Russia: Life under sanctions

Video transcript of interview with Professor Stefan Hedlund

How is the Russian population bearing up under EU-imposed sanctions? What is the impact on the daily lives of Russians?

Professor Hedlund:

It is beginning to hurt. The first pain felt was from the Russia imposed food sanctions, the sanctions imposed on the import of food from the UN and the US, which meant prices have gone up considerably in the past few months.

The food stuffs have not disappeared, we can still get some, and salmon and parmesan cheese, but it is imported from Belarus, which is not known to be a big exporter of these items and so there is a lot of so-called 'parallel imports' which means the price is marked up by the middle man. So the Russian population especially those in the big cities have been feeling substantial food price increases in recent months. That’s one part of it.

Another part, which does not have so much to do with the sanctions, is the drop in the exchange rate. The literal collapse of the rouble in December 2014 caused a lot of Russian's to panic-buy everything, appliances, cars, everything of substantial value, to spend their rouble's before they became valueless. So that gave them a sort of feeling of being very rich in December having a lot of purchasing.

That is now gone too and now we are looking at 2015 when inflation will start eating out their living standards, when they will feel massive budget cut-backs, hurting social services, healthcare, perhaps lay-offs. Wages will not be indexed for inflation, so this is going to be a very, very hard year for the Russian population at large.

In 2012, about 75% of all investment in Russia came from EU countries. How is Russia dealing with the fall in foreign investors?

Professor Hedlund:

Well, based on what happened with the foreign ministers' meeting in Brussels the other day there were some discussions on whether sanctions should be eased off but the increased fighting, around Donetsk in particular, and in Donbass in general, since the New Year has caused most countries in the EU to say we cannot ease off the sanctions. So my guess, and I think that is almost a certainty, is that in March 2015 the EU will decide that sanctions will have to remain.

This is incredibly unfortunate in the sense that everybody knows that the sanctions are not working in the intended sense.

The purpose of sanctions was to get Mr Putin to withdraw from Crimea and to cease his support for the rebels in eastern Ukraine. None of that is going to happen and everybody knows that. You are not going to get Crimea back and Russia is not going to stop interfering in the Donbass because of the sanctions.

The track record of sanctions generally is that they do not ever work. I mean look at Cuba and North Korea. Sanctions is a mugs game. It is for politicians to demonstrate that they are doing something when they don't really know what to do.

So the sanctions don't have the intended effect but they have the side effect of crippling the Russian economy and adding to the exiling of Russia and the Russian economy from the western community at large, and this again will have very negative long-term implications.

But sanctions are a political game and there is very little realisation of the hard economics involved here, unfortunately.

The first sanctions the EU imposed on Russia come up for renewal in March 2015. What stance is Europe likely to take? Will Russia budge and call an end to the fighting in Ukraine?

Professor Hedlund:

Until the crisis erupted in Ukraine, the Russians were quite optimistic that foreign direct investment would pick up, and that the investment activity with the Russian economy in general would pick up; and this is by far the biggest problem for the Russian economy, that there is insufficient fixed capital investment with the crisis in Ukraine.

It's not only that foreign direct investment has slumped very badly as foreign investors do not dare get involved in the Russian market fearing what the next round of sanctions may be, it is also the case that sanctions mean that Russian companies can't get credit, so they have to pay off all their loans and that reduces their ability to make investment both inside Russia and outside Russia.

So what the sanctions are achieving is that Russia is becoming disintegrated from the West. There is very little investment going in and there is very little investment going out. So the sanctions are achieving sort of an ostracisation of Russia from the Western community which will have very significant negative long-term effects.

(photo credit: dpa)