It is time for the Kremlin to realize that the notion that Western sanctions can in some way benefit the Russian economy is fundamentally false and dangerous.

As a result of plummeting oil prices and controversial policy of Russia's Central Bank, ruble became weak and extremely volatile. Photo: AP

A year has passed since the imposition of international sanctions on the Russian economy as a result of events in neighboring Ukraine. So it is now possible to sum up the initial results of their impact and predict the further trajectory of life “under sanctions.”

Strictly speaking, the sanctions’ ultimate objective of pressuring the Russian leadership into a review of its new expansionist foreign policy strategy, launched in February-March 2014, has not yet been achieved. However, the very fact of their introduction and continuation, despite the real losses suffered by business and the fierce opposition from some very powerful lobbies in the West, shows how serious the Ukraine crisis is viewed in the rest of the world. 

Sanctions, at their core, are an attempt by one set of actors in international relations to express disapproval of another and to try to change its actions without — crucially — resorting to military force.

History has no subjunctive mood, so we cannot conjecture how events might have developed if sanctions had not been introduced against Russia last year. Indeed, despite the consistent tightening of the measures, they did not prevent the annexation of Crimea or an escalation of the conflict in eastern Ukraine and the significant expansion of separatist-controlled territory. Nevertheless, it is just possible that the sanctions were in fact a major deterrent in the development of the Ukrainian crisis; without them, the situation could have been even more acute.

Moreover, the sanctions are still relatively young. Modern “smart” sanctions are aimed at a limited “target audience” and become tangible throughout the economy as a whole only after the elapse of a certain period. Formally, contrary to existing notions, the economic sanctions directly affect a relatively small set of Russian individuals and legal entities, as well as a very narrow section of foreign trade operations. The measures so far imposed by the United States, Canada, the EU, Japan and a number of other countries pertain to imports of dual-use technologies and deliveries of modern technologies and equipment to Russian companies, as well as to a range of services in the field of hydrocarbon exploration and production.

Wide-scale sanctions take the form of financial constraints that effectively sever a significant part of the Russian economy from the now customary sources of foreign capital in all its manifestations. As such, instead of refinancing past loans and raising new capital for development, many Russian companies are being forced to take money out of circulation and pay off debts. Despite all the assurances of the Russian government regarding the potential alternatives to “Western money,” they have not been found, as experts predicted, which has sharply reduced domestic investment resources.

The most severe negative impact on the Russian economy has not come from the sanctions themselves, but the uncertainty they cause. Even the most optimistically minded investor cannot ignore the fact that the Russian authorities could at any time take action that might provoke even tougher sanctions in response. The very real prospect of a further deterioration in the business climate is a far greater obstacle to the investment process than the totality of the current sanctions.

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The triple blow to the Russian economy from three different sides (the collapse of an ineffective economic development model, the fall in oil prices and international sanctions) represents Russia’s biggest challenge since the 1998 crisis. Nevertheless, the past year has demonstrated that survival under sanctions is possible for a time. 

But the deepening investment crisis (the official forecast for 2015 promises a sharp decline in capital investment of 13.7 percent) means that the Russian economy is not just treading water, but also gradually squandering its future. All the while, the country continues to fall ever further behind the rest of the world.

Thus, to restore the investment process and exit the crisis, it is vital to convince potential Russian and foreign investors that, come the next anniversary of sanctions, the Russian economy will not be in an even worse state. Unfortunately, that is a very difficult task and the solution requires at the very least some fundamental economic policy changes.

The idea that the sanctions regime can somehow benefit the Russian economy is fundamentally false. Therefore, one of the most important components in advancing toward sustainable economic development is to remove the threat of tougher sanctions and to make steady progress in the dialogue with Western partners with a view to having them lifted.

The opinion of the author may not necessarily reflect the position of Russia Direct or its staff.