NEW YORK — Nearly two months into the Russian-Ukrainian war, the Kremlin has taken extraordinary steps to blunt an economic counteroffensive from the West. While Russia may claim some token victories, the full impact of Western sanctions is beginning to be felt in very real ways.
As the West attempted to cut off Russia’s access to its foreign exchange reserves, limit imports of key technologies and take other restrictive measures, the Kremlin launched drastic measures to protect the economy. These included raising interest rates to as much as 20%, instituting capital controls and requiring Russian companies to convert their profits into roubles.
As a result, the value of the ruble has recovered from an initial dip, and last week the central bank reversed part of its interest rate hike. Russian President Vladimir Putin felt emboldened and proclaimed – evoking the images of World War II – that the country had withstood the West’s sanctions ‘blitz’.
“The government wants to show that things aren’t as bad as they really are,” said Michael Alexeev, an economics professor at Indiana University who has studied the Russian economy in its post-transition the collapse of the Soviet Union.
A closer look, however, shows that the sanctions are undermining the Russian economy:
— The country is experiencing its worst surge in inflation in two decades. Rosstat, the state economic statistics agency, said inflation hit 17.3% last month, its highest level since 2002. By comparison, the International Monetary Fund expects Consumer prices in developing countries are rising 8.7% this year, compared to 5.9% last year.
— Some Russian companies have been forced to close. Several reports indicate that a tank manufacturer had to stop production due to a lack of parts. US officials are pointing to the closure of Lada car factories – a brand made by Russian company Avtovaz and majority-owned by French automaker Renault – as a sign that the sanctions are having an effect.
– The mayor of Moscow said the city is considering 200,000 job losses due to the closure of foreign companies. More than 300 companies pulled out and international supply chains largely shut down after container company Maersk, UPS, DHL and other shipping companies left Russia.
— Russia is facing a historic default on its bonds, which will likely freeze the country out of debt markets for years.
Meanwhile, Treasury officials and most economists are urging patience, saying the sanctions take months to take full effect. If Russia cannot obtain adequate amounts of capital, parts, or supplies over time, it will shut down even more factories and businesses, leading to increased unemployment.
It took nearly a year after Russia was sanctioned for seizing Ukraine’s Crimean peninsula in 2014 for its economic data to show signs of distress, such as higher inflation, a drop in industrial production and slower economic growth.
“The things we should be looking for to see if sanctions are working are, frankly, not yet easy to see,” said David Feldman, professor of economics at William & Mary in Virginia. “We will look for the price of the goods, the quantity of goods they produce and the quality of the goods. The last being the hardest to see and probably the last to appear.
Transparency on how the sanctions affect the Russian economy is limited, in large part because of the extraordinary efforts the Kremlin has put into supporting it. In addition, its most important sector – oil and gas – is largely cleared due to the dependence of Europe, China and India on Russian energy.
Benjamin Hilgenstock and Elina Ribakova, economists at the Institute of International Finance, estimated in a report published last month that if the European Union, Britain and the United States banned Russian oil and natural gas, the Russian economy could contract by more than 20% this month. year. Current projections call for a contraction of 15%.
While the EU has agreed to ban Russian coal by August and is discussing oil sanctions, there has so far been no consensus among its 27 countries on halting oil and natural gas. The European Union is far more dependent on Russian supplies than Britain and the United States, which have banned or are phasing out Russian oil. In the meantime, Russia receives $850 million a day from Europe for its oil and gas.
The United States and its allies have argued that they have tried to tailor the sanctions to affect Russia’s ability to wage war and financially hit the highest echelons of government, while leaving ordinary Russians largely untouched. .
But the Russians have noticed a spike in prices. Residents of a Moscow suburb said the 19-litre jugs of drinking water they regularly ordered had become almost 35% more expensive than before. In supermarkets and stores in their area, the price of 1 kilogram (2.2 pounds) of sugar has increased by 77%; some vegetables cost 30-50% more.
In recent weeks, local news sites in different Russian regions reported that several stores were closed in shopping malls 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 crashed to around 150 to the dollar at the start of the war, but recovered to around 80 to the dollar, about where it was before the invasion. A weekly inflation gauge by Rosstat showed inflation slowing, but that’s no surprise after the central bank raised interest rates as quickly as it did.
Russia’s central bank had doubled its benchmark interest rate to support the ruble’s fall and stop bank runs. He lowered the rate to 17% from 20% this month and signaled that he could lower it further.
This is not the first time that Russia has thrown its weight 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 equaling around $1.35, while the black market exchange rate was closer to four rubles to the dollar. The Russian debt crisis of the late 1990s was also caused in part by the active defense of the value of the currency by the Kremlin.
US Treasury officials dismissed the significance of the ruble’s recovery.
“The Russian economy is really in shock from the sanctions we have put in place,” Treasury Secretary Janet Yellen said, adding that the value of the ruble had been artificially inflated by the central bank’s intervention.
If and how Russia wins the economic war will depend on the Kremlin’s ability to divide the West, which will make sanctions unequal and less effective. At the same time, Russia will have time to develop alternatives for goods it no longer has access to, a concept known as import substitution.
Looking back on the 2014 sanctions, the Congressional Research Service said in January that the impact on Russia was modest only because the United States had effectively acted alone. This time, the international actors are multiple.
But Alexeev, a professor at Indiana University, sees a glaring shortcoming.
“As long as Russia can continue to sell oil and gas, it will get by,” he said.