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How Has Russia Withstood Two Years of Sanctions?


In this interview, Xu Poling, a Russia expert at the Chinese Academy of Social Sciences, reflects on lessons learned from recent research trips to the country. He seeks to explain Russia’s relative resilience in the face of sanctions, concluding several factors are at work – the quick imposition of strict outbound capital controls, forced sales of foreign currency to increase central bank holdings, insistence on selling gas to Europe in rubles, and de-dollarization efforts since 2014.

Key takeaways
  • In this interview, Xu Poling, a Russia expert at the Chinese Academy of Social Sciences, recounts observations from recent research trips to Russia. He suggests the war has not significantly affected the lives of ordinary citizens, and some regions are thriving economically.
  • Xu attributes this relative resilience under Western sanctions to a variety of factors. Following the initial sanctions against Russia, Xu argues, Moscow implemented strict outbound capital controls, mandated sales of foreign currency earnings to increase central bank supply, and restored confidence in the ruble by tying the currency to gold.
  • Xu suggests the Russian financial system is strong, due to minimal government debt and a history of de-dollarization and diversification of international reserves since 2014.
  • Looking ahead, Xu suggests Russia’s economy is shifting away from its traditional concentration on the energy sector, with an expanding manufacturing sector. This “steroid shot” for Russian economy, the author posits, could be the reason Putin is not in a hurry to end the conflict.
  • Xu notes that as Western brands and goods have left Russia, Chinese firms have stepped in, and have also begun to import more energy from Russia.
  • At the conclusion of the interview, Xu draws lessons for Beijing in guarding against possible future sanctions from the West—emphasizing the importance of enhancing financial security, diversifying foreign reserves, and reducing dependencies within security-related supply chains.

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The Russia-Ukraine conflict began on February 24th, 2022. Over the past two years, Russia has been hit with almost 20,000 different sanctions from 48 countries (mainly located in Europe and North America). The number of countries leveling sanctions, the number of sanctions, and the breadth of said sanctions are unprecedented.


However, after a brief period of turmoil, Russia’s economy and financial system stabilized. The Russian economy shrank by 2.1% in 2022, but in 2023, it grew by 3.6%, one of the fastest growth rates of any major country. Russia has become the largest economy in Europe, according to purchasing power parity.


How did Russia manage to achieve this? Guancha recently conducted an exclusive interview with Professor Xu Poling, Director of the Office of Russian Economic Studies at the Chinese Academy of Social Sciences’ Institute of East European, Russian, and Central Asian Studies. Professor Xu gave us a deep dive into Russia’s economic resilience, as well as the lessons that China can learn from it.


The Living Standards of the Russian People are Improving


Guancha: A group of Chinese scholars traveled to Russia to conduct research in 2022-2023. They found that the political and social situation in Russia is quite stable, and that the war has not affected the lives of the vast majority of Russian urban residents. These results are quite surprising. Professor Xu, what did you learn from your research, and how do you interpret your findings?


Xu Poling: In June 2023, we visited Moscow, Saint Petersburg, and Armenia. In November 2023, we went to Khabarovsk and Yekaterinburg. We visited five different places during our two trips in an attempt to understand the effect of the sanctions on Russian public sentiment and the Russian economy.


In June, we visited two Russian think tanks, as well as Russia’s two largest cities, Moscow and Saint Petersburg. We found that the Russian “social and living order” remained stable. The general mood of the people did not reflect the tension and anxiety typically seen in a nation at war. The everyday lives of ordinary citizens were largely unaffected.


In November, we visited the border region of Khabarovsk, as well as Yekaterinburg, one of Russia’s main economic centers. Each Russian federal district has its own economic hub: the Northwestern Federal District’s hub is Saint Petersburg, the Central Federal District’s hub is Moscow, the Volga Federal District’s hub is Kazan, and the Ural Federal District’s hub is Yekaterinburg. In the past, these four federal districts were the most important economic centers in Russia, with the Northwestern Federal District being the most active and developed.


After the sanctions, economic activity in the Northwestern Federal District decreased. Most of the main Russia-Europe joint ventures and trade-related enterprises are located in the Northwestern District, so its economy was heavily impacted by the sanctions.


However, more than a year after the sanctions were first implemented, the manufacturing industry of the Ural Federal District, where Yekaterinburg is located, has actually experienced rapid growth. We observed that, particularly in Yekaterinburg, the standard of living has been improving. This also applies to the Far East region of Russia, where income levels have increased. Traditionally, Russian ride-hailing drivers have earned fairly high incomes. The driver who took us from the airport to our hotel mentioned that his monthly income was now over 200,000 rubles (about RMB 20,000). It was evident that the overall mood of the Russian people, as well as their attitudes towards consumption, were very positive. It did not feel like a society experiencing the hardships of war.


Our analysis has identified several reasons for this. After President Putin announced the “special military operation,” he laid out three principles: first: keep the hostilities outside of Russia’s borders and prevent them from spreading into Russian territory; second: the financial burden caused by the war should not affect the basic living standards of the Russian people; third: minimize casualties among both civilians and soldiers as much as possible.


These three principles played a vital role in mitigating the negative impact of the war on Russian society and the Russian economy.


The Russian economy has yet to suffer a significant downturn, even after two years of conflict. Russia’s GDP declined by 2.1% in 2022, with revised figures in October showing a smaller decrease of only 1.2%. Between July and August of 2022, the economy began to show positive growth compared to previous months. After experiencing 9 to 13 consecutive weeks of deflation, prices stabilized, and Russian residents’ lives began to return to normal.


By 2023, the economy had grown by 3.6%, with real disposable income increasing by 5.4% year-on-year (adjusted for inflation), and real wages growing by 7.6%. Russian residents’ real disposable income reached 98.6% of its 2013 peak. Against the backdrop of war, the Russian people’s standard of living has not been significantly affected; in fact, real incomes are rising, and consumption is growing. We feel that Russian society has not actually experienced too much hardship from the war.


How has Russia withstood the sanctions?


Guancha: You have long been dedicated to the study of Russia’s economic transition. The sanctions and isolation imposed on Russia by the West, especially the blockades of its financial sector and the freezing of its foreign exchange reserves, are unprecedented. Based on your research, what impact have these sanctions had on the Russian economy?


Xu Poling: Russian scholars categorize the sanctions from the West into six categories. (1) bans on goods, (2) technology blockades, (3) sanctions against enterprises involved in the war, (4) sanctions against major entrepreneurs and political figures, (5) sanctions against the entire Russian financial system, (6) sanctions against the Russian energy sector. We’ve observed that all six types of sanctions have been implemented.


Among these, the financial sanctions have had the most significant impact on the Russian economy. The West’s objective was to cause capital flight from Russia and deplete its financial resources, ultimately leading to a financial crisis. Clearly, that’s what started happening, at least initially.


The war started on February 24, 2022, and Western countries leveled sanctions for four consecutive days, causing significant fluctuations in the Russian stock market and the ruble exchange rate. The ruble depreciated sharply, with exchange rates plummeting across three markets. It fell to as low as 150 rubles to the dollar in the London market, 120+ rubles to the dollar in the Moscow market, and 120-130 rubles to the dollar in other offshore markets. Hence, the sanctions initially led to massive capital flight and a shortage of foreign currency supply in the Moscow market, making it very expensive to purchase foreign currency with rubles.


The Russian domestic financial system also faced severe problems. Initially, the Russian people were uncertain about the future and became leery of depositing their money in Russian banks. At the same time, Russian businesses lacked confidence in the use of foreign currency and international trade settlements. This all led to a short-term crisis of trust.


However, the Russian government responded quickly. We’ve identified three distinct counter-sanction measures that Russia employed to effectively control the situation.


First, Russia implemented capital outflow controls, restricting money transfers abroad, as well as foreign loans. It prohibited cash loans over $10,000 and temporarily suspended repayment of foreign debts.


Second, it enforced mandatory sales of foreign currency earnings. Russia decreed that 80% of the foreign currency earnings from foreign trade contracts signed after January 1, 2022 had to be sold to the central bank, thereby increasing the supply of foreign currency in the Moscow market. We estimate that Russia needed about $1 billion in foreign currency supply per day at the time, and this measure alleviated that shortage.


To address public concerns, Russia adopted a method similar to the Bretton Woods system’s gold standard, specifying that 5000 rubles (equivalent to about RMB 400 at the time) could be exchanged for 1 gram of gold. This way, both businesses and individuals that lacked confidence in rubles could exchange them for gold at banks. This quickly restored confidence in the Russian financial market.


Confidence in the ruble recovered quickly, especially after the announcement of the “Natural Gas Ruble Settlement Order” on March 19, 2022. By April 9, the ruble had appreciated to 70+ rubles to the dollar, eventually reaching a peak value of 53 rubles to the dollar.


The “Natural Gas Ruble Settlement Order” was a masterstroke. Russia was prohibited from using euros, dollars, yen, and pounds for settlements, but Europe’s ability to purchase Russian natural gas had not yet been interrupted. Then Russia declared it would only accept rubles as payment. However, Europe didn’t have any rubles. Russia advised the European countries to open a ruble account and a euro account at the Russian Gazprombank, the bank that has always handled Russia-Europe natural gas trade settlements. European businesses would deposit euros into their euro accounts. Russia would then exchange the euros for rubles in the Moscow market and transfer them into the ruble accounts. This allowed European businesses to settle their natural gas transactions in rubles.


Russia mandated that, starting from April 1, 2022, natural gas transactions would be settled in rubles.

This move effectively anchored the value of the ruble to natural gas, allowing Russia to control the pace of foreign exchange transactions in the market. Consequently, the ruble’s exchange rate quickly rebounded, stabilizing Russia’s financial system.


The export controls and technological restrictions imposed by Western sanctions had a significant impact on Russia, disrupting its international supply chain. Between March and May of 2022, Russia experienced significant disruptions in its manufacturing sector as its supply of intermediate products, such as equipment and raw materials imported from Europe, was abruptly cut off. Russian businesses had to rebuild their supply chains by finding new domestic and/or international suppliers.


After three months of turmoil, Russia began to stabilize. On May 31, 2022, Russia signed the “parallel import” decree, which covered over 1300 types of goods. This was essentially “official smuggling.” Foreign sellers had been prohibited, by sanctions, from selling certain products to Russia. Therefore, Russia decided to begin purchasing these goods through alternative channels, with the caveat that Russia would no longer protect these products’ trademark and intellectual property rights within the Russian market. Thus, Russia slowly restored its industrial supply chains by sourcing goods through parallel imports internationally while also developing domestic suppliers.


Another area that was significantly affected by sanctions was logistics and international transportation. Russia’s exports of crude oil and liquefied natural gas enter the international market through the Baltic Sea and the Atlantic Ocean. However, 95% of the international maritime transport insurance business is controlled by European companies. One of the financial sanctions imposed on Russia prohibited companies from insuring merchant ships that conduct business with Russia. The Baltic states were the first countries to join in the sanctions, and land rail transport and pipeline transport were also restricted. This severely disrupted Russia’s international logistics.


Guancha: When the West initiated sanctions, there were claims that they would turn the ruble into “worthless paper,” but that did not happen. Could you expand a bit on why the ruble and the Russian financial system have been so resilient?


Xu Poling: Through our analysis, we’ve identified several reasons for the resilience of the Russian economy.


First, Russia worked hard to establish financial security, including the way it structured its own banking system. As of July 1, 2022, Russia had only 329 banks and 34 non-banking financial institutions, a product of its long-term initiative to establish financial security.


After Russia’s transition, the banking system went through a period of chaos. At one point, Russia had over ten thousand banks. When Russia instituted its anti-crisis plan in 2015, it still had over 1500 banks. Subsequently, Russia began to have annual reorganizations of “banks in violation”. Banks that did not meet the capital adequacy ratio and/or were operating in violation of regulations had their licenses revoked. Russia revoked the licenses of about 90-100 banks per year. This prevented the health of Russian banks from becoming an issue. Therefore, when Russia was faced with this financial shock, there were no bank closures or shutdowns, and the financial sector quickly stabilized.


Second, after 2014, Russia started de-dollarizing, which played a significant role in countering financial sanctions. Russia saw that the U.S. was becoming more and more hostile. They recognized that it was no longer safe to rely on the U.S. dollar. However, there were significant barriers to de-dollarization. After multiple devaluations of the ruble, the Russian public lacked faith in the currency and preferred to exchange rubles for dollars. Thus, domestic Russian savings had become dollarized. International trade settlements were also conducted in dollars. Russia’s international reserves were invested heavily in dollar assets, and central bank assets were also dollarized.


The internationalization of the euro provided Russia with an opportunity to de-dollarize. Initially, the euro was mainly circulated within Europe. Few countries held euros, and the ones that did hold them held them in small amounts. Since Russia’s energy exports mainly flowed to Europe, Russia gradually adopted the euro for energy export settlements. Afterwards, the euro began to circulate widely outside Europe, becoming an international currency. After the West sanctioned Russia in 2022, and the euro could no longer be used in Russia, the proportion of international transactions settled in euros declined, turning the euro back into a regional currency.


Third, Russia benefited from good fiscal health and diversified international reserves. Research has showed that between 2019 and 2021, the Russian Central Bank added significant amounts of JPY and RMB to its reserves. Additionally, after 2019, Russia significantly increased its gold reserves. Over the next four years, it became the world’s main buyer of gold. When the Russian Central Bank’s assets were frozen in 2022, Russia had nearly $600 billion in reserves, and a large proportion of those reserves were in gold. Russia’s diversified international reserves provided stability for its financial system.

第三就是财政状况和国际储备多元化。2019年到2021年期间,有研究报告发现俄罗斯央行储备资产增加了很多的日元和人民币资产。此外,2019年以后俄罗斯还大幅增加了黄金的储备,此后的四年俄罗斯是全球最主要的黄金买入方。在2022年俄罗斯央行资产被冻结时,俄罗斯有将近 6000亿美元储备,其中黄金储备占了很大的比重,多元化的国际储备给俄罗斯金融稳定提供了保障。

Before the sanctions (as of June 2021) Russia’s foreign exchange reserves were diverse, composed of many different currencies in varying proportions.

The measures Russia took in response, implementing capital outflow controls, signing the natural gas ruble settlement order, pegging the ruble to gold to boost public confidence, etc., were very clever. Additionally, the coordination between Russia’s Central Bank and its Ministry of Finance played a vital role. When the Russian Central Bank’s financial resources were threatened by the sanctions, it re-allocated some of its assets to the Ministry of Finance through privatization. For example, it redistributed shares of Sberbank (Russia’s largest bank) and allocated a portion of the profits to the Ministry of Finance. The Central Bank’s cooperation with equity wealth funds also provided significant support for its construction of financial security.


Does the resilience of the Russian economy have anything to do with its Soviet heritage?


Guancha: Some scholars think that the resilience of the Russian economy and its ability to withstand sanctions are due to the legacy of the Soviet era, such as its industrial system, its financial discipline, etc. What do you think?


Xu Poling: I don’t think that’s accurate. If there is any Soviet legacy, it definitely does not have much to do with finances. Debt expansion was one of the main reasons the Soviet Union disintegrated. Back then, Russia’s financial and fiscal systems were very weak. If we must identify a Soviet legacy, it would be that fiscal weakness significantly reduced the government’s capabilities, which taught Russia a valuable lesson.


The financial chaos during the first decade of Russia’s transition led to a redistribution of wealth, severely impacting the lives of its citizens. Since 2000, Russia has been strengthening its financial and fiscal security. Its main task has been to continuously reduce its debt ratio.


At the start of its transition, Russia inherited a staggering debt of $99.6 billion from the former Soviet Union, which was the main cause of the 1998 Russian ruble crisis and the collapse of its national credit. After President Putin took office in 2000, oil prices, coincidentally, began rising gradually. The influx of petrodollars greatly facilitated debt repayment, continuously reducing Russia’s debt-to-GDP ratio until Russia fully repaid the Soviet Union’s debt in 2017.


Before the sanctions, Russia’s core sovereign external debt, the debt for which the Central Bank is responsible, was only about $35 billion, just over 3% of GDP. When you include the debts of federal subjects and state-owned enterprises, Russia’s total debt-to-GDP ratio was 13.4%. Among the 89 economies monitored by the World Bank and the International Monetary Fund, Russia has one of the lowest levels of debt.


We know that there are countries with high levels of debt, such as Japan, with a debt-to-GDP ratio of over 200%, and the United States, with a debt-to-GDP-ratio of 130%. Countries without full currency sovereignty can encounter debt crises if their debt-to-GDP ratio rises above 70%, as seen in the debt crises in Greece and several Latin American countries, which occurred even though their debt levels had not yet exceeded 100% of GDP. The most recent example is Sri Lanka, which has a high foreign debt ratio. The U.S. Federal Reserve’s interest rate hikes, combined with the appreciation of the U.S. Dollar and the depreciation of its own local currency, resulted in significantly increased debt repayment costs. This eventually caused a debt crisis.


Russia has consistently kept its debt-to-GDP ratio at around 15%. Some observers have even criticized Russia for being too fiscally conservative, i.e., not taking on foreign debt, despite having limited domestic financing capabilities, and maintaining a low level of domestic debt. However, this approach has kept Russia’s finances very secure, with no deficit financing and mostly balanced budgets or budget surpluses. After 2021, Russia adopted a more proactive fiscal policy in order to respond to the pandemic and support national infrastructure projects.


Before the sanctions, Russia’s debt-to-GDP ratio consistently hovered around 15%.

By 2023, Russia’s GDP had reached 171 trillion rubles. Its domestic debt levels had reached 24 trillion rubles, compared to the previous years’ range of 18 to 23 trillion rubles. Even when you factor in foreign debt, Russia’s overall debt level was still very low. This can be seen as a lesson learned from the Soviet Union.

2023 年俄罗斯GDP达到了171万亿卢布,内债水平在24万亿卢布左右,之前几年的内债水平在18万亿卢布到23万亿卢布之间。即使内债外债加起来,俄罗斯整体债务水平都是很低的。这可以说是它吸取了前苏联的教训。

One key aspect of the Soviet Union’s legacy is that it left Russia with a solid base in fundamental sciences, setting the stage for significant technological advancement. After the dissolution of the Soviet Union, Russia experienced a temporary “brain drain”, but it continuously reformed its scientific research institutions, improved the efficiency of its research, and increased or at least maintained financial allocations to research institutions. This is also why Russia was able to successfully respond to sanctions and maintain normal economic operations during the Russia-Ukraine conflict.


Was Russia’s economic performance in 2023 driven by a war economy?


Guancha: Russia’s economy unexpectedly grew by 3.6% in 2023. Western media generally attribute this growth to a war economy. What do you think about this?


Xu Poling: I think Western media are setting the narrative. They believe Russia’s economic performance is due to its strong military-industrial sector. I don’t agree. In fact, Russia only began to strengthen import substitution in the military sector in 2014. At that time, Russia’s military-industrial foundation was relatively weak.


During the Soviet era, each region of the USSR specialized in different military industries, ex. gas turbines and rocket engines in Ukraine and large aircraft manufacturing in Uzbekistan. Russia did indeed inherit some of the Soviet military assets, but in no way did these assets form a complete system.


Russia’s military-industrial or strategic resource sectors were most severely impacted in the first decade after the dissolution of the Soviet Union. It was only after the year 2000 that Russia began to reorganize and restore its military-industrial sector. The Yukos-Khodorkovsky incident in 2003 was a turning point. That was when the oligopoly in Russia’s strategy resource sector started to break down.


Traditionally, Russia’s military sector has been strong, but also very fragile. Back then, Russia, having been influenced by the United States’ Gulf War and anti-terrorism military campaigns, deemed large-scale foreign conflicts to be unlikely. Thus, it felt that massive investments in homeland security and military production were unnecessary. Russia’s anti-terrorism operations in Syria were not large-scale foreign wars either.


Russia’s militarization reforms were carried out according to this same concept. In this context, Russia’s military-industrial sector had few large purchase orders and was still relatively small in scale. During Medvedev’s presidency (2008 to 2012), he once noted that it would be difficult for Russia to achieve complete autonomy in its military sector.


Thus, I do not believe the military-industrial complex dominated Russia’s economy before the war. In fact, it was the resource sector which played a significant role in the Russian economy. This is why Russia experienced issues with weapon and ammunition supplies during the Russia-Ukraine conflict.


In 2014, Russia began implementing import substitution policies in the military sector, and it quickly achieved 98% autonomy in military equipment production. However, Russia’s supply of munitions and military equipment only began to accelerate after July 2022. The military-industrial complex shifted to three shifts production after the partial mobilization order in October 2022. Following inspections of military-industrial enterprises by Putin, Medvedev, and Shoigu from November to December 2022, Russia began to fully invest its economic resources into the military-industrial complex, and the volume of government contracts for military production significantly increased.


After Putin’s visit to military factories on December 23, 2022, there was a significant increase in the volume of government contracts for military production.

Thus, we can see that Russia’s military-industrial sector has not always been strong. In fact, the sector’s revival has been relatively recent. Before that, it was in a state of decline. Russian economists understand that it was the resource sector, not the military-industrial complex that drove Russia’s past economic growth. Moreover, the volume of government contracts for military production experienced explosive growth in the second half of 2022, but decreased after April 2023.


The expansion of the production scale of military enterprises led to a significant increase in demand for downstream enterprises’ equipment, materials, and components. Demand for investment in machinery and equipment grew, and industrial production expanded from purely military goods to other manufacturing industries related to military production.


Transitioning from an energy-dependent economy to an economy where investment and consumption are balanced


Guancha: So, do you believe that during these past two years of war, the Russian economy, instead of collapsing, actually underwent a successful structural transformation?


Xu Poling: It’s still too early to conclude whether this transformation was successful. However, one thing we have observed is that Russia’s economic growth is breaking its previous dependency on the energy sector. In 2023, the share of revenue from energy/fuel fell by 22.8%, whereas the share of revenue from non-oil and gas sectors increased by 26.5%. With the decline in oil and gas revenue, its relative contribution to fiscal revenue remained flat, compared to the previous year, at about one-third. The decreased contribution from the energy and raw materials sector to Russian GDP, as well as the increased contribution from the manufacturing sector, reflect the Russian economy’s transformation from an energy-dependent economy to an economy where investment and consumption are balanced.


Russia has long had a low rate of capital accumulation, with net capital accumulation consistently below 20%. Even when you include inventory accumulation, it’s still between 20% and 22%. Russia had aimed to raise the capital accumulation rate (the ratio of accumulated funds to total national revenue used) above 25%, but this goal was never achieved.

俄罗斯长期以来资本积累率偏低,净资本积累长期低于20%,加上库存的积累也就在20%- 22%之间。俄罗斯曾提出将资本积累率(积累基金与国民收入使用总额的比例)提高到25%以上,但是一直没有实现。

On February 7, 2024, Russia’s Federal State Statistics Service announced that Russia’s capital accumulation rate in 2023 was 27%, with final consumption accounting for 68.7% and imports and exports accounting for 4.3%. Russia had finally resolved its long-standing issue of a low capital accumulation rate.


The importance of increasing the capital accumulation rate cannot be overstated. A higher rate provides the possibility for future economic expansion. According to Marx’s “Das Kapital,” a 20% capital accumulation rate is the minimum standard for simple reproduction. For economic expansion, the rate must exceed 20%. For accelerated growth, it must exceed 25%. For an economy to “take flight”, the rate must reach 35%.


Traditionally, the energy sector has been very critical to the Russian economy, with energy and raw material exports accounting for 70%-80% of GDP. Wealth was concentrated in the energy sector, where salaries, profits, and other income were high. This created a social structure where the vast majority of Russia’s wealth was concentrated the hands of a small oligarchy. Energy exports were the main source of Russia’s trade surpluses, and the state obtained tax revenue from the energy sector. After receiving petrodollars, the government injected funds into the public sector through fiscal transfers and social policy expenditures. This provided the main source of income for government employees and service industry workers. This income was akin to welfare benefits. It did not stimulate increased labor.


The national economy’s high dependency on the energy sector suppressed the development of its manufacturing sector. In 2012, the core manufacturing sector’s value added accounted for only 12.8% of GDP. When you add in mineral processing, it still accounts for only 16%, merely at the level of Germany (Germany’s core manufacturing sector accounted for 17.8% of GDP at the time) and the United States, which was already in a post-industrial phase.


The expansion of Russia’s manufacturing sector after the Russia-Ukraine conflict is a fascinating phenomenon. Russia experienced rapid wage growth in the light industry, machinery manufacturing, and electronic information sectors. The primary distribution of income through wages and salaries created strong labor incentives. This is why, during our visits to Russia in June and November of last year, we noticed a different spirit among the people.


In the past, people outside the energy sector had few opportunities to earn money through work and relied on social welfare. Now, people can work in factories and earn money. Companies have started “bidding wars,” where they attempt to lure qualified employees by offering more attractive salaries. This approach has created labor incentives through primary distribution, which has, in turn, boosted the spirit of the Russian people.


The Russia-Ukraine conflict has injected a steroid shot into the lethargic Russian economy, making it stronger and more vigorous. We even speculate that President Putin is not exactly in a hurry to end the conflict. The military purchase orders triggered by the conflict have expanded investment into non-military sectors, providing better job opportunities and earning potential for Russian citizens. This has stimulated Russian society.


Data from the second and third quarters of 2023 reveal a rapid expansion of investment in industries related to military production, including leather, machinery manufacturing, and electronics. This led to an increase in Russia’s fixed asset investment growth rate to 12.9% in the second quarter and 13.3% in the third quarter. The total capital accumulation for the year (including inventory) was 19.8%, with net fixed asset investment growing by 10.5%.


The growth in investment led to an increase in output, with data released by Russia’s Federal State Statistics Service on February 7 showing that manufacturing experienced the fastest growth. Specifically, the production of computers, electronic equipment, and optical equipment increased by 32.8%, the production of metal processing products increased by 27.8%, other vehicles and equipment production increased by 25.5%, and food production grew by 5.9%. Services supporting production, such as warehousing and transportation, also grew by 12.8%. These rapidly growing sectors may be closely related to the military industry, but they don’t just produce products for the military. They are civilian industries, even though their products may also support military enterprise production. This is actually the diffusion of investment from the military sector to downstream industries.


Photo provided by author

Why hasn’t Russia’s traditionally strong energy sector led to investment diffusion? Because the equipment for oil and natural gas extraction in Russia is imported, it is a one-off investment. However, producing even one machine requires lathes, materials, electronic devices, energy, and power plants, creating a very long industrial chain. Producing a single mortar shell involves dozens of steps. These dozens of steps, in turn, require dozens of factories. These factories did originally produce civilian goods and then later expanded to focus more on military production. However, due to industrial division and cooperation, investment then diffused to civilian production.


If the investment rate remains this high over the next six months, then Russia’s structural transformation will have been effective.


The state economy played a significant role.


Guancha: You mentioned that Russia’s capital accumulation rate reached 27% in 2023, which was a major contributing factor to the 3.6% growth of its economy. Where did Russia get the money for such a significant increase in investment?


Xu Poling: Russia’s investment growth in 2023 was related to its active fiscal and monetary policies. The main sources of funds were fiscal spending and preferential mortgages. Before 2015, Russia’s macroeconomic policy was non-interventionist and aimed at balancing the budget. After Russia adjusted the ruble exchange rate on January 1, 2015, the Central Bank of Russia shifted the focus of its monetary policy from stabilizing the exchange rate to targeting inflation. It adopted more focused policy objectives, which yielded more noticeable effects. However, its basic principle of not interfering with economic growth remained unchanged.


After Mikhail Mishustin became Prime Minister, he fully committed to implementing the national projects proposed by President Putin in the “May Decrees” of 2018. It’s worth noting that before becoming Prime Minister, Mishustin was a director at the Federal Treasury, where he significantly improved tax revenue collection efficiency. Additionally, before Prime Minister Mishustin took office, the 13 national projects proposed in the “May Decrees” were not being implemented well due to a lack of funds.


Upon taking office, Mishustin undertook substantial reforms, transforming Russia’s Foreign Economic Affairs Bank into the State Development Corporation and merging other development institutions, which had long been ineffective, into the National Development Group. A financing vehicle was established to implement large national infrastructure projects, similar to China’s National Development and Reform Commission and the China Development Bank.


During the COVID-19 pandemic, Mishustin organically combined anti-crisis measures with major project construction, achieving a 4.7% economic growth rate in 2021. After the outbreak of the Russia-Ukraine conflict in 2022, Mishustin’s main focus became securing a budget for military operations and continuing to support major national construction projects. His policies provided a firm foundation for the rapid recovery and stabilization of the economy in 2022. The Central Bank also introduced a series of policies to support economic recovery, including cutting interest rates during the U.S. Federal Reserve’s 2022 rate hikes, supporting businesses that lost external financing, etc.


In 2022, Russia received lots of revenue from rising energy prices, resulting in a very favorable fiscal situation. To complete the 2022 budget plan, Russia spent 6.5 trillion rubles in December 2022, which accounted for 22.5% of that year’s expenditures. This spending provided important start-up capital for investment growth in 2023. Russian federal fiscal spending continued to expand in 2023, with total budget revenue reaching 29.1 trillion rubles, a 4.7% increase from 2022, and budget expenditures exceeding 32.3 trillion rubles, a 4% increase from 2022. Spending on government procurement and national construction projects grew the fastest.

2022年俄罗斯得到大量能源涨价的溢价收入,财政形势非常好。为了完成2022年的预算计划,当年12月,财政支出6.5万亿卢布,占全年支出的22.5%,这成为2023年投资增长的重要启动资金。2023年俄联邦财政支出继续扩大,全年预算收入为29.1 万亿卢布,较2022年增长4.7%;预算支出逾32.3万亿卢布,较2022年增长4%。其中用于政府采购和国家大项目建设的支出增长最快。

At the same time, the Central Bank provided numerous preferential mortgages for the development of the Far East and Arctic regions, as well as for investments in major projects. The proportion of consumer spending that was financed by credit grew by more than 10 percentage points in 2023, from 37% to 48%. The mortgage rates on self-built housing in the Far East are only 3%, despite the key interest rate in Russia being raised to 16% in December 2023 to curb inflation. These preferential mortgages have become a subsidy for both businesses and residents.


Investments in major projects, supported by project finance vehicles and direct/indirect financial support from the government, are not affected much by the increase in the key interest rate. Therefore, raising the key interest rate affects social investments that do not receive policy support.


Additionally, Russia’s ability to withstand pressure after being sanctioned and blockaded in 2023, while still achieving rapid economic growth, is a direct result of the Russian government’s control of and investment in the economy.


Since the year 2000, despite multiple rounds of privatization in which many state-owned enterprises and shares were sold off, the state-owned economy’s contribution to GDP output has increased rather than decreased, rising from 31.2% in 2000 to 56.23% in 2021 (before the war). There were two reasons for this increase. First, the Russian government reduced the proportion of companies with more than 50% state ownership but increased the proportion of companies in which it had a 25% stake to over 75%. This allowed the government to gain control over a wider swath of the economy while also growing the total amount of state assets.


Moreover, within Russia, state-owned and state-controlled companies hold dominant positions across a variety of industries. As of 2021, Russia had 2045 state-owned companies and 2587 state-controlled public companies, with tens of thousands of subsidiaries, dominating the operations of various industries. Military mobilization orders and wartime policies further increased the importance of the state-owned enterprises in terms of investment and output. This government control of the economy is what allowed its fiscal spending and preferential mortgages to take effect so quickly.


Who Benefits from the Russia-Ukraine Conflict?


Guancha: In a previous speech, you mentioned that China played a significant role in the structural transformation of Russia’s economy. How so? Some Western media claim that China is profiting from the war in Russia, that they are hiding in the background reaping benefits from the conflict. What’s your take?


Xu Poling: At the Munich Security Conference, Wang Yi stated that China and Russia have what could be considered a normal relationship for two major neighboring countries. He clarified that both nations adhere to the principles of non-alignment, non-confrontation, and not targeting any third party. These principles form the foundation for the Russia-China relationship, as well as an important template for relations between two major countries.


Of course, you’ll discover that after Russia was sanctioned by the West, foreign luxury brands, machinery, and automotive companies withdrew from the country, leaving Russians unable to purchase these products. China stepped in to fill the void, producing and exporting the goods Russia needed. Western countries stopped importing Russian energy, but it’s cheap and of high quality. Naturally, China started to import more energy from Russia. The Russia-China relationship has been a win for both sides.


In 2022, the total volume of trade between China and Russia was $190.27 billion. In 2023, it reached $240.11 billion, accounting for about 39% of Russia’s total trade volume, a significant increase. Russia’s foreign trade underwent significant structural changes, with the proportion of its total foreign trade conducted with European nations falling from 40% to 20%. Conversely, trade with Asian countries rose to comprise 72% of Russia’s total foreign trade, while trade with African and Latin American countries increased to account for 8%.


The growth in Russia’s foreign trade with Asia was largely driven by China. In 2023, Russia’s imports from China reached $110.97 billion, and exports to China reached $129.14 billion. The trade imbalance between China and Russia began to narrow, with Russia’s trade surplus with China decreasing. Many of China’s exports to Russia are products not available in the Western market. These products are filling the gaps in the industrial chains that were created when the West sanctioned Russia.


From March to June 2022, due to sanctions-related settlement and transportation issues, China-Russia trade initially experienced a monthly decline of 18%-26%. However, after companies from both countries found alternative solutions, Russia-China trade experienced 20 straight months of continually accelerating growth. This was primarily due to a rapid increase in Russia’s purchases from China, especially in 2023. After September 2023, flights departing Russia for China were filled with Russian business delegations eager to purchase anything that Russia needed and China could produce.


Russian energy exports to China also increased. Last year, Russia’s crude oil exports to China rose by 24%, reaching 107 million tons. However, due to falling prices, the actual amount that China paid only increased by 4% YoY. This proves that Russian crude oil is both cheap and of good quality and that Russian pipelines are secure. Last year, China imported over 34 billion cubic meters of natural gas from Russia, of which 22.7 billion cubic meters were via pipeline, accounting for over one-third of Russia’s total natural gas exports.

俄罗斯对中国的能源出口也在增加。俄罗斯去年对中国的原油出口增加了24%,达到 1.07亿吨,但是价格下降了,因此支付金额与之前相比只增加了4%。这就证明俄罗斯的原油又便宜又好,通过管道输送又很安全。去年中国从俄罗斯进口天然气达到340多亿立方米,其中管道天然气是 227亿立方米,占俄罗斯去年总共出口天然气的三分之一以上。

Russian energy exports to China are extremely significant. They have helped stabilize Russia’s financial and fiscal situation. China’s exports to Russia have provided crucial support for the restoration of Russia’s industrial and supply chains, with both sides benefiting.


The decline in Russia’s trade with Europe and the increase in its trade with China stem from the widespread security concerns of the Western world. The Western media’s notion of “China profiting from the Russia-Ukraine conflict” is unfounded.


Wang Yi articulated this point very clearly at the Munich Conference. China has normal relations with Europe. China has normal relations with Russia. The blame for the Ukraine crisis cannot be shifted to China. The West understands what really provoked this crisis. Russia and Ukraine both have security concerns which can be resolved through negotiation and other peaceful means. There have been many “windows” to secure peace, along with numerous peace proposals.


Politically speaking, if you look at who stands to benefit the most from this conflict, it’s the United States. The Americans themselves have said that the money spent on supporting Ukraine was well worth it. American aid effectively reduced Russia’s military capacity by 50% without sacrificing a single American soldier. In this light, it can be seen as one of the most successful investments in American history. This was openly stated by U.S. Senator Lindsey Graham.


U.S. Senator Lindsey Graham, the ranking Republican on the Senate Judiciary Committee, openly stated that supporting Ukraine is a cost-effective deal for the United States.
美国参议院司法委员会首席共和党议员林赛‧格雷厄姆(Lindsey Graham)公开称,援助乌克兰是最划算的买卖

Furthermore, it’s the United States, not China, which has profited immensely in the European natural gas market. After Russian energy was banned, U.S. exported liquefied natural gas to Europe at a price of $2,200 per thousand cubic meters (8-9 times the usual price), earning a substantial profit.


The American elite and the deep state have reconsolidated their alliance and hegemony systems. They are the ones making money in the background, or perhaps, they originally provoked the Russia-Ukraine conflict with this goal in mind. Ultimately, they achieved their goal. What’s more, they managed to cripple Europe’s industry, technology, capital, and currency (the euro), which posed a threat to the U.S., in addition, of course, to entangling Russia in the conflict.


However, this conflict represents both a crisis and an opportunity for every nation-state and actor involved. For Europe, the conflict has led to a security crisis. However, it also presents an opportunity for Europe to reassess its identity. The same applies to the United States.


I think that President Putin may be able to utilize the Russia-Ukraine conflict to restructure Russian society and the Russian economy. It may actually become a shot-in-the-arm for Russia. Yes, it is true that the increase in China-Russia trade is definitely related to Western sanctions against Russia. However, throughout the crisis, China has adhered to the principles of non-alignment, non-confrontation, and not targeting any third party in its relationship with Russia. China has consistently worked towards a peaceful resolution, offering support, proposals, and constructive input.


Guancha: The sanctions placed on Russia sparked lots of conversations in the Chinese academic community. The main topic of concern is what China should do if it were to be sanctioned. What lessons can China learn from Russia’s response to the sanctions?


Xu Poling: I believe the Russia-Ukraine conflict is one factor that has stimulated a sudden change in the international order.  China’s insistence on neutrality has somehow become a sin, leading the U.S. to escalate the confrontation. But that is not the strategic choice that China wanted.


China has always wanted to focus on domestic development and avoid causing trouble abroad. China’s foreign development strategy has always been about peace, development, cooperation, and win-win outcomes. Even now, our view of the global environment remains unchanged: China is facing a “major change, the likes of which haven’t been seen in a hundred years,” with insecurity and uncertainty on the rise.


This picture shows the Arctic LNG 2 project facility located in Russia’s Yamal-Nenets Autonomous Region. Photo by Xinhua News Agency reporter Cao Yang.

The United States feels that its hegemony is being threatened and seeks to rebuild a hegemonic alliance system aimed at containing and encircling China. Indeed, a few hot-button issues could lead to a rapid escalation of security risks, resulting in sanctions against China.


I believe an important lesson from Russia in effectively dealing with sanctions is to maintain financial security, as well as “safe backup plans” for international reserves, international settlement systems, key technologies, and production chains and supply chains related to national security.


Beyond passive defense, we must also prepare some proactive and aggressive measures to use if necessary. For example, Russia later used energy, grain, rare metals (titanium for manufacturing aircraft engines), potash fertilizer (over 80% of Europe’s imports), and uranium (which the U.S. still imports in large quantities from Russia) as strategic tools to manage imports and exports. This is why the West cannot fully sanction Russia and may even have to compromise with it in some cases. Simply put, security is not about building a Great Wall and avoiding expansion.


Russia has taught us that weaknesses in technological supply chains and financial systems can lead to big losses. Thus, Russia was somewhat disorganized initially when it was sanctioned by the West. However, since 2014, Russia has been building its own economic security.


China must also prepare for similar potential risks. We do not seek trouble or provoke conflicts, but we should not be afraid of them either.


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Cite This Page

徐坡岭 (Xu Poling). "How Has Russia Withstood Two Years of Sanctions? [经历两年制裁俄罗斯没被打败,靠的是什么?]". CSIS Interpret: China, original work published in Guancha [观察者网], February 27, 2024

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