Russia: the economy and the risk of sanctions

Paper kindly translated by Anne-Marie de Grazia.

The economic consequences of the Ukrainian crisis are only beginning to be seriously assessed since the end of April. Considering that the crisis is far from over, and the question of economic sanctions against Russia will remain on the table for months to come, the present situation could well be degrading itself in the near future. Still, we must add that such a scenario remains of a low probability. The interconnections between the economies of the European countries and of Russia are very important. It is not so much the exports of fossil fuel which are at stake, than the impact of the Russian market for the European exporters. The sanctions are therefore counterproductive, especially considering that Europe is no longer speaking with a single voice. Between Northern Europe, which is pushing for a confrontation, a second block made up of Bulgaria, Hungary and Slovakia which doesn’t want to confront Russia under any circumstances, and finally the historic nucleus made up of France and Germany which are equivocating, there is no longer any European unity. All these elements incite one therefore, if not to optimism, at least to a measure of serenity. It is clear that up to now, we are quite far from the catastrophic scenario which has been announced for the Russian economy, including by the IMF.

 Industrial production is taking off again.

The first point which must be made presently is that we are witnessing since early February a rebound in industrial production. This point is the more important – and surprising for some – because one of the preconceived ideas about Russia consists in thinking that the country were in a process of de-industrialization under the influence of some “dutch syndrome” linked to the export of commodities. However, Russian industry is developing and it is competitive. This is apparent in the automobile sector but also beyond, in the aeronautics and space sector. There clearly exists a strong potential. Constructors who set up shop in Russia, such as Toyota and Renault Nissan, are pointing out that within 5 or 6 years, the Russian automobile production should reach 2.5 to 3.5 million cars, as against 1.7 million at present. This rebound is occurring after practically one year of stagnation. The concomitance between this phenomenon and the present situation calls for an explanation.

 Chart 1


Source : Rosstat

Russia has indeed, after the recovery following its exit from the crisis in 2010, gone through a stagnation in industrial production, and particularly in manufacturing, since the end of 2012. This stagnation has generated the strong downturn in growth which has been registered in 2013. The present exit out of this period of stagnation can be explained by several phenomena :

  • (1)    The depreciation of the rouble registered since the beginning of 2014 and following the new strategy of the Central Bank has given back competitiveness to manufacturing.
  • (2)    The halting of industrial production in a large part of Ukraine following the political events in that country can also explain the extra production in Russia, insofar as on a certain number of products, Ukraine and Russia are in competition.
  • (3)    The production restart in manufacturing can also be explained by the necessity for households and for economic actors to start consuming and investing again. Average real income has gone up 1.8% and median income 3.5%.

We will need to watch very closely to see if this tendency maintains itself. The will of the Russian government to guarantee the progression of real income, particularly for the more modest of them, but also the depreciation of the rouble, which is presently reaching about 15%, can contribute to it. But, already, the more depressing prognostications which have been made about the Russian economy are invalidated.

But investment continues to stagnate.

By contrast, investment, calculated as fixed capital growth, therefore excluding purely financial investment, continues to stagnate.

Chart 2


Source : Rosstat

Here again, we notice a stagnation in investment (at constant prices) beginning in autumn 2012. The reasons are several :

  • (1)   There is first of all the tailing off of the public investment plan linked to the « great public works,» themselves linked to the Olympic Games in Sochi.
  • (2)  There is then the will of the government to balance the budget without sacrificing social expenses. The effort in budgetary adjustment has therefore been realized essentially at the expense of public investments.

This appears very clearly when one compares the 2013 budget the one of 2007.

Chart 3


Source : Ministry of finances and Rosstat.

From this point of view, it is patent that this situation cannot endure. The government will have to re-launch public investments, which have a strong boosting effect on private investments. However, the question of a balanced budget will come up. This is where the considerable depreciation of the rouble will be registering.

Chart 4

Exchange rate /US Dollar


Every depreciation in the order of one rouble in the exchange rate to the dollar has additional revenues to the State accruing in the order of 200 to 300 million roubles, according to the calculations of Russian economists. One can see therefore that the depreciation of the rouble, far from being a catastrophe, turns out to be relatively interesting, whether it be for the competitiveness of manufacturing industries or for balancing public finances.

Chart 5

Exchange rate Ruble / Euro


Capital flows and growth.

This is the context in which we need to consider the movements of capitals which occurred following the political crisis generated by the events in Ukraine. The exit of capitals, measured by the balance of payments, can have several reasons:

  1. They can result from the purchase of foreign companies by Russian companies.
  2. They can come from the reimbursement of loans contracted abroad by Russian companies.
  3. They may, finally, translate the mistrust of non-residents who have invested their money at the Moscow stock-market and who decide to repatriate it.

It is of course the capitals of the third category which are meant to cause a problem to the economic development of Russia. But if one looks at the trend over the past years, we can see that 2014 will remain way behind 2008 as far as the “exit” is concerned, and moreover that there is no link between these exits of capital and the growth of the country.

Chart 6

Cap.outflow - copie

 From this point of view, the Direct Foreign Investments in the productive domain have a much more important impact on growth, both directly and indirectly, because they are one of the engines of the modernizing of Russian industry. It is clear that with a less expensive rouble, be it in relation to the dollar or to the euro, direct investment opportunities for non-residents will become more important. The unknown here resides in the possible sanctions affecting international financial circuits. This is where the true interrogation for the future of mid-term growth lays for Russia.

What development model for Russia?

The country, for sure, has still an enormous need of catching up to do in relation to the big developed countries. It is still paying a hard price for the lost decade of the transition, 1991 to 1998, when the economy was literally looted. The country is still therefore a developing economy and one reconstructing itself. Has it found a point of equilibrium between the extractive industries and manufacturing in its development model? The question remains open. Over the last 150 years, Russia has always been an exporter of commodities, such as butter, milk, or wheat before 1914, while developing in the same time a modern industry. One forgets all too quickly that the GDP of the Russian empire in 1914 was equal to the one of France [1], a situation to which it has found back today. Exports concern presently fossil fuels, wood and metals. In the same time, Russia is developing, with the help of foreign industrialists, an extremely dynamic industry in order essentially to supply its internal market. There is therefore a great similarity between the model of development before World War One and the one put in place from 2004-2005, following the recovery from the financial crisis of 1998. But this model is not balanced. In 1914, it translated in very strong social tensions in the countryside and, within the bourgeoisie, in a merciless confrontation between the great capital linked to foreign companies and leaning on the apparatus of the State, and a bourgeoisie which one may qualify as « national, » which dominated the sector of small and medium enterprises.

The opposition between these two groups turned into an open conflict during the years immediately preceding World War One, to the point that one can practically speak of a concealed insurrection on the part of the Russian bourgeoisie against the political-economic system of czarism. This expresses a second imbalance, the fact that economic growth doesn’t manage to find endogenous factors for refueling itself. However spectacular may have been growth between 1885 and 1905, it has not induced a process in which the enrichment of some social groups would have allowed to provide the economy with what it needed to keep itself going. So that, after the depression which started in 1903 and was prolonged by the 1904-1905 war, the restart of growth was very largely pulled by orders emanating from the military budget [2], which leads one to relativize the theses about the autonomous development of capitalism in Russia [3]. Except for fiscal pressure, monetary and trade relations had little effect on the rural world [4]. This is a notable difference with the development pattern of Western Europe in the XIX century. The rural wold remains to a large extent outside of growth carried either by export (of commodities) or by public spending. The domination of the monetary system under the control of the central authorities, and more broadly the persisting division into two systems, monetary and financial, hark back to this fragmentation of economic logic and to the social and political oppositions which underpin it.

From this point of view, it is patent since 2000 that a good part of Russian growth has been fueled by the growth in internal demand. But in the structure of industry as well as in that of finance, we find again the unbalance between an oligarchic capital, broadly linked to foreign countries, and the under-development of national capital. From this point of view, the recent depreciation of the rouble since the beginning of 2014 constitutes in reality an excellent piece of news. But this depreciation will not suffice. The country’s technological and organizational needs remain important, despite the considerable gains in labor productivity which have been made since 2004. However much some companies have become modernized, many others, even if they are private, remain stuck in forms of industrial organizations which date back to the 1960s or 70s.

Presently, Russia is suffering from two problems. First of all, the investment in fixed capital, which represents almost 20% of GDP, a figure which is higher than the European average, is insufficient in relation to the country’s needs and especially taking into account the destruction of fixed capital which occurred in the years 1990. The policies of balanced budgetary expenses, which are otherwise understandable, put a drag on investment, as we have seen. But above all, investment remains very dependent on public expenses and on “great projects.” In the representations of the Russian elite, public and private investment continue to oppose each other. When, in reality, there is a synergy. Here again, the depreciation of the rouble is probably going to help the government. But more needs to be done, and differently.  This is where the main challenge lies for Russia and, paradoxically, the whole rather crude discourse about economic « sanctions » could lead to a realization of the necessity to find a model of development and innovation which would be truly centred on the needs of the country.

[1] Voir, P.R. Gregory, Russian National Income 1885-1913, Cambridge University Press, Cambridge, 1982.

[2] See K.F. Chatsillo, “O disproportsij v razvitij vooruzhennyh sil Rossii nakanunie pervoij mitovoj vojny (1906-1914), in Istoritcheskie Zapiski, vol. 83, 1969, pp. 123-136.

[3] R. Portal, “The industrialization of Russia” in J. Habakkuk et M. Postan (edits.), The Cambridge Economic History of Europe, vol. VI, part. II, Cambridge University Press, Cambridge, 1966.

[4] D. Atkinson, The end of the Russian land commune : 1905-1930, Stanford University Press, Stanford, 1983.


Jacques Sapir

Ses travaux de chercheur se sont orientés dans trois dimensions, l’étude de l’économie russe et de la transition, l’analyse des crises financières et des recherches théoriques sur les institutions économiques et les interactions entre les comportements individuels. Il a poursuivi ses recherches à partir de 2000 sur les interactions entre les régimes de change, la structuration des systèmes financiers et les instabilités macroéconomiques. Depuis 2007 il s'est impliqué dans l’analyse de la crise financière actuelle, et en particulier dans la crise de la zone Euro.

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