Are Sanctions Saving Russia?

MOSCOW – The economic sanctions imposed on Russia by the West in March 2014 have undoubtedly been painful. But they have so far failed to achieve the goal of weakening Russian President Vladimir Putin’s position. In fact, they may have the opposite effect, leaving Russia – and its president – even stronger than before.

European Union countries are estimated to have lost about $100 billion in trade with Russia, hitting the likes of Bavarian dairy farmers and eastern German industrial exporters. Russian GDP, which grew modestly in 2014, contracted by 4.6% in annual terms in the second quarter of this year. The ruble lost more than half of its US dollar value in the second half of last year, fueling inflation, which increased by 15.6% year on year in July.

But inflation now seems to have peaked, and the effects of the drop in oil and gas prices were mitigated by the US dollar’s appreciation, so that the value of Russia’s foreign reserves actually increased, reaching $362 billion in June (13% of which is in gold). And despite belt-tightening in Russia, Putin is more popular than ever.

The rationale behind economic sanctions is straightforward: free trade and free markets deliver growth (and thus political support for the government), whereas restrictions choke off growth (and thus erode support for the government). This emphasis on free trade and free markets was a central tenet of nineteenth-century British classical economics. It remains a core message of today’s dominant neoclassical school – embodied in the so-called “Washington Consensus,” adopted across the world under the International Monetary Fund’s advice – which claims that the key to economic development is to open up, deregulate, liberalize, and privatize.