Russia and the unravelling of economic sanctions

The G7 countries led by the US have imposed additional economic sanctions on Russia due to its perceived meddling in eastern and southern Ukraine. These sanctions, enforced from the end of April, are now targeted against Russian companies and banks having substantial links to the Kremlin. The aim is to deprive Moscow of Western technology and investment and disrupting its financial system thereby forcing President Putin to back down. While the impact of these sanctions has so far been limited yet few trends reveal a grim outlook for the Russian economy. Its capital flight is expected to breach the US$ 100 billion mark by the end of this year, rouble and stock market have continued to plunge since January and economic growth is expected to be the lowest in a decade.

These trends highlight the possibility of an impending economic gloom. However, it also raises a few pertinent questions: Will sanctions spur Russia to implement the much needed economic reforms? Can they influence the direction of Russia’s foreign policy? and What do these developments signify for India?

Russia’s response to tackle the crisis

It can be argued that Russia’s influence in global affairs is limited on account of its lack of global economic competitiveness. The current negative forecast is a symptom of several flaws plaguing the economy. Restrictions on transfer of Western technology and capital that prop up several key sectors of the economy will only make matters worse. Faced with a gripping economic problem, sanctions can just be the incentive that Russia needs to implement structural reforms and reduce its dependency on the West. The emergence of anti-West and patriotic sentiments can help the Kremlin to push through difficult initiatives. These include tackling endemic corruption, improving business climate and rule of law, diversifying the economy from its heavy dependence on hydrocarbon exports and promoting innovation and capacity building. Doing so will also improve Russia’s soft power potential which President Putin has championed in his concept of a new Russian World (‘Russkiy Mir’).

Moreover, Russia retains significant monetary reserves to cushion any disruption in the short to medium term. With oil prices still holding high, there exist opportunities to initiate the modernisation drive without excessively curbing social spending. The Skolkovo innovation hub can be a good starting point in the endeavour to build a robust national innovation system and a knowledge based economy.

Sanctions can also force Russia to establish its own financial systems. Visa and Master Card’s suspension of payments is likely to fast-track the development of a national payment system. Similarly, the proposal to set up rouble as a reserve currency is bound to gain momentum. There are also expectations of Russian capital coming back to the country on account of uncertainty about stashing money abroad. This can help offset the capital flight.

Implementing these reforms should further consolidate the position of President Putin. The people are expected to support any initiative that tackles corruption especially against the backdrop of 2012 mass protests being centred on an anti-corruption motto.

These issues also highlight the inefficacy of Western penalties. Sanctions can only be effective if there is unanimity among key stake holders, which the West lacks. Russia is not a small country like Cuba or Iran. In a globalised world, it will be impossible to influence Russia’s economy without suffering collateral damage. Domestically, rather than changing the political equation, sanctions are likely to accentuate the anti-West narrative and make citizens rally around their President.

Nevertheless, Russia needs to modernise in order to make itself more relevant on the global stage. A Herculean mobilisation effort might be needed, with odds stacked against it. Inability to do so can be catastrophic for the Russian state. But knowing its history and resilience to endure, one cannot rule out Russia emerging stronger from this crisis.

Sanctions and Russia’s Foreign Policy

The Western attempt to isolate Russia is likely to encourage President Putin to build ties with countries that do not follow the West’s diktat and can be a source of new investment and markets. Formation of Eurasian Union and forming partnerships with growing economies of the Asia-Pacific can become a priority for Moscow. Apart from hydrocarbons, it retains inherent potential to deliver nuclear energy, weapons and high technology. Russia is also expected to step up its engagement with non-Western multilateral organisations like the APEC, CICA, SCO and BRICS. The underlying goal is to reinforce its position as a pole in global affairs.

Notwithstanding these calculations, evolution of strategic ties with China is likely to be the defining relationship for Russia. The signing of a 30 year-multi-billion-dollar gas deal during President Putin’s recent Shanghai visit is a game changer for Eurasian geo-politics. Closer partnership with Beijing can help Moscow ward off Western sanctions and provide an alternative to European energy markets. There exist many convergences of interests between the two; none more significant than facing Western geo-political pressure in their own backyards. A strategic relationship with China also contributes towards President Putin’s aim of a multipolar world order. However, these developments have the potential to tilt the balance of this partnership towards Beijing.

Implications and Opportunities for India

At a time when Russia is seeking reliable partners on the global stage, India can explore greater synergies of cooperation with one of its closest strategic allies. Given Kremlin’s increasing dependence on China and Beijing’s growing clout in Eurasia, there is likely to be implications for India’s Eurasian policy. Against this backdrop, Moscow still retains the potential to assist India in its engagement with the region through mechanisms like the Shanghai Cooperation Organisation (SCO). A strong Russia can also help stabilise Eurasia. Moreover, the two countries similar views on practically most issues of global concern can contribute towards strengthening the emerging world order. This includes the common objective of making global governance structures more representative.

At the bilateral level, India and Russia can look to build new pillars of engagement in order to sustain the strategic relationship. Joint development of high-technology that contributes towards economic modernisation of both economies can be one of the many unexplored opportunities on the horizon.

The strategic partnership with Russia has helped India overcome difficult situations in the past. Russia will continue to remain relevant on the global stage despite its perceived decline and isolation. Maybe it is time for India to show support to an old friend.

Views expressed are of the author and do not necessarily reflect the views of the IDSA or of the Government of India.