After Russia’s full-scale invasion of Ukraine in February 2022, Western countries imposed numerous sanctions against Russian banks and companies, which significantly affected the Russian economy. Yet the economic collapse some expected never came.
This allowed President Vladimir Putin to declare confidently at the beginning of this year: “2022 was a challenging year for us, and we managed to get through the risks that emerged … quite successfully.”
Indeed, the Western sanctions did not undermine Russia’s economic potential to an extent that the Kremlin would lose the ability to finance its war in Ukraine. The events of 2022 have confirmed that the Russian economy is inefficient but resilient and that the Kremlin is able to mitigate any destabilising effect the economic downturn may have on the political front.
The impact of sanctions
The sustainability of the Russian economy is determined by its place in the global division of labour: it stands at the very beginning of technological chains as a supplier of natural resources.
Since the global economy cannot grow without increasing its consumption of natural resources, the demand for Russian raw materials is maintained. This, to a large extent, has protected the Russian economy from the impact of sanctions.
In 2021, Russia provided 17.5 percent of oil sold on the world market, 47 percent of palladium, 16.7 percent of nickel, 13 percent of aluminium (not including China), and almost a quarter of potash fertilisers.
Hypothetically, the world economy could give up Russian raw materials, but only at the cost of price hikes and potentially years of recession, which is not in the interests of Western politicians.
The United States’ attempt to close the access of Russian aluminium to the world market in 2018 led to an instant jump in the price of this metal by 20 percent, which forced the White House to abandon the announced plans.
That is why, in 2022, the West imposed some of the harshest sanctions on Russian export sectors, such as steel, coal and processed wood, where the global economy has spare capacity. The combined share of these raw materials in Russian exports in 2021 was 11.7 percent, so restrictions on sales to Europe did not have a significant impact on Russia’s economy at large.
However, they did affect significantly the economies of certain regions where these sectors are dominant. For example, in November-December 2022, coal mines in Kemerovo, Russia’s core coal production region, were able to sell just 50-60 percent of extracted coal. In Karelia and Arkhangelsk, where there are many woodworking enterprises, industrial production contracted by 15.5 percent and by 19.8 percent respectively. In Lipetsk, it collapsed by 15.4 percent due to a drop in production at the largest Russian steelmaker, Novolipetsk Steel.
Western sanctions related to the oil industry targeted revenues rather than production. As a result, Russian oil production increased by 2 percent in 2022. On February 5, an EU ban on the import of refined petroleum products from Russia came into effect, but there is no evidence yet that it has impacted the Russian economy. Since the beginning of 2023, production of gasoline and diesel fuel climbed by 7 percent compared with the previous year which could in part be the result of increased demand from the Russian army.
The decline in exports of gas to Europe – which is not so much sanctions-related but a consequence of Putin’s “freeze and split” strategy for Europe – has had a more significant impact, with production falling by 18-20 percent. If the situation does not change, gas production may shrink by an additional 7-8 percent in 2023.
The Russian economy in recession
The impact of the sanctions on the Russian economy was significant but it was not as severe as some expected. It contracted by 2.1 percent in 2022 – much less than the predictions of 5-6 percent made in the spring.
The fall in GDP was cushioned by the high oil and gas prices which brought in windfall profits. Revenues from hydrocarbon production and exports increased by 28 percent compared with 2021, and high inflation in the first half of 2022 led to an increase in nominal revenues from taxes.
Financial sanctions, such as the freeze on the accounts and assets of the central bank and commercial banks, and the restriction on payments and access to capital markets, had the most immediate impact on the economy.
In the spring of 2022, it took just a week for inflation in Russia to accelerate to more than two percent per week and for the dollar to appreciate by 60 percent to the rouble. The Russian financial authorities were able to mitigate this initial fallout by imposing restrictions on current and capital transactions and refusing to convert the rouble, thus strengthening the exchange rate and suppressing inflation.
However, the gradual build-up of pressure on the balance of payments associated with restrictions on trade in Russian hydrocarbons led to a fall in the current account balance and a weakening of the rouble by more than 20 percent in the second half of the year.
A more severe blow to the Russian economy came from the “moral sanctions” – the voluntary withdrawal of foreign companies from Russia. The most significant effect was the shutdown of automobile plants, which belonged to international companies. As a result, the production of new cars in Russia fell threefold, and sales – by 59 percent. The manufacturing industry in the Kaluga and Kaliningrad regions, where such plants were concentrated, shrunk by 20 percent.
When considering the drop in industrial production and services, we should take into account the fact that throughout the past year, many foreign companies sold their assets to Russian businesses. This process, especially if we are talking about large production facilities, takes several months and requires the consent of the Russian government.
During this time, current activities may stop, but after the transaction is legally formalised, the companies can resume their work. This means that to a certain extent, the economic decline reflected in shrinking gross domestic product (GDP) for 2022 may be partially compensated in 2023.
The Russian government was also able to mitigate the effect of the sanctions on the general population by increasing spending. Public expenditure went up by 32 percent of the planned budget for 2022 or $113bn.
About half of the additional budget was directed to the military, but much of the rest was spent on new social programmes, including additional indexation of pensions, increased benefits for families with children, deferment of payroll tax payments, etc.
The Russian government was able to cover the extra expenditure from the fiscal reserve accumulated in previous years, the National Wealth Fund (NWF). At the beginning of 2022, the liquid part of it amounted to $113.5bn or 7.3 percent of GDP. The entire budget deficit for 2022, which equalled 3.3 trillion roubles ($50bn), was financed from it. It is likely that in 2023, the fiscal reserve – which now has fallen to 4.6 percent of GDP or $87bn – will be used to cover the budget deficit again.
The pressure on the Russian government budget will inevitably increase in the coming years because the sluggish economy will not be able to generate enough revenues. As a result, the fiscal reserve may disappear completely by 2025-26, but that will not lead to a budgetary crisis. The overall Russian public debt is below 20 percent of GDP which allows the government to borrow from the domestic market.
The long-term outlook
It seems that the past year of sanctions and economic downturn is continuing a trend of stagnation in the Russian economy rather than starting a new one.
In the first eight years of Putin’s presidency (2000-2008), the Russian economy grew at an average rate of 7 percent annually as a result of the economic reforms of the 1990s, high oil prices and extensive foreign borrowing.
By contrast, between 2012 and 2021, the Russian economy grew on average by 1.4 percent. This slow growth had a lot to do with Putin’s authoritarian approach to political and economic decision-making after he returned to the presidency in 2012.
While cracking down on political competition, he also dismantled the progressive system of arbitration courts, which had provided a much higher level of legal protection for businesses. Putin also launched a massive programme to rearm the military at the expense of investment in human capital development.
After the annexation of Crimea in 2014 and the unleashing of the armed conflict in eastern Ukraine, sanctions were imposed against Russia limiting many companies’ access to modern technology. The research and development sector was also undermined, especially by criminal cases launched against Russian scientists, who were accused of treason. These factors severely worsened the business climate in the country and diminished economic growth.
In the short term, the Kremlin will do its best to cushion the Russian population from the effects of the economic crisis.
It is already looking to compensate for falling revenues from slumping oil and gas prices (down 43 percent for October 2022 -January 2023 compared with January-March 2022) by introducing changes to oil tax rates. Putin also declared he wants Russian businesses to contribute voluntary payments to the budget to boost its revenues.
This additional revenue will be used to finance not only the Russian army but also the families of regular and mobilised soldiers. Other social benefits and programmes will also be maintained.
This will ensure that when the time comes for the presidential elections in March 2024, a considerable amount of the population would not mind seeing Putin re-elected with 70-75 percent of the votes.
In the longer term, the Russian economy is still unlikely to experience a collapse. That is because even the most onerous sanctions have a limited effect. Iran is a good example of that. The country has been under US sanctions since 1987, but its GDP grew by 3.3 percent on average between 1990 and 2020.
Like Iran, Russia will gradually lag behind the global economy and it will not achieve more than 1.5-2 percent annual growth.
In the long term, the sanctions will have severe consequences for the technological development of the Russian economy. For ordinary Russians, this would mean a gradual decline in the quality of goods on store shelves and the inaccessibility of services that were customary until the war.
Economic stagnation, however, is unlikely to lead to social or political unrest. The decline of the standard of living will be very slow and uneven, while the repression of dissidents and the political opposition will grow, making the cost of protest very high.
The views expressed in this article are the author’s own and do not necessarily reflect Al Jazeera’s editorial stance.
OTTAWA – Canada’s unemployment rate held steady at 6.5 per cent last month as hiring remained weak across the economy.
Statistics Canada’s labour force survey on Friday said employment rose by a modest 15,000 jobs in October.
Business, building and support services saw the largest gain in employment.
Meanwhile, finance, insurance, real estate, rental and leasing experienced the largest decline.
Many economists see weakness in the job market continuing in the short term, before the Bank of Canada’s interest rate cuts spark a rebound in economic growth next year.
Despite ongoing softness in the labour market, however, strong wage growth has raged on in Canada. Average hourly wages in October grew 4.9 per cent from a year ago, reaching $35.76.
Friday’s report also shed some light on the financial health of households.
According to the agency, 28.8 per cent of Canadians aged 15 or older were living in a household that had difficulty meeting financial needs – like food and housing – in the previous four weeks.
That was down from 33.1 per cent in October 2023 and 35.5 per cent in October 2022, but still above the 20.4 per cent figure recorded in October 2020.
People living in a rented home were more likely to report difficulty meeting financial needs, with nearly four in 10 reporting that was the case.
That compares with just under a quarter of those living in an owned home by a household member.
Immigrants were also more likely to report facing financial strain last month, with about four out of 10 immigrants who landed in the last year doing so.
That compares with about three in 10 more established immigrants and one in four of people born in Canada.
This report by The Canadian Press was first published Nov. 8, 2024.
The Canadian Institute for Health Information says health-care spending in Canada is projected to reach a new high in 2024.
The annual report released Thursday says total health spending is expected to hit $372 billion, or $9,054 per Canadian.
CIHI’s national analysis predicts expenditures will rise by 5.7 per cent in 2024, compared to 4.5 per cent in 2023 and 1.7 per cent in 2022.
This year’s health spending is estimated to represent 12.4 per cent of Canada’s gross domestic product. Excluding two years of the pandemic, it would be the highest ratio in the country’s history.
While it’s not unusual for health expenditures to outpace economic growth, the report says this could be the case for the next several years due to Canada’s growing population and its aging demographic.
Canada’s per capita spending on health care in 2022 was among the highest in the world, but still less than countries such as the United States and Sweden.
The report notes that the Canadian dental and pharmacare plans could push health-care spending even further as more people who previously couldn’t afford these services start using them.
This report by The Canadian Press was first published Nov. 7, 2024.
Canadian Press health coverage receives support through a partnership with the Canadian Medical Association. CP is solely responsible for this content.
As Canadians wake up to news that Donald Trump will return to the White House, the president-elect’s protectionist stance is casting a spotlight on what effect his second term will have on Canada-U.S. economic ties.
Some Canadian business leaders have expressed worry over Trump’s promise to introduce a universal 10 per cent tariff on all American imports.
A Canadian Chamber of Commerce report released last month suggested those tariffs would shrink the Canadian economy, resulting in around $30 billion per year in economic costs.
More than 77 per cent of Canadian exports go to the U.S.
Canada’s manufacturing sector faces the biggest risk should Trump push forward on imposing broad tariffs, said Canadian Manufacturers and Exporters president and CEO Dennis Darby. He said the sector is the “most trade-exposed” within Canada.
“It’s in the U.S.’s best interest, it’s in our best interest, but most importantly for consumers across North America, that we’re able to trade goods, materials, ingredients, as we have under the trade agreements,” Darby said in an interview.
“It’s a more complex or complicated outcome than it would have been with the Democrats, but we’ve had to deal with this before and we’re going to do our best to deal with it again.”
American economists have also warned Trump’s plan could cause inflation and possibly a recession, which could have ripple effects in Canada.
It’s consumers who will ultimately feel the burden of any inflationary effect caused by broad tariffs, said Darby.
“A tariff tends to raise costs, and it ultimately raises prices, so that’s something that we have to be prepared for,” he said.
“It could tilt production mandates. A tariff makes goods more expensive, but on the same token, it also will make inputs for the U.S. more expensive.”
A report last month by TD economist Marc Ercolao said research shows a full-scale implementation of Trump’s tariff plan could lead to a near-five per cent reduction in Canadian export volumes to the U.S. by early-2027, relative to current baseline forecasts.
Retaliation by Canada would also increase costs for domestic producers, and push import volumes lower in the process.
“Slowing import activity mitigates some of the negative net trade impact on total GDP enough to avoid a technical recession, but still produces a period of extended stagnation through 2025 and 2026,” Ercolao said.
Since the Canada-United States-Mexico Agreement came into effect in 2020, trade between Canada and the U.S. has surged by 46 per cent, according to the Toronto Region Board of Trade.
With that deal is up for review in 2026, Canadian Chamber of Commerce president and CEO Candace Laing said the Canadian government “must collaborate effectively with the Trump administration to preserve and strengthen our bilateral economic partnership.”
“With an impressive $3.6 billion in daily trade, Canada and the United States are each other’s closest international partners. The secure and efficient flow of goods and people across our border … remains essential for the economies of both countries,” she said in a statement.
“By resisting tariffs and trade barriers that will only raise prices and hurt consumers in both countries, Canada and the United States can strengthen resilient cross-border supply chains that enhance our shared economic security.”
This report by The Canadian Press was first published Nov. 6, 2024.
