The Russian economy is holding its ground in the face of the sanctions imposed on it by the US-backed Western Group, which aim to knock the wind out of Russia's ability to sustain a prolonged military conflict in Ukraine. Against all odds, the International Monetary Fund has recently declared that the Russian economy has come out on top, defying the storm of sanctions.

According to information from the International Monetary Fund (IMF), the Russian economy experienced a minimal contraction of 3% in 2022, which was much less severe than the decline that Russia experienced during the global financial crisis that took place between 2008 and 2010.

The IMF anticipates that the recent increase in inflation and decline in imports will only be transient and go away by the end of the fiscal year.

However, the Western media continues to project misleading data, suggesting an accelerated decline in Russia's economic conditions. In reality, the West's sanctions have hurt the world economy, while Russia has shown resilience and proven initial expectations wrong.

What's the lowdown on sanctions?

Russia's military confrontation with Ukraine prompted a coalition of countries to unite and impose severe sanctions on Russia. These countries include the US, the European Union (EU), the United Kingdom, Canada, Australia, Japan, and many others. The new regulations have hampered the offshore holdings and business operations of powerful Russians. These regulations have had a particularly negative impact on Russia's financial and energy sectors, driving it to seek out Western technology and other financial and trade tools.

In the initial phases, the sanctions wreaked havoc on the Russian economy and slowed the functioning of numerous government agencies, particularly the banking sector, which has lost hundreds of billions of dollars in wealth. It has been a struggle to procure essential supplies for the Russian military's war efforts.

As a result of the shortage of imported materials, a large number of Russian factories have been forced to shut down while some manufacturing units have taken austerity measures, such as reducing workers' hours or placing them on temporary unpaid breaks. The situation only got worse when a large number of American and multinational firms walked out of the Russian market, slowing down their business activities and drying up the trading hubs of considerable investment.

In addition to the domestic sanctions-related ramifications for the Russian economy, several offshore steps taken by the US-led group created trouble for the export of Russian oil. As a result of the embargo on shipping companies to book Russian oil cargo, the international price of Russian oil fell. Russian oil is currently selling at a discount in Asian and Chinese markets.

Why did the sanctions fail to make a dent?

Despite the initial bumps in the road for the Russian economy, these sanctions didn't make a worthwhile dent in the country's reserves, balance of trade, and surplus position declared by the Central Bank of Russia at the end of the financial year 2022–23. The US financial experts were expecting that these sanctions would be the straw that broke the camel's back in the economy, causing the Russian people to hit the streets in protest against skyrocketing prices, joblessness, and the scarcity of necessities. However, that did not happen.

The initial storm in Russian markets appears to have blown over. Ever since hitting rock bottom in the early days of March last year, the ruble has skyrocketed and is now inching closer to its pre-war glory. The main benchmark of Russian stocks took a nosedive, dropping by a whopping third, but it has managed to find its footing and stabilize since then. The government and most firms are staying on top of their game when it comes to paying off their foreign-currency bonds. The bank rush, where Russians withdrew a whopping 3 trillion rubles ($31 billion), finally fizzled out as people decided to put most of the money back into their accounts.

Bruegel analysis

What were the contributing factors that ultimately led to the failure or unfavorable outcome of the US sanctions regime? According to Bruegel, a Brussels-based economic think tank, various vulnerabilities in the sanctions regime, as well as some positive aspects of Russia's defensive efforts, have contributed massively to offset the ramifications of severe sanctions on the Russian economy.

It's essential to grasp that these sanctions serve as a foreign policy tool used in a variety of scenarios. The synchronized imposition of sanctions on Russia holds a lot of weight for the global economy, mainly because Russia's economy is as big as a whale, ranking 11th in 2021, and is deeply intertwined with the global economic fabric.

In the face of severe sanctions and limitations on Russian oil shipment, the Russian leadership pulled out all the stops to think outside the box and come up with clever economic measures to level the playing field. The Central Bank of Russia hatched the "Fortress Russia" program as one of their cunning moves to safeguard the Russian financial system.

This initiative has shown its true colors in defending the system. The system hit the nail on the head during its early stages thanks to the imposition of sanctions on Russia's central bank assets, which went above and beyond expectations. The US-backed pro-Ukraine nations had put a freeze on nearly 60% of the central bank's international reserves, leaving them high and dry. The plan was to make Russia's economy hit rock bottom, giving President Vladimir Putin a taste of his own medicine for his "aggression." As a consequence, there was a significant decrease in the bank reserves of the system, amounting to a 40% decline.

Nevertheless, as a result of effective administration, the system experienced a revival, enabling the bank to maintain substantial reserves of international currency. As of May 5, 2023, the international reserves of Russia amounted to approximately 599 billion US dollars. In the pre-war period of 2022, the foreign exchange reserves in Russia were recorded at a value of 630.5 billion US dollars.

The purpose of these reserves is to potentially intervene in both currency and debt markets. Despite the cessation of access to the SWIFT financial transfer system, Russian banks have successfully procured the requisite money to ensure the continuity of their operations. The presence of alternate pathways enables the facilitation of interaction between Russian banks and the global financial community. Despite facing considerable interruptions, the central bank has successfully upheld the integrity of Russia's financial system and prevented a potential collapse of the wider Russian economy.

Import and export

Several restrictions were enforced to obstruct some sections of the Russian economy from participating in commercial endeavors. It indicates that Russia's economy demonstrates a comparatively reduced reliance on imports in comparison to other prominent advanced nations and emerging markets. Nevertheless, several industries in Russia, including the manufacturing of transportation equipment, chemicals, food products, and IT services, are exposed to considerable susceptibility to external influences. The implementation of sanctions successfully limited Russia's initial acquisition of vital imports, such as components utilized for manufacturing objectives. Nevertheless, despite the first surprise, Russia swiftly adapted its strategy and initiated a growth in its imports from nations such as China, Belarus, and Türkiye, which are not actively engaged in the sanctions regime. Russia has faced limitations in its access to numerous markets to import vital commodities. Nevertheless, the nation has later identified alternative markets to meet a substantial amount of its needs.

The effectiveness of the sanctions imposed on Russian exports has been significantly constrained. Several countries have discontinued their acquisition of certain goods from Russia, yet the continuous inflow of important items endures to a considerable degree. Moreover, the notable influence of inflation has been demonstrated to be beneficial for Russia in this specific sphere.

The decline in imports and concurrent rise in exports led to a positive trade balance for the Russian economy last year. The surplus for the period spanning from January to September reached a total of $198.4 billion, denoting a noteworthy increment of more than $120 billion in comparison to the same time in the year 2021.

Furthermore, this surplus is more than twice as large as the previous record set in 2008. Bruegel anticipates that Russia's balance of payments will maintain its resilience through 2023 due to the projected persistent increase in commodity prices. This projection is made in the face of a 67% decline in the balance of payment position this year in comparison to the preceding year of 2022. This decline is of considerable magnitude; however, it retains its significance in light of the economic sanctions imposed on the state.