Russian Sanctions Preparing for a Long Winter

For more than a year, Russian leaders shook off western economic sanctions. But as the ruble and GDP continue to decline, that may no longer be possible. Consumers are being told to brace for the worst.
Russia leaders are warning citizens to brace for tough times, as the economy slows and ruble plunges amid ongoing western sanctions.

For more than a year, Russian leaders have been stoic in the face of their country's faltering economy, brought on by economic sanctions imposed after its seizure of the Crimea.

But now, as things get worse, that bravado appears to be crumbling.

Prime Minister Dmitry Medvedev recently warned Russians that it may be time to brace for “the worst scenario.” Finance Minister Anton Siluanov said he couldn't rule out another deep crisis, like when the ruble collapsed in 1998-99.

Russia is reeling from its dependence on oil exports. In 2015, the country's gross domestic product sank 3.7 percent, slightly less than expected, but the downturn is entrenched, and investment and retail suffering.

The country's Department of Labor estimates that unemployment this year will climb above 6 percent, and many see little chance of improvement soon.

“This probably won't bottom out until the second quarter of 2016,” said Natalia Orlova, a chief economist at Alfa Bank.

Wouldn't it be more clever to begin step-by-step dismantling sanctions? Gerhard Schroeder, Ex-Chancellor, Germany

Market experts watched with apprehension Tuesday as the global oil price once again sank beneath the psychologically important $30 per barrel mark, dragging down the ruble.

Economists see a further downgrade of Russia's credit rating, even though Standard & Poor's and Moody's have already relegated its debt to junk status.

Given Russia's economic tightrope walk, former German Chancellor Gerhard Schroeder has questioned the wisdom of the European Union continuing its financial sanctions started in March 2014 after Russia’s annexation of Crimea.

“Wouldn't it be more clever to begin step-by-step dismantling sanctions?” Mr. Schröder, who chairs Gazprom's joint venture that supplies Germany with Russian natural gas, said.

On a visit to Moscow, the French economics minister, Emmanuel Macron, suggested the possiblity of lifting sanctions as early as this summer, but many German politicians remain reluctant.

“We have no interest in a collapse of the Russian economy,'' said Hubertus Heil, the deputy head of the Social Democrats in the Bundestag. "We need a stable Russia as a partner in international conflict.”

But Mr. Heil said lifting of sanctions could only be discussed if Moscow implements the so-called Minsk agreement to bring about peace in Ukraine.

Roland Pofalla, who co-heads the German-Russian public forum Petersburg Dialogue, said Moscow was taking steps in the right direction while Ukraine was not always holding up its end of the deal.


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“But still, I think it is too early to discuss removing sanctions,” Mr. Pofalla said, stressing that sanctions were imposed because of Ukraine, meaning it would be a mistake to lift them because of Russian engagement in Syria.

The waning oil price and ruble devaluation have left Russia without two vital motors of economic growth: government investment and private demand. But Michael Harms, who heads the German Chamber of Commerce in Moscow, said the country is unlikely to buckle under anytime soon.

"The situation is serious, but a collapse of the economy won't happen in the short term," he said, pointing to a stable economic structure and how businesses benefit from comparatively low wages.

There is dispute about how much sanctions hurt, but Russian expert Alexander Rahr said the effects have been severe.

Russia's oil industry has been harmed by the ban on Western companies selling advanced technology to Russian firms for oil and gas exploration in harsh climates like the Arctic, where much of its resources lie.

“This is a big blow to the industry which is unable to modernize,” Mr. Rahr said.

And the sanctions will bite for years to come, affecting mid-size companies rather than the general population.

“Hardest hit are the Russian companies which are not allowed to borrow from western banks, leaving them exposed to the local institutes' exorbitant interest rates,” Mr. Rahr said.

But in Brussels, a premature end to the embargo is not on the agenda, even though Italy is pushing for a reassessment behind the scenes.

Knut Fleckenstein, vice leader of the Socialist Party in the European Parliament, sees no reason to reconsider: "It is not sanctions that are causing the weakness, but Russia's one-sided economic focus on raw materials."


André Ballin writes for Handelsblatt from Moscow, Russia  Ina Karabasz is an editor at Handelsblatt's companies and markets team.  Thomas Ludwig is a Handelsblatt correspondent in Brussels.  Klaus Stratmann is the deputy bureau chief of Handelsblatt in Berlin and covers the energy market. To contact the authors: [email protected]  [email protected] [email protected]  [email protected]