How Sanctions Stall Russian Economic Development

Despite being hit with a high volume of sanctions after February 24, 2022, Russia's economy has held up relatively well during more than a year of military conflict. However, some experts are questioning the effectiveness of these sanctions. Alexandra Prokopenko, an expert on Russian economic policy, suggests that instead of focusing on the quantity of sanctions, we should be paying attention to their quality.


According to Prokopenko, sanctions have drastically changed the way the Russian government's economic bloc operates, and not for the better. Prior to the escalation of the conflict in Ukraine, the Russian economy was focused on technological development, export diversification, and relatively free capital. However, after the imposition of massive sanctions, the economy has shifted towards capital control, yuanization of settlements, and militarization of expenditures. While this strategy may have short-term benefits by isolating the economy from global shocks, in the medium to long term, it weakens it.

During the first few months of the conflict, the Central Bank of Russia implemented several measures to stabilize the economic situation. These included restrictions on the movement of capital, a ban on cash currency issuance, and an immediate increase in the key rate to 20%. These measures stopped the outflow of money from the banking system, which had exceeded 2 trillion rubles ($30 billion) in the first two weeks of the conflict. Additionally, the Central Bank increased rates on short-term deposits, suspended regulation of the full cost of loans, and banned the issuance of cash currency. These actions helped stabilize the Russian economy, but they also resulted in capital control measures that are likely to remain in place for some time, according to Prokopenko.

The division of countries into «friendly» and «unfriendly» or «hostile» has also had a negative impact in the long term. Currently, more than 50 states are on this list, and the lack of clear criteria for inclusion in the list leaves room for further expansion. Additionally, Russian lawmakers regularly propose new measures against these states, and there is a push to settle payments for Russian energy resources in rubles.

As a result, the pragmatism of Russia's trade relations has been replaced by the criterion of «friendliness». Geopolitics is likely to continue to determine the direction of Russian trade, with production chains based on geopolitical priorities rather than economic efficiency. The resulting costs will likely be passed on to consumers in the form of increased prices and decreased quality, according to the expert.

The «turn to the East» that occurred after Europe abandoned most of the Russian energy supply has led to increased trade relations with China. However, this has also led to an increasing dependence on China. In 2022, the trade turnover between Russia and China increased by almost a third, with over two-thirds of Russian exports to China being energy resources. This gives China significant influence over prices, and weakens Russia's position in negotiations.

Following the imposition of sanctions that restricted Russia's access to Western high technologies, China has become the primary supplier of high-tech goods such as electronics, semiconductors, cars, and automotive components. This has resulted in a growing share of payments in yuan. In fact, the share of yuan payments for Russian exports has increased 32 times, from 0.5% in 2021 to 16% in 2023, and for imports from 4% to 23%. This rapid yuanization is turning the de-dollarization of the Russian economy into a significant simplification that increasingly relies on oil and gas trade.

Sanctions have also deprived Russia of the opportunity to develop new energy projects on the shelf and hard-to-reach deposits, restricted access to turbines, modern tanker construction technologies, locomotives, cars, new generation communication networks, and other high-tech products. The orientation towards raw material trade and the militarization of government spending, which is likely to continue after the hot phase of the conflict ends, is preserving Russia's economic development, Prokopenko concludes.

Source — Carnegie Politika

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