Sanctions have hit the Russian economy, even though Putin says otherwise
New York (AFP) – Almost two months into the Russo-Ukrainian warThe Kremlin has taken extraordinary steps to mitigate an economic counterattack from the West. While Russia can claim some symbolic victories, the full impact of Western sanctions is starting to show in very real ways.
As the West moved to cut off Russia’s access to its foreign reserves, limit imports of key technologies and take other restrictive measures, the Kremlin has launched some tough measures to protect the economy.. This included raising interest rates as much as 20%, placing capital controls and forcing Russian companies to convert their profits into rubles.
As a result, the value of the ruble has recovered After an initial decline, and last week, the central bank reversed part of the rate hike. Emboldened by the image of World War II, Russian President Vladimir Putin declared that his country had withstood Western sanctions.
“The government wants to paint a picture that things are not as bad as they really are,” said Michael Alekseev, an economics professor at Indiana University who has studied the Russian economy in the post-Soviet transition.
However, a closer look shows that sanctions are killing the Russian economy:
The country is experiencing the worst inflation wave in two decades. The government’s economic statistics agency, Rosstat, said inflation last month reached 17.3%, the highest level since 2002. By comparison, the International Monetary Fund expects consumer prices in developing countries to rise 8.7% this year, up from 5.9% last year.
Some Russian companies have been forced to close. Several reports indicate that the tank manufacturer was forced to stop production due to a shortage of parts. US officials point to the closure of car factories in Lada – a brand made by Russia’s AvtoVAZ and majority owned by French carmaker Renault – as evidence of the impact of the sanctions.
– The mayor of Moscow said that the city is considering the loss of 200,000 jobs from foreign companies that have closed their operations. More than 300 companies have pulled out, and international supply chains have largely shut down after container company Maersk, UPS, DHL and other carriers exited Russia.
Russia faces a historic default on its bondsWhich is likely to lock the country out of debt markets for years.
Meanwhile, Treasury officials and most economists are urging patience as the sanctions take months to take full effect. If Russia cannot obtain adequate amounts of capital, parts, or supplies over time, it will lead to more factories and businesses closing, leading to higher unemployment.
It took nearly a full year after Russia was punished for its 2014 seizure of Ukraine’s Crimea for its economic data that showed signs of distress, such as rising inflation, declining industrial production and slowing economic growth.
“The things we have to look for to see if sanctions are working, frankly, are not easy to see yet,” said David Feldman, professor of economics at William & Mary in Virginia. We will research the prices of the goods, the quantity of goods they produce, and the quality of the goods. The latter is the hardest to see and perhaps the last to appear.”
Transparency into how sanctions will affect the Russian economy is limited, in large part due to the extraordinary hours the Kremlin has taken to support it and its largest sector — oil and gas — largely unencumbered by Europe, China and India’s dependence on Russian energy.
Benjamin Helgenstock and Elena Rybakova, two economists at the Institute of International Finance, estimated in a report last month that if the European Union, Britain and the United States would ban Russian oil and natural gas, they would be able to do so.The Russian economy could contract by more than 20% this year. The current forecast expects a contraction of 15%.
While the European Union agreed to ban Russian coal By August and discuss oil sanctionsThere was no consensus among the 27 countries so far about stopping oil and natural gas. Europe is more dependent on Russian supplies Britain and the United States, which have either banned or are phasing out Russian oil. Meanwhile, Russia receives $850 million per day from Europe for oil and gas.
The United States and its allies argued that they tried to tailor sanctions to affect Russia’s ability to wage war and financially hit those at the highest levels of government, while leaving ordinary Russians largely unaffected.
But the Russians noticed the high prices. Residents of a Moscow suburb said that the 19-liter jugs of drinking water they regularly order have become almost 35% more expensive than before. In supermarkets and department stores in their area, the price of one kilogram (2.2 pounds) of sugar rose 77%. Some vegetables cost 30% to 50% more.
Local news websites in various Russian regions have reported in recent weeks the closure of many stores in shopping centers after Western companies and brands halted operations. Or pulled out of Russia, including Starbucks, McDonald’s and Apple.
The Kremlin and its allies on social media have repeatedly pointed to the recovery of the Russian ruble as a sign that Western sanctions are not working. The ruble collapsed to about $150 to the dollar in the early days of the war but recovered to about 80 to the dollar, what it was before the invasion. Weekly Inflation Gauge By Rosstat showed inflation slowing, but that’s not surprising after the central bank raised interest rates as quickly as it did.
The Russian Central Bank doubled its benchmark interest rate to support the falling ruble and halt bank buying. He lowered the rate to 17% from 20% this month and indicated he could cut it further.
This is not the first time that Russia has thrown its full force behind defending the value of the ruble as a symbol of resistance against the West. Throughout the 1970s and 1980s, the Soviet Union had an official exchange rate of one ruble equal to about $1.35, while the black market exchange rate was closer to four rubles to a dollar. The Russian debt crisis in the late 1990s was caused in part by the Kremlin’s active defense of the currency’s value.
US Treasury officials denied the importance of the ruble’s recovery.
“The Russian economy is really reeling from the sanctions we have imposed,” Treasury Secretary Janet Yellen said, adding that the value of the ruble had been artificially inflated due to central bank intervention.
If and how Russia wins the economic war will depend on whether the Kremlin is able to drive division in the West, causing sanctions to become patchy and less effective. At the same time, Russia will have time to develop substitutes for goods it no longer has access to, a concept known as import substitution.
Looking back at the 2014 sanctions, the Congressional Research Service said in January that the impact on Russia was only modest because the United States effectively acted on its own. This time, there are many international actors.
But Alexeyev, a professor at Indiana University, sees one clear gap.
“As long as Russia is able to continue selling oil and gas, it will interfere in this matter,” he said.
Hussein reported from Washington. White House Correspondent Joshua Boak contributed from Washington.