Russia under the sanctions: From energy sector to digitalization

Olga Garanina,
Associate Professor,
Graduate School of Management,
St Petersburg University,

Anna Abramova,
Associated Professor,

For the last 5 years Russian economy is developing under the sanctions. Economic sanctions following the conflict in Ukraine imposed significant constraints for country’s economic development as well as business internationalization strategies. The sanctions have been introduced in several rounds since March 2014 by the US and were supported by the EU as well as some other countries. The most important limitations concern financial sanctions (bans on long-term credits to a list of Russian companies) as well as sectoral technological sanctions which target the oil and gas industry (bans on supplies of specific types of technologies and equipment, in particular applicable for Arctic and shale oil and gas projects development). Direct impacts of the sanctions are amplified by a wide array of indirect effects adversely influencing the business environment. Internationally, the sanctions negatively affect Russia’s ties with third countries as they inflate the Russian risk. For example, pressed by the role of the US in the global arena, Chinese banks may limit transactions implemented on behalf of Russian counterparts. In a similar way, domestically, various industries in Russia including those which are not directly targeted by the sanctions have to deal with the degradation of the economic climate and represent higher risks for their counterparts.

Energy sector is Russia was chosen for sectoral sanctions because of its significant role in national GDP and exports. While most attention in literature is devoted to the negative impacts of the sanctions, several points need to be discussed.

Firstly, it is difficult to presume the effectiveness of the sanctions, either from the political (i.e. change of Russia’s foreign policy course), or from the economic point of view (i.e. constraining international expansion of Russian companies). In today’s globalized economy, business strategies exert a moderating role which means softening the limitations imposed by the sanctions. For example, western sanctions catalyzed the expansion of Russian oil and gas companies towards rapidly growing markets in Asia. Sanctions also stimulated reorganizing partner relationships along the value chains to circumvent the legal constraints i.e. through shifting towards partners from the countries outside the western bloc.

Looking at the case of the energy sector, we can observe that Russian oil and gas industry showed a robust performance during the sanctions. Russian companies increased crude oil production. Russia also increased its market share in the EU gas market and expanded oil and gas supplies to Asia. Under the sanctions, the pipeline map of Eurasia has been complemented with the second line of the Nord Stream, the TurkStream and the Power of Siberia gas pipelines being put in service or under construction.

Secondly, sanctions have substantiated the economic modernization challenge. Essentially, sanctions have catalyzed the import substitution policy. Yet, Russia’s economy remains dominated by the primary sectors, and the short time horizon impedes conclusive statements.

Finally, sanctions seem to be driven not only by political motives, but also by commercial motives of the sanctions imposing states, as demonstrated by the recent sanctions against the Nord Stream 2 pipeline which correspond to the interests of the US gas exporters. In this sense, the sanctions exacerbate competitive pressures in global economic environment.

However, while at the macro level diversification policy is pending on the progress of institutional reforms, at a micro level several companies have been upgrading their role in global value chains. Sanctions pressurized companies to increase their operational efficiency, to expand to new product markets and to develop innovative products.

Current modernization and innovative midterm development are relying on digital transformation. Russia having highly competitive IT sector is in the search of optimal pathway for diversification. Demand for ICT innovations especially in the data science is fast growing even in the conservative energy sector.  Russia has consistently been working on information society development, having midterm state programs since the beginning of the century. The economic sanctions stimulated concerns on national information security and software import substitution plan implementation just after the first wave of sanctions. After 5 years of enactment it has become obvious that it didn’t become the main trend for national ICT industry development. Moreover, Russian market is seeing the growth of imports and collaboration enlargement with Chinese business. Digital transformation at the state level is supported with Digital economy state program started in 2017 for the midterm period up to 2024. The program is aimed to create the ecosystem for the digital economy, supporting institutional and infrastructural changes for wider use of ICTs, improving the country’s competitiveness in the global economy through digitalization. The Program is also contributing to the National Technological Initiative (NTI) focused on Russian technological development for long term period – till 2035. The Initiative is prioritizing digital technologies highlighting big data, artificial intelligence, distributed registry, and wireless connectivity as basic ones at the first wave of implementation.

However, economic diversification patterns having as a core pillar digitalization are not substantially influenced by economic sanctions. Russia is still enjoying the position of technological leader in software and computer services that are essential for data-driven economy. The growing collaboration with Asian markets makes it less dependent from ICT goods from USA. But the floor for further discussions is open in case of energy sector digitalization – is it enough for the industry long-term development seeing the technological sanctions focused on the reduction of supply.


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