Western sanctions “hurt” Russia’s economy deeply

Russia’s economy was expected to grow by 5%-6% in 2022 if Western sanctions had not derailed growth for years and paved the way for a period of technological stagnation, a veteran Russian economist told Reuters. Oleg Vyugin.

Vyugin said there was no disaster, with the sweeping sanctions imposed against Moscow over the conflict in Ukraine only 30-40% effective as Russia has found ways around the restrictions, but warned of serious problems if reduce Russia’s soaring export earnings.

“Without sanctions, the Russian economy could have grown by 6% this year” Vyugin, who served as deputy finance minister and deputy governor of the central bank before retiring from the Moscow Stock Exchange this year, told Reuters in an interview.

“In January-February one could see an upcoming takeoff. It turns out that there is a negative effect. Instead of a 5% increase, we had a 4% decrease, so the sanctions are working».

Russian officials are at pains to praise Russia’s economic strength in the face of sanctions.

President Vladimir Putin expects GDP to fall by only 2% this year, a more optimistic forecast than the economy ministry’s forecast of around 3%, but much improved on the World Bank’s April collapse forecast of 11, 2%.

Russia’s current account surplus — the difference between the value of exports and imports — more than tripled in the first eight months of 2022 to a record high of $183.1 billion as revenues surged while sanctions caused imports to sink, although the central bank expects them to contract in the second half of the year.

Vyugin said the outlook is bleak as long as no end to the conflict is in sight.

“The numbers may vary, but the main effect of the sanctions is that the process of economic development in Russia has been halted for several years“, he said.

“As long as export earnings are high, the economy receives very strong support,” he said. “If exports are too limited … that will cause serious damage and we will see the next cycle of GDP decline».

After imposing the toughest sanctions on Russia in modern history, including cutting off some of its biggest banks from the global financial system, Western countries and their allies are now preparing to limit their use of Russian oil and gas.

Meanwhile, China is reaping the benefits of cheaper energy supplies from Russia as Moscow looks east in search of alternative markets.

Viugin expects the impact of some sanctions to be felt with a delay, especially in the technology sector, where dependence on imports is high.

Industry sources told Reuters last month that Russian airlines, including state-run Aeroflot, had begun dismantling aircraft to secure spare parts they can no longer buy abroad because of the sanctions.

“The world will move forward, but Russia will only use second-rate technology and spend huge resources to recreate what already exists in the world, but cannot be imported” said Viugin.

“If the situation does not change, Russia will see a gradual decline in the level of technological development».

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