Trump’s Sanctions Reboot Ushers In a ‘New Normal’ for Russia

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Russia Warns of Worsening U.S. Ties

As Russia hunkers down for “decades” of U.S. sanctions, the chill in geopolitics is threatening to turn into a deep freeze for an economy retooling after the crash in oil prices.

By reluctantly codifying the penalties into law, U.S. President Donald Trump is ensuring that Russia’s future may look much like its past as a petrostate. It also marks a shift to a “new normal” that’s all the scarier for being impossible to undo any time soon, according to Vladimir Miklashevsky, a senior economist at Danske Bank A/S.

Desperate to snap out of an investment torpor after its longest recession this century, the economy of the world’s biggest energy exporter can’t afford to remain walled off from foreign capital and technology. Russia was rated 111th among 138 nations in foreign direct investment and technological transfer by the World Economic Forum’s Global Competitiveness Report.

“While on the face of it Western sanctions haven’t wreaked havoc on the Russian economy,” what’s clear is that it’s “become more isolated and has lagged further behind technologically,” said Liza Ermolenko, an economist at Barclays Capital in London. “It remains heavily dependent on exports of oil and gas and this seems unlikely to change any time soon. What’s more, no country in recent history has managed to catch up economically and technologically with the rest of the world by shutting itself off.”

Long Lasting

The sanctions legislation gives lawmakers the power to block the president from lifting them, strengthening punitive measures imposed over Russia’s intervention in Ukraine and its interference in last year’s U.S. election. That gives the measures a similar status to the ones that were entrenched under Jackson-Vanik, the 1974 Cold War-era amendment that imposed trade restrictions on the Soviet Union for blocking Jewish emigration and endured for four decades, even after the Soviet collapse.

Read more: A Q&A explainer on who loses the most in the U.S. Russia fight

Russian officials have previously put the annual cost of sanctions at 25 billion euros ($30 billion) in 2014 and 2015. The International Monetary Fund has estimated that prolonged curbs may result in a cumulative loss of as much as 9 percent of gross domestic product in the medium term.

“Now that the law is signed, it’s completely clear that the situation with sanctions will last a long while,” said Natalia Orlova, chief economist at Alfa Bank in Moscow. “This flavor of sanctions will accompany all business activity with Russia.”

For now, the market has taken the latest developments in stride. After suffering a battering in the past two months, Russia’s currency, bonds and stocks showed signs of recovery this week as oil climbed. The ruble was among the top performers in emerging markets on Thursday.

Still, “the next half a year will be full of uncertainty and turbulence toward Russian assets,” especially until the U.S. clarifies its position on whether it might target sovereign debt, Miklashevsky said.

‘Geopolitical Risks’

While the central bank has pointed to “elevated geopolitical risks” as it paused monetary easing last week, its forecasts already assumed that sanctions will remain in place in the coming years. S&P Global Ratings also said it wasn’t clear if the curbs “will further hamper what we currently regard as only modest medium-term economic growth prospects for Russia.”

Although the government is targeting a GDP increase of 3.1 percent in 2020, the Bank of Russia says the economy’s potential growth is likely capped at 2 percent. The economy will expand 1.3 percent in 2017 after two years of contraction, according to analysts surveyed by Bloomberg.

Russia has become more resilient to external shocks in the three years since sanctions were first imposed, allowing its currency to trade freely, keeping spending in check and trying to promote “import substitution.”

Behind the bluster of some officials, however, there’s recognition that the deepening standoff risks unsettling investors. Even as Russia has grown accustomed to turbulence, Industry Minister Denis Manturov said what businesses need the most is “confidence in tomorrow.”

“How is it possible to speak of any long-term prospects when everything is unstable?” he said.

— With assistance by Andre Tartar

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