[LINK] "Putin's Fortress Russia Takes Its Toll"

[rfmcdonald]

Leonid Bershidsky's Bloomberg View article notes that Russia's response to sanctions has not been stellar, and is likely to get worse.

It's difficult to quantify the damage Western economic sanctions have done to Russia. The country's slump is almost exclusively due to a drop in oil prices, which has led to a sharp currency devaluation and a jump in interest rates. Yet the sanctions have fueled the Kremlin's paranoia, lending Russia's economy an aura of autarchic defensiveness.

Russian exports are down 31.9 percent in January through September, and imports have dropped 38.8 percent. One could argue that this downturn in foreign trade is due to the ruble's devaluation. Self-isolation, however, has played a major role too. One form of this self-isolation is unilateral trade restrictions like President Vladimir Putin's vindictive and ineffective food embargo against countries that have sanctioned Russia. Another is the country's increasing financial lockdown.

The embargo has failed on multiple counts. An August government report showed that though food imports made a disproportionately large contribution to the general decline in trade, Russian producers were unable to fill the gap in the market immediately, resulting in rapid price growth and an increase in embargo-busting schemes. For example, European Union exports of milk and cream to Belarus increased in 2014 by a factor of 573; obviously, all the extra European milk went to Russia. Landlocked Belarus also became a major fish exporter. At the same time, EU agricultural exports just kept growing as if the Russian market never existed; Poland's, for example, increased by 7.1 percent last year and by 6.4 percent in the first half of 2015.

Undeterred by the debacle, the Russian government wants to re-enact the experiment in other markets. From January 1, 2016, government agencies have to prove they need foreign software before they can buy it. A separate government decree only allows such purchases if there is no equivalent Russian software. The reasoning for this is a noxious mixture of fear that Western countries could be spying on Russia through office applications and enterprise resource planning systems and a misguided desire to spur local development by shutting off competition. The European Business Association, the biggest foreign business lobby in Russia, recently sent a letter to the government expressing concern that Western tech companies may be unable to keep operating in Russia under these conditions.