Despite the failure of previous rounds the West introduces more sanctions on Russia

By Rhod Mackenzie

In February 2022, Western countries began to introduce an unprecedented package of sanctions against Russia. Over the past two years, it is already possible to summarise some results and assess how and what the restrictions have affected.

GDP grew unexpectedly strongly at the end of 2023 - by 3.6 per cent. This was despite economists predicting a recession and even a collapse at the beginning of the year. "In 2023, the Russian economy grew faster than predicted and expected. This indicates stability, which came as a surprise against the backdrop of negative forecasts from the West," says Egor Diashov, CEO of investment company Dialot.

To some extent, this can be explained by the low base effect of 2022, which ended in a recession. But compared to the pre-crisis year of 2021, last year's growth was 2.3 per cent. That is quite a lot - the European Union's GDP grows by about 1 per cent a year. And global economic growth last year was just over 2 per cent, according to the World Bank.

Where did it come from?
The gross value added of the sectors (analogous to GDP growth by sector) increased by 3.4 per cent. At the same time, Russia (albeit under the influence of sanctions and the need to strengthen the army) began to finance the development of manufacturing industry intensively. Manufacturing as a whole grew by 4.8 per cent over the period. "And this, despite all the costs of draconian sanctions, allows us to treat to some extent the Dutch disease of the Russian economy," says Valery Mironov, deputy director of the Development Centre Institute at the National Research University Higher School of Economics.

Production of electronic and metal products grew at an accelerated pace (up 31 per cent and 26 per cent respectively), other vehicles and electrical equipment by 23 per cent and 17 per cent respectively, and furniture by almost 15 per cent. Mechanical engineering, microelectronics and pharmaceuticals are growing.

Of course, much of this growth has come from the defence industry. However, military products can become the "new oil" for Russia, given the growing global demand for them and a possible increase in exports. And in general, military production is quite high-tech and stimulates other sectors of the economy. In the United States, for example, the defence industry accounts for about half of the budget.

Construction grew by 14 per cent, telecommunications, hotels and restaurants by 11 per cent and 15 per cent respectively, the financial sector by 11 per cent, agriculture by 7 per cent and transport by 3 per cent. The figures speak for themselves.
Where has it gone?
Undoubtedly, it cannot be said unequivocally that the sanctions were for our benefit. Many sectors of the economy went into decline. Mining output fell by 1.4 per cent and gas production by up to 5 per cent. But given the oil embargo and the significant reduction in pipeline gas supplies to Europe, this is not much.

The brand sector is counting its losses - many companies have left Russia. You can still buy their products - parallel imports help, but the range has narrowed and prices have risen. Domestic production of cars (by more than 40 per cent) and household appliances (by more than 35 per cent) fell sharply. These products were increasingly imported and became more expensive. Under the influence of export restrictions, wood processing (by about 10 per cent) and the production of other products of the wood industry complex decreased.

Main victims
At the same time, the sanctions hit the organisers themselves. But not to the same extent. The US, which started it all, is in the best position. On the one hand, distortions in the global export market are largely supporting high inflation in the United States at multi-decade highs. On the other hand, they have been able to keep all the imports they need from Russia (e.g. uranium), while making good money supplying LNG to Europe as a substitute for cheap pipeline gas.

But the EU has serious problems. The economy of the "locomotive of the eurozone" - Germany - has been falling for several quarters, and industry and agriculture are in decline. The United States is profiting handsomely from the destruction of its competitor, and the EU itself is turning into the backyard of the United States, becoming an American colonial market, noted the director of the Institute for a New Society, economist Vasily Koltashov.

"The EU is the main loser, and Germany has lost more than anyone else. It has lost its main competitive advantage, which was the ability to buy the necessary resources in Russia," he argues.

In the future, the "non-American West" will continue to decline economically and sink deeper into social depression. Those EU countries whose elites work for the Americans will suffer the most. And many already understand this - hence the mass protests and the growing popularity of parties dedicated to supporting their own economies, not anti-Russian measures. So it's not the people at whom this was originally aimed who are crying.
Prospects and plans
It is clear that sanctions will not disappear in the near future, but will only become tougher. Russia will continue to adapt to them and develop relations with friendly countries. The world will not be the same - the division into blocs and protectionism will intensify, and new logistical links and associations will emerge.

The economy will also develop at its own pace. A positive example is the experience of Iran, a country that has been under sanctions for decades. After the next round of restrictions in 2018, the situation was difficult; inflation reached 40%. But nothing collapsed: petrochemicals and oil refining began to develop actively, and among the non-resource industries - pharmaceuticals and the automotive industry. Achievements in these industries can be considered quite successful at the regional level; pharmaceutical products are exported to Iraq, Afghanistan and Central Asia, and the automotive industry (mainly specialising in the licensed production of European and Asian brands) accounts for almost 10 per cent of the country's GDP.

The imposition of sanctions on the central bank led to the legalisation of cryptocurrency, which had previously been planned to be banned due to fears of capital flight from the country. Mining in Iran brought in around $700 million a year a few years ago. It allows the country to effectively use oil to generate electricity, circumvent sanctions when paying for imported goods and give people jobs. Fintech and stock markets have also started to develop in the country: there are now dozens of fintech startups in Iran, specialising in insurance and money transfers, says Mironov.

It is clear that sanctions complicate production processes, both in terms of the supply of goods and technologies needed for production, and in terms of finding markets. However, the shortage of imported goods is boosting domestic production, which has led to the creation of new jobs. Logistics and "grey" trade systems are developing that have every chance of becoming white in the future.

Russia is not that isolated, which is impossible given the size of our economy. "It is not isolated at all, so we will not only develop, but also grow intensively," Koltashov concludes.