How much longer can the Russian economy survive the sanctions?
MOSCOW — “The most effective sanction to weaken the Kremlin? Not to target and punish us, but to give us visas instead… to abandon the sinking ship!” This businessman’s iconoclastic view embodies the anxiety that could be detected just under the surface at the “Russian Davos” Forum in St. Petersburg last week.
Officially called the “International” Economic Forum, the annual event hosted by Vladimir Putin is supposed to attract foreign investors, but this year the elite of the domestic business community has been cut off from the rest of the world. “Just between Russians … And forced to line up behind the regime and its economic strategies which lead us to an impasse”, explains the same source, a Russian executive in one of the main public companies.
Like so many others, this man in his forties, typical representative of the new upper middle class, foreign passport in his pocket, educated in the West, liberal and polyglot, discovered his name on Western sanctions lists. Directly or indirectly, much of the Russian business community has been caught up in European and American sanctions against Moscow.
At the start of the Kremlin’s “special operation” in Ukraine, many top business leaders were shocked and made no secret of their disapproval of the military offensive. Four months later, successive rounds of sanctions prevent them from leaving Russia. Departures which, on the contrary, would have weakened the Kremlin and its economic strategy.
Entrepreneurs “stuck” in Russia
At the St. Petersburg International Economic Forum, these silenced rebels kept a low profile. They quietly confide their discomfort and evoke a reality: the sanctions have had a counter-productive effect. Working-class people, staunch supporters of the Kremlin, applauded the moves against the wealthy, indirectly thanking Europe for doing what the Kremlin couldn’t: go after the despised oligarchs.
As for the upper class people, they are bogged down in Russia and must implement the President’s goals, including the hypothetical replacement of imports with domestic production. A policy which has nevertheless been a long-standing fight.
In 22 years in power, Vladimir Putin has been able to restore order in the country and, despite a drop in income in recent years, has improved the daily lives of Russians. But he failed to modernize the country’s economy and, far from oil and other raw materials, to diversify its industry.
By failing to create the conditions for a stable, open, competitive and business-friendly market, including a fair and transparent legal system for entrepreneurs, it has sacrificed the long-term well-being of Russians. Not the poor, whose numbers will continue to grow. Not the richest either, who, despite the crises, know how to maintain their fortune. But it is the entire middle class which, between economic frustrations and political distortions, is now forced to line up behind the Kremlin.
A chicken burger from the new McDonald’s restaurant called ”Vkusno i Tochka” in Saint Petersburg, Russia. The new channel is seen by some as a symbol of Kremlin propaganda.
Challenging the Economic Blitzkrieg
The sudden renewed strength of the rouble, artificially supported, allows Vladimir Putin to present a resilient economy. Especially with falling commodity imports and exports boosted by higher prices, the trade balance is at record highs of surplus.
Gazprom has never earned so much from gas sales, providing the state with much-needed tax revenue to fund the war effort. The reopening of McDonald’s, which was taken over and relaunched with a new name and logo by one of the franchisees, is another symbol highlighted by Kremlin propaganda. This is an example of Russia’s ability to bounce back despite the departure of Western companies. What feed the middle classes of cities and maintain hopes of emancipation against the threats of isolation.
At the St. Petersburg Forum, Putin put it this way: “The economic blitzkrieg against Russia had no chance of success!”
Yet the first real damage to the economy, the earnings performance of Russian companies, is expected to come in the fall. Recession seems inevitable. But, defying previous forecasts, the decline in gross domestic product is expected to be closer to 15% than 25%. Because the very structure of the Russian economy, 70% controlled by the state and its public companies, helps it to cope.
Employment is also resisting the slowdown, thanks to agreements (and limitations…) on part-time work and other paid leave. But ultimately, waves of layoffs seem inevitable as companies are caught in the bottleneck of depleted inventories of intermediate products.
State aid and intervention from Moscow has therefore contributed to short-term resilience, but the false image of a Russian economy invincible in the face of Western pressures is sure to backfire on a bewildered middle class.