Russian GDP growth is unlikely to pick up, even if sanctions imposed in 2014 and 2015 were to be lifted.  Analysis by ACRA suggests that although the effects of the sanctions are pervasive across the economic landscape, they are not as influential as other economic policy settings in shaping Russia’s economic fortunes, and have even had some upsides.

Significant, yes…but not a killer blow

According to analysis undertaken by Analytical Credit Rating Agency (ACRA) the financial sanctions imposed in the wake of the Crimea annexation, amidst claims of Russian destabilisation of Eastern Ukraine, has affected about 20-21 percent of the Russian corporate sector. In a report reflecting examination of the combined consolidated IFRS revenues of more than 400 domestic companies under the sanctions (RUB 30 trln in 2017) they note that the biggest impacts were on state controlled companies, stating “The restrictive measures mostly affected large state-owned banks (54 percent of the banking sector by assets), oil and gas companies (95 percent of combined oil and gas sector’s revenue) and almost all defense companies”.

With Russia’s economy heavily concentrated in state hands, this means the sanctions have had a significant effect, but ACRA notes that this impact has been diminished beyond the sectors directly impacted.  Their report states that profit margin of the non-financial corporate sector were pared by about 1.6% due to International financial sanctions over the first 2 years of their operation, but that a strategic macroeconomic tax manoeuvre, which saw an increase in mineral extraction tax and a reduction in export duties supported aggregate demand.

But also offsetting the impact were corporate behaviour changes. The sanctions encouraged companies to borrow locally, with foreign debt and equity seen as less reliable. This has seen RUB-denominated borrowings climb from 13% to 41% of total corporate borrowings and a boost for the domestic debt market as corporates and banks upped domestic debt from 40 to 66%.  This has meant a change in debt ‘geography’ as foreign debt holders headed for the exits and local holders took their place, even for companies which have been relatively unaffected by sanctions directly.  The sanctions have also accompanied a rise in debt sourced from Chinese banks.

Indirect upsides and downsides

ACRA notes that the sanctions have triggered some significant economic changes for Russia.  Referring to trade barriers it notes “Russian counter sanctions restricted import of some goods pushing their prices in the domestic market higher. We estimate the negative impact on real disposable income as minus 2-3 pp in 2018. Russia’s GDP growth was 3 percent in 2014-2018 while the counter sanctions contribution was estimated at minus 0.2 pp (due to weaker household consumption)”. ACRA states too that aricultural production growth failed to offset the negative effect of the counter sanctions.

But a possible upside of the sanctions regime has been to edge business to a more conservative budgeting approach, with Russian authorities and business more generally wary of external borrowings.  This means that with a global backdrop conspicuous for having sovereigns, financial sectors, corporates, and households around the world swimming in more debt than ever previously known, Russia’s corporate world is conspicuous for its financial prudence, and the Russian state in surprisingly rude good health, while the national economy is running a current account surplus.  The downside corollary to that spending personal debt hasnt been the stimulus for Russian policymakers that it has been almost everywhere else.

ACRA analysis concluded that the sanctions are not a key constraint on Russian economic growth in the medium term. GDP growth in 2018-2020 is expected to grow at 1.5 percent, hampered by a labor shortage which is shaving off an estimated 0.4 pp of GDP growth. This, the analysts conclude, is far more influential in shaping the economy, and means economic growth is unlikely to accelerate significantly even if sanctions are removed.

Last week, the Russian Economy Ministry also wrote about human capital stagnation again, noting it to be a key reason behind unemployment falling since mid 2016. “In the past 24 months, the number of unemployed reduced by 0.7 mln, or 16 percent“ and adding “The applicant-to-hire ratio remains at record low after two consecutive years of falling”. The government has launched a pension system reform, which envisages pension ages increase to 65 years for men and to 63 years for women, in part to address the labour shortage.

Raiffeisenbank analyst Stanislav Murashov notes that Russia’s major labor issue is the shortage of qualified labor, adding that he sees the concentration of the economy in State hands, and inefficient economic decisionmaking by State controlled entities as being a bigger brake on economic growth. “In addition, the new pension reform envisages no measures to support employment, and there is a VAT increase 18 to 20 per cent”, he adds.

The Economy Ministry has already revised its GDP growth forecast downward to 1.9 percent in 2018 and 1.4 percent in 2019 (versus 2.1 percent and 2.2 percent expected earlier, respectively), with growth expected to rise to 3 percent only from 2021.

Other issues

According to ACRA, sanctions have a more significant impact on the long-term GDP growth outlook. They note a reduced number and the scale of joint projects, including those related to energy and resources, adding that the sanctions introduced in 2014 will begin to become more apparent in the energy sector from 2020. “Deposit developments started after 2013 will contribute to the total production increase in 2019-2020 but from 2020 new technologies and investments will be needed for both aged and new deposits. This will require significant spending, but will be hampered by the sanctions”, ACRA state. They also refer specifically to the sanctions against UC Rusal affecting aluminum exports.

Raiffeisenbank’s Murashov points to this impact as being pervasive moving forward, even if sanctions were to be lifted in the near future.  “Economic growth is unlikely to pick up if the sanctions are lifted. Companies invest from profits, not from borrowings (while the sanctions are designed to affect company borrowings)”.  Murashov also notes that that the conservative budget and State macroeconomic policy may be baking in sluggish growth prospects for some time to come, with the current conservative budget policy mainly reflecting the collapse of crude prices post 2014. He adds that external borrowings have never been the main source of state debt financing, and that the RUB slide when the sanctions were first announced supported the economy, but also meant that corporates now borrowing increasingly in the Russian currency were more constrained in their investment outlooks.