RD Interview: Dr. Birgit Hansl, the World Bank’s lead economist for the Russian Federation, shares her views on the state of the Russian economy and gives her take on what to expect from Russia’s economic pivot to Asia.

Russian President Vladimir Putin's press secretary Dmitry Peskov, left, speaks to Russia's former finance minister Alexei Kudrin, one of the critics of Kremlin's economic policy, who argues that Russia urgently needs structural reforms. Photo: AP

A year has passed since the West imposed sanctions against Russia over the crisis in Ukraine and Russia’s incorporation of Crimea. Since then, the state of the Russian economy and its future has become a hot topic for experts, scholars and practitioners. Although sanctions are still in place and have already resulted in weaker economic performance, the overall economic situation in Russia is far from collapse.

To learn about where the Russian economy is now, what has been the impact of sanctions and what to expect from the Russian pivot to Asia, we sat down with Dr. Birgit Hansl, the World Bank’s lead economist for the Russian Federation.

Russia Direct: While many believe that the sanctions that were imposed on Russia almost a year ago are not working, some analysts argue that it's just too early to evaluate the full impact of them. They say it will take at least another full year for the sanctions to hit even more. What is your take on that?

Birgit Hansl: Well, there is truth in both sides of the story. Of course you have some immediate impact of geopolitical tensions and the sanctions that were imposed on Russia.

I mean first you have something that creates uncertainty and that happens immediately when you have geopolitical tensions and when sanctions are imposed, because the market penalizes it as a higher risk and a country and its market participants, like Russian firms and companies that would like to borrow abroad, immediately have to deal with higher prices, for instance, for capital.

So, that is an immediate effect and that is what we saw last year and the increase in borrowing costs on external markets and that had some effect on how Russian firms, banks and companies access external financing. But if we look at how it really impacts an economy and we compare it to other countries that experienced sanctions in the past, we see that the most profound impact is over time.

Dr. Birgit Hansl, the World Bank’s lead economist for the Russian Federation. Photo: Pavel Gazdyuk

It is partly related to the issue of uncertainty and risk, especially on the investment side, which is related to borrowing on external financing markets, but it is not just related to that. Now companies that would normally enter the Russian economy to invest are more discouraged. So we have really two different ways how it impacts the economy: Maybe, one is more short-term and medium, and one is more long-term impacting the investment profile of the country.

RD: So, you do believe that over the long-term the sanctions might hit more?

B.H.: It will impact investment in Russia in the long term. This is really something we studied when we looked into sanctions’ impact in other countries, that the most profound and similar pattern we see across them is that, first of all, the sanctions linger much longer than everybody expects. And second, the main manifestation is in a lower investment profile and that is, of course, limiting your potential growth in each economy.

RD: Do you agree with the opinion that Russia's economy is not collapsing due to its flexibility and durability? Can it withstand external pressure?

B.H.: I think what you see what hit the economy last year was mainly the terms of trade shock when the oil price deceased in the fourth quarter. You had also some impact due to geopolitical tensions and sanctions but the main negative impact on the economy was the change of the global oil price markets so things converged to a different equilibrium.

Now here the impact is naturally felt this year but some of this impact will play out over time. There is, of course, a bottom, now it is the recession happening this year and we here have not much different views from the Russian authorities when this will happen – most likely in the second quarter and then we expect to see some recovery kicking in.

RD: Do you agree that the Russian economy is flexible and durable enough to withstand the economic crisis?

B.H.: If you connect these issues of the recovery with more growth potential that Russia has, I think this of course partly an impact from these two shocks from last year. Butwe had already before relatively low investment and slowing down in consumption and overall growth since 2012 and this is really related to the structural issues that Russia has. The economy is still facing and limiting the growth numbers for the next year.

I think you have at the same time different impacts on the economy from these shocks but also underlying economic trends for a while. In that regard, I think the structural reform agenda is becoming even more important because on top of structural constrains you now have the impact of these shocks that economy also has to deal with. It would be especially important at these times to start to implement reforms that would help the economy to create this growth potential in the next years.

RD: Given the Russian pivot to Asia, can the new launches of the BRICS Development Bank and the China-led Asian Infrastructure Investment Bank really become an alternative to European markets and banks?

B.H.: I think it is partly related to the issue of how your environment changes under sanctions. And of course the country is more cut off from Western markets that are traditionally main trading partners for Russia, so it is very natural to observe this reorientation to other markets and I think this is also the right decision of the authorities to then push to higher integration with other markets that have high potential.

I mean the Eurasian Economic Union in itself is a quite limited market for Russia and there is less potential to increase exports to these countries frankly. But if you look at the reorientation overall to the Asia-Pacific, that is a big market of course.

So, in the medium to longer term it has much more potential in terms of bringing returns to the economy if Russia is competitive in these markets. And this, of course, is again the question of structural reforms because you have to become competitive to be successful in these markets no matter what.

In terms of closer integration with the BRICS or the new Asian Infrastructure Investment Bank, I think, of course, if you are restricted in access to international financing, these are good alternatives because they allow you more easily to access external financing. It is just the question of how fast some of these new development banks come up to speed and are able to lend to Russia. But generally it is very good alternative strategy to regain access to international financing.