Elvira Nabiullina, the head of Russia’s central bank, said on April 9 that the Russian economy would feel the impact of the latest U.S. sanctions on Russian officials and businesses because it is an open economy with significant exposure to global markets. She also said the central bank would be able, if necessary, to mitigate the sanctions’ effects on inflation.
Nabiullina’s comments came three days after the U.S. imposed sanctions on more than a dozen senior Russian officials, heads of state-controlled companies, and business tycoons with ties to the Russian government and Russian President Vladimir Putin.
The U.S. sanctions were in response to a series of Russia’s actions, ranging from the seizure of Ukraine’s Crimean Peninsula in 2014, alleged meddling in the 2016 U.S. presidential election, and the alleged poisoning of ex-double agent Sergei Skripal and his daughter in Britain last month.
The measures freeze the financial assets of the sanctioned entities on U.S. territory and prohibit U.S. individuals and groups from engaging in business transactions with them.
The mere announcement of the sanctions by the U.S. Treasury Department has created jitters in the Russian economy and in the financial markets, causing significant sell-offs of shares in the sanctioned companies and downward pressure on the Russian currency.
There are fears that, absent a calming of the market or effective counter-measures by the Russian government, inflation, currently running at about two to three percent, could reach double digits, as it did at the peak of the 2014-2015 financial crisis, which followed the collapse of global oil prices.
Nabiullina’s assessment of the impact of sanctions is therefore correct, as are her claims that Russia’s trade value is large relative to its overall economy and that its exporters are integrated into global markets. But her claim that Russia has an open economy is only partially true, resting solely on the absence of trade barriers while ignoring qualitative assessment criteria.
Countries pursue varying degrees of economic openness. An open economy is mostly free of trade barriers and has a large share of exports and imports relative to the GDP. An open economy also has a flexible and transparent regulatory environment, competitive economic and political environment, and unimpeded investments, labor and technology flows, enabling innovation.
According to Anders Åslund, a Swedish economist and a Senior Fellow at the Atlantic Council, Russia’s foreign trade value was $591 billion out of the GDP of $1.4 trillion in 2017, and its tariffs are relatively low -- in the 7% range.
“Russia has hardly any quotas or other absolute non-tariff barriers,” he told Polygraph.info, noting that its tariffs are “far lower” than those of other BRICS economies and that, based on these measures, Russia’s economy is more open than that of the United States. The acronym BRICS stands for Brazil, Russia, India, China, and South Africa – large developing economies with the potential to rank among the most influential economies in the future.
The Heritage Foundation’s economic freedom index puts Russia’s trade at 46%, and assigns Russia a freedom score of 58.2, making its economy the 107th freest in the index. The score from the politically conservative U.S. organization falls below the regional and global average.
Meanwhile, according to the World Economic Forum’s Global Competitiveness Report, Russia’s competitiveness indicators have remained stable, moving up two places on the index to 43rd place thanks to improved scores on education, innovation, and overall business environment.
The WEF report noted, however, that Russia has yet “to close the gaps” in “innovation capacity and technological readiness.”
Russia has also not yet overcome major non-tariff barriers, including “sectoral restrictions,” “the prevalence of state-owned enterprises,” and a large number of public financial entities in the lending market, all of which are factors restricting private and foreign investment.
Experts say Russia is still transitioning from a centrally planned to a more market-based economy. But it faces serious obstacles due to “imperatives of political stability and government longevity,” as well as the public sector’s marginalization of the private sector.
“Large state-owned institutions and an inefficient public sector dominate the economy. The judiciary is vulnerable to corruption, and weak protection of property rights undermines prospects for optimal long-term economic development,” the Heritage Foundation report notes.
A 2015 policy brief published by the Petersen Institute for International Economics highlights the growing involvement of the state in the Russian economy under Putin, pointing to Russia’s use of extractive resources as a foreign policy tool and lagging structural reforms.
“Changing course can only be pursued in the presence of political competition; the current political landscape does not allow for such competition to flourish,” the brief notes.
In fact, the burden of non-trade barriers is so significant that a statement made by Russia’s first president, Boris Yeltsin, during his final state of the nation address in 1999, rings true today:
“We are stuck halfway between a planned, command economy and a normal, market one. And now we have an ugly model—a cross-breed of the two systems.”
The World Bank says Russia needs to improve its regulatory environment, limit the role of the state in the economy, and advance fair competition in order to open up its economy even more.