Sanctions lead to gloom for Russian economy

The sanctions imposed on Russia as a result of the country’s actions in Ukraine are finally starting to bite, according to a new Strategic Comments report from the International Institute of Strategic Studies.

Since economic sanctions and financial measures were put in place over a year ago, the rouble has lost nearly half of its value against the dollar and around 60% of its value against the euro. As the report, ‘Negative outlook for Russian economy as sanctions bite’, notes: “The economy, while not in crisis, has gone into recession, the budget deficit has widened and large amounts of capital have fled the country. As a result, capital bases and liquidity levels in the Russian banking sector have been depleted.”

The report also traces the evolution of the Western sanctions over the past 12 months, from travel and transaction bans for certain individuals to tougher measures taken against large companies in Russia’s financial, energy and defence sectors after the downing of Malaysia Airlines flight MH17 in July. “Although limited in scope, sanctions have nonetheless placed significant strains on the Russian economy, especially when they have coincided with steep declines in oil prices,” the authors conclude.

While the sanctions may not have brought about a change in Russian foreign policy, the government has taken notice of their effects by increasing interest rates and injecting capital into the struggling banking system. Despite this, the report suggests that Moscow is “bracing itself for at least a 4% contraction in economic output in 2015 if oil prices stabilise at around $60 per barrel, after growth of 1.3% in 2013 and .6% in 2014.” More pessimistic forecasts forecast that the Russian economy will contract by 5.5% this year and 3% the year after.

As a result of the economic situation, both the Russian government and its energy giants have recently revised their spending and investment plans. US and EU sanctions, could, the report suggests, seriously impede Russia’s shale-gas development plans as well as limit the country’s military spending. Crucially, there remains “plenty of scope” for the West to tighten existing sanctions should it so wish.

This report provides an informative, authoritative and concise overview of the effect of sanctions on the Russian economy over the last 12 months and what the likely effects of continued sanctions might be in the months ahead. As the authors warn: “The Ukraine conflict risks locking Russia into a vicious cycle of rising international tensions, escalating sanctions and deeper economic problems.”

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