Behind Russia’s ‘high income’ rating from World Bank: Why Western sanctions haven’t worked

Last Updated11/07/2024

Almost two and a half years after the imposition of wide-ranging Western sanctions, Russia’s economy doing Unexpectedly well
Earlier this month, the World Bank upgraded Russia from an “upper-middle income” country to a “high-income” one, a status it last had in 2014.

The ranking was boosted by growth in trade (+6.8%), the financial sector (+8.7%), and construction (+6.6%), which led to increases in both the real (3.6%) and nominal (10.9%) GDP.

Restrictions on trade and financing from the G7 countries and EU resulted in trade diversion to China, India, Türkiye, Central Asia and the South Caucasus, and investment in new infrastructure and logistics
Matching this process, the share of Russia’s external trade transactions in the currencies of countries that imposed sanctions fell from about 80% in 2021 to less than 30% in 2023.
Indeed, things are much better than they might have been.
Russia’s job market is strong, unemployment is at a record low, and rising wages continue to propel consumer spending.
Following a relatively small contraction of 1.2% in 2022, the economy outperformed expectations in 2023, growing by 3.6%.
However, the medium to long-term economic prospects remain dull.
Businesses and households in Russia face great uncertainty, with sweeping restrictions on exports, crucial and persistent gaps in the supply of technological equipment, and higher trade costs

OIL: The sanctions on Russia’s energy sector are not as tight as the ones that were imposed on Venezuela or Iran. The West designed the sanctions keeping in mind its own interests, to ensure that Russia would continue to produce fossil fuels, and there would be no significant surge in oil prices. The sanctions, and subsequent price caps, were loosely designed.
- The oil that used to go to Europe is now being absorbed elsewhere, especially China and India.
INVESTMENT: Investment is flowing to Russia’s defense and manufacturing sectors.
CONSUMPTION: Private consumption has recovered strongly, adding 2.9 percentage points to GDP growth

Also, some sanctions had been imposed in 2014 after Russia annexed Crimea, and those had already been factored in the cost.
Economic policy mandarins in Moscow have learnt to work around these measures over time.