The story begins in 2014, when Russia suffered the twin shock of a plunge in oil prices, and Western sanctions levelled to punish the Kremlin for invading Crimea. Russia was no stranger to financial crises, which helped topple its Soviet empire in 1989, wiped out the rouble twice in the 1990s, and devastated the Russian economy again in 2008. The 2014 shocks seemed to persuade Russian President Vladimir Putin that enough was enough.
Though he is often compared to erratic and repressive autocrats, on macroeconomic policy Putin has long been relatively careful and moderate. After 2014, Putin turned even more defensive on economic policy, focussed on turning Russia into a financial fortress invulnerable to external pressure, including from sanctions. To a surprising extent he has succeeded.
Once among the most crisis-prone emerging nations, Russia is now one of the most – perhaps the most – conservative and stable. While peers like Turkey’s Recep Tayyip Erdogan grow increasingly unorthodox on economic policy, Putin has become a model of extreme orthodoxy.
The pillars of fortress Russia lie in the way the Kremlin manages its budget and the rouble. By the time the pandemic started to force lockdowns last year, Russia was ready. It entered the pandemic with the lowest government debt among the 20 largest emerging economies, just 14% of GDP. It also had the highest government surplus, the fourth highest current account surplus, and the fourth largest foreign currency reserves: $580 billion, up from an early 2015 low of $350 billion.
Moreover, after seven years of hawkish monetary policy to control inflation, the central bank had greater room to cut rates. For the first time in modern history, Russia had the ammunition to counter a crisis by both raising government spending and easing interest rates.
Nonetheless, the Kremlin continued to move deliberately. In 2020 its combined central bank and government stimulus was relatively moderate compared to other big emerging economies, and so was the resulting downturn, a contraction of 3.5%.
Today Russia is much less vulnerable to outside pressure than it was when the sanctions campaign began. One of the best gauges of external vulnerability is to compare a country’s short-term foreign debt to the means it has to cover that debt, including export revenues and foreign currency reserves.
By any measure, Russia is now a highly stable outlier. For example, the short-term debt it owes to foreign lenders amounts to barely over 10% of its foreign currency reserves, compared to more than 30% on average in emerging countries.
Russia’s fate is also less beholden to the whims of the global oil market. The government stores excess profits when prices are high, and spends those stores when prices are low, stabilising the economy and the rouble. Today the rouble is well-insulated against oil price shifts, even in comparison to the currencies of developed energy exporters like Canada and Norway.
Finally, the Kremlin is making the widely discredited strategy of import substitution work. It countered international sanctions by blocking food imports, which has invigorated Russian agriculture and reduced dependence on foreign suppliers. Along with China, Russia is one of the few emerging countries nurturing successful internet giants behind increasingly closed doors, to protect them from Western competition. Russian companies dominate the domestic market for online search, shopping and other services.
The flaw in Putin’s strategy is that it is all defence, no offence. He talks of boosting the economy’s anaemic growth rate – which has averaged barely 2% over the past decade – but has offered no real plan to make it happen, outside of an underfunded infrastructure spending programme. Since 2014 Russia has fallen off the list of the world’s ten largest economies, and Russian per capita incomes have shrunk.
This turn has not dented Putin’s political strength as much as many commentators suggest. Despite recent anti-Putin protests, and opposition exposés of state corruption, credible polls suggest that more Russians think the country is moving in the right direction than the wrong one. Putin’s approval ratings have slipped but are still around 65%, an endorsement most world leaders would die for.
Why? A crisis-battered nation seems to prize stability. Past surveys have shown that Russians care more about the absence of instability than about growth. As it happens, fortress Russia is well-built to survive a post-pandemic world that is likely to be defined by greater de-globalisation and local digitisation.
The economic lockdowns accelerated both the ongoing decline in global trade and capital flows, and the adoption of online services. With the global economy facing the threats of slower growth, higher inflation and frothy markets, stability and domestic strength are key advantages.
Of course, the stated intention of sanctions was to target the Kremlin allies responsible for its meddling abroad, not to punish the Russian economy or its people. But the meddling continues. Meanwhile, seven years of sanctions have hardened the Kremlin against outside pressure, which means that it will take more than just ratcheting up targeted sanctions to dent the walls of fortress Russia.
Ruchir Sharma is the author of the upcoming ‘10 Rules of Successful Nations’