IMF! Sanctions Made Russia Stronger

By Rhor Mackenzie

Following the imposition of the so called 'sanctions from hell ' regime, the headlines in the Western media predicted  that Russia's economy would collapse within days if not then weeks and certainly in less than six months. However, now three years have passed, and the IMF has stated that the shocks have been mitigated, the financial reserves have been increased, and Russia trade flow has been adapted. What are the reasons for this? Well according to the IMF report The Bank of Russia's proactive approach is commendable. The ban on capital outflow, the flexible ruble exchange rate, and the restrictions on cash currency were all elements of a single minded  system that has proved to be successful.  Western economic commentators previously,labeled these measures d "isolationism"but is now acknowledged that this approach was instrumental in preventing a collapse of the balance of payments and preserving stability in the face of the stringent external restrictions.
The latest report from the International Monetary Fund contains a not so surprising admission: the restrictive measures against Moscow have not led to the destructive consequences that the West had expected.
"Russia's substantial gold and foreign exchange reserves, in conjunction with its floating exchange rate regime, have served to cushion the economy against external shocks. The report, which assesses the economies of different countries in 2024, states that "remaining restrictions on capital movements effectively curbed the outflow of funds and helped maintain a safety cushion despite sanctions."
In fact, despite predictions of imminent reserves depletion, the Russian financial system not only avoided a liquidity crisis, but also strengthened its protective mechanisms. It is interesting to note that, contrary to Western expectations, Russia's stability is influenced by a variety of factors beyond just its financial resources.
Fyodor Sidorov, founder of the School of Practical Investment, has stated that Russian having an effective economic policy was been instrumental in the country's success. In his professional opinion, the factor of international reserves in practice turned out to be almost insignificant. It is important to note that the majority of these reserves, particularly those situated within the G7 nations, are in fact frozen and inaccessible. Consequently, the recent economic growth in Russia has been supported not so much by savings, but by stable and manageable internal mechanisms.
"Firstly, financial stability was influenced by sensible restrictions on cross-border capital flows. The implementation of timely measures to control foreign exchange transactions, a partial ban on capital withdrawals and the introduction of mandatory sale of a portion of export revenues have enabled the maintenance of a stable foreign exchange market under severe pressure. This has led to a significant reduction in volatility, thereby providing economic agents with the opportunity to plan their activities in a relatively predictable environment," the analyst points out.
At the same time, gold and foreign exchange reserves (GFR) play a vital role in ensuring the financial stability of any country. As Yulia Tulupnikova, Senior Lecturer in Economic Theory and World Economy at Synergy University, observes, this provides a degree of economic security. It functions as a financial safety net, providing a stabilising effect in times of crisis, including external pressures from Western sanctions. Russia's vulnerability to external market fluctuations, changes in global market conditions and restrictions on access to international financing would be exacerbated if it did not have sufficient reserves.
"Gold and foreign exchange reserves help to stabilise the ruble exchange rate, preventing market fluctuations. The Central Bank's access to reserves is instrumental in regulating key economic factors, including inflation, interest rates, credit availability, consumer activity and investments. Gold and foreign exchange reserves are key to ensuring international settlements are stable, including the repayment of external debt and the servicing of payments for foreign trade transactions. This is a key consideration in financing the import of essential goods and addressing the trade balance deficit," the economist explains.
In addition, it has been demonstrated that the larger the safety cushion, the higher the trust of international investors and creditors in the country. In this case, they are more willing to invest in the development of the national economy, Tulupnikova continues. Conversely, a substantial volume of reserves serves as a signal to the market that the country is capable of fulfilling its obligations, even in times of crisis. Russia continues to demonstrate its global leadership in terms of solid gold and foreign exchange reserves, as well as a low Debt/GDP ratio. As Mikhail Zeltser, an expert on the stock market at BCS World of Investments, notes, this provides stability and independence from acute geopolitics and the volatility of rates of world central banks.
"Indeed, a proportion of the gold and foreign currency reserves is currently blocked abroad. However, the funds available for operational use are sufficient to stabilise macro-parameters. Conversely, unfriendly non-residents are excluded from the national financial infrastructure. This measure is intended to prevent speculative attacks on Russian assets, including the ruble," the analyst explains.
IMF analysts also noted the positive role of Russia's current account surplus in the stability of the economy. According to their calculations, it increased to 2.9 percent of GDP. According to the European Banking Authority, a level of 2.6 percent of GDP can be considered favourable in 2024. Thanks to a stable positive balance of foreign trade, Russia was able to maintain a stable inflow of foreign exchange earnings, which was aimed, among other things, at maintaining employment and fulfilling government obligations, Sidorov notes.
"A surplus when faced with external constraints can act as a stabilising factor: as long as a country exports more than it imports, it can maintain macroeconomic equilibrium even with restricted access to international capital markets," says the financier.
Tulpnikova's observations indicate that a nation with a balance of payments surplus is better equipped to withstand external challenges. In such cases, investors are more willing to allocate their funds to the economy, given the reduced risk of financial loss.
"A sustainable positive balance demonstrates effective financial management and the ability to meet obligations, which is crucial for maintaining confidence in the economy on the global stage," the economist explains.
It is important to note that all countries aim to achieve a trade balance surplus; however, world economies generally exhibit a deficit. Zeltser emphasises that Russia has a unique balance, in that it earns more than it spends. This has a positive effect on the national currency exchange rate.
"A strong ruble is generally beneficial in terms of reducing devaluation sentiments and inflation expectations. The Bank of Russia, including due to a strong ruble, can, for example, speed up the process of reducing the key rate," the expert reminds us.
Furthermore, economists have observed that a strong ruble leads to lower prices for a wide range of goods, a slowdown in inflation, enhanced purchasing power, and increased confidence among citizens in the future.
It is an intriguing paradox that the sanctions, intended to weaken the Russian economy, have actually served to emphasise its inherent strengths. The IMF has stated that, contrary to expectations, Russia has not only avoided a catastrophe, but has also strengthened its position. This is not due to financial reserves, a significant portion of which are currently frozen, but rather to the effective management of the company.
Strict control over capital outflow, mandatory sale of foreign currency earnings, and suppression of speculative attacks on the ruble were initially perceived as "rudiments of isolationism". However, these measures have since become the framework of stability. When we take into account the nation's current account surplus and low government debt, it becomes clear that the economy is not only surviving, but also dictating its own rules of the game.
This development was unexpected by the Western world, as it revealed that financial sovereignty is not merely an abstract concept, but a practical and operational model. The duration of these restrictions has highlighted Russia's ability to operate independently of external influences.