Russia’s economy has weathered the West’s sanctions – but how?

Published

2 years ago

February 24, 2023

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In the aftermath of Russia’s invasion of Ukraine, Western leaders heralded a sanctions regime that would cripple the country’s war machine.

Joe Biden claimed Russia’s economy would be “cut in half”, while Boris Johnson spoke of squeezing it “piece by piece.”

A year has passed, but that great promise has been slow to deliver.

“The Russian economy and system of government have turned out to be much stronger than the West believed,” President Vladimir Putin said in a speech to the country’s parliament on Tuesday.

He was also flexing his muscles at an economic cabinet meeting last month: “Remember, some of our experts here in the country – I’m not even talking about Western experts – thought [gross domestic product] would fall by 10%, 15%, even 20%.”

Instead, Russia shrunk by a relatively modest 2.2% and it is expected to grow by 0.3% this year, according to the International Monetary Fund.

It means the sanctions-hit country will outperform Britain.

Among Western leaders, these predictions will make for unpleasant reading.

Over the past year, sanctions have descended on Russia’s economy but, to the surprise of most economists, it has weathered the storm.

This is largely down to the country’s oil and gas reserves. Although Europe turned its back on Russian energy exports, the country was able to exploit delays in imposing the ban, which helped bolster its public finances.

Revenues held up strongly thanks to a global spike in energy prices and a successful reorientation of trade to China and India.

Russia was already sitting on a comfortable cushion.

Record high trade surpluses following the invasion came after years of conservative fiscal policies which allowed the country to amass a fund that it is now deploying in the war against Ukraine.

The country has been quietly sanctions proofing its economy for years.

Russians are enjoying record low unemployment and wage growth that has helped them to weather the worst of rising inflation.

They’re still cautious about spending during times of economic uncertainty, but the government is trying its best to encourage them by hiking minimum wages and pensions.

While economic data is not wholly reliable, nor does it provide a full view of the strains Russian society is under, the domestic economy has not collapsed in the way some had warned.

President Putin is in a triumphant mood but it may not last for long as cracks are starting to show.

Oil revenues are slipping now that Western countries have introduced a price cap on Russian Urals, its main crude export blend, and the country’s public finances are deteriorating as a result.

At the same time Russia is having to ramp up military spending and is relying on sales of foreign currency – Chinese yuan – to support the rouble. Last year may have exceeded expectations, but the sting of Western sanctions is only just starting to be felt.

Jobs

Living standards in Russia have been supported by record high wage growth and low unemployment.

When the war first broke out, analysts expected the departure of foreign companies to lead to mass job losses.

Instead, unemployment fell to a record low of 3.7% as Western firms handed over their businesses to local partners, which helped to maintain employment.

However, the headline unemployment rate is disguising a massive drop in the size of the workforce.

Hundreds and thousands of skilled workers have left or fled the country, either to fight or find work elsewhere – estimates range from 0.4% to 1.4% of Russia’s workforce. This is weighing on economic growth, with the country’s central bank warning recently: “The capacity to expand production in the Russian economy is largely limited by the labour market conditions.”

As in Britain, where a shrinking labour market is affecting the country’s economic outlook and putting pressure on inflation, Russia’s fortunes will also depend on how well the size of its workforce recovers.

Tatiana Orlova, economist at Oxford Economics, said: “There is anecdotal evidence that some of those who left in panic in March or September have since returned, due perhaps to their being unable to find an equivalent job abroad or because they still had family and property back in Russia.”

Wages

The tight labour market has led to robust wage growth – especially for IT professionals, construction workers and hospitality staff – which is boosting living standards. Wage growth in Russia is almost keeping pace with inflation and the government is hiking pensions and the national minimum wage, which will go up by another 10% next January after rising by 20% last year.

Consumer spending

Oil revenues get a lot of attention but consumer spending is still the dominant part of the country’s economy and the government is hoping that the extra money will encourage Russians to go out and spend, something they have been cautious about indulging in over the past year.

It may have a large task on its hands, however. Many analysts expect Russia to launch a new offensive in the coming weeks in an effort to capture the whole of Donbas. If the country’s leadership announce a new wave of mobilisation then consumer confidence will likely drop again, causing households to prioritise saving over spending.

“The savings-to-disposable income ratio will rise again and stay elevated until the fighting abates, hampering authorities’ efforts to revive household demand,” Ms Orlova said.

Business investment

Another round of mobilisation could also start weighing on business confidence. In the early days of the conflict economists were convinced that business investment would collapse at its fastest pace in decades but that did not happen.

Bumper profits for oil, gas and fertiliser producers helped fund business plans, with fixed investment increasing by 6% in 2021.

As Russia diverted its energy exports to Asia, the country required a massive increase in infrastructure.

This also helped boost the country’s manufacturing sector, although not uniformly. The country’s car industry, for example, collapsed last year as manufacturers struggled to access key component parts and tools from the west. Others are coping by accessing parts from Turkey, which is yet to participate in the international sanctions.

Oil and gas

Attempts to strangle Russia’s economy were immediately stifled by Europe’s heavy reliance on Russian oil and gas exports, which make up about 40% of the country’s revenues.

Russia successfully exploited this.

In the nine months that it took for the EU to agree and implement a bloc-wide ban on Russian oil exports, Putin’s regime enjoyed record fiscal surpluses as the country benefited from soaring wholesale prices, with its current account surplus jumping by 86% to $227.4bn.

This gave Russia a giant cushion to help fund the war effort and strengthened its currency, helping keep the price of imports low and dampening inflation.

During this time the country was also able to redirect supply to India and China, where its overall crude and fuel oil exports reached a record high of 1.66 million barrels a day last month.

A more challenging 2023

This year will be more challenging.

The country’s public finances are already starting to weaken as lower energy prices weigh on revenues. A $60 a barrel price cap on Russian crude oil – imposed by the EU, G7 and Australia in December – means the country is being forced to sell oil at a considerably discounted price compared to the global Brent benchmark.

The cap was recently extended to refined petroleum products as well.

Russia’s budget deficit came in at £20.8bn in January as income from oil and gas fell by 46% over the year. At the same time, government spending increased by 59% over the year.

Economists identified these as early signs of strain, with the country having to sell more Chinese currency and issue local debt to support itself.

However, they were still relatively sanguine about the country’s prospects.

Sofya Donets, chief Russia economist at Renaissance Capital, said: “The fiscal deficit expanded in 2022 but remained still moderate at 2% – below the pandemic or the great financial crisis levels.”

She added: “With the public debt below 20% of GDP the financing is hardly an immediate source of the stress, though a sustainable decrease in oil and gas revenues will call for a medium-term fiscal consolidation and non-oil tax increase, we believe.

“This consolidation, however, is yet not that urgent and could be delayed by up to two years, we assume.”

Analysts said the country had scope to increase the tax intake by levelling windfall tax on energy and fertiliser producers.

Crucially, Russia is able to meet its financing needs comfortably at home.

Both the government and corporations have very low levels of external debt and the government has built up a robust sovereign wealth fund.

“We need to remember Russia has spent the best part of 10 years sanctions proofing its economy,” said Liam Peach of Capital Economics.

“What all this meant was being cut out of global capital markets and sanctions on various corporates, banks and the government didn’t really have much of an impact on their financial needs, because they were quite low. So Russia’s government, for example, could go eight months without issuing any debt.”

Business

Trump trade war escalation sparks global market sell-off

Published

1 day ago

April 3, 2025

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Trump trade war escalation sparks global market sell-off

Donald Trump’s trade war escalation has sparked a global sell-off, with US stock markets seeing the biggest declines in a hit to values estimated above $2trn.

Tech and retail shares were among those worst hit when Wall Street opened for business, following on from a flight from risk across both Asia and Europe earlier in the day.

Analysis by the investment platform AJ Bell put the value of the peak losses among major indices at $2.2trn (£1.7trn).

The tech-focused Nasdaq Composite was down 5.8%, the S&P 500 by 4.3% and the Dow Jones Industrial Average by just under 4% at the height of the declines. It left all three on course for their worst one-day losses since at least September 2022 though the sell-off later eased back slightly.

Trump latest: UK considers tariff retaliation

Analysts said the focus in the US was largely on the impact that the expanded tariff regime will have on the domestic economy but also effects on global sales given widespread anger abroad among the more than 180 nations and territories hit by reciprocal tariffs on Mr Trump‘s self-styled “liberation day”.

They are set to take effect next week, with tariffs on all car, steel and aluminium imports already in effect.

Price rises are a certainty in the world’s largest economy as the president’s additional tariffs kick in, with those charges expected to be passed on down supply chains to the end user.

The White House believes its tariffs regime will force employers to build factories and hire workers in the US to escape the charges.

Economists warn the additional costs will add upward pressure to US inflation and potentially choke demand and hiring, ricking a slide towards recession.

Apple was among the biggest losers in cash terms in Thursday’s trading as its shares fell by almost 9%, leaving it on track for its worst daily performance since the start of the COVID pandemic.

Concerns among shareholders were said to include the prospects for US price hikes when its products are shipped to the US from Asia.

Other losers included Tesla, down by almost 6% and Nvidia down by more than 6%.

Many retail stocks including those for Target and Footlocker lost more than 10% of their respective market values.

The European Union is expected to retaliate in a bid to put pressure on the US to back down.

The prospect of a tit-for-tat trade war saw the CAC 40 in France and German DAX fall by more than 3.4% and 3% respectively.

The FTSE 100, which is internationally focused, was 1.6% lower by the close – a three-month low.

Financial stocks were worst hit with Asia-focused Standard Chartered bank enduring the worst fall in percentage terms of 13%, followed closely by its larger rival HSBC.

Among the stocks seeing big declines were those for big energy as oil Brent crude costs fell back by 6% to $70 due to expectations a trade war will hurt demand.

The more domestically relevant FTSE 250 was 2.2% lower.

A weakening dollar saw the pound briefly hit a six-month high against the US currency at $1.32.

There was a rush for safe haven gold earlier in the day as a new record high was struck though it was later trading down.

Sean Sun, portfolio manager at Thornburg Investment Management, said of the state of play: “Markets may actually be underreacting, especially if these rates turn out to be final, given the potential knock-on effects to global consumption and trade.”

He warned there was a big risk of escalation ahead through countermeasures against the US.

Sandra Ebner, senior economist at Union Investment, said: “We assume that the tariffs will not remain in place in the
announced range, but will instead be a starting point for further negotiations.

“Trump has set a maximum demand from which the level of tariffs should decrease”.

She added: “Since the measures would not affect all regions and sectors equally, there will be winners and losers as in 2018 – although the losers are more likely to be in the EU than in North America.

“To protect companies in Europe from the effects of tariffs, the EU should not respond with high counter-tariffs. In any case, their impact in the US is not likely to be significant. It would be more efficient to provide targeted support to EU companies in the form of investment and stimulus.”

Business

British businesses issue warning over ‘deeply troubling’ Trump tariffs

Published

1 day ago

April 3, 2025

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British businesses issue warning over 'deeply troubling' Trump tariffs

British companies and business groups have expressed alarm over President Donald Trump’s 10% tariff on UK goods entering the US – but cautioned against retaliatory measures.

It comes as Business Secretary Jonathan Reynolds launched a consultation with firms on taxes the UK could implement in response to the new levies.

Money blog: Pension top-up deadline days away

A 400-page list of 8,000 US goods that could be targeted by UK tariffs has been published, including items like whiskey and jeans.

On so-called “Liberation Day”, Mr Trump announced UK goods entering the US will be subject to a 10% tax while cars will be slapped with a 25% levy.

The government’s handling of tariff negotiations with the US to date has been praised by representative and industry bodies as being “cool” and “calm” – and they urged ministers to continue that approach by not retaliating.

Business lobby group the CBI (Confederation of British Industry) said: “Retaliation will only add to supply chain disruption, slow down investment, and stoke volatility in prices”.

Industry body the British Retail Consortium (BRC) also cautioned: “Retaliatory tariffs should only be a last resort”.

‘Deeply troubling’

While a major category of exports, in the form of services – like finance and information technology (IT) – has been exempted from the tariffs, the impact on UK business is expected to be significant.

Mr Trump’s announcement was described as “deeply troubling for businesses” by the CBI’s chief executive Rain Newton-Smith.

The Federation of Small Businesses (FSB) also said the tariffs were “a major blow” to small and medium companies (SMEs), as 59% of small UK exporters sell to the US. It called for emergency government aid to help those affected.

“Tariffs will cause untold damage to small businesses trying to trade their way into profit while the domestic economy remains flat,” the FSB’s policy chair Tina McKenzie said. “The fallout will stifle growth” and “hurt opportunities”, she added.

Companies will need to adapt and overcome, the British Export Association said, but added: “Unfortunately adaptation will come at a cost that not all businesses will be able to bear.”

Watch dealer and component seller Darren Townend told Sky News the 10% hit would be “painful” as “people will buy less”.

“I am a fan of Trump, but this is nuts,” he said. “I expect some bad months ahead.”

Industry body Make UK said the 25% tariffs on cars, steel and aluminium would in particular be devastating for UK manufacturing.

Cars hard hit

Carmakers are among the biggest losers from the world trade order reshuffle.

Auto industry body the Society of Motor Manufacturers and Traders (SMMT) said the taxes were “deeply disappointing and potentially damaging measure”.

“These tariff costs cannot be absorbed by manufacturers”, SMMT chief executive Mike Hawes said. “UK producers may have to review output in the face of constrained demand”.

The new taxes on cars took effect on Thursday morning, while the measures impacting car parts are due to come in on 3 May.

Business

Trump trade war: The blunt calculation that should have spared UK from reciprocal tariffs

Published

1 day ago

April 3, 2025

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Trump trade war: The blunt calculation that should have spared UK from reciprocal tariffs

Economists immediately started scratching their heads when Donald Trump raised his tariffs placard in the Rose Garden on Wednesday.

On that list he detailed the rate the US believes it is being charged by each country, along with its response: A reciprocal tariff at half that rate.

So, take China for example. Donald Trump said his team had run the numbers and the world’s second-largest economy was implementing an effective tariff of 67% on US imports. The US is responding with 34%.

Trump latest: UK considers tariff retaliation

How did he come up with that 67%? This is where things get a bit murky. The US claims it studied its trading relationship with individual countries, examining non-tariff barriers as well as tariff barriers. That includes, for example, regulations that make it difficult for US exporters.

However, the actual methodology appears to be far cruder. Instead of responding to individual countries’ trade barriers, Trump is attacking those enjoying large trade surpluses with the US.

A formula released by the US trade representative laid this bare. It took the US’s trade deficit in goods with each country and divided that by imports from that country. That figure was then divided by two.

So, in the case of China, which has a trade surplus of $295bn on total US exports of $438bn, that gives a ratio of 68%. The US divided that by two, giving a reciprocal tariff of 34%.

This is a blunt measure which targets big importers to the US, irrespective of the trade barriers they have erected. This is all part of Donald Trump’s efforts to shrink the country’s deficit – although it’s US consumers who will end up paying the price.

But what about the small number of countries where the US has a trade surplus? Shouldn’t they actually be benefiting from all of this?

That includes the UK, with whom the US has a surplus (by its own calculations) of $12bn. By its own reciprocal tariff formula, the UK should be benefitting from a “negative tariff” of 9%.

Instead, it has been hit by a 10% baseline tariff. Number 10 may be breathing a sigh of relief – the US could, after all, have gone after us for our 20% VAT rate on imports, which it takes issue with – but, by Trump’s own measure, we haven’t got off as lightly as we should have.