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UPDATED: January 29, 2015 NO. 2 JANUARY 10, 2013
Russia's Twin Troubles
Falling energy prices and sanctions by Western countries spur the vulnerable Russian economy to make changes
By Yu Lintao

Although it would be difficult to change Russia's heavy reliance on energy exports in a short time, the Russian Government has now begun taking measures for economic restructuring, as well as substituting imported products such as military hardware components and food. In a recent cabinet meeting, Russian Prime Minister Dmitry Medvedev urged ministers to focus on supporting the innovation sector as a way to cut the country's dependence on imports and facilitate a solution to current economic woes.

Double-edged sword

As the ruble underwent a sharp depreciation, U.S. President Barack Obama signed an executive order on December 19, 2014 to start a fresh round of sanctions on Russia, imposing a ban on new investment in Crimea and barring the export or import of goods, technology or services with the region. On the same day, Canadian Prime Minister Stephen Harper also announced restrictive measures on the export of technology in relation to Arctic, deep-water and shale oil explorations and extraction to Russia. And one day before, the EU unleashed similar sanctions on Moscow. The new punitive measures will undoubtedly further strain Russia's economic woes as they jar investors, leading to capital flight.

Russia sees the latest moves of Western countries as evidence that they lack willingness to settle the Ukraine crisis.

Though the rounds of sanctions have severely wounded Russia's economy, it seems that they have also helped cement President Putin's status in Russian politics with his favorability rating reaching a new high. A recent Associated Press-NORC Center for Public Affairs Research poll found that about 80 percent of Russians support him.

Under pressure from the West, Putin called the sanctions an opportunity for Russia's economic transition. At his 10th annual year-end press conference on December 18, 2014, Putin claimed that the current situation can be used to offer additional conditions for production businesses, which would help spur the diversification of the Russian economy.

"External conditions urge us to be more effective and shift to more innovative development patterns," Putin said.

Chen of the CICIR noted that Russia will not yield to Western sanctions and Putin will continue his hardline stance and will raise a wave of patriotic fervor in his country to pull through the economic hardship in the next one or two years.

Regarding the Ukraine crisis, Chen added that Moscow might take a tougher stance, making the crisis more difficult to resolve.

In addition, He Maochun, Director of the Research Center of Economy and Diplomacy under Tsinghua University, noted that Western sanctions as well as the deterioration of Russia's economy will surely have negative effects on the economic development of the West.

In the face of the threat of new sanctions, Russia has vowed to take retaliatory measures. Putin has already announced that Russia will ban or limit the imports of agricultural and food products from EU countries. Moreover, during his visit to Turkey in early December 2014, the Russian president played an "energy card," warning that the planned South Stream Offshore Pipeline project, which will supply gas to Europe through Turkey, would be canceled.

According to European Commission statistics, if Russia takes counter-sanction actions, the EU will lose 50 billion euro ($62 billion) this year, compared with 40 billion euro ($49 billion) in 2014. And if Putin plays the "energy card" again, energy-strapped EU countries will suffer even more.

Washington cannot be a complete winner in the game of sanctions against Russia. As Russia has acted as an important partner of the United States for combating extremist forces in the Middle East and in solving the Iranian nuclear issue, the current circumstances will undoubtedly weaken the joint international endeavor to cope with global security challenges.

Squeezed by the West, Moscow is seeking opportunities in the East. On January 1, 2015, the Eurasian Economic Union (EEU) officially came into being. First initiated by the leaders of Belarus, Kazakhstan and Russia, the EEU is aimed at establishing an economic bloc for the free movement of goods, services, capital and labor. The union will create a single economic market of 183 million people with a gross domestic product of over $4 trillion.

Analysts said that against the backdrop of Western sanctions, the EEU will be of great significance for Russia to drag its economy out of the doldrums. The new bloc not only can provide Russia a big market for its products, but also help the country attract a cheaper workforce. What's more, the EEU can also facilitate Russia's economic and trade ties with more countries, as it has been negotiating with Viet Nam, Israel, Turkey, India and Uzbekistan over free trade agreements.

Email us at: yulintao@bjreview.com

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