The impact of sanctions on the Russian economy

This article delves into the notable expansion of the economic sector in Russia, with a specific focus on the significant influence of sanctions. The political situation undoubtedly plays a key role in the country's economic system. This article raises the topic of the Russian economy, which directly depends on the sanctions that were imposed against it. How does the country cover consumer needs, from medicines to Coca-Cola? How do you pay bills abroad without crossing the line? In general, despite the sanctions, such a huge country as Russia must provide the consumer with the necessary resources for a comfortable and familiar life. Import substitution in the country has increased several times, which certainly has a positive impact on its economy and workforce. But the consumer also does not want to give up the original taste of the products he is familiar with, and now the entrepreneur needs to organize logistics during the sanctions period and do it legally.

Keywords: Russia, sanctions, expansion, online retail, consumer behavior, market growth, international trade, digital technologies, regulatory framework, market competition, supply chain, payment systems, logistics.

Introduction: Sanctions at any time are a tool for influencing the economy of the country to which they are applied. The degree of development of the country’s economy determines its resistance to the sanctions imposed, at the same time, the country to which sanctions have been applied has the opportunity to develop the economy, relying on internal resources. The basis of the life of any state is its finances, the state of which determines both its longevity and the volume of the state economy. Finance ensures the defense capability of the state and the satisfaction of private interests. Therefore, their quantity and methods of use are placed at the forefront of the existence of the state itself. Such a system, which is designed to explain and analyze the processes occurring in this area, give recommendations on proper financial management, and develop ways to improve the financial system, is financial law.

Finance must be considered as a tool that serves the formation and functioning of a system of direct and feedback connections in society, as the basis for self-regulation of the state and society.

Objectives:

1. Consider the possibility of import substitution on the territory of the Russian Federation. It is necessary to find out which areas need certain products/resources and start working on their production. As a result, understand what the end customer needs and satisfy his needs without using resources that are under sanctions. Give an independent assessment of ready-made products from the import substitution section. Also, just as important, to produce products of good quality with a more affordable price for the end customer.
2. Sanctions and the fall of the ruble and GDP. The Ministry of Economic Development assessed the change in the main indicators of the Russian economy in the event of unforeseen risks. The department traditionally prepares a conservative version of the socio-economic development forecast for the next three years. The macro forecast was submitted to the State Duma on Friday as part of the materials for the draft budget for 2024–2026; Vedomosti previously reported on how the Ministry of Energy assesses the basic version of economic development.

The department named the prerequisites for the implementation of the conservative forecast as a stronger slowdown in global economic growth than in the base case, as well as increased sanctions pressure on Russia, including through secondary sanctions for friendly and neutral countries.

By addressing these objectives, this article intends to contribute to the existing scholarly discourse on import substitution development in Russia and the influence of sanctions. The findings, analysis, and recommendations will provide valuable insights for researchers, and industry professionals involved in shaping the future trajectory of economic sector in Russia.

Import substitution in Russia under sanctions

Before the sanctions, Russia in certain industries was 90 % dependent on software and products created abroad. Countries in which production is no cheaper than in the Russian Federation and even partially purchase raw materials from it, brought back goods with high added value. The share of imports from countries on the list of openly unfriendly countries was more than 51 %. During the period of sanctions, such dependence could cause technological collapse. Strengthened measures to support domestic producers and a deliberate increase in customs duties were intended to solve the problem. As for the needs in various areas of import substitution, as of the end of 2022 and beginning of 2023, specialists from the Ministry of Industry and Trade compiled the following list of industries that most urgently need the attention of domestic manufacturers and merchants:

— Heavy engineering;

— Electronics industry;

— Machine tool industry;

— Aircraft manufacturing;

— Textile industry;

— Medical and pharmaceutical production.

In accordance with the data of the ministry, all of the listed industries must mobilize their production capacities to increase the production of existing goods and expand their range. Since the needs in the domestic market in the above areas range from 60 to 90 % of the entire assortment.

In 2023, the money that was allocated in 2022 for import substitution, industrial competence centers and cluster development centers began to work. This is the main trend that dates back not even to 2022, but to 2014, when the first sanctions restrictions began to appear. But import substitution reached its highest point in 2023. Intensive development of a wide variety of software began. This is a long-term trend, which (and this is already visible) will lead to the fact that these investments will turn into products, which will affect all sectors of the Russian economy.

At the same time, we see a multiple increase in the interest of Russian software companies in the markets of friendly countries. Thus, based on our recent review of Russian software exports, Asian countries have surpassed Europe and America not only in terms of export potential in the coming years (74 % for Asia, 34 % for Europe and only 16 % for America), but also in actual exports in 2022 -2023: 34 % of IT companies already have experience in exporting software to Asia, while this figure is 29 % and 16 % for Europe and America, respectively. Russia was able to prove its technological sovereignty, despite all the sanctions restrictions and cyber attacks on our systems, which attracts the attention of friendly countries to our expertise — they ask for help in building their own independent and secure IT industry.

The growth in demand for domestic electronics is growing rapidly, existing contract manufacturing is overloaded, the cost of services for manufacturers is rising (they, among other things, need to replace Western equipment with Asian equipment). For these and a number of other reasons, many developers choose enterprises from other countries, usually from China, India, Turkey and Vietnam. According to the Association of Electronics Developers and Manufacturers, about 10 % of development companies decided to move production abroad during the year.

Results and plans of import substitution

As experts interviewed by CNews noted, this result was partly achieved due to a low base (the first quarter of last year was very difficult for the IT sector).

In addition, it must be taken into account that in addition to “information technology” itself, this group of activity codes includes, for example, filming and sound recording, activities in the field of television and radio broadcasting, publishing activities, etc. And 80 % of revenue comes from telecommunications industry (which, however, includes hosting and cloud services).

Be that as it may, there is growth, albeit not so significant. Sales of IT industry products and services increased by 22 % in 2022.

Import substitution is a type of political and economic activity that has internal complexity and which requires careful planning and implementation. Although this may be effective way to promote economic development national economy and reducing dependence on foreign goods, it is important to consider potential risks and develop a comprehensive economic development strategy that includes a range of economic measures policies that are based on new trends building economic systems based on digital reality and digital technologies.

Sanctions and Gross Domestic Product

GDP, gross domestic product, is the total amount of services and goods produced in a country over a given amount of time.

According to Rosstat, in 2022, when the West imposed sanctions against Moscow against the backdrop of a military operation, the economic decline was 1.2 % — more than half as much as in the pandemic year of 2020.

In 2023, according to Russian President Vladimir Putin, the economy grew by 3.6 %, which exceeded the world average growth rate of GDP. In September of the same year, the head of state announced that the economic recovery after the imposition of sanctions against the country was completed.

The Ministry of Economic Development assessed the change in the main indicators of the Russian economy in the event of unforeseen risks. The department traditionally prepares a conservative version of the socio-economic development forecast for the next three years. The macro forecast was submitted to the State Duma on Friday as part of the materials for the draft budget for 2024–2026; Vedomosti previously reported on how the Ministry of Energy assesses the basic version of economic development.

The department named the prerequisites for the implementation of the conservative forecast as a stronger slowdown in global economic growth than in the base case, as well as increased sanctions pressure on Russia, including through secondary sanctions for friendly and neutral countries, the document says. Similar risks were cited in the conservative version of the forecast that the Ministry of Energy prepared last year for the current budget cycle (the department develops estimates primarily to calculate the budget parameter). However, the Russian economy actually developed according to a significantly more favorable scenario (a year ago, a 0.8 % decline in GDP was expected in 2023; now it is projected to grow by 2.5 %).

It is also expected that certain pro-inflationary factors will be implemented (in particular, a stronger depreciation of the exchange rate), which will lead to higher inflation rates in 2023–2024. In this case, the Ministry of Energy expects inflation for this and next year to be 8 % and 5.4 % (instead of 7.5 % and 4.5 % in 2023–2024, respectively).

The consequence of this will be lower growth rates of real cash incomes of the population and a contraction in consumer activity, the document says. Real disposable income of the population in this case will grow by 4.1 % this year (versus 4.3 % in the base case), in 2024 — by 1.4 % (versus 2.7 %), in 2025 and 2026 — by 1.6 % (versus 2.6 %).

Conclusion

According to expert forecasts (both international and domestic), the Russian economy in 2024 will not maintain its current pace and will grow by only 1.1 % (IMF) or 1.3 % (WB). Experts immediately name a set of reasons that can lead to this, both objective and controllable. Firstly, the factor of GDP recovery after its contraction has largely exhausted itself (-2.1 % in 2022, according to Rosstat). Based on the experience of the previous decade: before the recent adjustments by Rosstat, the average growth rate of the Russian economy did not exceed 2 % of GDP per year. The shortage of personnel and technology will also have a restraining effect, and attempts to accelerate growth through budget expenditures can lead to accelerated inflation and loss of macroeconomic stability.

It is expected that the Bank of Russia will continue its tight monetary policy, where the most obvious, although far from the only instrument, is a twofold increase in the key rate in four months (from 7.5 % in July to 15 % in October). As a result, loans, both consumer and corporate, may soon become even more expensive, which in turn will lead to a slowdown in consumption growth in 2024. Constraints on growth from resource opportunities and tight monetary policy will most likely lead to a significant slowdown in economic growth next year, to 1–1.3 %.

The GDP growth forecast for 2024 today is in a fairly wide range from 0.7 to 1.8 %. However, he recalls that due to the influence of many non-economic factors, the reliability of forecasts is now not very high. Just like everything for the last three years.

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