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Ever since the West imposed economic sanctions on Russia in the aftermath of annexation of Crimea and intervention in eastern Ukraine, the Kremlin, and the large number of Kremlin friendly media outlets, have struck a bold and defiant tone, writes Mark Adomanis, the expert on the Russian economy, in his article published by Forbes.
According to the Kremlin's (obviously self-interested) interpretation, European and American sanctions would backfire. Instead of harming Russian business, they would actually enable domestic entrepreneurs to seize market share. Basically, Western sanctions, along with a healthy depreciation of the ruble, would be a good thing because they would spark domestic industry, according to the report.
How has that situation been working out so far?
As the ruble has collapsed, crippling the purchasing power of Russian households, imports really have declined. Data of Rosstat [the Federal State Statistics Service] show what has happened to inflation-adjusted imports over the past several years. From the second quarter of 2014 through the second quarter of 2015, the ruble value of Russia's imports decreased by almost 30% (the ruble value of exports, meanwhile, actually increased). When a currency depreciates as much as the ruble has over the past year you would expect imports to take a significant hit, the report notes.
But what has happened to domestic manufacturing? Official Rosstat data show that through the first half of 2015, Russian manufacturing actually shrunk by about 2.8%. The only sectors of the economy to show any growth were agriculture (up 2.4%), natural resource extraction (up 2.4%), and public administration (up 0.7%). The areas of the Russian economy where private business predominates, particularly consumer retail, have been absolutely walloped, with the overall retail sector shrinking by almost 9% over the past six months, as noted in the report.
According to the author, the crisis has not made Russia's economy any more flexible, entrepreneurial, or dynamic. It has instead made it even more dependent on the old growth model, which was based on government and natural resources. One of the few areas of agreement in Russian society is that the old model is exhausted and in desperate need of replacement. But exactly the opposite is happening. It is being further supported and institutionalized.