September 28, 2022
  • September 28, 2022

This is how Western sanctions are hitting the Russian economy

By on April 5, 2022 0

A month after the start of the most severe and coordinated sanctions by Western governments, the Russian economy is showing signs of cracking.

As the value of the ruble changes against the dollar and many educated Russians are said to flee the country, the Russian economy faces an unprecedented contraction. “The current crisis will undo 15 years of economic development,” the Institute of International Finance said in a report.

The IIF estimates that Russia’s gross domestic product will decline by 15% this year and 3% next year. Goldman Sachs predicted a smaller but still significant contraction of 10% in 2022.

“Russia has not experienced a recession of this magnitude since the 1990s,” said Elina Ribakova, IIF’s deputy chief economist. “This is an unprecedented shock to the Russian economy.”

As Western nations brace for another round of sanctions after reports of war crimes in towns around kyiv, here’s how the shock is already affecting Russian shops and factories.

Factories are closing

With heavy equipment and automakers shutting down in Russia, the country’s manufacturing output in March fell at the fastest rate since the spread of COVID-19 two years ago. The S&P Global Purchasing Managers’ Index noted longer delivery times, “serious shortages of materials” and prices for producers as well as consumers “skyrocketing” at record rates.

The index, which measures manufacturing activity, fell to 44.1 in March, signaling “the biggest decline in operating conditions in Russia’s manufacturing sector in almost two years,” S&P Global said on Friday. (A reading below 50 indicates contraction; a reading above 50 indicates growth.)

Amid a drop in orders from domestic and overseas customers, “companies continued to cut jobs, with employment falling at the fastest rate in nearly two years,” S&P Global said.

A woman walks past empty shelves in a supermarket in Moscow.
A woman walks past empty shelves at a supermarket in Moscow March 23, 2022. There have been shortages in Russia of women’s sanitary napkins, nappies and sugar after many foreign brands announced they were suspending operations in the country in the light of President Vladimir Putin. large-scale military attack on Ukraine. Besides these categories, there has been no shortage of other fast-moving consumer goods in supermarkets in Russia.

Vlad Karkov/SOPA Images/LightRocket via Getty Images

empty shelves

Russian supermarkets are short of essential items, including diapers, sanitary napkins and sugar. Images of empty store shelves are circulating the internet, with some people drawing comparisons to North Korea, according to British newspapers.

Russians began buying sugar in a panic about two weeks after the invasion, leading to empty shelves and the imposition of purchase limits on groceries by stores, the report reported. Russian newspaper Kommersant. The rush for the products prompted the Russian government to issue public statements against panic buying.

Russia has already banned exports of sugar, wheat, rye, barley and corn during the summer to protect the domestic food supply, Reuters reported.

20% inflation

While some Western countries struggle with inflation of between 5% and 8% this year, consumer prices in Russia are expected to rise by 20% this year, according to Capital Economics.

According to reports from Insider and the Daily Mail, some expensive electronics and cars are rising in price even faster as wealthy Russians try to buy goods with their rubles rather than risk the currency losing value. .

The cost of a new television, for example, tripled from January to March, the Daily Mail reported, with a television now costing two-thirds of a typical monthly salary.

A stock trader in Moscow told Insider he bought a new iPhone 13, a Samsung tablet and new tires for his family’s BMW. An investment banker told the outlet, “We have all these roubles, and I’d rather buy something now than see it become completely worthless.”

After falling last month at value of one american cent, the ruble has recently regained much of its value, thanks to tough capital controls imposed by President Vladimir Putin, which limit the amount Russians can withdraw from banks and prohibit the exchange of rubles for foreign currency.

Still, the effects of the sanctions on Russia are already being felt with declining consumer spending in the country, the IIR noted.

Tinkoff Bank ATMs in Moscow
MOSCOW, RUSSIA – MARCH 2, 2022: People line up outside a Tinkoff Bank ATM in central Moscow. Artyom Geodakyan/TASS. Russians rushed to withdraw their deposits before President Vladimir Putin imposed capital controls to prevent rubles from leaving the country.

Artyom Geodakyan/TASS

Some banks cut

Financial sanctions have hit banks unevenly. About seven major banks have been disconnected from SWIFT, the system that allows banks to communicate with each other, but around three-quarters of Russian banks remain connected, according to the IIF.

Sberbank, the region’s largest bank, can continue most operations but cannot engage with banks in the United States and is locked in for long-term borrowing, Ribakova noted.

“It is the most important joint bank,” with most Russian pensioners receiving their pensions through Sberbank, Ribakova said. “That may be why the United States decided not to oppose it too aggressively.”

Few want Russian oil

Russian fossil fuel exports, which account for 40% of Russia’s budget, could be at risk as Western countries call for a response to atrocities around kyiv. The European Union on Tuesday banned Russian coal imports and some European countries are calling for a ban on Russian oil and gas.

A total ban on Russian fuels would cost the country between $250 billion and $300 billion in export losses, according to the IIF.

Russian oil is already struggling to find buyers after a ban by the US and UK last month. “[O]Traders are very reluctant to acquire Russian oil. Anecdotally, even shipments at a heavily discounted price ($35/barrel below Brent) sometimes failed to find buyers,” the IIF wrote in a report.

The Russian oligarch denounces the sanctions


Are the sanctions effective?

As ordinary Russians suffer from lack of products and rising costs, it is unclear whether the sanctions will impact the political class or Putin’s desire for war in Ukraine.

Brian Grodsky, professor of political science at the University of Maryland in Baltimore County, pointed out that sanctions against autocratic governments rarely work because elites can often evade sanctions by siphoning off resources for their own benefit. Meanwhile, those bearing the brunt of the economic fallout have little sway over their government, with Russian protesters or those simply discussing the war facing stiff penalties, such as long prison sentences.

“It will bleed the country dry, but we have seen authoritarian leaders continue to bleed their people,” Grodsky said of Western sanctions. “Regimes like this will sneak in everywhere if it means safety. If it means not cleaning the streets, not filling the potholes, they will.” Grodsky also noted that the sanctions could potentially backfire if they stir up a lot of anti-Western sentiment in the country.

But with Russia so dependent on foreign imports, the sanctions will make it harder to fund the war in Ukraine, Ribakova noted.

“Even for domestic military production, [Russia] relies on imports from abroad. A weaker ruble makes it harder and direct export controls make it harder. There will be a lot of value chains in Russia that will collapse,” she said.

She added: “The problem here is Russia’s ability to finance the war – the more effective sanctions also make it harder for Russia to finance the war and more costly for the Russian economy. Whether they decide to give the priority to war over their own citizens, remains to be seen.”