Dr. Diana Galeeva
During a meeting on economic issues, Russian Prime Minister Mikhail Mishustin on Friday stated that economic growth in the country amounted to 2.8 percent in the first nine months of this year. For September, this figure was almost doubled – more than 5 percent in comparison to the previous year. Among the key sectors for economic growth, he listed an increase in non-oil and gas revenues, which were up by 30 percent compared to 2022. In addition, the production of industrial goods had risen by more than 3 percent between January and September.
As a keen observer of the Ukraine war and its impact on the changing geopolitical landscape, for me the most interesting figure among these results was the ongoing trend toward deepening cooperation with “friendly” states, which is both despite and in reaction to the economic pressure from the West. For January to August, trade turnover with these states increased by 22 percent, according to the Ministry of Economic Development. I thought about what this means in terms of Russia’s economic statecraft in a time of geopolitical sanctions, which the country has been facing since February 2022. Who are the so-called friendly countries in the current Russian geopolitical context? What steps and strategies has Russia adopted to boost its dealings with them? And what are the current realities and challenges affecting these relations?
The terms “friendly” and “unfriendly” emerged as part of Russia’s response to states that supported, or did not support, Western-led economic sanctions against Moscow following the outbreak of the Ukraine crisis. “Friendly” generally covers those who showed diplomatic support to Moscow or at least took a neutral position over Russia’s actions in February 2022. Among these can be listed about 25 countries, including China, India, Saudi Arabia, Brazil, Turkiye, Kazakhstan and Belarus. While Russia has honored these countries with diplomatic “friendly” status, it also realizes their importance to it overcoming the Western economic sanctions. Perhaps the clearest impact has been Russia’s strategy of replacing “unfriendly” countries with “friendly” ones in its economic deals. For example, in October 2022, President Vladimir Putin shared Russia’s intention to allow companies from friendly countries to enter into mining projects within the territory of the Russian Federation. “We will provide our friends and partners with access to our energy resources. Why not? We did the same thing with the Europeans and the Americans, but they chose to leave our market,” he said.
This strategy has been supported by mechanisms created by Russia’s key financial institutions that target the friendly states. In October, the central bank announced it was considering the possibility of gradually admitting friendly foreigners into the Russian market. After the start of the Ukraine crisis and the consequent sanctions, the Bank of Russia froze nonresident investments in the Russian market, but investors from friendly countries now have renewed access. Another development has been the efforts to overcome Western sanctions via Islamic banking and financing, which are designed to appeal to the several friendly states from the Muslim world. After lengthy discussions, Russia in September finally launched Islamic banking for the first time as part of a two-year pilot program. It has been implemented in Russia’s Muslim-majority republics: Tatarstan, Bashkortostan, Dagestan and Chechnya. Should the program prove successful, the plan is to introduce the new regulations throughout Russia.
Finally, there have been separate announcements that measures are being taken to simplify investment processes for friendly countries. Although there have been marked gains through these efforts to enhance links, Russia’s reliance on friendly states has hit the country in a few ways. This includes Russian investors being lured away by banks and brokers from countries that the authorities call friendly. So, not only has “Western money” left the Russian market, but the money of Russian investors has also partially left or is leaving, according to Ivan Chebeskov, director of the Financial Policy Department at the Ministry of Finance. Some of the money, he said, was lost due to the loss of access to foreign instruments. The Russian market is too narrow, some industries are simply not represented in it and investors have instead looked to Western companies. These instruments can sometimes only be offered to Russians by banks and brokers from other countries.
The war has long signaled the risk of private investment emigration. “If private investors’ confidence in the Russian stock market decreases, there are risks of an increase in citizens’ savings in foreign instruments and an outflow of funds from the Russian banking system, as well as a decrease in the ability of companies to attract long-term financing,” Chebeskov said. Another concerning reality emerged at the end of July, when the main net sellers of Russian shares were investors from friendly countries. In total, they sold securities worth 10.4 billion rubles ($113 million), which was a record value over the past year and a half, according to Kommersant. Net sales from friendly residents had been observed earlier, but the volumes were noticeably smaller. Independent financial analyst Andrei Barthota suggested that the situation was influenced, among other things, by the behavior of Russian investors, who changed their registration to reduce sanctions risks.
Also in July, individuals reduced their investment activity. Net purchases amounted to 2.9 billion rubles – much less than in the preceding months, which usually hit between 13 billion rubles and 29 billion rubles. The main participants in stock exchange trading were individuals, accounting for more than 80 percent of the total volume of transactions. Arikapital strategist Sergei Suverov pointed out that the dynamics were affected by both market overheating and the depreciation of the ruble, with high volatility forcing investors to pay attention to the foreign exchange market. In conclusion, the developing Russian strategy to deal with so-called friendly states to overcome the limitations caused by sanctions is active and observable. Along with opportunities to enter different projects and easier investment opportunities, Islamic banking is being offered as a genuine alternative to Western markets. However, the policies are not without cost or uncertainty. Risks include private investment emigration, sales by friendly residents and friendly countries luring Russian investors away. Challenges remain and it is likely that further integration with the friendly states will need to be negotiated to gain full and sustainable benefits. In the short run, however, friendly states are playing an essential role in preserving Russia’s gross domestic product, serving as key partners in energy deals and trade increases and as drivers and advisers in creating alternative financial systems.
