Several Western countries have decided to impose new sanctions on Russia because of the situation in eastern Ukraine. However, one thing the West has not taken into account: Russia has been preparing for this for years.
Russia is used to sanctions.
This is what the Russian Foreign Minister commented on Sergei Lavrov after the European Union, Britain and the United States announced new sanctions on Russia on Tuesday.
Sanctions were the result of the Russian president Vladimir Putin declaring the separatist regions of eastern Ukraine independent.
President of the European Commission Ursula von der Leyen said on Tuesday that the EU is banning trade between the two separatist regions and the EU, as it did in 2014 in connection with the illegal annexation of Crimea.
In Finland, the sanctions round is remembered for the so-called Putin cheeses, but in 2014 Russia learned a lesson that has led to Russia’s determined efforts to become more self-sufficient.
This story presents five ways in which Russia has prepared for a new batch of sanctions in the West.
1. Russia shall maintain balanced public finances and avoid indebtedness
Russia has sought to reduce its dependence on the West and has chosen to increase its treasury instead of economic growth.
Russia’s budget has been in surplus for several years, when the price of oil, which is important to Russia, has been high.
Russia has also stored the surpluses of previous years in case of a bad day in the so-called National Welfare Fund.
Its funds are intended to cover temporary deficits. The fund currently has $ 160 billion in currency.
Senior Advisor Laura Solanko The Bank of Finland says that there is no acute need for borrowing in Russia right now, even though sanctions are hitting.
Strengthening the Russian economy has been a conscious economic policy line since the beginning of the 21st century.
– It is considered that public indebtedness is a bad thing in principle. In particular, government indebtedness abroad, Solanko says.
After the occupation of Crimea in 2014, the view of a debt-free economy has intensified.
According to Solango, focusing on debt prevention may be one reason for Russia’s slow pace of economic growth.
The country’s economy has grown at an average rate of about 1.5 percent per year over the past decade.
From the citizens’ point of view, slow economic growth has meant impoverishment of the middle class and growing income inequality. However, the economic policy line chosen for the state may mean a more financially stable and self-sufficient development.
In addition, Russia has developed its own internationally operating payment system in case the West interrupts Russia’s access to the global SWIFT cross-border payment system.
In practice, therefore, Russia is seeking to build its own, alternative financing system that would help it withstand Western sanctions.
2. Russia invests in gold and reduces its dependence on the dollar
Russia has prepared for the fluctuation of the ruble by shifting money from the currency to gold and the US dollar to the Chinese renminbi.
It is more than ever.
Solanko says the foreign exchange reserves and the National Welfare Fund it would help support Russia for some time if the Russian ruble depreciates as a result of sanctions.
– The funds in foreign exchange reserves are not intended to cover government expenditure, but the funds can be used to support the exchange rate of the ruble or, in theory, to support companies in repaying a foreign currency loan, Solanko says.
Usually, sovereign wealth funds are invested in U.S. dollar-denominated bonds, but Russia has reduced the amount of dollar-denominated securities and deposits in recent years.
In addition, Russia has recently invested more and more money in gold.
At present, Russia has the fifth largest amount of money in gold reserves in the world and has the fourth largest foreign exchange reserves, according to the International Monetary Fund. statistics (switch to another service).
Only 16 percent of Russia’s foreign exchange reserves today are in dollars, up from 40 percent five years ago.
Instead of dollars, Russia has begun investing money in Chinese renminbi.
Laura Solanko, a senior adviser at the Bank of Finland, says that Russia can protect itself if the use of the US dollar is suddenly restricted, for example as a result of sanctions.
– There is certainly political will in it. Russia, of course, would like the world to be less dependent on the dollar and has also set an example by reducing its dependence on the dollar.
3. Looking for trading partners in the East
In recent years, Russia has reduced its dependence on foreign loans and investments and sought to new trading partners outside the Western market.
Among other things, China has become an increasingly important trading partner for Russia, although partnerships with other CIS countries and the EU have continued to be built.
China’s share of both Russian exports and imports has clearly increased, but this is due to the fact that China’s role in the world economy has strengthened over the past 15 years.
– Much of the growth in China’s role reflects what has happened in the global economy in general, Solanko says.
China has become the world’s largest consumer of energy raw materials and has opened up new export opportunities for Russia.
Economic cooperation between China and Russia outside energy raw materials remains weak. For example, China has not replaced EU countries and the United States as a source of direct investment or funding.
However, China and Russia unite cooling relations with the United States. Both have been subject to US sanctions, which could further strengthen their trade relations.
4. Russia trusts in the power of natural resources
So far, the EU has not dared to touch the jewels of the Russian economy: oil and natural gas.
Exports of oil and natural gas play a significant role in the Russian economy. The EU has so far not imposed sanctions on the Russian oil and gas industry, and this may be Russia’s survival strategy.
Russia is confident that the EU, which receives 40% of its natural gas supplies from Russia, will suffer the most from the cooling relationship.
Germany’s decision to suspend the Nord Stream 2 gas pipeline project is detrimental to Russia, but excluding Russia from the market could significantly increase the price of electricity and heating in Western Europe. That, in turn, would push European households into disrepair.
5. The elite takes care of themselves
Putin’s networks take care of the elite’s money and assets, and the money is not deposited in foreign accounts.
The EU added 351 members of the Russian Duma to its sanctions list, who voted in favor of recognizing the separatist regions of eastern Ukraine. It is the majority of the 450 members of the Duma.
Russian President Vladimir Putin is not on the list.
Putin does not keep money and other assets in his own name for obvious reasons. However, he has a network of wealthy supporters who take care of the finances on his behalf.
Russian oligarchs have money caught in, for example, securities, companies, stock exchanges and real estate across Europe. In addition, billionaires invest money in luxury lifestyles, gold and jewelry.
So much Russian money has been nestled in Britain in recent years that Russians own British football teams, the media and universities, and even finance (switch to another service) British policies.
The origin of money is often in tax havens and networks are complex. Property regimes make it difficult to impose sanctions on wealthy individuals.
What do you think about Russia sanctions and economic sanctions more broadly? You can discuss the topic until Friday, February 25, 2022 at 11 p.m.