Thread by @amenka

Russia's economy, fueled by the ongoing war with Ukraine, shows surprising stability amidst sanctions. However, this stability is precarious and not everlasting. In my newest paper for @CarnegieEndow, I explore the resilience and risks of Russia's economy
carnegieendowment.org/2024/04/10/is-…

1/ While sanctions restrict Russia's economic growth, they've paradoxically shielded it from certain external shocks. Key pillars of resilience include:
- Market nature of the economy
- Commodities-based exports
- Strategies to bypass sanctions
- Significant fiscal impulse

2/ Since 2014, Russia has adapted its financial system to mounting U.S./EU sanctions, ensuring that foreign-currency debt levels pose no threat to financial stability. The Central Bank of Russia holds sufficient foreign-exchange reserves to finance this debt

3/ De-dollarization has helped to insulate the Russian economy from external financial shocks. For example, in spring 2023, the Russian market was unaffected by the turbulence following the bankruptcy of several U.S. banks

4/ The freezing of $300b reserves had more psychological impact than practical.With a floating exchange rate, the CBR didn't require currency interventions, posing no risks to financial stability. The economy appears to have adapted to this new equilibrium carnegieendowment.org/politika/91556

5/Sanctions capped 🇷🇺 export revenues, they are near limits. Despite external demand, the economy struggles to meet it due to operating near capacity. Recognizing this, Putin's team revised O&G taxation formula; now the Kremlin goes after individual and corporate incomes

6/ As the war in Ukraine continues, state spending in 🇷🇺 has surged. The fiscal impulse from 2022-2023 surpassed 10% of GDP. To circumvent sanctions, Russia utilized shadow fleets. Acc to @wallyadeyemo, sanctions were designed "not to take Russian oil off international markets"

7/The oil price remains the primary channel for ext shocks for 🇷🇺 economy, providing financial comfort. A $10/bar ⬇️ in oil price would leave 🇷🇺 state budget Rb 1.6 trillion rubles short.Reserves would only be at risk if the average annual oil price fell below $60/bar for a while

8/Despite this, the FinMin has signaled fiscal belt-tightening in '25, potentially resulting in a harsh economic downturn. Reverting to the old budget rule means downward expenditure adjustments. While this move may help control inflation, it's likely to hurt economic growth

Western sanctions have prompted Russia to strengthen its ties with China. Beijing now holds a near monopoly on various products exported to Russia: In '23, Chinese car and tractor exports to Russia surged by nearly 600% to learn more read @AlexGabuev foreignaffairs.com/china/putin-an…

10/The share of yuan in Russia's export/import has surpassed one-third and continues to grow moderately. Russian corporates and individuals held $68.7 billion in yuan in 2023, slightly more than the $64.7 billion held in dollars

11/ @POTUS Dec'23 executive order has made settlements more challenging but hasn't halted trade entirely.The ongoing quest for workarounds has sparked interest in digital currencies. While 🇷🇺 and its BRICS partners are exploring this option,progress toward viability has been slow

12/ Technology sanctions are taking a toll, prompting the Kremlin to lean heavily on commodities-based exports. This persistent focus on the commodity sector, coupled with the rapid militarization of government spending, threatens to hinder Russia's long-term economic potential

13/Brain-drain from 🇷🇺 has impacted the quality of human capital. 🇷🇺's isolation from the international mainstream appears in textbook rewriting & the decline in English language classes. The repercussions of these setbacks will become increasingly evident in the coming years

14/ If Russia attempts to slow down expenditures, it will unveil several challenges. Cutting wages and reducing military spending would be politically delicate under any circumstances, especially now that the population has grown accustomed to increased income and expenditures

15/ Because of the war, the distribution of wealth within Russia changed. The average Russian has never felt so rich and will not want to give that up as we discussed with @yaffaesque in his brilliant essay newyorker.com/news/the-weeke…

16/The budget burden is escalating due to 'new' Russians: residents of occupied 🇺🇦 territory.~ 700,000 pensioners in annexed regions get ~$200 p/m, less than the national average but more than the average in the North Caucasus. All new pension payments undergo annual indexing

17/ The Kremlin possesses tools to facilitate a soft landing for the economy. With a 16% interest rate and a near 4% inflation target, there's ample space for rate cuts to stimulate consumer demand. But major problem with the labor market continue to bite

18/After the war, 🇷🇺 will need to replenish weapons stocks, which will boost employment. However, over time, inflation may erode high salaries, and options for personal investment will diminish: large mortgage subsidy programs may be cut, and access to investment tools limited

19/🇷🇺 economy is subordinated to political imperatives, providing few incentives for sustainable development. Short-term fixes and declining living standards will pose challenges for the Kremlin. Despite the design of G7 sanctions, Russia is on it's way but far from the crisis

20/ For nuances and data, read the whole piece at @CarnegieEndow more analysis on the topic is coming
carnegieendowment.org/2024/04/10/is-…