WIREDGOV

EXPERT COMMENT

Russia’s defensive management of its economy protects itself against the risk of US sanctions. But China doing the same is worrying for the world economy.

The main idea behind ‘fortress economics’ is that any country with a terminally bad relationship with the US is well-advised to try to earn more than it spends. Keeping the current account of the balance of payments in surplus is preferable to a deficit which then needs an external funding requirement – because most of that funding is dollar-denominated, which gives Washington leverage.

The logic of fortress economics also argues in favour of building up a big stock of foreign exchange reserves to support a country’s ability to spend if, and when, sanctions bite – and Russia has followed this pattern assiduously. Its current account surplus averages 3.5 per cent of GDP in the past ten years, which helped finance a build-up of foreign exchange reserves worth $460 bn, or around 30 per cent of GDP – huge by international standards.

A crucial tool in building this financial fortress is a highly conservative bias in fiscal and monetary policy. Macroeconomic policy must be kept tight to restrain domestic spending, and indeed the average growth rate of Russian public spending over the past decade has been less than one per cent in real terms, way below the 3.5 per cent average in other emerging economies.

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