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Why Russia isn’t flinching at snowballing US sanctions

Why We Wrote This

Sanctions are often seen as an effective tool for encouraging nations to change their behavior. But when it comes to Russia, the United States may soon learn that too many sanctions can have an opposite effect.

Ilya Naymushin/Reuters
Combines harvest a barley field on the Solgonskoye farm outside the Siberian village of Talniki, Russia.

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When the United States launched its first sanctions against Russia, in response to the Kremlin’s interference in Ukraine and annexation of Crimea, it had the unified support of its Western allies. But as its latest round of sanctions go into effect this week, this time targeting a range of alleged misdeeds from the Skripal poisoning in Britain to the hacking of US elections, it does not have that same backing. As a result, Russia seems to be better prepared than ever to weather the storm. The key Russian response appears to be the economic equivalent of circling the wagons. Thanks to the rising price of oil, Russian foreign currency reserves are a healthy $450 billion. And Russia’s once-depeleted National Wealth Fund is now reportedly back up to about $75 billion. Long-suffering Russian consumers have paid the price, but evidence suggests they are willing to endure it if they believe it’s the patriotic thing to do. “Russia has plenty of reasons for social unrest, but sanctions only help Putin,” says Sergei Markov, a former adviser to Russian President Vladimir Putin. “If history shows anything, it is that Russians will always unite to resist outside pressure.”

Russians have been living with escalating US sanctions for more than four years. For many, it's become a dismal fact of life, like the Moscow weather.

And this week, a new wave of US sanctions hit Russia, with more in the pipeline. But while there's little sign that the American deluge will abate any time soon, Russia seems to be better prepared than ever before to weather the storm.

Many things have changed since the United States and its Western allies imposed comprehensive economic measures against Russia's Kremlin-friendly oligarchs and state corporations back in 2014. Those were meant to punish Moscow for its annexation of Crimea and force it to change its behavior in Ukraine, and the Europeans remain on board.

But the US is basically going it alone with its new sanctions, which seem aimed at a wide variety of alleged Russian misdeeds. The latest salvo bans certain technology exports to Russia over the attempted nerve gas poisoning of former double agent Sergei Skripal and his daughter in England last March. It also promises much tougher measures if Russia doesn't certify that it has stopped using chemical weapons and allow on-the-ground inspections by November.

A more serious battery of measures, which aims to punish Russia for its alleged election interference in the US, is pending. It would block US investments in Russian energy projects and effectively ban major Russian banks from conducting transactions in US dollars. Russian Prime Minister Dmitry Medvedev has admitted those measures might really hurt, calling them “a declaration of economic war” against Russia.

“The Europeans can still tell the Kremlin that, if it changes certain behaviors connected with Ukraine, their sanctions will come off and things can return to normal,” says Fyodor Lukyanov, editor of Russia in Global Affairs, a leading Moscow foreign policy journal. “But all these waves of US sanctions seem directed against just about everything Russia is doing, or allegedly doing, in every way. Basically, if Russia wanted to convince the US that its behavior is changing enough to remove the sanctions, we would have to agree to totally overhaul our foreign policy, admit we were wrong about everything and, well, give up. That's probably too much to ask from any country, but particularly Russia.”

Mr. Lukyanov says that there is little Russia can do to retaliate against the US, despite brave talk of tit-for-tat sanctions from the Russian Foreign Ministry. But simultaneous US attempts to sanction Iran and Turkey, while threatening Europeans with “secondary sanctions” if they do not comply with US demands, does create many new opportunities for Russia to win sympathy from other countries and bypass US measures that did not exist four years ago.

“The main mood in Moscow is that we need to be patient, we need to be wise, and we need to survive this,” he says.

Restored finances, bolstered economy

The key Russian response appears to be the economic equivalent of circling the wagons. During the course of this year the Russian Central Bank has unloaded most of its US Treasury bonds, about $85 billion worth, and appears to be stockpiling gold as a hedge against future isolation. Thanks to the rising price of oil, the Russian state's main source of international revenue, its foreign currency reserves are a healthy $450 billion. And Russia's once-depeleted National Wealth Fund is now reportedly back up to about $75 billion.

Long-suffering Russian consumers have paid the price for bolstering the country's war chest. The Central Bank has consistently declined to intervene to support the ruble, letting the national currency sink from around 30 per dollar before the crisis began five years ago to almost 70 today. High inflation rates, which threatened social stability early in the crisis, have been beaten down to near-historic lows – currently around 2.5 percent – again at the expense of average Russians. The Central Bank's base interest rate is just under 8 percent, but consumer loans start at upwards of 12 percent, making it very difficult to start a business or make home improvements.

But government finances are in good order, and a new value-added tax intended to kick in next year will add about $50 billion in annual revenue. Other unpopular measures, such the controversial pension reform, may test the limits of public patience but will strengthen the Kremlin's ability to withstand any coming external storms.

Russia may be better prepared for a long-term economic standoff with the US in other ways too. The country's agricultural sector is booming in part due to the war of sanctions and counter-sanctions. To defend against the possibility of being cut out of the SWIFT international bank transfer system, Russia devised its own independent network to bypass international payment systems. It's still a work in progress, and has zero traction outside of Russia, but millions of Russian pensioners and public employees now receive their payments via the new Mir card.

Available evidence suggests that Russians are willing to endure a fair amount of pain if they believe it's the patriotic thing to do. According to a new Pew poll, they are about evenly divided on whether the sanctions are hurting their economy or not. But the same poll found that eight in ten Russians have at least some confidence in Vladimir Putin's conduct of international affairs, with 58 percent expressing “a lot of confidence.”

“Russia has plenty of reasons for social unrest, but sanctions only help Putin,” says Sergei Markov, a former Putin adviser. “If history shows anything, it is that Russians will always unite to resist outside pressure. It's when we are at our best.”

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