WIIW expert says first sanctions will hardly hurt Russia’s economy

The first sanctions announced on Tuesday against Russia by major Western powers will hardly have a symbolic effect on the Russian economy, warned an expert from the renowned Vienna Institute for International Economic Studies (WIIW).

The chief economist for Russia at the WIIW, Vasily Astrov, assures that the measures adopted so far are “quite modest”, since Russia depends little on international financial markets.

According to the Russian economist, who has been working for the WIIW since 2003, the Russian Federation has been accumulating significant foreign exchange reserves in recent years and its public debt is very low.

“Russia’s public debt is only 28% of Gross Domestic Product (GDP), foreign exchange reserves (dollars) amount to 40% of GDP”, explains Astrov.

With some US$640 billion, these reserves are only behind those of China, Japan and Switzerland, the economist points out.

Given this data, the sanctions announced by the United States and the European Union, among other countries, “are only symbolic in nature,” says the economist.

“They are small punctures, which are hardly important, as are the measures against certain people”explains the expert, referring to the sanctions against several businessmen and against the 351 Russian deputies who voted in favor of recognizing the “independence” from the rebel territories in eastern Ukraine.

“These measures are unpleasant for the people concerned, but have no economic relevance. The idea behind it is to create discomfort in the Russian political and economic elites so that they will rebel against (President Vladimir) Putin. But that’s not going to happen”, he assures.

“The problem is that these people depend more on Putin than on the West and if they have to choose they will remain loyal to the regime, even if they suffer some losses in the West.”, explains Astrov.

Thus, the announced punitive measures will subtract tenths of a percentage from Russian economic growth at most, estimates the WIIW economist.

“What may be more relevant is not the sanctions themselves but the growing risk in general, such as the depreciation of the ruble (the Russian currency) due to capital flight these days”, notes Astrov.

More painful for Russia, undoubtedly, would be to exclude the country from the international SWIFT payment system, which would lead to the collapse of the payment processing system.

“Even in this case, I highly doubt that Russia will fall into a recession because of it.”, qualifies the expert and recalls that Western countries would also be greatly affected, since they would not be able to pay their natural gas bills to Russia.

Several European countries, such as Germany, Austria or Bulgaria, are highly dependent on Russian natural gas.

Another measure that could harm Russia, according to the expert, would be to cut off access to the international sale of dollars. “That would be a very harsh sanction for Russia, as it would cause significant costs”, assures Astrov.

In any case, the expert highlights, Russia is much better prepared today to face Western sanctions than in 2014, after the annexation of Crimea, when the price of oil was at its lowest.

With the current price above $90 a barrel, Russia can easily withstand a drop even if Iran returns to oil markets in the framework of a possible imminent deal on the nuclear pact.

“High oil prices are a major prop for Russia and make it unlikely to fall into a recession”, assures the expert.

Russia is, together with the United States and Saudi Arabia, the world’s largest oil producer and the largest exporter of natural gas on the planet.

Astrov recalls that the Russian public budget is based on an oil price of US$42 per barrel.

The money entered above that price is invested in a special state fund, whose volume already amounts to 12% of GDP.

The Russian economist also recalls that the Russian population is used to economic crises, such as in the 1990s or early 2000s.

“The Russian population is very patient, not like in Italy or France”, says the expert, questioning whether the economic damage to Russia could cause social unrest that could be a danger to the Russian president.