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The Russian economy appears to be able to withstand the pressure of sanctions, in part because the West made mistakes in its thinking. Meanwhile, China is seizing some opportunities in Russia.
Much has changed for Russia's economy since the attack on Ukraine. However, Vladimir Putin is unlikely to feel the pressure just yet. Among other things, because he still has the support of important partners, such as China.
But does China want this too?
Oliver Kempkens was a former manager at Sberbank. In an interview with IPPEN.MEDIA, he provides insight into daily life in Russia, why sanctions against Russia's economy could have a damaging side effect for the West – and what its economic partner, China, has in mind.
Russia has been waging war against Ukraine for over two years now. This is also very costly for Putin. How is the Russian economy doing with this?
Of course it is expensive, but on the other hand, at the beginning of the war, the Russian economy had accumulated reserves that it could use. The budget was always planned very conservatively. The Kremlin had never created "special funds" and had in fact become slightly over-indebted. There were also reservations. Now the reserves are largely used up. The Kremlin is now considering how to generate new revenue – for example through tax reforms and special taxes.
At the same time, Putin wants to invest a lot of money in the military – for the next year, military spending should correspond to almost a third of the total budget. Can he even afford such investments?
The Russian state can certainly afford this at the moment, but not for ten to 15 years. When you invest in the defense industry, you always produce goods that are not sustainable. If necessary, investments are also made in systems and fixed assets that will no longer be needed in the future. In the long term, this will undoubtedly have an effect on the Russian economy. But no one in Russia knows exactly how much the Kremlin has invested in the military so far, because not all data is transparent.
Do Western sanctions and the war in Russia severely limit life?
Of course, there are restrictions that every normal Russian feels: be it travel restrictions or financial restrictions, because you can no longer pay with a Russian credit card abroad. The utility market is more competitive and the housing market, which is generally not very volatile, has frozen and rents have risen sharply. In addition, the interest on the property has also increased due to the high base interest rate, even though wages are increasing and the depreciation of the property was usually possible in five to eight years.
But: everyday life has actually remained the same. Not much has changed there. For example, there are no restrictions on the food products you can get in Russia, the cars are Chinese, but there are also luxury brands there. Those with money continue to drive western luxury cars. For example, one of the first Rolls-Royce Specters was registered in Moscow.
But isn't it inflation that raises prices?
The state is also trying to counter the price hike. There are always pension adjustments and one-off payments for certain situations and preferential loan terms for families. Mechanically, this is quite impressive. As long as things are going well for a certain class, in this case the middle class and the elite, the war does not play that much of a role for the people and the state can distract from the war situation.
Would you say that the West underestimated the impact of sanctions on the Russian economy?
Yes, I think so. Above all, an underrated moment. Financial sanctions, in particular the freezing of Russian Central Bank funds abroad, have completely undermined the credibility of the West.
To what extent?
Because it is common for central bank funds to be stored elsewhere. By freezing Russian state assets abroad, it has made countries on the brink feel that the West is not such a reliable partner after all and, above all, the legal system has become politicized. A situation has been created in which many countries have not taken a stand against Russia, but at least remained neutral. By this I do not mean only China and Kazakhstan.
So is the West hurting itself with sanctions against Russia?
I'm not sure if the more sanctions you impose, the more countries you want on your side will win back. Especially when, historically and politically, people have not always been fully supportive of these countries. If you keep turning the spiral of sanctions, then at some point it will have to turn again. It's a very fine line, I don't think it's easy for anyone. Not for Ukrainians, not for Russia, not for the West, not for other countries, some of which also want to secure their markets.
Should the West put more pressure on Putin's allies?
This is always attempted through secondary sanctions. The West is trying to sanction trading companies in the United Arab Emirates, Singapore, Egypt and Turkey. But of course there are societies that operate in a non-transparent manner. Sanctions are systematically very harsh, but their application is not always consistent. It should also not be forgotten that some neighboring states had great economic relations with the Russian Federation. And of course they also see their prosperity at risk.
For Putin, China is one of the few allies. Is China really interested in helping Russia economically?
I think many Chinese companies are basically in compliance with the sanctions. Russia has certainly become a bit of an open-air laboratory for China. There are many things you can try. The automobile market is currently dominated by China, which is interesting for the end consumer. If you also look at consumer goods, especially consumer electrical goods, mobile phones, IT – a lot of it comes from China. This is certainly exciting for the Chinese market. Historically, they are not the partners you might imagine. I think that from the Russian perspective, the West will still be seen as a more suitable economic partner.
However, sanctions have forced Russia to turn more and more towards China, including in the energy sector. A pipeline deal is under discussion, but talks appear to be stalling.
There is little audience there. But I suppose people don't agree on everything. China apparently does not want to pay the prices the West paid. Russia would like to work with great symbolism. If "Power of Siberia-2" or another pipeline had already been built, this would also be a good signal for the inside.
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