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Economy

How Much Longer Can The Russian Economy Survive Sanctions?

The head of the Kremlin boasted at the recent forum in St. Petersburg International Economic Forum about Russia’s economic resilience against Western sanctions. But behind the scenes, Russian business leaders tell a different story.

Photo of a worker collecting goods in a warehouse for an online order at a Veshki distribution center for the food retailer VkusVill, a chain of Russian grocery stores.

At a Veshki distribution center for the food retailer VkusVill, a chain of online Russian grocery stores.

Benjamin Quénelle

-Analysis-

MOSCOW — "The most effective sanction to weaken the Kremlin? Not to target us and punish us, but to give us visas instead ... to abandon the sinking the ship!" This businessman's iconoclastic perspective embodies the anxiety one could detect percolating just below the surface at the "Russian Davos" Forum in St. Petersburg last week.

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Officially called the "International" Economic Forum, the annual event organized by Vladimir Putin is meant to attract foreign investors — but this year, the elite of the national business community were cut off from the rest of the world. "Just among Russians... And forced to line up behind the regime and its economic strategies that lead us to a dead end," says the same source, a Russian manager in one of the main state-owned companies.

Like so many others, this man in his 40s, a typical representative of the new upper middle class, with a foreign passport in hand, educated in the West, liberal and multilingual, discovered his name on the lists of Western sanctions. Directly or indirectly, a large part of the Russian business world has been caught up in the European and U.S. sanctions against Moscow.


At the beginning of the Kremlin’s “special operation” conducted in Ukraine, many top business leaders were shocked and did not hide their disapproval of the military offensive. Four months later, the successive series of sanctions are making it impossible for them to leave Russia. Departures that, on the contrary, would have weakened the Kremlin and its economic strategy.

Entrepreneurs "stuck" in Russia

At the St. Petersburg International Economic Forum, those silenced rebels kept a low profile. They quietly confided their discomfort and mentioned a reality: the sanctions have had a counterproductive effect. People from the working class, faithful supporters of the Kremlin, applauded the measures taken against the richest, indirectly thanking Europe for doing what the Kremlin could not do: attack the despised oligarchs.

As for the people from the upper class, they got stuck in Russia and must implement the President's objectives, in particular the hypothetical replacement of imports by domestic production. A policy that nonetheless has been a struggle for a long time.

In 22 years in power, Vladimir Putin has been able to bring order to the country and, despite a decline in income in recent years, has improved the daily lives of Russians. But he has failed to modernize the country's economy and, far from the oil and other raw materials, to diversify its industry.

By not creating the conditions for a stable, open, competitive, and business-friendly market, including a fair and transparent judicial system for entrepreneurs, he has sacrificed the long-term welfare of Russians. Not the poor, who will continue to grow in number. Not the richest either, who, despite the crises, know how to maintain their fortunes. But across the middle class that, between economic frustrations and political distortions, is now forced to stand behind the Kremlin.

A chicken burger from the new McDonald's restaurant called ''Vkusno i Tochka'' in St. Petersburg, Russia. The new chain is seen by some as a symbol of the Kremlin's propaganda.

© Maksim Konstantinov/SOPA Images/ZUMA

Defying economic Blitzkrieg

The suddenly regained strength of the ruble, artificially supported, allows Vladimir Putin to present a resilient economy. Especially with fewer imports and exports of raw materials boosted by rising prices, the trade balance is reaching record levels of surplus.

Gazprom has never earned so much from gas sales, providing the state with much-needed tax revenue to finance the war effort. The reopening of McDonald's, which was taken over and relaunched with a new name and logo by one of the franchisees, is another symbol put forward by the Kremlin's propaganda. It serves as an example of Russia's ability to rebound despite the departure of Western companies. This is enough to feed the middle classes in the cities and to maintain hopes of emancipation against the threats of isolation.

At the St. Petersburg forum, Putin put it this way: “The economic Blitzkrieg against Russia had no chance for success!”

Still, the first real damages to the economy, the performance of Russian companies' earnings, are expected to arrive in the fall. Recession looks inevitable. But, defying earlier forecasts, the gross domestic product drop is likely to be closer to 15% than to 25%. Because the very structure of Russia’s economy, which is at 70% controlled by the state and its public companies, helps it to cope.

Employment is resisting the slowdown as well, thanks to agreements (and limitations...) on part-time work and other paid leave. But eventually, waves of layoffs appear inevitable as companies are caught in the bottleneck of depleting stocks of intermediate products.

Moscow's state aid and intervention has thus helped with short-term resilience, but the false picture of an invincible Russian economy in the face of Western pressures is bound to backlash among a bewildered middle class.

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