The United States and its allies have imposed unprecedented economic sanctions on Russia following its full-scale invasion of Ukraine. The speed and intensity of the sanctions toppled the ruble, forced the Russian stock market to close and forced Russians to line up in front of ATMs to withdraw dollars from their bank accounts.
The Russian economy was in free fall. Until it was, exactly.
The country’s central bank responded by sharply raising interest rates to 20 percent and imposing tight capital controls. These interventions, along with Russia’s still intact ability to sell its oil and gas abroad, helped create a buffer against economic chaos following the initial shock of sanctions. The measures are “straight from the book on the country’s economic crisis,” said Adam Smith, a Gibson partner at Dunn & Crutcher who worked on sanctions during the Obama administration.
The management of the economic crisis has done its job and calmed the immediate crisis. The rolls stabilize. This allowed Russia to declare victory over the onset of sanctions. “The economic blitz strategy has failed,” Russian President Vladimir Putin said in April.
At least that’s what Russia would like to say. Russia’s efforts to strengthen its currency mask the deep-seated economic downturns and transformations that sanctions are unleashing in Russia. Western sanctions are isolating Russia, cutting it off from key imports it needs for trade goods and its own production to keep its economy afloat. This means high-tech imports such as microchips for the development of modern weapons. But it also means shirt buttons.
There is currently “this false sense of stability,” said Maria Shagina, a visiting associate at the Finnish Institute of International Affairs.
Russia is facing a deep recession, which the Bank of Russia says will be “transformational, structural in nature.” The Ministry of Finance predicts that Russia’s GDP will shrink by about 8.8 percent in 2022. Inflation is expected to reach 23 percent this year. Russia is looking forward to the impending default. All this will mean difficulties for ordinary Russians, who already see that their real incomes are declining. Tens of thousands have tried to escape, especially those in technology, leading to a potential “brain drain.” And these are the things we know; Russia will stop publishing a lot of economic data, a tactic that experts say Moscow has used before to cover up the effects of sanctions.
These sanctions, said Jacob Fagin, a political economy expert at the Berggruen Institute, are pushing Russia, a modern economy integrated around the world, decades ago.
“They stabilized him, took urgent measures. This was to be expected. But that will not help them in the long run, “Fagin told Russia. “You won’t see people queuing for food for a while. But in the current course of events, this is still very possible. “
The United States and European allies have continued to impose more penalties, improving and tightening sanctions, all in an effort to increase pressure on Moscow. The EU has proposed a phasing out of Russian oil products, and depending on the latest details, this could further erode the Kremlin’s bailout. And the United States could take further steps, such as threatening secondary sanctions against countries such as China or India to deter them from buying cheap Russian energy. This has a price, and not just for Russia.
Even without further escalation, the sanctions regime against Russia is one of the most aggressive in history, untested on an economy the size of Russia and as entangled in the global financial system.
Whether sanctions are “working” then depends on what they are designed to achieve. One thing is clear: over time, these sanctions are likely to make it difficult for Russia to rebuild its tanks, produce cruise missiles and fund war. It will also make food and car production more difficult. And Russia may still continue its campaign against Ukraine, all with unpredictable consequences for the rest of the world.
What Russia has done (and what the West has not done) to deal with the shock of sanctions
The United States and its allies have threatened sanctions against Russia if it invades Ukraine. It has always been a question of how far the West can go, largely because of fears that some of the pain may return, economically and politically, to the United States and its allies. But the West is moving faster and stronger than many expected, in response to the brutality of Moscow’s attack, the fierceness of Ukraine’s resistance and the harsh pleas of Ukrainian President Vladimir Zelensky.
After the United States and the EU imposed targeted sanctions on Russia in 2014 following the annexation of Crimea and the invasion of Donbas, the Russian government has taken steps to protect its economy from sanctions, such as accumulating about $ 640 billion in gold and foreign reserves. Yet the intensity of these recent sanctions against Ukraine has shaken Russia’s “fortress” economy. And in some cases, Western action was directly aimed at Russia’s backup plan; Sanctions against Russia’s central bank, for example, have prevented Russia from gaining access to about half of those foreign reserves.
However, Russia reacted aggressively after the sanctions hit. “They have pursued defensive policies on textbooks to retain capital and stabilize the currency and avoid a financial crisis,” said Rachel Ziemba, an economic and political risk expert and assistant senior fellow at the Center for a New American Security.
Take the ruble that President Joe Biden declared reduced to “ruins.” After the sanctions, its value collapsed. Suddenly it took much more rubles to buy, say, a US dollar. Then you really would not want rubles, because you would not have so much purchasing power. Thus, the Russian central bank tried to create a demand for rubles.
The central bank did this through a series of measures. This included raising interest rates, an incentive for Russians to save money. The bank has introduced a series of capital controls aimed at Russian businesses and individuals. For example, companies that export or do business abroad had to convert 80 percent of their foreign exchange earnings into rubles. It also limits the amount of money Russians can transfer abroad or withdraw from foreign bank accounts – currently no more than $ 10,000 over the next six months.
The exchange rate of the Russian ruble against the dollar over the past six months. Google Finance
These are policies set by Russia’s central bank, but Russia is also taking advantage of the fact that it still exports a lot of oil and gas, including to places like Europe, which receives more than a third of Russia’s natural gas imports. This money – hundreds of millions a day from the European Union alone – goes into the Kremlin’s coffers, and its ability to raise funds gives a pillow to the economy.
This is partly why Putin is demanding that “unfriendly countries” pay for natural gas in rubles, as this will help maintain Russia’s currency. But this is also the reason why, until his suspension for Poland and Bulgaria (which are by far the largest consumers of Russian gas), Putin did not apply it because he could require renegotiation of the agreement and this could encourage EU countries to start the process of weaning to give up Russian hydrocarbons altogether.
Neither the complex Russian central bankers nor the energy sector can completely save the Russian economy in the long run. As Smith said, this is the book on the economic crisis. “The problem with this book, of course, is that it works on a course,” Smith said.
These measures are painful, making them more difficult to maintain. Russia eased some of its interventions slightly, lowering interest rates to (still high) 14 percent. This also loosened some capital controls, but it also lowered the value of the ruble.
Oil and gas revenues are helping, but if energy sanctions are tightened, as with the EU’s gradual ban on oil, or Russia is forced to sell its gas cheaply – or if the threat of sanctions discourages even a hunters’ deal – a precaution network disintegrates over time. Russia has already said oil production is expected to decline as sanctions hamper investment and trade.
“There was an initial shock,” Fagin said. “It’s over, but it’s not better.”
The blow from Russian sanctions so far
Russia wants everyone to want rubles. But Russia cannot do much with all these rubles because sanctions block these transactions or make them too expensive. “The money itself matters, but also how you can use it – both in terms of who your colleagues are and physically, how you can move it – is much more important,” said Edoardo Saravale, a sanctions researcher. .
Moscow cannot buy some foreign goods due to control over critical elements such as microchips. These restrictions will directly undermine Russia’s technology and defense sectors, making it difficult to continue developing weapons or tools such as artificial intelligence or even repairing damaged tanks.
Even if items are not explicitly banned, a network of financial sanctions can make transactions more difficult and it is often easier for Western companies to self-sanction to avoid possible sanctions.
And the sanctions have revealed how dependent Russia is on imported goods and products, not only for the things the country’s population buys, but also for the things it needs for the products it produces and sells at home.
All this means that the Russian economy will become more isolated over time. Data from other countries show that this is already beginning to happen as imports into Russia collapse. For example, Finland’s exports to Russia are …
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