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Russian economy feels consequences of sanctions despite Kremlin's denial

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By Euronews  with AP
People walk past a currency exchange office screen displaying the exchange rates in Moscow's downtown, 28 February 2022
People walk past a currency exchange office screen displaying the exchange rates in Moscow's downtown, 28 February 2022   -   Copyright  AP Photo

Nearly two months into the Russian invasion of Ukraine, the Kremlin has taken extraordinary steps to blunt an economic counteroffensive from the West.

While Russia can claim some symbolic victories, the full impact of Western sanctions is starting to be felt 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 actions, the Kremlin launched drastic measures to protect the economy.

These included hiking interest rates to as high as 20%, instituting capital controls and forcing Russian businesses to convert their profits into rubles.

As a result, the ruble's value has recovered after an initial plunge, and last week the central bank reversed part of its interest rate increase.

Russian President Vladimir Putin felt emboldened and proclaimed — evoking World War II imagery — that the country had withstood the West's "blitz" of sanctions.

"The government wants to paint a picture that things are not as bad as they actually are," said Michael Alexeev, an economics professor at the University of Indiana, who studied Russia's economy in its transition after the collapse of the Soviet Union.

Factories shut down amid worst inflation in decades

However, a closer look shows that the sanctions are taking a bite out of Russia's economy.

The country is enduring its worst bout of inflation in two decades. Rosstat, the state's economic statistic agency, said inflation last month hit 17.3%, the highest level since 2002.

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 shut down. Several reports say a tank manufacturer had to stop production due to the lack of parts.

Lada — a well-known car brand in eastern Europe made by Russian company Avtovaz and majority-owned by French automaker Renault — also had to close its plants.

Moscow Mayor Sergey Sobyanin said the city was looking at 200,000 job losses from foreign companies shutting down operations.

More than 300 companies have pulled out, and international supply chains have largely shut down after container company Maersk, UPS, DHL, and other transportation firms exited Russia.

Russia is facing a historic default on its bonds, likely freezing the country out of the debt markets for years.

Sanctions take time to hit hard

Meanwhile, most economists urge patience, explaining that sanctions take months to have full effect. If Russia can not get appropriate amounts of capital, parts or supplies over time, that will cause even more factories and businesses to shut down, leading to higher unemployment.

It took nearly an entire year after Russia was sanctioned for occupying Ukraine's Crimea peninsula in 2014 for its economic data to show signs of distress, such as higher inflation, a decline in industrial production and a slowdown in economic growth.

"The things that we should be looking for to see if the sanctions are working are, frankly, not easy to see yet," said David Feldman, a professor of economics at William & Mary in Virginia.

"We'll be looking for the price of goods, the quantity of goods they are producing and the quality of goods. The last being the hardest to see and probably the last to appear."

Transparency into how sanctions affect the Russian economy is limited, mainly because of the extraordinary lengths the Kremlin has taken to prop it up. Its most significant sector — oil and gas — is primarily unencumbered due to European, Chinese and Indian reliance on Russian energy.

Benjamin Hilgenstock and Elina Ribakova, economists with the Institute of International Finance, estimated in a report released last month that if the European Union, the UK and the US were to ban Russian oil and natural gas, the Russian economy could contract more than 20% this year. Current projections forecast a 15% contraction.

While the EU has agreed to ban Russian coal by August and is discussing sanctions on oil, there's been no consensus among the 27 nations so far about halting oil and natural gas.

Europe is far more reliant on Russian supplies than the rest of the Western allies, which have banned or are phasing out the Kremlin's oil. In the meantime, Moscow gets about €787 million a day from Europe for its oil and gas.

Prices at Russian supermarkets skyrocket

The Western allies have argued that they have tried to tailor sanctions to affect Russia's ability to wage war and financially hit those in the highest echelons of government while leaving everyday Russians largely unaffected.

But Russians have noticed a spike in prices. In supermarkets and stores in their area, the price for 1 kilogramme of sugar has grown by 77%; some vegetables cost 30% to 50% more. Residents of one Moscow suburb said 19-litre jugs of drinking water they regularly order have become nearly 35% more expensive than before.

In recent weeks, local news sites in different Russian regions have reported that multiple stores are shuttered in malls after Western companies and brands halted operations or pulled out of Russia, including Starbucks, McDonald's, and Apple.

This is not the first time Russia has thrown its full force behind defending the ruble's value as a symbol of resistance against the West.

Throughout the 1970s and '80s, the Soviet Union had an official exchange rate of one ruble equaling about $1.35, whereas the black-market exchange rate was closer to four rubles to the dollar.

The Russian debt crisis of the late 1990s also was caused partially by the Kremlin's active defence of the currency's value.

US Treasury officials have dismissed the significance of the ruble's recovery.

"The Russian economy is really reeling from the sanctions that we put in place," Treasury Secretary Janet Yellen said, adding that central bank intervention has artificially inflated the ruble's value.

If and how Russia wins the economic war will come down to whether the Kremlin can drive division in the West, causing the sanctions to become patchy and less effective.

At the same time, Russia will have time to develop alternatives for goods it can no longer access, 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 modest only because the US effectively acted alone. This time, there are multiple international actors.

But Alexeev, the University of Indiana professor, sees one glaring gap.

"As long as Russia can continue to sell oil and gas, they will muddle through this," he said.