What strategies did Vladimir Putin use to force Russia to resist on economic grounds?

“We are going to cause the collapse of the Russian economy.” Economy Minister Bruno Le Maire was confident in Franceinfo in March when he defended a second wave of European sanctions against Russia in response to the invasion of Ukraine. But the Russian economy did not collapse, and in some sectors even recovered. Resilience that is not due to chance.

“Before the war, Russia tried to build an economic fortress”, summarizes with franceinfo Sergey Guriev, an economist at Sciences Po. However, the strength of its walls is being tested today by attacks of unprecedented intensity that force it to seek new parades. How did the country prepare for the crisis? And how does he adapt to it?

Incomplete economic isolation

Moscow has long been trying to make its economy more independent. “Russia pursued the so-called import substitution policy from 2014 to 2015”explains franceinfo by Caroline Dufy, Science Po Bordeaux lecturer and book author The return of Russian grain power (ed. Peter Lang, 2021).

“The idea was to promote import substitution with domestic production in many areas.”

Caroline Dufy, Lecturer at Sciences Po Bordeaux

on Franceinfo

This policy had some success, especially in agriculture. Russia imported up to a third of its food in 2014, according to David Turtry, but an embargo on some European food that it imposed after invading Crimea that year allowed it to self-sufficient in wheat and meat. , junior researcher at Inalco Research Center for Europe and Eurasia, about the culture of France.

Moscow has also encouraged the creation of national technology leaders, such as the Yandex search engine, and the empowerment of the financial sector. “He developed his own Mir payment system and his own interbank messaging system.David Turtry explains to Franceinfo. These technologies have allowed Russian banks to continue to trade seamlessly with each other despite their gradual ousting. [par vagues, au fur et à mesure, depuis le 1er mars] Swift”, a messaging system used by banks around the world to communicate information related to bank transfers.

But faced with the scale of Western sanctions, this policy is rapidly finding its limits. Only about 50 foreign banks use Russian Swift, recalls Reuters *, and those that accept Mir bank cards are mainly located in small countries, according to the company’s official website. (in Russian). First of all, “import substitution” has not made Moscow technologically independent, and a deficit is brewing. For example, the country has allowed the production of cars without airbags due to a shortage of components, and the repair of its aircraft may require the dismantling of others, according to Russian media. Kommersant (in Russian). The sanctions also cut off the country from state-of-the-art semiconductors (Taiwanese, South Korean, or American) that power everything from smartphones to medical devices to weapons.

“Russia is a small manufacturer of processors, and their performance is very far from the most advanced.”

David Turtry, Associate Research Fellow, Europe-Eurasia Research Center

on Franceinfo

In response, Moscow again called for the relocation of production and allowed the import of technology through intermediaries, in defiance of Western prohibitions, according to Reuters*. But for David Turtry, “Any industrial product of any complexity always requires foreign components. For advanced technologies, Russia will require many years of work and significant investment to develop the necessary know-how.”

The country could turn to China to replace these components, but, according to Sergey Guriev, “Chinese companies are not going to want to replace the most advanced technologies, much less not supply military or 5G equipment, for fear of sanctions. They won’t be able to do it anyway, because their semiconductors always lag behind those in Taiwan.

Huge surplus through energy sales

This is the key to the stability of the Russian economy. Russia sells much more than it buys, and therefore receives much more money than it spends. On the one hand, imports from Moscow collapsed by almost 40% between April 2021 and 2022, according to an association of professionals. Institute of International Finance (IIF)* due to international sanctions, uncertainty and health restrictions in China.

But, on the other hand, Russian exports have risen sharply in price, notes on twitter* this is an association of major world banks. The Center for Energy and Clean Air Research (Crea)* calculated that the sale of fossil fuels abroad brought Russia almost $1 billion a day in the first two months of the war in Ukraine, up from about $660 million a day in 2021, according to data of the Bank of Russia, provided by Reuters*. Thus, according to the IIF calculations cited Economist*.

All this money will prevent Moscow from buying sanctioned Western goods. “But it can be used to trade with countries that have not imposed sanctions, especially China.”Richard Connolly, director of Eastern Advisory Group and Russia specialist, explains to Franceinfo.

A grain of sand slipped into this well-oiled machine: at the end of May, the European Union adopted a gradual embargo on Russian oil. Moscow could suffer from this, as the EU has accounted for 71% of Russia’s fossil fuel exports since the start of the war in Ukraine, again according to Crea. But Russia has already started looking for other buyers for its hydrocarbons. “The share of sales in Asia has been growing for more than a decade”, emphasizes David Turtry. It was the continent that for the first time in April became the largest buyer of Russian oil, according to Bloomberg *, mainly due to China and India. The two giants are taking advantage of the discount offered by Russia compared to other manufacturers.

“Moscow should offer its customers big discounts as they take risks trading with it.”

David Turtry, Associate Research Fellow, Europe-Eurasia Research Center

on Franceinfo

It may still be difficult for Russia to move all of its black gold sales to Asia, as its pipelines are mainly directed to Europe. But since oil can be transported relatively easily by tankers, unlike gas, the impact of the European embargo should be limited, says Richard Connolly. “He leaves both sides more than six months to find new partners, and if the price of oil continues to rise, Russian losses will be reduced,” he said. emphasizes the expert.

Monetary measures that “froze” the economy

This is one of the data regularly cited by the Russian authorities in praise of the stability of the economy: the ruble is worth more and more. I must say that the scenario of the disaster was close. At the beginning of the war, the Russian currency lost almost 30% of its value, which threatened to explode in import prices, inflation and, consequently, the fall of the ruble into a hellish spiral.

Vladimir Putin was afraid of such a scenario. “Russian elites were traumatized by the Russian financial crisis of 1998, which made the country dependent on Western financial institutions such as the IMF”explains David Turtry. Thus, over the years, Russia has accumulated a large amount of foreign currency that could be used to support the value of the ruble in the event of a crisis. Thus, it represents one of the largest reserves in the world: as of February 2022, the Central Bank of Russia* holds $630 billion.

But this strategy did not work as expected. Almost half of the reserves of the Central Bank of Russia were kept in foreign banks and therefore were frozen by sanctions.

“It was completely unexpected. The main pillar of the Russian fortress collapsed.

Sergey Guriev, Economist at Sciences Po

on Franceinfo

The disaster scenario is back. So Russia has used important means: it has suddenly raised interest rates to encourage Russians to save, and it has sharply restricted the exchange of rubles with foreign countries. “Monetary policy was carried out very well”for David Turtry, who points out that the value of the ruble has since reached an all-time high thanks to these measures and the country’s huge trade surplus.

But for Caroline Dufy, “This ‘success’ is completely artificial. This is the result of extremely tight financial controls: companies cannot freely exchange their rubles.” However, hard currency is not very useful if it cannot be spent anywhere. “Russia brought interest rates back to pre-war levels precisely because these measures threatened to stifle the economy by making credit very expensive.”, adds the researcher. Checks allowed Moscow “freeze the situation”Por the German economist Janis Kluge, who is quoted by the American media Grid*, but the respite may not last.

The increase in the minimum wage and pensions announced in May by Vladimir Putin* will not be enough to offset inflation, which could reach 23% in 2022 according to the Bank of Russia, cited by Bloomberg*. Despite the resistance of the currency, the real incomes of Russians will fall. And even if prices grow less rapidly than expected, again according to official estimates of the Bank of Russia*, “this probably hides a local deficit”, with products disappearing solely because of sanctions, emphasizes Caroline Dufy. Russia is in a difficult situationsummarizes Sergey Guriev. Not catastrophic, but its GDP will fall by 10% in 2022, and even if it recovers, it may not return to pre-war levels until 2027.” The siege of the Fortress Russia has just begun.

* All links marked with an asterisk lead to links in English.