Permanent Crisis Mode: Why Russia's Economy Has Been So Resilient against Sanctions

PERMANENT CRISIS MODE: WHY RUSSIA’S ECONOMY HAS BEEN SO RESILIENT AGAINST SANCTIONS Alexandra Prokopenko ZOiS REPORT No. 4 / 2023 · November 2023 ZOiS Report 4 / 2023 Permanent Crisis Mode: Why Russia’s Economy Has Been so Resilient against Sanctions 2 Content 02 ___ Summary 04 ___ Crisis and management 06 ___ The global financial crisis 08 ___ The end of the commodities supercycle and the first sanctions 13 ___ The coronavirus crisis 15 ___ The war against Ukraine 17 ___ Conclusion 19 ___ Imprint Summary In the aftermath of Russia’s full-scale invasion of Ukraine in February 2022, a coalition of Western nations imposed a comprehensive set of sanctions on Russia, encompassing over 13,000 individual restrictions — surpassing the cumulative constraints applied to Cuba, Iran, and North Korea. Remarkably, Russia’s economy has exhibited notable resilience in the face of these punitive measures. In 2022, the country’s gross domestic product (GDP) experienced a mere 2.1 per cent contraction, and in 2023 GDP growth is expected to exceed 2 per cent. This report seeks to contribute to understanding this paradoxical result by analysing the key factors of Russia’s economic resilience. There is a misconception in public debates that this resilience is due mainly to oil revenues. Yet, an explanation based on this reason alone would be an oversimplification. The Russian authorities have generally seemed prepared for large-scale sanctions. However, this preparedness derives mostly from a mix of the large profits that the Russian government received in the first half of 2022 and a special type of economic management. ZOiS Report 4 / 2023 Permanent Crisis Mode: Why Russia’s Economy Has Been so Resilient against Sanctions 3 This report focuses on the period from 2008 to 2023 and is based on an analysis of Russia’s financial management policies, drawing on data provided by the Russian Federal State Statistics Service (Rosstat), the Bank of Russia, media sources, and interviews with financial sector leaders. Over the past 15 years, Russia has faced a series of significant crises, including the 2008 global financial crisis, the 2014 – 2015 decline in commodity prices, the 2020 – 2023 COVID-19 pandemic, and the repercussions of the ongoing war against Ukraine. These frequent shocks within a relatively short time frame have placed the Russian economy under sustained stress. Notably, the same leadership in Russia’s central bank and finance ministry has been at the helm of the country’s economic policies throughout this period. Russian top bureaucrats have drawn valuable lessons from managing these crises. They have adopted an ultra-conservative macroeconomic policy marked by cautious reserve spending, an accelerated accumulation of reserves between crises, increased reserve requirements within the financial system, reduced competition in the banking sector for easier management, and strict monetary and fiscal policies. These impact of these policies on the Russian economy has been average GDP growth during this period of close to 1 per cent. The succession of crises has instilled a particular mindset in Russian officials. The perpetual need to address challenges that arise from factors beyond their control, often unrelated to monetary and fiscal matters, has kept them in a state of constant readiness for unexpected crises. This mindset, coupled with substantial oil revenues, has enabled the Russian economy as a whole to withstand the impact of sanctions and swiftly adapt to new realities. The role of crisis management by the central bank and the finance ministry in responding to sanctions should not be underestimated. While conservative approaches and ad hoc management practices can be effective in dealing with crises, they may limit long-term development. Additionally, dependence on high oil revenues can impede economic diversification. In the periods between crises, the Russian economic authorities failed to strengthen established institutions. Moreover, some aspects of Russia’s financial architecture, such as a predictable tax system and the budget rule, which seeks to encourage economic stability, became victims of crisis management. ZOiS Report 4 / 2023 Permanent Crisis Mode: Why Russia’s Economy Has Been so Resilient against Sanctions 4 Crisis and management In the realm of long-term economic developments, institutions often emerge in response to crises. The evolution of institutions in modern Russia reflects this pattern, with significant institutional changes having occurred as reactions to various crises. Notable examples include the reform of the Russian tax system because of non-payments in the 1990s, the introduction of deposit insurance and budget policy frameworks in the wake of the 1998 Asian financial crisis, and the shift towards inflation targeting after the 2008 financial crisis.1 During crises, ad hoc management practices often come into play, which may temporarily deviate from established institutional procedures. Usually, these ad hoc practices are implemented with the goal of minimising the impacts of the shock, but they may sometimes run counter to existing institutions. However, over the medium and long term, institutions and the actors behind them tend to adapt and strengthen themselves to better handle future crises. It is worth noting that crucial institutions for the Russian economy, such as a stable tax system, budgetary rules, and budgetary federalism (Russia’s system of financially autonomous regional budgets), emerged after the 1998 financial crisis, despite the absence of excessive export revenues at the time. Paradoxically, in the past 15 years, which have been characterised by significant growth in export revenues, some of the institutions that were established in response to earlier crises have faced challenges. This study intentionally focuses on the period from 2008 to 2023 and is based on an analysis of Russia’s financial management policies, drawing on data provided by Rosstat, the Bank of Russia, media sources, and interviews with financial sector leaders. This period was chosen because key figures in Russia’s financial leadership reached top positions during this time and have since been responsible for economic statecraft and decision-making. The years before the 2008 global financial crisis were a period of no major crises for the Russian economy. Ad hoc management in this context refers to decisions made by the country’s financial authorities to allocate or withdraw funds from the economy outside established institutional procedures. This includes actions like bypassing the budget process, making non-tax withdrawals from the corporate sector, and making sudden shifts in tax revenues from the regions to the central government. Emergency decisions to adjust key interest rates also fall into this category. In this context, financial crises are characterised by sharp declines in the value of financial assets and increased risks to financial stability. 1 AnatolyChubais,‘Неплатеживpоссийскойэкономике1990-х:непредвиденныйинститут’ [Non-paymentsintheRussianEconomyinthe1990s:AnUnforeseenInstitution],Voprosy Ekonomiki7(2023):pp. 142 – 158,https://doi.org/10.32609/0042-8736-2023-7-142-158. For the last 15 years, the same key figures have been responsible for economic state craft. ZOiS Report 4 / 2023 Permanent Crisis Mode: Why Russia’s Economy Has Been so Resilient against Sanctions  5 Historically, the interval between major crises averages 10 to 15 years.2 Russia has been exceptional in facing four major crisis episodes in the past 15 years: the 2008 global financial crisis, the 2014 – 2015 end of the commodity supercycle, the 2020 – 2023 COVID-19 pandemic, and the repercussions of the war against Ukraine that began in February 2022, along with two minicrises related to grain exports in 2010 – 2011 and trade issues with Turkey in 2015 – 2016. This high frequency of shocks within a relatively short time frame indicates that the Russian economy has been under persistent stress for the past decade and a half. Interestingly, the second and fourth crises were consequences of the Kremlin’s foreign policy decisions. However, the structure of President Vladimir Putin’s regime and the personalistic nature of Russian statecraft have limited the accountability of key institutions like the State Duma, the government, and the central bank in addressing why Russia has repeatedly faced such shocks. In times of crisis, the emphasis shifts towards crisis management, which often relies on ad hoc approaches and even manual control practices, rather than policies aimed at building and strengthening institutions. In normal economic conditions, regulators typically separate monetary policy and macroprudential measures, such as keeping an eye on risky financial activities to prevent them from causing problems for the whole financial system. That is because of Tinbergen’s rule, which advocates unity between policy goals and instruments. Put simply, the principle, formulated by Nobel laureate Jan Tinbergen, states that to achieve a given number of interrelated goals, it is necessary to have at least the same number of economic instruments in place. However, during crises, maintaining financial stability becomes paramount, and policies are adjusted accordingly. Financial stability is essential not only for price stability but also for policymakers’ ability to absorb shocks and prevent them from spilling over into the real economy. During all of the crisis episodes mentioned above, the Russian economy faced financial market turmoil, abrupt price and exchange rate fluctuations, inflationary pressure, withdrawals of investments by non-residents, and decreased transaction activity, which often led to fluctuations in commodity prices. The ability of financial leaders to contain a crisis within the financial sector and prevent it from spilling over into the real economy hinges on the stable functioning of the financial sector. In Russia, both the central bank and the finance ministry have done this job more or less successfully. It is worth noting that the same leadership has guided Russia’s economic policies throughout the period in question. Elvira Nabiullina and Anton Siluanov, the key figures in Russia’s economic management, served in 2008 as minister of economic development and deputy minister of finance, respectively, and have since solidified their roles, becoming central bank governor and finance 2 LeonidGrininandAndreyKorotayev, Глобальный кризис в ретроспективе: От Ликурга до Алана Гринспена[GlobalCrisisinRetrospect:FromLycurgustoAlanGreenspan](Moscow: URSS,2010),https://cliodynamics.ru/index.php?option=com_content&task=view&id=218&Item id=1. The Russian economy has been under persistent stress for the past decade and a half. ZOiS Report 4 / 2023 Permanent Crisis Mode: Why Russia’s Economy Has Been so Resilient against Sanctions 6 minister. The succession of crises has instilled a specific mindset in these actors: the perpetual need to address challenges that stem from factors beyond their control, such as policies unrelated to monetary and fiscal matters, which has kept them in a state of perpetual readiness for unexpected crises.3 This readiness has led to a conservative approach to governance that favours the accumulation of reserves over the stimulation of investment and, ultimately, restrains institutional development. Building institutions takes time and confidence. The fixation on reserves generates endless waiting for a rainy day and reduces the appetite for institutional development and, consequently, investment. This can artificially slow down the business cycle and lead to slower economic growth. In times of crisis, institution-based management, like long-term budgetary procedures or the budget rule, which aims to contribute to economic stability by saving excess oil revenues during boom periods and using them during economic downturns, may conflict with manual interventions, and a more reactive approach proved to be justified in the face of the shocks of 2022. However, in the medium to long term, continuous ad hoc management can be detrimental to the economy. While it may be effective in overcoming shocks, it can impede economic growth and development. The global financial crisis The first crisis faced by Putin’s government, when he was prime minister, was caused by the 2008 global financial crisis. Before the shock, the Russian economy and financial sector were growing rapidly. Under a quasi-fixed exchange-rate regime, the rouble was subject to controlled floating within the boundaries of a dual-currency basket composed of the US dollar and the euro. Against the backdrop of rising oil prices, Russia’s monetary authorities were accumulating gold and foreign exchange reserves, and nonfinancial companies and banks were actively increasing external borrowing. The bankruptcy in September 2008 of the American financial services firm Lehman Brothers and the ensuing panic in global markets had acute consequences for Russia as well. The price of Brent crude oil fell from its peak of $ 146 a barrel in July 2008 to $ 37 in December. That year, the net capital outflow of the private sector from Russia amounted to $ 133.6 billion. From the beginning of August 2008 to the end of February 2009, the foreign exchange reserves of the Bank of Russia fell by $ 215 billion.4 By the start of the crisis, the foreign-currency debt of the banking and corporate sector amounted to $ 418.5 billion, and in the context of the global crisis, the opportunities for refinancing this debt were significantly limited. In that period, the Bank of Russia regularly conducted currency interventions to adjust the exchange rate to new conditions more smoothly. From 30 3 AndreyYakovlev,‘Стратегиибизнесакакфакторстабилизациироссийскойэкономики: успешныйопыт2022годаинеясныеперспективынабудущее’[BusinessStrategiesasa FactorinStabilisingtheRussianEconomy:ASuccessfulExperiencein2022andUnclearProspectsfortheFuture],Sociodigger,10April2023,https://sociodigger.ru/articles/articles-page/ strategii-biznesa-kak-faktor-stabilizacii-rossiiskoi-ehkonomiki-uspeshnyi-opyt-2022-goda-inejasnye-perspektivy-na-budushchee. 4 ‘Годовойотчет2008’[AnnualReport2008],CentralBankoftheRussianFederation,2009, https://www.cbr.ru/collection/collection/file/7805/ar_2008.pdf. In the medium to long term, continuous ad hoc management can be detrimental to the economy. ZOiS Report 4 / 2023 Permanent Crisis Mode: Why Russia’s Economy Has Been so Resilient against Sanctions 7 September 2008 to 31 January 2009, the volume of the central bank’s foreigncurrency reserves fell by 31.7 per cent to $ 370.4 billion. It is noteworthy that the economy’s level of dollarisation increased even more — to 39 per cent by February 2009.5 In other words, while the monetary authorities were spending reserves to maintain the rouble’s exchange rate, households and firms were acting speculatively by buying foreign currency and so forcing the central bank to increase sales. To stabilise the situation in the financial sector, in October 2008 the Bank of Russia began to provide loans without collateral on an emergency basis, and the rates at such auctions rose to 19 per cent.6 Two months later, lending secured by non-marketable assets was launched. The crisis that unfolded in 2008 – 2009 marked the onset of extensive government involvement in the Russian economy. During this period, over 1 trillion roubles ($ 10.7 billion) was allocated to support various companies, with a significant portion directed towards the financial sector.7 Notably, substantial support was extended to prominent corporations, including $ 4.5 billion for Rusal, a leading aluminium producer owned by Oleg Deripaska; $ 1.8 billion for Evraz, a major mining company owned by Roman Abramovich and partners; assistance for the national carmaker Avtovaz, which at the time was in a consortium with Rostech and Renault-Nissan; and support for enterprises in the military-industrial sector.8 The government established a list of strategically vital industries and enterprises and engaged in the manual allocation of financial assistance to these entities. In hindsight, Putin would later describe this approach to economic management as optimal. By 2010, Russia’s significant GDP growth, at 4.5 per cent, had largely offset the decline experienced in 2009.9 One of the key lessons that Putin and his economic team learned from this crisis was an awareness of the finite nature of reserves and the need to preserve them.10 In subsequent years, the Russian government and central bank prioritised the prudent management of reserves and the creation of financial buffers to safeguard the economy against future crises. This strategy involved accumulating foreign-currency reserves and building the National Welfare Fund, which could be tapped into when needed to mitigate economic shocks. However, the imperative to maintain these reserves also tempered investment in infrastructure and other development initiatives. To sum up, the key lesson from this crisis was that maintaining reserves and low levels of government debt is critical to ensuring macroeconomic stability. 5 Ibid. 6 Ibid. 7 ‘МакроэкономическаякартинавРоссииивмиреза1кв.2020’[TheMacroeconomicPicture inRussiaandtheWorldforQ12020],RoscongressFoundation,2020,https://roscongress. content.rcmedia.ru/upload/medialibrary/605/Makroobzor_upd_ver.15042020_oformlen.pdf. 8 NatalyaSuvorova,‘Размерыспасения’[RescueDimensions],RBC,20October2014,https:// www.rbc.ru/magazine/2014/10/56bc7e499a794701b81d2b66. 9 ‘Национальныесчета’[NationalAccounts],Rosstat,https://rosstat.gov.ru/statistics/accounts#. 10 Off-the-recordinterviewwithaRussianseniorofficial,conductedontheconditionofanonymity. The crisis in 2008 – 2009 marked the onset of extensive government involvement in the Russian economy. ZOiS Report 4 / 2023 Permanent Crisis Mode: Why Russia’s Economy Has Been so Resilient against Sanctions 8 The end of the commodities supercycle and the first sanctions In 2014 – 2015, the Russian financial sector faced a double blow. On the one hand, the supercycle in the commodities market ended and oil prices fell sharply. Between late June 2014 and early January 2015, the price of Brent crude oil plummeted by 60 per cent to $ 47 a barrel. On the other hand, the US, the EU, and several other nations imposed economic sanctions on key Russian banks and companies in response to Russia’s annexation of Crimea and involvement in hostilities in Ukraine’s Donbas region, which included the downing of flight MH17 over eastern Ukraine. These sanctions coincided with the deterioration of the global hydrocarbon market, resulting in a weaker rouble, and rising inflation. In just a few months, the price of Brent crude oil nearly halved, falling from $ 115 a barrel in June to $ 55 by the end of December.11 This had a devastating impact, as approximately 70 per cent of Russia’s budget relied on oil and gas revenues. Consequently, the rouble-dollar exchange rate surged from 32 roubles per dollar at the beginning of 2014 to 56 roubles in December, eventually reaching 79 roubles on a particularly turbulent day.12 The rouble and the dollar are interdependent because of the latter’s global importance, Russia’s reliance on oil exports priced in dollars, and various economic and geopolitical factors. Changes in the dollar-rouble exchange rate can have significant consequences for Russia’s economy and trade relationships. In his customary New Year’s Eve meeting with the government at the end of 2014, Putin called for a shift to a ‘manual mode of economic management’.13 This entailed closer coordination between the government, the central bank, and the presidential administration as well as heightened control over critical sectors of the economy. Putin cited the management practices employed during the 2008 crisis as a model to follow. The government opted for an expedited approach, invoking the trump card of referring to the 2008 experience: ‘Forceful measures were taken then, but there was a need for rapid action without the lengthy process of approvals.’14 In effect, this approach involved direct government intervention in allocating state support to the corporate sector in exchange for increased bureaucratic involvement in corporate management. As a result of this form of management, substantive reforms aimed at building and fortifying institutions were either delayed or never introduced.15 Ex11 ‘BrentCrudeOilPrices–10YearDailyChart’,Macrotrends,https://www.macrotrends.net/2480/ brent-crude-oil-prices-10-year-daily-chart. 12 ‘КурсдоллараСШАв2014году’[USDollarExchangeRatein2014],Ratestats,https://ratestats. com/dollar/2014/. 13 PetrNetreba,‘Путинпоручилправительствувключитьрежимручногоуправления экономикой’[PutinInstructedtheGovernmenttoEnableManualControloftheEconomy], RBC,24December2014,https://www.rbc.ru/economics/25/12/2014/549bff109a794746becedc 1e. 14 Ibid. 15 In2012,expertsincoordinationwiththegovernmentproposedareformprogrammecalled Strategy2020.Itwasnotapprovedasanofficialgovernmentactionplan,butmanyofitsprovisionswereimplementedthroughindividualregulations.Thestrategyenvisagedthebroadapplicationofprojectmanagement,greaterfinancialautonomyfortheregions,thedevelopment ofmechanismsofpublicparticipation,andcontrolovereconomiclife.AntonFeinberg,‘Центр КудринаобъяснилнеудачиреформвРоссии’[TheKudrinCentreExplainedtheFailuresof ReformsinRussia],RBC,27December2016,https://www.rbc.ru/economics/27/12/2016/58613e d19a7947897126ff05. At the end of 2014, Putin called for a shift to a ‘manual mode of economic management’. ZOiS Report 4 / 2023 Permanent Crisis Mode: Why Russia’s Economy Has Been so Resilient against Sanctions  9 amples of such reforms include the transition to project-based management in statecraft, the replacement of short-term investments with long-term ones, and the increased protection of private property.16 In short, this approach prioritised immediate crisis management over long-term structural reforms. In autumn 2014, the Bank of Russia initiated a transition to an inflationtargeting regime ahead of its planned schedule. This transition included a shift towards a floating exchange rate for the national currency. The decision to move to inflation targeting was preceded by a depreciation of the rouble’s exchange rate, driven by geopolitical risks and falling oil prices. This change was necessary, among other things, so that the government and the central bank would not have to spend a significant portion of reserves to support the rouble exchange rate in the event of a crisis. Starting on 5 November, the central bank terminated unlimited currency interventions on a spot market, currency repo (repurchase agreement, a form of short-term borrowing) was provided instead, and by 10 November, it had effectively completed the shift to a freely floating rouble exchange rate by discontinuing regular interventions and the floating corridor for the currency basket. A critical situation unfolded in the currency market on 15 – 16 December 2014. This situation resulted from several adverse events, including an announcement by a representative of the Organisation of the Petroleum Exporting Countries about maintaining oil-production quotas despite the potential decline in oil prices to $ 40 a barrel. Additionally, there was concern over an opaque bond deal involving Russian energy company Rosneft.17 These events triggered panic in the currency market, and at an emergency meeting, the central bank raised the interest rate to its maximum level of 17 per cent.18 At that time, there were no mandatory requirements for exporters to sell their foreign-currency earnings, and the government refrained from direct capital flow control measures. However, Putin informally requested leaders of major companies to sell their foreign-currency earnings,19 and the government urged the five largest exporting companies to reduce their foreigncurrency holdings.20 The shift to a floating exchange-rate regime led to a sharp depreciation of the rouble, whose value ultimately fell by about half. Nevertheless, at that moment, maintaining a fixed exchange rate would have required the central bank to continuously sell foreign currency to offset its shortage in the 16 EkaterinaMereminskaya,FilipSterkin,andAlexandraProkopenko,‘ДмитрийМедведев предложилВладимируПутинуизмениться’[DmitryMedvedevInvitedVladimir PutintoChange],Vedomosti, 22April2016,https://www.vedomosti.ru/politics/ articles/2016/04/22/638724-dmitrii-medvedev-predlozhil-vladimiru-putinu-izmenitsya. 17 YuriBarsukovetal.,‘“Роснефть”провеласекретноеразмещение’[RosneftConducteda SecretPlacement], Kommersant, 12December2014,https://www.kommersant.ru/doc/2631053. 18 ‘ОключевойставкеБанкаРоссии’[AbouttheKeyRateoftheBankofRussia],CentralBankoftheRussianFederation,30January2015,https://www.cbr.ru/press/ pr/?file=30012015_133122dkp2015-01-30t13_15_49.htm. 19 EvgeniyKalyukov,‘Улюкаевопровергтребованиекгоскомпаниямпродаватьвалюту’ [UlyukaevDeniedtheRequirementforState-ownedCompaniestoSellForeignCurrency],RBC, 23December2014,https://www.rbc.ru/finances/23/12/2014/549978d49a79476dbdbb83fc. 20 DenisSkorobogatkoetal.,‘Валютныйрыноквылечатотаритмии’[TheForeignExchange MarketWillBeCuredofArrhythmia],Kommersant,23December2014,https://www.kommersant.ru/doc/2639259. A critical situation unfolded in the currency market on 15 – 16 December 2014. ZOiS Report 4 / 2023 Permanent Crisis Mode: Why Russia’s Economy Has Been so Resilient against Sanctions 16 a surprise to them.41 After these sanctions were announced, the roubledollar and rouble-euro exchange rates broke through the 120 and 150 rouble marks, respectively, and people rushed to banks to withdraw their deposits and stash them under their mattresses. The outflow of funds from the banking system exceeded 2 trillion roubles ($ 30 billion) in the first two weeks of what Moscow called the special operation in Ukraine.42 The government and the central bank responded by banning the withdrawal and physical export of currency from the country for Russians and nonresidents, obliging exporters to sell 80 per cent of their foreign-currency earnings within three days after they were deposited in their accounts, closing the stock exchange, and increasing the interest rate to 20 per cent. In fact, the central bank and the finance ministry put the economy into an artificial coma. Restrictions on capital flows literally locked foreign-currency liquidity inside the Russian financial system, maintaining its stability. With the exception of the interest rate change, such moves had not been applied in previous crises. Moreover, the regulation of capital flows in Russia had been consistently liberalised in previous years. Their restriction, among other things, indicates the extraordinary nature of the regulation introduced. On the one hand, the rate increase cooled economic activity, as few people were ready to take out loans at such a price; and on the other hand, it made deposits attractive again, because people and companies started to return funds to their accounts. At an extraordinary meeting on 27 May 2022, the Bank of Russia sharply reduced the rate again from 14 per cent to 11 per cent.43 This level was still attractive for people to keep their money in bank deposits, and it was less damaging for credit purposes. For the real economy, the sanctions restricted companies’ access to technology and equipment, while the closure of Western markets forced the sector to seek new customers in Asia and the Middle East by adapting products and adjusting supply chains. As the economy shifted to the new realities, the tightening measures were lifted. Indeed, the adaptation was faster than expected: while in April pessimistic scenarios were dominant,44 by September, according to surveys by the Bank of Russia, positive changes in the economy were recorded thanks to high inventories and their replenishment due to the strengthened exchange rate and, as a result, the rapid adaptation of business.45 By mid-2022, the financial sector and the economy had been stabilised. The rouble, after a short fall from 76 roubles per dollar on the eve of the invasion to 120 roubles per dollar in early March 2022, strengthened sharply to 41 AlexandraProkopenko,‘TheCostofWar:RussianEconomyFacesaDecadeofRegress’,CarnegieEndowmentforInternationalPeace,19December2022,https://carnegieendowment.org/ politika/88664. 42 Ibid. 43 NadezhdaNizamova,‘ЦБснизилключевуюставкудо11%:чтобудетскредитамии ипотекой’[TheCentralBankReducedtheKeyRateto11%:WhatWillHappentoLoansand Mortgages],Banki.ru,26May2022,https://www.banki.ru/news/daytheme/?id=10966832. 44 ‘Очемговоряттренды:Макроэкономикаирынки’[WhattheTrendsAreTalkingAbout:MacroeconomicsandMarkets],CentralBankoftheRussianFederation,April2022,https://www. cbr.ru/Collection/Collection/File/40953/bulletin_22-02.pdf. 45 ‘Очемговоряттренды:Макроэкономикаирынки’[WhattheTrendsAreTalkingAbout:MacroeconomicsandMarkets],CentralBankoftheRussianFederation,September2022,https:// www.cbr.ru/Collection/Collection/File/42297/bulletin_22-05.pdf. The central bank and the finance ministry put the economy into an artificial coma. ZOiS Report 4 / 2023 Permanent Crisis Mode: Why Russia’s Economy Has Been so Resilient against Sanctions 17 50 – 60 roubles per dollar in June – November 2022.46 Consumer prices, which had jumped in March 2022, almost stopped growing by April. A year later, price growth exceeded the previous year’s level by only 2.3 per cent.47 In any prosperous, non-militarised developing country, such rates of price growth would be considered quite acceptable. But this prosperity was the product of a combination of several factors whose effect ceased by the spring and early summer of 2023. And the authorities returned to ad hoc economic management modelled on the beginning of the invasion: in response to the sharp weakening of the rouble, the central bank raised the key rate at an emergency meeting, and the government returned to the discussion of capital flow controls.48 The government decided to delay the introduction of regulatory restrictions but used manual controls instead: Russian deputy minister of industry and trade Viktor Yevtukhov held a meeting with retailers at which he demanded price limits for several goods,49 and the government informally agreed with exporters that they would be more active in selling foreign currency.50 Conclusion The primary objective of taming the economic cycle is to smooth out fluctuations while helping businesses and households to adapt to the economic rollercoaster. This imperative is particularly significant for emerging countries, including Russia. Recent research highlights the pivotal role of institutional quality, such as the rule of law, and its relationship with countercyclical policies in shaping the economic and financial repercussions of global shocks on emerging economies.51 Paradoxically, countries with more effective countercyclical policies may have less incentive to bolster their institutions. In the 2020 coronavirus crisis, the Russian central bank and government successfully navigated resistance from lobbyists from the real economy to enact countercyclical measures. This success was largely due to decisions that were made by a select group of technocrats, including Nabiullina, Siluanov, and Maxim Oreshkin, a former minister of economic development and current presidential aide, then endorsed by the president and subsequently implemented. 46 ‘КурсдоллараСШАв2022году’[USDollarExchangeRatein2022],Ratestats,https://ratestats. com/dollar/2022/. 47 ‘КлючеваяставкаБанкаРоссиииинфляция’[BankofRussiaKeyRateandInflation],Central BankoftheRussianFederation,https://www.cbr.ru/hd_base/infl/. 48 ‘Russia’sEliteSplitIntoSquabblingFactionsOvertheRuble’,Bloomberg,18August2023, https://www.bloomberg.com/news/articles/2023-08-18/no-one-in-russia-could-agree-on-howto-wrest-control-of-the-ruble. 49 AdamTooze,‘Chartbook236:Russia’sLong-WarEconomy’,Chartbook, 30August2023,https:// adamtooze.substack.com/p/chartbook-236-russias-long-war-economy. 50 DmitryGrinkevichandGalinaKazakulova,‘Властирешилипоканеужесточатьвалютный контроль’[TheAuthoritiesHaveDecidedNottoTightenForeignExchangeControlsforNow], Vedomosti, 16August2023,https://www.vedomosti.ru/economics/articles/2023/08/16/990533vlasti-reshili-poka-ne-uzhestochat-valyutnii-kontrol. 51 AndreaFerreroetal.,‘WorkingPaperSeries:Leaningagainsttheglobalfinancialcycle’, EuropeanCentralBank,December2022,https://www.ecb.europa.eu/pub/pdf/scpwps/ ecb~3f8276f7dc.wp2763en.pdf. ZOiS Report 4 / 2023 Permanent Crisis Mode: Why Russia’s Economy Has Been so Resilient against Sanctions 18 The Russian authorities have gleaned valuable lessons from the four crises of the past 15 years, by striving to enhance the country’s economic resilience, refine their anti-crisis strategies, and manage emerging risks better. Key takeaways of the way Putin and his economic team have grappled with recent crises include the adoption of an ultra-conservative macroeconomic policy characterised by cautious reserve spending (with accelerated accumulation between crises), higher reserve requirements in the financial system, reduced competition in the banking sector for easier management, and stringent monetary and fiscal policies. These policies, while promoting stability, have, at times, come at the cost of lower economic growth, with the average growth rate between 2013 and 2022 hovering at around 1 per cent.52 By 2023, Russia had garnered the unenviable distinction of being the world leader in terms of the number of sanctions imposed on a country, with a total of more than 13,000 individual measures. Despite these challenges, Russia’s economic contraction in 2022 was milder than some had anticipated, at 2.1 per cent of GDP. The country’s economy demonstrated resilience against shocks, which can be attributed to factors including the government’s consistent readiness for crises and the financial authorities’ acute focus on financial stability. High levels of reserves, built up by businesses before the war, and the strengthened rouble exchange rate in the second quarter of 2022, along with liquidity buffers in the banking sector and the National Welfare Fund, allowed the authorities to quickly saturate the economy with money even while the central bank’s reserves were frozen. This state of constant preparedness has compelled the Russian authorities to address most challenges manually, while the economy, accustomed to this style of management, exhibited limited resistance. In 2022, a portion of the budget rule that constrained additional government expenditure was suspended, and in 2023, the component mandating the accumulation of excess oil and gas revenues was also disapplied. Major corporations, such as Gazprom and oil companies, did not object to substantial payments to the budget,53 while businesses, according to Russian first deputy prime minister Andrey Belousov,54 approached the government voluntarily to contribute additional taxes.55 Anonymously, business representatives complained to the media that the new taxes had hardly been discussed with them.56 Coupled with a substantial trade surplus, which reached a record $ 332 billion in 2022, this management system allowed the Russian economy to withstand significant shocks.57 52 ‘Данныепонациональнымсчетам’[NationalAccountsData],Rosstat,https://rosstat.gov.ru/ storage/mediabank/VVP_god_s_1995-2022.xls. 53 ‘Russia’s“newformula”toincreasetaxrevenuefromoilexporters’,The Bell,18February2023, https://en.thebell.io/russia-s-new-formula-to-increase-tax-revenue-from-oil-exporters/. 54 ‘АндрейБелоусов:«Ядроустроенонеизэкономики,оноустроеноизсмыслов»’[Andrey Belousov:‘TheCoreIsNotMadeofEconomics,ItIsMadeofMeanings’],RBC,13June2023, https://www.rbc.ru/business/13/06/2023/6482d3389a79473805ee8978. 55 ‘Putinsignslawonwindfalltax’,Reuters,4August2023,https://www.reuters.com/markets/ europe/putin-signs-law-windfall-tax-2023-08-04/. 56 MaxSeddonandAnastasiaStognei,‘KremlinunveilswindfalltaxtoraiseRbs300bnfromoligarchs’, Financial Times,13June2023,https://www.ft.com/content/c6080d1e-d3c3-4b1d-b7f3e3acff1876ca. 57 ‘ФТСРоссиичастичновозобновляетпубликациюданныхтаможеннойстатистики внешнейторговли’[TheFederalCustomsServiceofRussiaPartlyResumesthePublication ofDataonCustomsStatisticsofForeignTrade],CustomsServiceoftheRussianFederation, 13March2023,https://customs.gov.ru/press/federal/document/385906. Factors for resilience include the government’s readiness for crises and the financial authorities’ acute focus on financial stability. The Russian authorities have gleaned valuable lessons from the four crises of the past 15 years. ZOiS Report 4 / 2023 Permanent Crisis Mode: Why Russia’s Economy Has Been so Resilient against Sanctions  19 While Russia’s capacity to respond to crises and its finely tuned anti-crisis strategies might appear successful on the surface, they also reinforced a penchant for manual intervention, a management approach that is proving unsustainable in present-day Russia. This approach has, in turn, hindered the development of institutions that constitute the framework of the economy. Having strong institutions, such as property rights, a predictable tax system, or the budget rule, will favour the Russian economy. But the permanent crisis mode and the habit of ad hoc management has cost the economy its growth rate. As a senior official said, if you wear a helmet all the time, you can save money on accident insurance.58 In other words: If you are always in crisis, why do you need working institutions and expect economic growth? 58 Interviewwithanofficialfromthefinancesector,conductedinpersonbetween2018and2022. Imprint Author Alexandra Prokopenko Published by © Centre for East European and International Studies (ZOiS) gGmbH Address Centre for East European and International Studies (ZOiS) gGmbH Mohrenstraße 60 10117 Berlin [email protected] www.zois-berlin.de Citation Alexandra Prokopenko: ‘Permanent Crisis Mode: Why Russia’s Economy Has Been so Resilient against Sanctions’, ZOiS Report 4 / 2023, (https://en.zois-berlin. de/fileadmin/media/Dateien/3-Publikationen/ZOiS_Reports/2023/ZOiS_ Report_4_2023.pdf) ISSN 2512-7233 Layout Yuko Stier This report is licensed under a CC BY-NC 4.0 license.