300 days since it launched its attack on Ukraine, Russia is seen as the biggest bully state in the world, facing the most extensive sanctions of all.
When the first of them were announced almost ten months ago - the seizure of almost 300 billion dollars from the central bank's reserves, the termination of aviation connections with the developed countries, the disconnection of central banks from the international clearing system and the voluntary departure of almost a thousand international companies from the country - it seemed that the Russian economy would collapse this year.
It did not happen.
Why - and what can we expect next?
For years, Russia has been described as a "gas station disguised as a country", and this assumption has become the basis for the sanctions policy.
Even before the war, this approach ignored at least four important points: first, the experience of Russia's financial authorities has improved significantly since the 2008 crisis;
second, the size and characteristics of the domestic Russian market;
Third, the close economic ties that Russia created with non-Western countries;
And fourth, the scale of private business in Russia and the durability of Russian consumers.
Ruble exchange rate at a money changer in Moscow,
When the West predicted that Russia would be crushed by the collapse of the national currency, as happened in the 1998 and 2009 crises, it was a correct idea, because for an ordinary Russian citizen the loss of half the value of the ruble was the best sign that the economy was in trouble.
But in March 2022, the authorities responded with capital restrictions: they prohibited the withdrawal of dollars and asked the companies to convert the income into rubles.
As a result, the dollar - which jumped from 77 rubles in February to 120 rubles in March - returned to the level of 80 rubles in April and remained there.
Inflation is rampant, and the Chinese yuan has replaced the dollar as the most traded foreign currency on the Moscow Stock Exchange.
The Russian market was considered small and vulnerable, but in fact proved to be not too dependent on Western supplies.
A few industries were severely damaged or almost destroyed - aircraft construction, the automobile industry and the production of heavy equipment.
But for consumers, there have been only a few changes so far, because a typical Russian household spends up to 70% of its income on food and supplies that are almost undamaged (Russia stopped importing food from the West in 2014, so there were only a few changes in this market this year).
Most of the goods are produced inside Russia or imported from Asian countries that do not support sanctions, and the frozen income simply takes the purchase of houses and cars off the shopping list.
Parallel imports and new markets
There was also an overestimation of the degree of connection between the Russian and European economies.
If the events of 2022 had occurred two decades earlier, the Russian economy would have been on the rocks.
But now it receives supplies of high-tech components from China, Western products arrive through parallel imports through Turkey, and Russian oil has been diverted from the European market to China, Turkey and India.
The European embargo on oil and the price ceiling are not level-breakers: next year Russia will lose up to 20% of its oil exports and up to 50% of its gas exports, but both numbers reflect only about 11% of output, because 35% of the oil is for internal consumption, as are more than 70 % of the gas.
Last, but not unimportant: excluding the energy and banking sectors, the Russian economy is controlled by private businesses, and their owners do everything they can to diversify the sources of imports, cut prices and look for new customers, and are even willing to absorb losses to keep their business functioning.
This is quite different from the Soviet economy, to which the Russian economy has been wrongly compared by Western analysts.
And above all, the Russians, whose standard of living has improved miraculously since the 2000s, have not seen an improvement since 2012, so Putin shifted the rhetoric from economic issues to geopolitical issues upon his return to the Kremlin.
That's why most people just hope it doesn't get worse, and can tolerate another 5-10% drop in their disposable income without grumbling against the government.
A woman walks past a branch of the Agricultural Bank in Moscow,
The Russian economy these days is in a unique situation, where the sanctions have hit its main industries (energy, heavy industries, metals and construction), but have left the consumer market almost unscathed.
This means that the effect of the sanctions policy will be reflected only in two or three years.
Also, the budget in 2022 received unexpected revenues, given an all-time record in the prices of energy exported by Russia to Europe.
Therefore, the deficit at the end of the year will be around 2.7 trillion rubles or 2% of GDP. In 2023, the deficit will double if the war continues, but it will be easily balanced by reserves from the National Welfare Fund, in which 11.4 trillion rubles are stored, and by loans from the public from the Ministry of Finance ( The public holds 37 trillion rubles in banks.) If there is no change in spending, we should not expect a crisis in 2023, nor in 2024.
My conclusion, then, does not look promising to those who expect the collapse of the Russian economy.
GDP will decrease in the next two years by approximately 3% annually, because under the current conditions there are no sources of growth. Government spending will keep the economy shrinking at a moderate level. Available revenues will decrease annually by approximately 2.5%, but the public will endure the decrease, which is presented as the war of the "West" Against Russia. The difficulties will begin to pile up in mid-2024 (if the sanctions remain in effect), because then the national welfare fund will be depleted, and because Putin will seek to increase social spending in preparation for the presidential elections in March 2024. But 2024 is too far away to predict trends.
The assumption that economic sanctions could change Russia's political goals was wrong from the beginning - not from February 2022 but from March 2014. Economic sanctions against Russia are no more effective than trade restrictions with Nazi Germany could be.
To stop the Russian invasion of Ukraine, the Russian army must be destroyed on the battlefield, and not create minor problems for the Russian economy.
Dr. Inozzem is a Russian economist and political science researcher
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