In my recent post about the Canadian House of Commons defence committee’s report on Ukraine, I complained that the committee had recommended strengthening sanctions against Russia without producing any evidence that sanctions were an effective tool in changing Russian behaviour. As luck would have it, I have acquired a copy of a recent report which analyzes the effect of sanctions on the Russian economy. I thought, therefore, that I should share the report’s conclusions with you.

Before doing so, it’s first necessary to point out that damaging the Russian economy isn’t the ultimate point of sanctions. If sanctions are to have any meaningful purpose, then that purpose has to be to change Russian behaviour, specifically vis-à-vis Ukraine, given that Ukraine was the pretext for the sanctions. That said, sanctions aren’t going to make Russia change its behaviour if they don’t damage the Russian economy. Coercion has to hurt if it is to coerce. No pain, no gain, as it were. So are they hurting?

The report I have in hand is entitled ‘What difference have sanctions made and is that about to change?’ It was published in September by Macro Advisory Eurasia-Russia Consulting which describes itself as ‘the leading independent macroeconomic and political strategy firm specialising in the Eurasia region, including Russia and the CIS states.’ The report concludes that, ‘it is impossible to say categorically that sanctions have either significantly contributed to the economic decline [in Russia since 2014] or that they have helped the economy survive what would otherwise have been a more severe recession.’ However, the report’s authors tend more towards the latter option, saying that ‘sanctions helped in many respects.’

According to the report, the Russian economy was slowing down even before 2014. The major cause of the subsequent recession was the collapse in the oil price. The impact of sanctions was very small. However, sanctions did affect the way that the Russian government responded to the oil-price-driven recession. Following the global financial crisis of 2008, the government reacted by spending large amounts of its reserves on propping up the ruble, and also by increasing government spending more generally in a type of Keynseian counter-cyclical strategy. In 2014, it abandoned this policy. Instead it allowed the ruble to become a free-floating currency, while it also exercised a tight monetary policy designed to drive down inflation.

The report’s authors credit this latter strategy with preventing the post-2014 recession from becoming as deep as many feared it would be. They write:

Sanctions removed, or made more difficult, the soft options of borrowing and spending … The combination forced the state to be much more fiscally disciplined and more flexible with monetary policy. The ruble free float would not have happened without sanctions. … the decision to stop supporting the currency was the single most important action taken by the government and one of the key reasons why sectors, such as agriculture, have become more competitive and started to grow. … [Therefore] it can be argued that the 2014 sanctions actually helped Russia avoid a steeper recession and a more severe financial crisis.

The report says also that the sanctions forced the oil and gas sector to become more efficient, resulting in an increase, not a decrease, in production after 2014. In general, says the report,

Russia is in good financial shape. … Russia is the sixth-lowest indebted nation and has the sixth-largest financial reserves. … As a result of the sanctions, Russia was forced to repay $250 bn of external debt between 2014 and 2016. That represented 12.5% of pre-devaluation GDP and 25% of post-devaluation GDP. Not many countries in the world could have done that and still avoid a catastrophic crisis. It shows the resilience in the macro-economic and social-political system.

What then of the future?

On this Macro Advisory is a little more cautious. It claims that a lot depends upon the effects of the latest sanctions legislation passed by the US Congress. With this legislation, Congress has effectively seized control of sanctions from the president. Given past experience (e.g. with Cuba, Iran, and the Jackson-Vanik amendment which imposed sanctions against the USSR), the likelihood is that the existing sanctions against Russia will remain for a very long time, regardless of what happens with US-Russia relations more broadly. The new legislation is disturbing, moreover, because it contains stipulations which could be used to dramatically increase sanctions against Russia in the future. This possibility creates a degree of uncertainty which deters foreign direct investment (FDI) in Russia. Currently FDI in Russia is rising again, but that could easily change. A much harsher sanctions regime is possible, and that, says the report, could have a negative effect on the Russian economy.

The report lays out three possibilities. The first involves a relaxation of sanctions by European powers. The second sees sanctions remaining as they are. The third envisages much tighter US sanctions. The report assesses that in the first scenario, growth in Russian GDP will pick up to 3.0% by 2020, accelerating to 4.5% by the end of Putin’s final term in office in 2024. In the second scenario, growth will gradually rise to 3.0% by 2022 and remain roughly constant at that level thereafter. In the third scenario, growth will drop to 0.8% by 2020 before increasing to 2.3% by 2024.

Personally, I suspect that scenario two is the most likely – things will continue on much as they are. If the authors are correct, therefore, we should expect that, barring some external shock such as another global recession, during Putin’s final term in office the Russian economy will experience steady if not extremely rapid growth, ending up with three years of 3.0% growth per annum. That’s not enough to catch up with the West, but it’s not bad either, and certainly sufficient to put a noticeable amount of extra money in Russians’ pockets. If that’s really true, then economically speaking Putin’s last years will be a moderate success from an economic point of view.

Of course, these are all just projections and, as we know, economists often get their projections wrong. Nevertheless, none of this is good news for those who think that sanctions are an effective tool against ‘Russian aggression’ or who imagine that the collapse of the ‘Putin regime’ is just around the corner.