Russia hails sanctions as an economic wonder tonic

Cash, Calculator, Pen

(Business New Europe – bne.eu – Nick Allen in Berlin – June 26, 2015)

You know Russia’s hurting when it moves to cut more than 10% from its defence budget, as written into the 2016-18 draft just approved by the cabinet. But you would never know it from the flow of bullish comments by the political elite about what a splendid thing the extended Western economic sanctions are.

“We are grateful to our European and American colleagues who made us take a fresh look at agriculture, forced us to find our reserves, discover our potential,” Agriculture Minister Alexander Tkachev said on June 24, in the latest glass-is-half-full sound bite. “We’ve learned not only to survive, but to work in this situation.”

After the June 22 announcement that the EU had extended the measures into 2016, a finance colleague took it a step further. “The longer the sanctions stay in place, the better it will be for businesses, especially those operating in the sphere of import substitution,” said Alexander Brechalov, secretary of the Russian Public Chamber. “Extension of sanctions by our Western partners is only positive for us so far.”

“This makes us more fit, stronger,” one of Russia’s top entrepreneurs, Andrei Guryev, CEO of the prospering PhosAgro fertiliser producer, told bne IntelliNews during the recent St Petersburg International Economic Forum.

In fact, all that’s missing now is the launch of a cheeky “Thanx for the Sanx” sweatshirt line, worn by smiling ministers and billionaires in defiant photo ops, just as many seemed proud to be named in the list of individuals sanctioned by the US and EU last year.

That they have since been unable to touch assets frozen overseas has likely dampened their spirits a little. Chechen leader Ramzan Kadyrov still can’t access his two Cologne-stabled race horses Zazou and Dashing Home, and their ability to generate big prize money. (Then again, he has about 50 more thoroughbreds at home).

The events are worlds apart, but it is all somehow reminiscent of how officials of Benazir Bhutto’s PPP party jostled in front of the late opposition leader’s house during protests in Islamabad in 2007 in order to be seen on TV being detained and carted off in police wagons, having chalked up an essential item on their CV.

As for the man at the top, President Vladimir Putin said during his forum speech on June 19 that Russia had found the “inner strength” to prevent sanctions causing a deep economic crisis, and told the West to stop using “the language of ultimatums”. Putin also recently picked up on the €100bn cost of sanctions to the EU calculated by one Vienna-based thinktank.

Bring on the blockade

But if the EU thought it would rattle Russians to be hit with seven more months of sanctions on June 22, the date when the Germans launched their 1941 invasion of the USSR, the diplomats in Brussels stepped on a rake. The spirit of blockade survival is a very powerful thing in Russia, epitomised by the WWII siege of Leningrad, which never surrendered despite the starvation and suffering it endured.

In other attempts to reduce the budget deficit, the government is looking to save $46bn by removing indexation of pensions. It will be unpopular, but support for the leadership is currently so strong that the Kremlin is clearly counting on senior citizens to adopt the same blockade solidarity. They will, is the prediction of most observers. Maybe Winston Churchill got it right when he reputedly said during a wartime winter visit to Moscow that “You cannot defeat a nation that enjoys ice cream at -40°C.”

Russia also renewed its own counter-sanctions after the EU sanctions extension. Officials initially said it was based on a strict principle of reciprocity and that new food products were unlikely to be added to the list. But some departments are clearly warming to the task.

“We are raising the proposal of banning confectionery imports to the territory of our nation, [and] canned fish,” Agriculture Minister Tkachev said, noting that the idea of including confectionery came from the Federal Service for Veterinary and Phytosanitary Inspection. And just for good measure: “I think these matters can also be discussed in respect of flowers,” Tkachev added.

But if we’re really honest …

But behind the defiance and bravado, even companies and industries not directly hit by the sanctions are also recognising their longer-term effects. In the same interview, PhosAgro’s Guryev said that even thriving concerns like his will have a hard time growing with lending rates still hiked up high. “If you want to invest and really substitute imports you have to take a very expensive credit, which today [is something] the whole country is facing, and this has really stopped development,” he conceded.

Macroeconomic indicators are looking glum: Russia’s foreign trade turnover was 32.7% year-on-year less in January-April at $182.4bn, the statistics office Rosstat said on June 23. Exports of goods declined by 29.3% y/y, while imports fell by 28.7% y/y. The share of fuels and energy sources in exports declined from 73% in January to 65.2% in April.

Russia’s ambitious plans for new Arctic energy exploration in June reported setbacks, with Rosneft having to suspend projects because imported drilling rigs and other systems are no longer available. And the French oil company Total just sold its 25% stake in the Shtokman gas field in Western Siberia because the sanctions did not allow it to continue.

The damage isn’t all due to sanctions, though. Collapsed global oil prices last year, plus a warm winter that deprived Russia of political leverage and revenues from increased oil and gas consumption in the EU all combined to deal Moscow a lousy hand when it needed aces.

Yet in terms of import substitution, it will be easier to overhaul Russia’s dilapidated agriculture sector and score some fast results than replace Western-bought technology in sectors like aerospace and energy. Millions of tons of harvested grain are still rotting due to Soviet-style systemic inefficiency. But with no Gouda or Emmental to contend with, Russian cheese production leapt almost 30% to 180,000 tonnes between January and April.

And the gratitude just keeps coming: “Thank you to those countries which adopted sanctions against us, I mean this absolutely honestly,” said Prime Minister Dmitry Medvedev. “In economic terms, all the sanctions imposed have of course led us to co-operate with the Asiatic countries more actively.”

But unless Russia’s technology can fill the gap fast, eating Russian-made ice cream in the economic chill may be the only thing to do until political and trade relations normalise. That, and hope for a rather harsher coming winter than Europe would care for.