Russia has been subjected to joint sanctions from European Union and United States since Crimea and Ukrain issues. Even in that case, despite continuous pressures from the West, the Russian economy refuses to collapse, almost a miracle. The people wonder how exactly the Russian economy works now and what problems are there in the country. It is also a matter of concern for China.
First of all, because of the joint sanctions imposed by the West, the biggest impact is on ruble devaluation. At its peak, 40 ruble could be exchanged for USD 1, now it is 62 ruble to USD 1, and even this is based on the exchange rate that has rebounded. This also means that the exchange rate of the ruble has depreciated over 55%.
Secondly, there are not products abundant in Russia. Many commodities depend on importing. Russia's price level is closely connected to the exchange rate. The devaluation of the Russian ruble will inevitably affect the price level. According to figures provided by the Federal State Statistics Service of Russia, in 2017, the country's inflation rate was expected to be 2.5-2.6%. While this figure is relatively high for other countries, for Russia, it was a pleasant surprise for the Russians for being below 3%. During the peak of sanctions in 2015, Russia's inflation rate had climbed to above 15%, and most of these years remained at a level of 6%-7%. Although the inflation rate is much high, there is no "big trouble" within the society of the country. One hand can be attributed to the strong role and effectiveness under the Putin regime; on the other hand, externally, the dollar sustains flowing in, and there are certain countries who offer essential supports to Russia.
Thirdly, the growth of Russian economy began to recover in 2017, which reflected in most of the forecasts. At the height of the sanctions in 2015, Russia's economy grew by -2% and even below. Subsequently, it was also a negative growth for the year of 2016. Since 2017, its economy experienced a slight increase at the rate of 1.5%. Although not as 2% expected by itself, Russia had the reason for optimism. This situation was also linked to prices and investment. As the prices decline, the role of consumption will come up.
Fourthly, the extraordinary increase in external investment that is conducive to the stability of the Russian economic situation. Compared to 2015, Russia's foreign direct investment (FDI) grew more than 4 times to USD 32.98 billion in 2016 . In spite of this, this figure remains less than half of the USD 69.22 billion in 2013, but it was an astonishing achievement under the sanctions. Why that? The scale of reinvestment from investment profits answered the question, with a total amount of USD 17.24 billion. It would be difficult to transfer those profits from Russia, so it has to be reinvested. In addition, Russia began to sell its oil assets. In the past, Russia exported its oil, and nowadays offering oil assets in exchange for foreign exchange. For example, Rosneft sold 19.5% of its shares to a consortium heading by Swiss Glencore and Qatar's sovereign wealth fund. A Indian consortium and India's state-owned Oil and Natural Gas Corporation (ONGC) acquired 23.9% and 11% of the shares of Russian oil subsidiary Vankorneft, respectively .
Fifthly, grain production has stabilized the overall domestic situation in Russia. That has been Russia's largest economic achievement in recent years. In 2017, Russia witnessed a recorded grain harvest, which grain output accounted for 140 million tons, and stimulated Russia's grain exports. According to the statistics data by analytical center Sovekon, the amount of grain available for export is 44.5 million tons (nearly at a capacity limit with corresponding infrastructure) for the years of 2017-2018. The figure was 37.7 million tons one year ago .
Yet, even if the Russian economy was able to avoid collapse due to the strong supports of China and India, the problem that the economy probably goes to collapse that is still lingering. The situation does not turn over.
Russia is seriously having money shortage, to the point almost unable to provide pensions. Aleksey Kudrin, Head of Center for Strategic Research, former finance minister of Russia, admitted that the country does not grant additional funds as pension protection for retirees. He said that if the state were to pay pensions in full, it must reduce investments in education, medical care, and road infrastructure. He pointed out that the pensions received by retirees in Russia today are averagely 34% of their wages before. If such situation is continuing, the above proportion will be down to 25-27% sooner.
Moreover, Russia goes through capital outflows seriously. The sanctions on Russia is related to its discord with Ukraine, yet, the State Statistics Service of Ukraine shows that Russia was actually Ukraine's largest source of investment with USD 1.67 billion in terms of total accumulated direct investment in 2016. Ukraine is also among Russia's Top 10 Targets for overseas investments. It is quite obvious that Russia's capital will keep on draining off so long as the opportunities are available.
Further, the U.S. sanctions may be further strengthened. At the end of 2017, the U.S. Department of State unveiled a new list of sanctions against Russia and completely banned from providing any advanced technology related to the exploration and exploitation of oil from the Arctic and the continental shelf as well as deepwater mining projects, exporting various goods and services accessible. Along with the Donald Trump's Russiagate proceeding. The possibility and risk of further sanctions will also be progressive. Russia would endure even more difficult situation.
Final Analysis Conclusion:
Overall, Vladimir Putin remains to endure hard times. Undoubtedly, Russia will be taking great efforts to seek the sources of capital from China and India, meanwhile energetically dumping varied assets including Russian ammunition. That may be the only way out of tough days. From the geopolitical perspective, yet, Russia's controls of Crimea and Eastern Ukraine did not cost as much as expected. The biggest test for Putin is whether oil prices drop or not and Ruble devaluation is greater in the future. That is really a big challenge for Russia. And at that time, either China or India could not lend a helping hand.
