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20th May 2018

Sanctions to have little impact on Russia in 2016, US says

  • Putin is, in himself, a cause of long-term economic uncertainty, the US says (Photo: Alex F)

Western sanctions will have a negligible effect on the Russian economy this year, after a “one-off” blow last year, but long-term effects will also hurt, the US says.

The sanctions, imposed by the EU and US in mid-2014, prompted the Russian economy to contract by 1 to 1.5 percent more than it would have done in 2015, a State Department official told press in Brussels on Tuesday (12 January).

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They also led international investors to write down the vaue of Russian assets by some 10 percent and saw Russian-linked deposits in certain European banks, for instance, in Austria, to go down sharply.

The Russian economy shrank 4 percent in total in 2015.

In normal circumstances, it might have grown by up to 5 percent, the US official said.

The slump in world oil prices, which coincided with Russia’s invasion of Ukraine, was the main factor, costing at least 4 percent of GDP.

Lack of structural reforms, such as loosening state control on major firms, also had a bigger impact than the Western measures.

The sanctions, wich curb Russian firms’ access to credit and which prohibit exports of energy technology, are being extended until mid-2016 due to Russia’s non-compliance with the “Minsk 2” ceasefire accord.

But the US official said the impact this year will be “much smaller” than last year.

“When the sanctions first kicked in, when they were first being discussed, there was a one-off effect, which was done up-front,” he noted.

“The roll-over for the next six months won’t have the same effect.”

He added: “The sanctions are not designed to push Russia over the edge, economically speaking, even though there’s some folks on the Hill [the Congress in Washington] who are in favour of that. They’re designed to slowly give the government pause for thought."

He said Russia’s oil and gas wealth, as with Iran, make it resilient to outside pressure.

“I would question if Russia can be pushed over the edge. It still has a large source of foreign income, so it’s always going to be OK ... It’s going to be difficult to do real damage.”

The US official said Russia’s foreign reserves, down from $500 billion [€462 billion] before the Ukraine crisis to $370 billion, “are doing rather well.”

He also praised Russia’s macro-economic decisions, such as keeping interest rates low.

Long-term effects

The US official said negative effects will linger in the long term, however.

He noted that even if Russian leader Vladimir Putin complied with Minsk 2, the aura of uncertainty on Russia’s future would remain.

He also said lack of access to US technology for extraction of “unconventional” oil and gas reserves mean Russian energy output will go down in years to come.

“If you were going to invest in Russia in a 20-year project, you’ve probably scaled that down to, say, a five-year investment instead,” the US official said.

“If you had a new Russian president, with wide support for reforms, that would be a game-changer. Then you’d see the uncertainty come down.”

He’d have gone further

The State Department says the impact of the sanctions, and of Russia counter-sanctions, on the EU economy is less than 0.1 percent of the bloc’s GDP.

It's bigger in the Baltic states, Finland, and Poland.

But the US official added: “These are the countries which support sanctions the most. When I meet with them, they’re saying: ‘Please. Please. Please keep them in place'.”

“The objective is geopolitical. It’s about the Ukrainian people being able to determine their own fate - that’s what’s diriving all of this,” he noted.

“If the sanctions weren’t in place, it’s pretty easy to imagine that Putin would have gone a lot further in Ukraine.”

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