Economic Sanctions Facilitate Growth? Look at Russia's Example

Indeed, that news not only has been ignored by the wider public all over Russia, it was ridiculed even by economic gurus, in blogs or ordinary mass media.

Same was the reaction to the previous sanctions package from the US, that has banned access to US dollars at the Moscow Stock Exchange. The ruble has even risen slightly, and then stayed still.

Why so? Maybe it’s because other kind of news are much more interesting and, yes, it has definitely been noticed by the wider public. Like, the news about unprecedented, explosive growth of Russian industry.

More, this year has shown a huge leap in export orders of Russian production, and that’s not only oil or gaz. Foreign trade data confirms the trend. Russia was boasting of a positive trade balance of 10.4 billion dollars in May of 2023, but it’s 10.6 billion last May. That’s official data of the Bank of Russia. The figures are in dollars, while these are almost out of use here by now, and the growth of foreign trade denominated in all kind of national currencies is even more spectacular.

So what the hell is going on in a nation that was supposed to lose, very fast, and never to regain 7% of its GNP, compared to the peaceful 2021? And that was an official estimate by IMF, if you are in any doubt.

How can a nation blocked by a group of about 30 Western former trade partners prosper almost instantly after that, instead of crumbling down? The simple answer is, something is very wrong with these Western nations. At the very least, we are talking about their dismal failure in proper assessment of results of their strategy.

But then, there are much worse answers to this and many other similar questions. Try this: Russia, before coming under attack in the winter of 2021-22, was mostly trading with the West, enjoying all the benefits of Western financial system. And the economy in general was barely dragging on at 2-3%. The year 2022 was mostly about quick change of partners, as in concluding new contracts and laying down new logistic links. But the moment that change of partners really happened, the same economy suddenly surged on. What conclusion do you make from that simple and clear picture?

Thing is, the picture is not at all simple or clear. Russia’s best minds are trying to find answers to these hard questions, and the search has barely began.

Here we have to consider some peculiarities of the purely local scene. The economy had received an initial push due to government’s military orders. That push has kick-started consumer demand of those getting new and higher salaries. But then, some absolutely peaceful industries began to revive themselves.

These were pharmaceuticals, and garments, and food, you name it. Western corporations have left the country, intending to leave gaps on the shelves (or on hangers). The potential profits for import substitution were all too obvious. And these profits came in.

Then there were things like power generation, which were capable of putting the huge nation on its knees. In fact, local production of turbines for power stations is, probably, the most spectacular success story in Russia so far.

Believe it or not, Russia’s power stations were only recently mostly relying on Siemens’ (or, sometimes, General Electric) gas turbines. If you don’t know, we are talking about a huge construction with thousands of parts, placed in a space where you cannot really see the far end of the unit.

Russia is using about 310 such monsters, and its dependence on foreign supplies for these was estimated at 90%, says Mr. Alexander Frolov of the National Energy Institute. Russia was lucky to keep at least a vestige of its own former engineering school, adds he. But in reality these people were working as apprentices at the same Siemens or General Electric branches in Russia.

A thrilling plot began to evolve in 2014, when Siemens tried to block the work of its turbines in energy-hungry Crimea, beginning to revive after decades of neglect under Ukraine and subsequent reverting back to Russia. That’s when people in Moscow have seen, that a totally independent turbine production was an absolute strategic must for the nation.

That dream began to come true only in May this year. By now, says Mr. Frolov, Russia has designed, built and is using three huge turbines on its own, and is also handling quite well service and part replacement of the rest. It will take years to create industry capable of gradually substituting all the foreign machinery, and even start to export. But, in the meantime, Moscow has a contract with Iranians.

That Iranian angle is quite a story in itself. It was Siemens, again, that supplied Iran with turbines. And then sanctions came along (does it sound familiar?), but Iranian engineers managed to replicate the German machines, and then to design some turbines of their own. So Russia was only following Iran’s lead (and good advice) in using the sanctions to own advantage.

Unfriendly Drivers of Growth – that’s the name of a research project, launched in the Higher School of Economy in Moscow. The start of the project has been announced only recently, so we’ll have to wait for the science to tell us, how we managed to turn a potential disaster into a bonanza.

In the meantime, other economists are tackling the issue. There was an enlightening piece in Bloomberg, recently, full of alarmist phrases like: For the G-7, defending Ukraine is a matter of principle and a defense of democracy itself. For many other nations, it’s just another sign of a multipolar world and the loosening reach of the West. Or: Trade bypasses G-7 sanctions and goes to Russia. Or: The G-7 economies are on track to be eclipsed by the rest of the G-20 in terms of gross domestic product by 2030, according to a Bloomberg analysis of World Bank data.

You can be even more drastic. Says a columnist from the Firstpost: The unspoken narrative underpinning the Washington Consensus is that the West must remain in absolute control of the global economy and global security. And that consensus, adds the author, is over and done with.

Look, people, surely it wasn’t us who caused the eclipse of the West and murdered the Washington Consensus? Don’t sanction us for that crime.