Russia’s economy is isolated, its billionaires have been sanctioned, and hundreds of foreign companies have either left the country or cut back on operations there.
Yet the Russian economy has proved surprisingly resilient; its currency recovered and this week found a way to avoid defaulting on its foreign debt.
“All things considered, it behaves better than originally expected,” said Art Wu, a senior economist at the Bank of Montreal.
Russia’s economy is still expected to fall into recession later this year, Wu said. But so far, it has blunted the worst economic consequences of Western sanctions imposed amid the country’s invasion of Ukraine.
Two women walk past an exchange office, showing the exchange rates of the US dollar and the euro against the Russian ruble in Moscow on April 1. (Associated Press)
The Russian ruble collapsed by 30% in late February, when Western sanctions were first imposed. A month later, US President Joe Biden said sanctions were working and that the Russian economy was about to be halved.
“As a result of our unprecedented sanctions, the ruble was almost immediately ruined,” Biden tweeted in March.
Protection of the ruble
But since then, the value of the currency has almost doubled – largely as a result of some cunning actions by the country’s central bank, which has taken quick steps to strengthen the ruble.
The Central Bank of the Russian Federation has severely restricted the ability of Russian citizens to sell rubles and buy foreign currency. He asked foreign countries to pay for Russian energy products in rubles. And this is forcing Russian companies that still export to sell 80% of their earnings in foreign currency and buy rubles instead.
Customers line up at a currency exchange pavilion in Moscow on February 28, just days after Russia invaded Ukraine. The Bank of Russia is acting swiftly to protect the $ 1.5 trillion economy from large-scale sanctions that have hit key banks and pushed the ruble to record lows. Since then, the currency has recovered, thanks to a number of economic measures. (Andrey Rudakov / Bloomberg)
Experts say this has essentially created an artificial demand for the currency, which has increased its value and kept the bottom below the ruble. According to the Wall Street Journal, the ruble is in a “coma caused by the central bank.”
Meanwhile, Russia’s labor market remains stable – and the state has shown a willingness to intervene to keep the local economy running, Wu said.
“We suspect that the government will rely on Soviet-era tactics (when unemployment was actually banned) and encourage employers to reduce wages / reduce working hours instead of cutting staff,” he told CBC News in an email.
The tanker loaded its cargo with liquefied natural gas from the Sakhalin-2 project in the port of Prigorodnoye, Russia, on October 29, 2021. Russia supplies about 40% of natural gas in Europe and about 25% of its oil, which means that the European Union hesitates to impose sanctions on Russian energy exports. (Associated Press)
The export of energy in the field of view
At the heart of this force is Russia’s lauded oil and gas exports. Following the invasion of Ukraine on February 24, oil and gas prices rose.
“High fossil fuel prices and continued imports into Europe have provided the Kremlin with significant profits and undermined the effects of economic sanctions,” said Lauri Milivirta, a leading analyst at the Center for Energy and Clean Air Research.
His organization tracked supply patterns to determine how much money Russia has made since the start of the war, finding that Russia has made about $ 65 billion for its oil, gas and coal in the last two months alone. That’s more than $ 955 million a day.
With such money you buy an awful lot of room for maneuver. And combined with the actions of its central bank, the Russian economy is holding up.
But now the European Union is threatening to cut off energy exports, and sanctions against Russian oil are possible on the table, which will be discussed at a meeting on Wednesday.
Russia supplies about 40% of the EU’s natural gas and about 25% of its oil.
“Our goal is simple,” said Charles Michel, head of the European Council this week. “We have to break down the Russian military machine. And I am confident that the Council will inevitably impose additional sanctions, especially on Russian oil. “
The very idea of stopping Russia’s energy exports was almost unthinkable when the conflict broke out. But as the war dragged on, pressure on governments to take more action grew.
People pass by the wreckage of military vehicles in Bucha, on the outskirts of Kyiv, Ukraine, on April 30. The conflict has been going on for 10 weeks. (Emilio Morenati / Associated Press)
“Politics has become so toxic,” said Rory Johnston, managing director and market economist at Toronto-based Price Street Inc. “Russia’s activities and human rights violations in Ukraine [were] so insulting that governments around the world really had no choice. “
If Europe carries out the threat and bans Russian oil and gas, it will severely limit Russia’s ability to blunt the impact of Western sanctions.
Economic problems lie ahead
And this comes as its central bank has already warned that the country is on the verge of the worst economic downturn it has seen in decades.
“Sanctions imposed on Russia have affected the situation in the financial sector, boosted demand for foreign currency and led to sell-offs of financial assets, cash outflows from banks and growing demand for goods,” Elvira Nabiulina said in a commentary published for the first time. English on Friday.
In this photo, the head of the Russian Central Bank Elvira Nabiulina delivers her speech at the State Duma in Moscow on April 21. (Press Service of the Federal Assembly of the Russian Federation via AP)
For the second time in less than a month, Nabiulina cut interest rates in the country by three percentage points. She also warned that consumer prices could rise by as much as 23% this year.
As sanctions drag on, she said, exporters and manufacturers will have to look for new partners and new markets.
“Currently, this problem may not be so acute, because the economy still has reserves, but we see that sanctions are tightened almost every day,” she said in a speech at a joint session of the State Duma last month.
The yacht Amore Vero was shown moored in the Mediterranean resort of La Ciotat, France, on March 3. French authorities have detained a yacht linked to Igor Sechin, an ally of Putin who runs Russian oil giant Rosneft, as part of EU sanctions over Russia’s invasion of Ukraine. (Bishr Eltoni / Associated Press)
The forecast of the International Monetary Fund (IMF) is even worse.
“The main forecast is for a sharp contraction in 2022, with GDP falling by about 8.5% and a further decline of about 2.3% in 2023,” the IMF’s global forecast said.
The most difficult part of assessing the state of the Russian economy is taking into account all the unknowns; even the best experts do not know how the war will develop or how European countries will react.
Measuring this uncertainty is the unenviable task of economists like Doug Hostland, associate vice president at TD Economics.
“Because of the unprecedented nature of what’s happening, we’re really out of our sphere as forecasting economists,” he said.
Hostland wrote a research paper on the impact of the potential that Russia may not pay its debt. “Foreign investors hold only about $ 20 billion in Eurobonds issued by the Russian government, which is small,” he wrote.
But the threat of default is simply a distraction from genuine concerns, said Hostland, which is a broader European ban on Russian oil and gas.
“This is the main event,” he said. “Here are the financial markets and the whole geopolitical perspective: what will Europe do next?”
Add Comment