Here’s how Western sanctions hit Russia’s economy

One month after the most severe and coordinated sanctions by Western governments, Russia’s economy is showing signs of cracking.

With the ruble fluctuating in value against the dollar and many well-educated Russians allegedly fleeing the nation, Russia’s economy is facing a contraction unlike any it has ever seen before. “The current crisis will wipe out 15 years of economic development,” the Institute of International Finance said in a report.

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

“Russia has not had 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.”

While Western nations are preparing for a further round of sanctions following reports of war crimes in cities around Kiev, this is how the shock is already affecting Russian shops and factories.

Factories close

With heavy equipment and automakers shutting down their operations in Russia, the country’s output fell in March at the fastest rate since COVID-19 first spread two years ago. The S&P Global Purchasing Managers’ Index noted longer delivery times, “severe material shortages” and prices for both producers and consumers “soaring” at record speeds.

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

Amid a decline in orders from domestic and foreign customers, “firms continued to cut back, with employment falling at the fastest pace 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 in a supermarket in Moscow on March 23, 2022. There has been a shortage in Russia of women’s sanitary napkins, nappies and sugar after many foreign brands announced that they were ceasing their activities in the country in the light of President Vladimir Putin a complete military attack on Ukraine. Apart from these categories, there has been no shortage of other fast consumer goods in supermarkets in Russia.

Vlad Karkov / SOPA Images / LightRocket via Getty Images

Empty shelves

Russian supermarkets are missing important goods, including nappies, sanitary napkins and sugar. Pictures of empty store shelves are circulating on the internet, with some people comparing to North Korea, according to British newspapers.

The Russians began to panic about buying sugar about two weeks after the invasion, leading to empty shelves and the introduction of purchase limits for groceries in stores, the Russian newspaper Kommersant reported. The haste with products has prompted the Russian government to issue public statements against panic buying.

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

20% inflation

While some Western nations are struggling with inflation between 5% and 8% this year, consumer prices in Russia are expected to rise by a staggering 20% ​​this year, according to Capital Economics.

Some major ticketing electronics as well as cars are rising in price even faster as wealthy Russians try to buy goods with their rubles instead of risking the currency losing value, according to reports from Insider and the Daily Mail.

The price of a new TV, for example, has 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 was buying a new iPhone 13, a Samsung tablet and new tires for his family’s BMW. An investment banker told the business: “We have all these rubles and I would rather buy something now than watch them become completely worthless.”

After the plunge last month value of one US cent, The ruble has recently regained much of its value, thanks to strict capital controls introduced by President Vladimir Putin, which limits how much Russians can withdraw from banks and bans the exchange of rubles into foreign currency.

Yet the effects of sanctions against Russia are already being seen with declining consumer spending in the country, the IIF noted.

Tinkoff Bank ATMs in Moscow
MOSCOW, RUSSIA – MARCH 2, 2022: People queue at a Tinkoff Bank ATM in central Moscow. Artyom Geodakyan / TASS. The Russians hurried to withdraw deposits before President Vladimir Putin introduced capital controls to prevent rubles from leaving the country.

Artyom Geodakyan / TASS

Some banks interrupted

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 about three-quarters of Russia’s banks remain connected, according to the IIF.

Sberbank, the largest bank in the region, can continue most of its operations but cannot engage with US banks and is blocked from long-term borrowing, Ribakova noted.

“It is the main joint bank,” with most retired Russians collecting their pensions through Sberbank, Ribakova said. “That may be why the United States decided not to go too aggressive against it.”

Few want Russian oil

Russia’s exports of fossil fuels, which account for 40% of Russia’s budget, may be on the wane as Western nations demand an answer to the atrocities surrounding Kiev. The European Union on Tuesday banned Russian coal imports, and some European nations are calling for a ban on Russian oil and gas.

A total ban on Russian fuel would cost the country $ 250-3 trillion in export losses, according to the IIF.

Russian oil is already having a hard time finding buyers following a ban from the US and the UK last month. “[O]il dealers have considerable reluctance to acquire Russian oil. “Anecdotally, even shipments at a greatly reduced price ($ 35 / barrel below Brent) have at times not found buyers,” IIF wrote in a report.

Russian oligarch blows sanctions


Are the sanctions effective?

While ordinary Russians are suffering from a shortage of products and rising costs, it is not clear whether sanctions will have an impact on the political class or Putin’s desire to wage war in Ukraine.

Brian Grodsky, a professor of political science at the University of Maryland Baltimore County, pointed out that sanctions against autocratic governments rarely work because elites can often evade sanctions by sucking up resources for their own benefit. Meanwhile, the people who bear the bulk of the economic downturn have little influence over their government, with Russian protesters or those merely discussing the war facing harsh punishments, such as long prison sentences.

“It will bleed the country dry, but we have seen authoritarian rulers continue to bleed their people,” Grodsky said of Western sanctions. “Regimes like this will push everywhere if it means security. If it means not cleaning the streets, not filling the gaps, then they do it.” Grodsky also noted that sanctions could potentially backfire if they drive a lot of anti-Western sentiment in the country.

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

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

She added: “The issue 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 expensive for the Russian economy. Whether they decide to prioritize the war over their own citizens remains . to be seen.”

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