Putin defies sanctions as he seeks reelection

Russia is reaping fruits of Putin’s war economy [View in browser]( [Bloomberg]( Welcome to the [Year of the Elections](, Bloomberg’s new newsletter on the votes that matter to markets, business and policy amid the most fragmented geo-economic landscape in decades. Subscribers to [Balance of Power]( will receive this newsletter periodically, ahead of key dates. You can unsubscribe anytime [here](. The war in Ukraine wasn’t yet a month old when President Vladimir Putin crowed Russia had already [survived an “economic blitzkrieg” of sanctions](, though warning of worse unemployment and inflation to come. In some ways, he wasn’t optimistic enough. Joblessness has been in a near-continuous decline since then and now hovers at a record low on the eve of this week’s presidential election, as an economy warped by the military effort scoured for workers. It’s emblematic of why Russia bent but didn’t break under coercion by shifting to a war footing, [allowing the Kremlin to spend its way]( out of a brief recession. As Russia adjusted to a predicament that — on paper — made it the most sanctioned country on earth, the drip feed of punishment by Western governments meant the economy had enough time to build immunity while pocketing a record windfall from the spike in commodity prices the invasion helped unleash. Putin has been playing Whac-A-Mole with sanctions ever since. Russia deployed a massive shadow fleet of tankers to evade restrictions on shipping and insurance and sold barrels to Asian clients to blunt a $60-a-barrel price cap imposed on the nation’s exports of crude and oil products. Besieging the world’s biggest country by landmass was a tall order. Workarounds emerged for a shape-shifting economy that now hauls in about 70% of its imports from China, Turkey and some former Soviet states, around double their share before the conflict. Though knocked down from its pre-war trajectory, the economy expanded 3.6% last year and could clock similar growth again in 2024. Albeit unprecedented, round after round of sanctions proved too incremental and piecemeal to deter Russia, swing the battlefield momentum, or shake Putin’s standing with the electorate he faces in this week’s presidential ballot. The coalition arrayed against Russia was also far too fractious and left enough backdoors to exploit. Putin may be winning a sanctions battle, not a war, but he’s already exposed the limits of economic weapons not backed by hard power. —[Paul Abelsky]( Putin visits the Scientific and Practical Centre for Diagnostics and Telemedicine Technologies in Moscow on Feb. 14.  Photographer: Vyacheslav Prokofyev/Sputnik/AFP/Getty Images Russian Economy Q&A We spoke with [Alex Isakov](, our Russia expert at Bloomberg Economics, for his perspective. Putin’s win is a given. What does another six years of his presidency mean for Russia’s economy? Isakov: There will be a search for a way to use Russia’s remaining fiscal space to boost trade with China. This will not be easy. Decades of trade with the EU shaped Russia’s economy — both its industrial structure and transportation networks. Russia’s industry will struggle to grow with restricted access to EU technologies and capital. Today trade decoupling is far from complete, and our estimates show that the drop in bilateral Russia-EU trade has been partially offset by indirect trade facilitated by Kazakhstan, Turkey and a host of other countries. Yet as the EU ramps up sanctions enforcement and cracks down on Russia’s access to investment goods Putin will have little choice but to invest billions of dollars into railway, road and pipeline infrastructure facilitating its exports of commodities and imports of goods from China. Putin’s policy agenda drifted substantially over his almost 25 years in power, our analysis of his speeches based on natural language processing shows. The invasion of Ukraine in 2022 and sanctions since will mean Putin’s key focus over the next six years will remain on hardening Russia’s economy by “sanctions proofing” banks and manufacturing, military modernization and reversing Russia’s demographic decline. Russia’s fiscal coffers, its National Wealth Fund, are also running thinner and at the current rate of use will be exhausted over the next two years. How much fiscal space does Putin have for the next six years? Isakov: Putin’s policy priorities will be expensive and Russia’s resources are increasingly constrained. For the federal budget, the share of oil and gas revenues has dropped from north of 45% in a decade before Russia’s annexation of Crimea to about 33% in the past four years. This reflects both the bite of recent energy export sanctions, but also Russia’s need to accept OPEC+ crude oil output, as its bargaining power within the club is constrained, and extraction costs grow. To balance his budget Putin will have little choice but to ditch Russia’s (almost) flat 13% income tax and increase its 20% corporate profit tax. This may add up to around 2% of GDP of extra revenues — enough to boost spending on war, demographic and industrial policies. The Markets Take [Eddie van der Walt](, deputy managing editor of Markets Live Europe, outlines the possible market reaction. Russia’s elections may be a foregone conclusion, but the market impact probably isn’t. Putin’s expected crushing victory will be presented as a sign of public support for the war in Ukraine, giving him more reasons to continue it and keep tapping into the vast wealth generated from commodities companies to fund it. People close to the administration suggest that Putin may carry out a [significant government shake-up](, with Energy Minister Nikolai Shulginov, 72, perhaps replaced by Boris Kovalchuk of the utility holding Inter RAO. The upshot is a likely increase in external attention. Any action by Putin will garner additional scrutiny from the US, which is also in an election year. Fresh sanctions will be brought to bear on individuals more closely involved in the war in Ukraine, with an opportunity to expand the circle of individuals and assets targeted. Relations with Russia are already a key point in US presidential stump speeches. That could create additional volatility in commodity markets. While most Russian assets are off limits to many outside investors, changes in raw material prices reverberate around the world. Putin weaponized gas flows to Europe, and that’s unlikely to change after the election. Yet a fire at Rosneft’s largest oil refinery showed that supply disruption to other jurisdictions is still possible, with knock-on implications for prices. WATCH: Smoke rises from the Ryazan refinery in Russia, in a video released by AP yesterday. Source: Ostorozhno Novosti/AP Clampdowns on the movement of oil, nickel and other raw materials — if successful — could bring fresh volatility and would be felt in portfolios around the world. And, of course, any future easing of tensions with Ukraine would bring its own set of implications for commodity prices. Corporate Stakes [Anthony Halpin](, the economy and government team leader for Russia, looks at the impact on companies. Uncertainty has been a constant since Russia started its war in Ukraine, as the Kremlin rewrites the rules of engagement with business in response to sanctions imposed by the US and its allies. Putin signed a decree in April last year allowing for the assets of companies from such “unfriendly” nations to be temporarily taken over by the state in response to similar moves or the threat of them by those countries. Local subsidiaries of France’s Danone and Denmark’s Carlsberg, which were both trying to leave Russia, [were seized under those powers]( last July, though Putin late yesterday [reversed the decision]( on Danone. The Kremlin in 2022 banned foreign investors from selling Russian assets without approval from a special government commission. It added to that last year by requiring foreign businesses seeking to sell their Russian assets and exit the country to pay a mandatory contribution to the state budget even if they offload them for a symbolic sum or even zero. Get ready for the flurry of elections that will shape the geo-economic landscape for years to come with [our 12 elections-to-watch guide](. More from Bloomberg - Check out our [Bloomberg Investigates]( film series about untold stories and unraveled mysteries - [Bloomberg Opinion]( for a roundup of our most vital opinions on business, politics, economics, tech and more - [Next Africa](, a twice-weekly newsletter on where the continent stands now — and where it’s headed - [Balance of Power]( for the latest political news and analysis from around the globe - [Washington Edition]( for exclusive coverage on how the worlds of money and politics intersect in the US capital - Explore all Bloomberg newsletters at [Bloomberg.com](. Follow Us Like getting this newsletter? 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