union (EMU), so there is little control over possible violations of EU sanctions. However, according to Teti, Russia is not able to replace 100 percent of the missing EU imports, at least when it comes to goods that are important for military purposes.
According to Teti, circumventing the sanctions through parallel imports also causes prices for these goods to rise. “Because direct exports from the EU to Russia are no longer possible, exporters have to take a longer route. But that also causes higher costs.” However, it would be difficult to understand exactly how much prices have risen, especially since this also depends on the industry.
Not all EU exports are on the sanctions list, but only 32 percent. This means that the EU continues to be Russia’s most important supplier of medical goods.
Price of Russian energy exports has taken a hit
While experts believe that the trade sanctions ensure that at least direct EU exports to Russia for the selected goods have been almost completely stopped, they see the energy sanctions as less effective. After a sharp drop in Russian revenues for gas and oil exports, the price of Russian energy has now recovered. According to Russian information, India and China are now responsible for the purchase of almost 90 percent of Russian oil exports. There is also the assumption that at least some of these exports find their way to EU member states – through the purchase of oil from India.
“At the beginning of the energy sanctions, Russia had a poor negotiating basis because it had to get rid of all that oil all at once,” says Vasily Astrov, senior economist at the Vienna Institute for International Economic Studies (WIIW). India and China in particular took advantage of this. In the meantime, however, the price for Russian energy exports has risen again, and the problems for Russia have largely been solved. The EU member states could be replaced as buyers.
Cat and mouse game
Overall, in Astrov’s view, sanctions are a kind of cat-and-mouse game. Shortly after the introduction of a measure, there is usually a shock for Russia. “Over time, however, other ways are found to evade or circumvent the sanctions.”
The EU and its allies such as the USA know this. For example, the EU has introduced new rules for criminal prosecution for evading sanctions. A few months ago, the USA also added more than 250 individuals and companies from countries such as China, Turkey and the United Arab Emirates to its sanctions list.
The first successes of these measures can already be seen, says Astrov. “As a result of the increased pressure, for example, Russian companies faced payment problems with Chinese banks for goods that were intended to circumvent the sanctions.” However, there is already a new alternative strategy in which payment processing is also carried out via third countries.
Russian economy benefits from Armament spending
However, from the experts’ point of view, the main reason for the growing Russian economy cannot be attributed to a supposedly unsuccessful sanctions policy by the EU and its allies. Because Russia has geared its policy entirely towards war, the economy also benefits from it. The Kremlin now invests a third of its budget in the defense budget, so that individual sectors such as the armaments sector and the construction industry are growing enormously.
“As a result of these measures, wages in Russia are also rising above average,” says Astrov. Because of the good pay in the defense sector and the overall shortage of workers, companies in other sectors would also have had to increase wages in order to remain attractive.
Even though Russia now has a budget deficit due to the high costs of the war, Astrov believes that the government can keep defense spending at the same level for a few more years: “The Russian economy is currently overheated. But I wouldn’t expect a real crash. I think Rather, there will be a gradual slowdown in economic growth.”