"Russians are devouring resources as though their existence will end tomorrow"
The EU sanctions impact Russia's economy, but it still experiences growth, according to Alexandra Prokopenko. She indulges that the growth will only be temporary. Prokopenko previously worked as a consultant for the Russian Central Bank until April 2022 and resigned due to Russia's invasion of Ukraine.
ntv.de: European heads of state and government have agreed on a new, now 14th sanctions package. It includes restrictions against the Russian liquefied natural gas (LNG) trade in the EU. What repercussions have the EU sanctions had on the Russian economy as a whole?
Alexandra Prokopenko: The situation is intriguing. On one hand, the sanctions undoubtedly hamper Russia's economic development. On the other hand, they insulate the Russian market from certain external pressure, as the Kremlin now invests heavily in the domestic economy. A country as vast as Russia has never been sanctioned to such an extent during a period of intense globalization. Both the Western nations and Russia are gleaning from this predicament. Russia is learning how to evade sanctions and how to survive embargoes. The EU and the USA are learning how to impose and most importantly, enforce sanctions. The 14th sanctions package isn't a silver bullet by itself. However, it tightens the grip, especially on the gas company Novatek, the sole provider of Russian LNG.*
ntv.de: Did Moscow predict the sanctions?
I believe so, at least with some sanctions. Before the invasion commenced, stress tests were performed on the Russian financial system and companies. It was evident as early as 2014 that the West intended to deny Russia access to the international interbank payment system SWIFT. The Central Bank had been preparing since 2014 an in-house SWIFT alternative - the Financial Messaging System of the Bank of Russia (SPFS). Russian banks were compelled to use this system for internal transactions. This mitigated the impact of the sanctions in 2022. The sanctions against SPFS were part of the 14th EU sanctions package. Even these sanctions were not a silver bullet. However, some secondary sanctions - those against Moscow's trading partners - are likely to harm the Russian economy. For example, banks in Kazakhstan must now choose between using SWIFT for their connection to the European financial system or continuing to work with the Russians. This limits Russia's possibilities for international cooperation and increases its costs.*
ntv.de: Why aren't many sanctions damaging the Russian economy as expected?
The main issue with the sanctions was that they were meant to bring about a quick impact. The conflict has been ongoing for nearly two and a half years, and the sanctions weren't designed for such a prolonged period. Additionally, the Russian government and the Central Bank responded promptly and competently. The West hadn't anticipated this, as Russia had shown so many unpredictable emotions in its foreign policy. Instead, purely technical decisions were made. In summary, it can be said: The sanctions don't work as anticipated. They need to be reassessed.*
ntv.de: Does Russia face sanctions that it wasn't prepared for and that could hurt hard?
This is complex, as sanctions not only affect the country against which they are imposed but also the other side. Every panacea against Moscow's economy would be difficult for the West as well. The design of energy sanctions is a good example of this. The USA appear pleased that Russia can sell its oil - at least to India and China. Moscow is circumventing Western sanctions with phantom fleets. The Western countries are permitting this to pass because they presumably don't want Russian oil to be withdrawn from the market, as this would also make it more costly for them.*
ntv.de: How is the Russian population faring economically?
The Russians are spending as if it were their final day on Earth. Inflation is substantial, but not as significant a problem as it was ten years ago. Wages are increasing with inflation at a faster pace. The situation is ironic. On one hand, the Russians have more money and are consuming more. On the other hand, inflation is pushing the Russian Central Bank to keep interest rates high. Russia now has an interest rate of 16% in the past seven months. That's not normal. A flourishing and growing economy doesn't require double-digit interest rates.*
ntv.de: Why is the demand in Russia so excessive?
The demand is being stimulated by the government, for instance through subsidized loans. That's not a sign of a healthy economy. Russia's trade is pivoting towards partners in Eastern countries. The Western products that are unavailable are being attempts to be substituted. This works poorly, as Western technology and machinery are in short supply - due to sanctions in the high-tech sector. Even secondhand machines and tools from Asia cannot replace Western technology.*
ntv.de: President Vladimir Putin is currently relying entirely on a war economy. Russia still has a substantial military-industrial complex from Soviet times and is expanding it. How durable is this strategy?
This strategy is risky, as focusing primarily on military production can lead to economic stagnation and dependency on military spending. A well-rounded economy is necessary for long-term growth and stability.*
If the hostilities between Russia and Ukraine were to cease, the country's economy might face a predicament. The military-industrial complex, which serves as the beating heart of Russia's economy, thrives on the demand for its goods. With the end of the war, domestic demand for military products would plummet, leaving Russia with limited options for generating revenue.
Russia has struggled to compete with Western counterparts in terms of exports due to technological sanctions, and domestic consumption of military goods is insufficient to sustain the military-industrial complex. If the demand does not materialize, Russia could be left with little choice but to shutter its military industry, leading to unemployment for thousands of military sector employees.
Such a scenario would force the Kremlin to consider yet another economic transformation, an endeavor that carries significant risks. However, the Kremlin's narrative of Russia being encircled by enemies adds impetus to the continued focus on the military-industrial complex. In the absence of a constant war, the industry's sustainability becomes questionable.
