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On Thursday, March 3, Sergei Guriev joined Markus’ Academy for a lecture on The Implications of Sanctions on the Russian Economy. Guriev is a Professor at Sciences Po and formerly the Chief Economist at the EBRD and Rector of Moscow’s New Economic School.  Introductory remarks by Markus Brunnermeier.

Watch the full presentation below. You can also watch all Markus’ Academy webinars on the Markus’ Academy YouTube channel.

Executive Summary

  • [00:00] There are several key questions about the design of economic sanctions: What should be the objective of sanctions? Whom to target primarily? How long does it take for sanctions to produce effects? Can bitcoin be used to circumvent financial sanctions? What will be the long-term outcome for Russia: economic autarky or closer cooperation with China? How would a sustained high oil price affect the world economy? To make progress towards answering those questions, is it useful to take stock of Russia’s economic situation in early 2022.
  • [11:36] Prior to the Ukraine War, the Russian economy exhibited slow growth but otherwise a robust macroeconomic environment. From 2013-2019, real GDP grew by .9% annually on average and real household incomes declined. Investment has been relatively weak over the last decade, partly due to corruption and weak institutional quality. As a result, Russia has been falling behind other emerging market economies. However, Russia has a balanced budget, low public debt and central bank reserves outpass total external debt. Inflation was close to target.
  • [21:26] The sanctions following the annexation of Crimea and invasion of Eastern Ukraine in 2014 had a minor economic impact, likely not exceeding 1% of GDP.
  • [23:34] Some sanctions were expected prior to the invasion of Ukraine on February 24, 2022, but Western sanctions went much further than expected. While an exclusion of Russian banks from SWIFT was feared, the most important – and unanticipated – sanctions have been imposed on Russia’s central bank. Those sanctions severely restrict the central bank’s ability to use its vast currency reserves.
  • [28:52] In the long-run, sanctions will substantially reduce economic performance through three channels: exodus of foreign investors, loss of access to foreign technology and outflow of human capital. There is already a major short-run impact, the ruble depreciated substantially, though the exact amount of depreciation is difficult to infer at the moment because of markets being closed. Stocks of Russian companies traded on stock exchanges outside Russia are almost worthless and Russian oil trades at a steep discount as nobody wants to be associated with Russia. Finally, CDS spreads have increased sharply for Russia.
  • [34:57] In the absence of further sanctions, revenue from oil exports will be sufficient to pay for imports and to service sovereign debt. However, there might be corporate defaults, especially for corporations with foreign-currency denominated debt. If an oil embargo were to be imposed, this would further hurt the Russia economy, though the effects will depend on China’s stance. An oil embargo supported by China could lead to a macroeconomic collapse. As such, Russia is very dependent on China at the moment.
  • [41:29] Politically, Putin’s spin dictatorship is turning into a fear dictatorship. The last independent media are being closed and some version of a martial law is likely to be imposed within the next few days.
  • [42:26] Some open questions to monitor are the role of cryptocurrencies in avoiding sanctions, the role of China and how Russia adapts to life without SWIFT, Visa and Mastercard.