Is Russia bound to a new model of development?

Texte aimablement traduit par Anne-Marie de Grazia.

The question of the development model which Russia might follow in years to come is now laid open by the evolutions in the international background. The game of sanctions and countersanctions risks going on.  One may wonder if it has not already brought about an important change in the world perception of the government, but also of the Russian elite.

A return to the Cold War ?

The relationship between the United States, the European Union and Russia have deteriorated considerably since the beginning of 2014. Not that they had been good before. The contradictions between foreign policies have been flagrant for about two years. But the Russian initiative on chemical weapons in Syria has shown that collaboration was always possible. These collaborations are necessary anyway, be it for the United States, who cannot extricate themselves from Afghanistan without the implicit support of Russia, or for France, who is largely dependent on the means of heavy transportation put at its disposal by Russian companies for its operations in Africa. Yet, we are witnessing an impressive deterioration of these relationships since the beginning of 2014.

John Mearsheimer, a professor of political science at the University of Chicago, has rightly pointed out in a recent article in the magazine Foreign Affairs that the responsibility for this degradation was to be found more on the side of the United States and of the European Union [1]. In this degradation, an important turn appears to have been taken with the tragedy of flight MH17 of Malaysian Airlines, which was destroyed over Eastern Ukraine. The United States have immediately declared the insurgents of the Donbass and Russia to be responsible for the tragedy. It appears today that things are far more complex and that the proofs allowing to condemn Russia and the insurgents simply do not exist [2]. High ranking former members of the American intelligence services have been troubled by this [3].

But whatever the origins of this crisis, its present dynamic is provoking an important pivoting in international relations, way beyond the case of Russia alone. This new international context is of course taken into account by the Russian elites. It explicitly or implicitly modifies their relationships with the rest of the world and, from this point of view, it has important consequences on the model of development adopted by Russia. Seen from this angle, even if it is probably exaggerated to talk about a “new Cold War,” as some commentators are doing, it is indisputable that we are observing all the characteristic features of an estrangement between Russia and the countries rightly or wrongly qualified as Western. Yet, for me, the great difference between the present situation and the one in the latter half of the XX century stems from the fact that henceforth, the « Atlantic Basin » (the United States, Canada and Western Europe) are no longer concentrating the main share of the techniques and of the production technologies. The possible estrangement of Russia might well translate, not into isolation, but into a shifting towards relations with other countries.

Sanctions and Counter-sanctions.

The mechanism of sanctions and counter-sanctions which is presently playing at full-throttle weighs heavily on the anticipations of the various economic actors. The various stages in the sanctions process, as well as the responses brought to it by the Russian government, are building up a peculiar psychological context, the importance of which goes well beyond the real effects of the measures taken by either side. On the side of the United States and the EU countries, we have a set of measures (if we include those foreseen on September 8, 2014) which include the domain of industrial cooperation as well as the one of financial transactions. First of all, measures are targeting industrial activities, essentially in oil extraction, in the military domain, and techniques likely to have a « dual » capacity. Still, these measures remain limited for several reasons :

  • (i) They apply only to new contracts, especially in the oil and military domains, and do not affect contracts already signed.
  • (ii) These measures are of a limited duration, potentially renewable (6 months).

It must also be pointed out that a number of countries possessing these techniques are not parties to the mechanisms of « sanctions ». These countries will continue to supply Russia. One can even imagine that a company of a country applying the sanctions will transfer to another company, with its seat in a country which does not apply these sanctions, the licence for the technique which is affected by the sanctions [4]. This reduces considerably the effect on Russia. Then we have measures affecting the financial sphere. As early as March 30th, the United States have decided to prohibit all contracts and to freeze the assets of the ROSSIYA Bank and of 6 small banks. They decided, during the month of July, to extend these measures to the sector of defence, applying it in this case to the State company of naval construction (OSK) and the State company of aeronautic construction (OAK). Then we have sanctions falling under the SSI regime of sectorial sanctions. This means Russian companies being banned from borrowing for above 90-day terms on the international financial markets. These sanctions forestall any increase in the external debt of private companies, as well as any « roll-over, » when the latter comes to maturity.

Chart 1


The debt of the banks affected is estimated at 140 billion dollars. Of these sums, about 12 billion should have been the target of roll-overs before the third quarter of 2014, and 22 billion before the end of 2014.

Table 1

Companies affected by the sanctions


Industrial Companies




Bank of Moscow







As for the gross external debt of Russian companies, it is in the order of 650 billion dollars. These banks represent a little less than half this sum (310 billion) but they are the ones which have undergone the strongest growth, for the debt of companies has remained about constant since 2012. These measures will therefore penalize essentially the Russian banking sector.

An important aspect of this regime of sanctions is that it is giving de facto to the United States the hand over the EU. The « jurisprudence BNP-Parisbas » will lead companies and European banks to be extremely reticent in making operations in dollars, which could fall under the SSI statute for the United States. An induced consequence could be a reduction in the flow of dollars, to the benefit of either the Euro, or the Yuan (used forthwith in investments more than the Euro) or other currencies. Russia decided, in response to these measures, to establish a one year embargo on some food products coming from the EU, the United States, Canada and Australia. These measures proceed from two distinct logics :  measures of retaliation, which we may suppose could be lifted if the sanctions of the United States and of the EU were lifted as well, and protectionist measures. In fact, we can observe that the Russian government took advantage of the occasion provided by the sanctions to take measures the effect of which could turn out positively for the Russian economy.

The possible impact on the development model of Russia.

Since October 2005, a compromise seems to have been established between the « interventionists » and the liberals within the government, and more generally the Russian elite, in favour of a measured use of the financial means proceeding from commodities revenues. The 4 “National Priorities” which had then been defined by V. Putin (Health, Education, Housing and agro-industrial integration) were meant to channel part of the investment activity wished for by the « interventionists, » but without provoking any sizable macro-economic imbalances. These national priorities were put under the responsibility of the former head of the presidential administration, M. Medvedev, who was made First deputy Prime Minister in the fall of 2005, and they were to be compatible with the rules established by MM. Kudrin and Gref. At that time, it must be noted that M. Kudrin, who was then the Minister of Finances, persisted in opposing any massive use of the funds accumulated by way of exports in the Russian economy, pretexting risks of macro-economic imbalances. This strategy had already been questioned during the world economic crisis (2008-2010) which had witnessed the State taking an ever increasingly important role in the economy. During the period 2010-2013 there occurred what we might call an « illusion » that a come-back to such a balance was possible.

Chart 2


Source: Central Bank of Russia. For 2014: estimations by Sberbank

At the same time, one could see an industrial strategy emerging, organizing the Russian economy around three sectors.

  • (a)   The priority sector for the development of the Russian economy which needs to be narrowly controlled by the State. This being the sector of energy and of commodities.
  • (b)   The sector of strategic industries, defined by a logic of diversification of industrial production. One finds there a good share of the mechanical construction. In this sector, the State does not seek to exert a direct control, but to define strategic orientations. The entrance of foreign actors is therefore possible, and even wished for, but provided that the policies of these actors are to integrate themselves into the predetermined strategic orientations. Moreover, Russian companies would seek entrance into the capital of big Western companies (EADS, Oerlikon) and in exchange the capital of a certain number of Russian companies could be opened up.
  • (c)   The sector of other industries, where the Russian state does not seek to intervene, except to enforce the common legislation.

In reality, the compatibility between the diverse orientations of economic policy included in the 2005 compromise was problematic. It is small wonder therefore that the fulcrum between the forces in presence within the Russian power structure shifted strongly in the wake of the crisis of 2008. The compromise seems to have become the first victim of the changes in the international context. But the signs of a reassessment could be perceived as early as in the fall of 2013, and even earlier. There had been a sign in the departure of M. Kudrin from the government. From this point of view, the change in the development model is not a simple reaction to the geopolitical change, but it was used to act out a change which had been on the order of the day since the end of 2012. This change was to bring about a model of development for Russia which was to be much more self-centered than is the case today, and much more decisively turned towards building up an innovating industry [5].

A politics of substituting to imports.

During these past months, we have noticed important evolutions which are to some extent the product of the new regime in international relations. The impact of sanctions appeared very weak until April 2014, but presently we can make the following assessment :

  • (a) There is a resumption in industrial activity (+2,5% over the first semester), distinctly noticeable.
  • (b) The activity in the agricultural and food-processing sectors seems to have accelerated over June and July, that is before the Russian measures of retaliation coming into force.
  • (c)  These positive effects seem directly connected with the depreciation of the Rouble by some 10% since March.

Chart 3


The Ukrainian crisis has also provoked important but limited crises on the currency exchange market and on the Russian financial market. If the fluctuations at the Moscow stock-exchange have only little influence (the Moscow stock-market finances only 1% of investments in Russia), the perturbations on the currency exchange market are more important. From this point of view, in order to estimate the real impact of the Ukrainian crisis, it is necessary to call back to mind the following elements :

  • (1)  Russia has an inflation rate that is very largely superior to the one in the countries of the EU and to the United States, with a rate estimated at + 7,5% over 2014. This means that with gains in productivity being comparable, the depreciation of the Rouble should be of 5% to the Dollar and 6,5% to the Euro in order for the country’s competitiveness to maintain itself.
  • (2)  In fact, productivity gains in the Russian manufacturing industry are more than about 2,5% above those we know in the United States and in the EU. The depreciation of the Rouble should therefore be of 2% to the Dollar and 4% to the Euro.
  • (3)  We are presently observing an average depreciation of 8% to 12% to the dollar and of 11% to 16% to the Euro, which results, on average, in a real depreciation of the Rouble of 8% to the  Dollar and 9% to the Euro.

These levels of depreciation can indeed have a positive effect on “resident Russian” producers. It is therefore logical that the Russian economy reacts positively, not negatively to the sanctions, insofar as it disposes over an important potential of growth in the domain of substitutions to imports. Still, the direct effect of a depreciation in the exchange rate is at its maximum between 6 and 18 months after the depreciation. This effect tends to taper down later on. It is considered to have run out within a period of 36 to 60 months after the depreciation. Yet this is a purely static analysis, supposing that the resident companies do not invest in order to qualitatively improve their competitiveness. The real question is therefore whether the investment in active assets in resident companies will bring about a progress in the quality and in the diversity in the productions of the manufacturing industry, and of the food-processing industry.

Towards financial independance?

The investment question reflects onto the autonomy, even the independence, to which Russia might gain access in the years to come. Since 2011, Russian authorities have given recurrent signs of their will to build up their autonomy from Western financial markets. This approach has gone through a distinct acceleration since the fall of 2013, in the frame of a de facto alliance with China. The quotation of the Yuan on the Moscow stock-market, and also the creation of a market for the « non-resident » Rouble, are moving in the direction of the building of an autonomy of the Russian economy in face of the financial space dominated by the Dollar. However, this can only have important consequences on the world financial equilibrium, for Russia is an important exporter of oil, gas, but also of certain ores and, up until now, these transactions were all largely realised in dollars.

The building by Russia of a financing system guaranteeing its autonomy in the face of the Western financial markets will only be accelerated through the logic of sanctions. The building of such a system is a priority for Russia if it wants to profit to the maximum of the logic of substitutions to imports, into which it seems to have engaged. The role of the State will also be important in this system of financing, and it is not yet clear if this role will be directly linked with the Ministry of Finances or if it will be operated by the State banks. But the building of such a system will also have extremely important consequences for the international financial system, which might witness its crisis accelerating through the imbalance thus produced.

[1] Mearsheimer J., « Why the Ukraine Crisis is the West’s fault », Foreign Affairs, September/October 2014,

[2] Sapir J., « MH17, doubts in the intelligence community », article published on Russeurope, 1 August 2014,

[3] « Senior U.S. Intelligence Officers: Obama Should Release Ukraine Evidence », 29 July 2014,

[4] “Rosneft to take 30 percent in Norwegian driller”, RT Business, August 22nd 2014,

[5] Trenim D., Russia’s New National Strategy,



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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