Russia is reeling under the double attack of Western sanctions and low oil prices hurting its revenues. Its currency has been devalued. Unemployment is rising. Inflation is running high. Wages are falling, benefits are being cut and pensions are getting eroded.
But Western powers may be overestimating the impact of all those factors to force Russian President Vladimir Putin into submission, according to experts. They note that several factors work in Russia’s favor: chiefly, strong currency reserves to ride out low oil prices; a continued, long-term growth in oil demand in the foreseeable future; the likelihood of oil prices strengthening, and the limited impact of Western sanctions on the lives of ordinary Russians. However, even as Putin seems set to wait out the crisis until oil prices pick up, Russia’s best long-term interests are in a rapprochement with the West, they add.
“[Russia] was flying high two or three years ago with a lot of surplus cash, and many opportunities to do dramatic programs in terms of geopolitical ambitions and new economic forays,” said Rudra Sil, professor of political science at the Penn School of Arts and Sciences (SAS) and co-director of theHuntsman Program in International Studies & Business. The drop in oil prices has forced the country to scale all of that back dramatically, he added.
“In hurting Russia we also hurt ourselves,” said Brenda Shaffer, a professor at Georgetown University’s Center for Eurasian, Russian and East European Studies, and an expert on energy and foreign policy. She noted that the Russian sanctions have cost the European Union one-half of a percentage point in GDP growth, citing recent EU statistics. Germany, as Russia’s second-biggest trading partner in Europe, is “bearing the brunt of the sanctions,” she added. (Sil and Shaffer discussed the impact of oil prices and sanctions on Russia and the global economy on the [email protected] show on Wharton Business Radio on SiriusXM channel 111. Listen to the podcast at the top of this page.)
Russia will have “a hard fall,” predicted Mitchell A. Orenstein, professor in the department of Slavic languages and literatures at the Penn School of Arts & Sciences. Orenstein’s specialties include the political economies of Central and Eastern Europe.
Orenstein noted that the fall in oil prices prevents Russia from making large investments in industrial modernization. That will be further constrained “under the shadow of Western sanctions that prevent investment in key sectors and cut Russia off from Western finance,” he added. “Russia will be forced into austerity and to spend down its substantial reserves in order to protect public consumption … or to continue or accelerate foreign military adventures.”
“Russia is in a bit of a bind,” said Wharton professor of legal studies and business ethics Philip Nichols. He noted that the country was forced to change when the Soviet Union dissolved. While Boris Yeltsin faced difficulties in steering the country after the dissolution, “Putin brought much-needed stability,” he added. “One of the ways he did so was by using incentives outside of the formal, market economy. That is not very efficient, but Russia could get away with it because of the high price of oil. Well, the crutch of the high price of oil is gone.”
Impact of Sanctions and Cheap Oil
Sil said the oil price fall has made the sanctions important for Russia. “It has cut off opportunities to cushion the blow from the drop in oil prices,” he explained. “[Yet], they are not on a scale so dramatic within Russia that we can afford to expect sanctions alone to bring about regime change and pressure administrative change in Moscow. It’s a much more complex and nuanced issue.”
According to Nichols, the sanctions have selective and limited impact on Russians. “When I walk around Moscow or St. Petersburg, I do not see shuttered store windows or people lined up outside of food distribution centers,” he said. “More accurately, Western sanctions and Russia’s counter-sanctions in response have constrained the country.”
Nichols pointed out that for the most part, the sanctions targeted the actions and assets of individual Russians and were not meant to have an effect on the broader economy. It was only in the third round of sanctions that limits were imposed in the financial and extractive sectors, he noted. “For most Russians whom I speak with, it is actually the Russian counter-sanctions that have had a greater effect on daily life,” he added. “In particular, they really miss parmesan cheese.”
Financial sanctions have hurt Russia the most, according to Nichols. The impact goes beyond irritants Russians initially faced in using credit cards, he said. “Far more deleterious to the Russian economy, it is difficult to structure transactions that require international financing,” he added. “Foreign investors are worried about financing and payments, and there is increased uncertainty.”
“[The effects of cheap oil] are not on a scale so dramatic within Russia that we can afford to expect sanctions alone to bring about regime change and pressure administrative change in Moscow.”–Rudra Sil
Russia’s problems will no doubt hurt the world economy, but not as much asthe contraction in China, said Sil. “China seems to drive so much of the global economy; relative to that, Russia’s problems are more of a domestic issue.”
Sil added that the EU as a whole might be able to survive the impact of the Russian sanctions. However, “countries like Greece, Spain and Italy are struggling a lot more, and these divisions are starting to come out this year.”
“Ironically, the sanctions have to some extent had a salubrious effect on an economy that may have depended too much on imports from just a few places,” Nichols said. “The sanctions have forced businesses that sell foodstuffs and consumer products to Russian consumers to find different sources of goods, and for the most part they have.”
Nichols talked of how such local sourcing has helped McDonald’s in Russia. McDonald’s increased its profitability in Russia last year by increasing local sourcing to about 85%, he said. The fast food chain now plans to open 60 new restaurants in Russia in the coming year, to begin franchising outlets instead of owning them all, and to increase local content to 100% in the next two years, he added. “McDonalds had to look for supply sources not affected by sanctions, and that actually increased its profits.”
Options for Russia
Nichols said the options for Putin depend on how Russian citizens choose between stability on the one hand, and economic growth and global integration on the other. “If the Russian people desire economic growth and global integration, it seems that the government should wean itself from these informal structures and incentives and should promote leaner, more competitive and transparent enterprises,” he noted.
“Russia’s best strategy would be to back down from its confrontation with the West, pull out of Ukraine, and agree to turn the Ukrainian border over to Ukraine, in exchange for a face-saving lifting of the sanctions and counter-sanctions, which would also improve domestic consumption by making food, in particular, less expensive,” said Orenstein.
However, Orenstein does not expect Putin to budge. “Given the opposing logics of creating foreign adventures to distract Russians from domestic troubles and making peace with the West to lift consumption, however, it is unlikely that Putin will want