By Rachel Ziemba:
Russian authorities have loudly proclaimed their preparedness to face new sanctions, maintaining a defensive economic policy stance. If Russians are committed to sticking out new sanctions, they will face inflation, higher financing costs, and low incomes. Whether new sanctions prompt policy change continues to rely on nationalist sentiment.
Financially, Russia’s balance sheet looks stronger than in 2014 or 2016, with foreign currency liabilities reduced and external and fiscal surpluses restored. Russia’s economy adjusted to the 2014–15 coordinated U.S.-EU sanctions, which coincided with a massive energy price collapse. Russia’s orthodox macroeconomic policy choices provided resilience and, helped by the energy rebound, contributed to the growth revival and asset accumulation. But neither sanctions nor these policy choices did much to change Russia’s long-term growth vulnerabilities, which perversely help it survive, if not thrive.
Russian citizens have yet to really be tested.
Understanding Russia’s resiliency toolkit, and the domestic costs of its deployment, is critical for policymakers looking to shift Russian policy. Although the impact of new sanctions depends on chosen targets, possible new U.S. measures on Russia’s sovereign debt and targeted financing restrictions would undoubtedly have an economic impact. This could include capital outflows, ruble weakness, and tightening local financial conditions.
These are the key elements of Russia’s resiliency toolkit:
- Fiscal restraint: Russia cut government spending, exacerbating the 2015–16 recession, and has remained cautious. The central government coffers are now in a good position. Local governments are weaker and pension liabilities a concern, but not one that needs to be tackled in 2019–20.
- Lower issuance and domestic financing of debt: Fiscal austerity kept Russia from adding much to its low government debt, among the lowest globally. Short-term foreign currency liabilities are also low, at $50 billion, which compare favorably with over $400 billion in reserves. Local corporations and banks might absorb the debt, admittedly at the cost of further restrictions to of local credit supply.
- Flexible exchange rate and inflation targeting: Monetary policy was also tight, retaining local capital as foreigner investors were scarce. The ruble dampened the effect of energy price fluctuations and sanctions. Indeed during 2018, the coincidence of a weaker ruble and stronger oil prices supported local revenues. Russia’s central bank seems to have significant government support.
- Consolidation of the banking system: The closure of many private banks on anti-money laundering and weak balance sheet grounds has only helped dominant public banks, who benefited from economies of scale.
- Reduced imports: Sanctions reinforced the influence of those advocating local production and financing. Low imports reflect investment weakness, but they reduce the risk of a financing crisis.
- Chinese and Gulf Cooperation Council financing: With EU and U.S. investors withdrawing, Asian and Middle Eastern funds dominated capital inflows, mostly through joint ventures with the Russia Direct Investment Fund.
Using this resiliency toolkit has costs, but ones Russian authorities seem willing to bear. These may include deferrals of planned infrastructure, further local credit scarcity, and higher debt servicing. However, Russian citizens have yet to really be tested. They may continue to accept low real incomes with a show of nationalist support in the face of sanctions. Or inflation may change the political calculus and challenge Putin’s leadership. U.S. policymakers are surely hoping for the latter.
A new round of U.S. sanctions that includes measures on sovereign debt, energy, and the financial sector would bring strains to the Russian economy, but is unlikely to prompt a debt default or recession. Triggering a greater shock would likely boost spillovers and pressure on Russia’s key trading partners and might undermine efforts to keep energy supply stable.
Proposed measures are likely to be tough but not catastrophic for Russia’s economy. This suggests ultimate success in shifting Kremlin policy may boil down to deft political management in Moscow, European capitals, and in Washington.
Rachel Ziemba is an Adjunct Senior Fellow at the Center for a New American Security (CNAS). Her research focuses on the interlinkages between economics, finance and security issues. Her research topics include coercive economic policies such as sanctions, economic resilience and the role of state-owned investors including sovereign wealth funds.
Read the full CNAS "U.S. Strategies to Counter Russia" commentary series below:
Embedding Sanctions in U.S. Russia Strategy
- Edward Fishman, "Russia Sanctions in 2019: Clarifying a Strategy"
- Peter Harrell, "The Goals of Sanctioning Russia"
Prospects for Transatlantic Cooperation on Russia Policy
- John Hughes, "The U.S. & Europe May Return to Common Sanctions Policies on Russia"
- Elizabeth Rosenberg, "U.S. Policy Toward Russia and a Deepening Transatlantic Divide"
- Rachel Rizzo, "Europe and the United States: A Diverging Approach Toward Russia?"
Russian Domestic Politics and Greater Russia-China Cooperation
- Neil Bhatiya, "What Pressuring Russian Oligarchs Accomplishes"
- Ashley Feng, "China-Russia Cooperation Presents a Fresh Threat to the United States"
- Andrea Kendall-Taylor, "U.S. Russia Policy: Moving Beyond Sanctions"
Russia’s Macroeconomic Vulnerabilities
- Sam Dorshimer, "Considering Sanctions on Russian Sovereign Debt"
- Rachel Ziemba, "Russia’s Resiliency Toolkit"