This is how Western sanctions are hitting Russia’s economy

A month after the toughest and most coordinated sanctions by Western governments, the Russian economy is showing signs of a split.

Due to the rise of the ruble against the dollar and the many educated Russians who are reportedly fleeing the country, the Russian economy is facing a contraction, unlike any previous one. “The current crisis will destroy 15 years of economic development,” the Institute of International Finance said in a report.

According to IIF estimates, Russia’s gross domestic product will shrink by 15% this year and 3% next. Goldman Sachs has forecast a smaller but still significant 10% reduction in 2022.

“There has been no such downturn in Russia since the 1990s,” said Elina Rybakova, deputy chief economist at IIF. “This is an unprecedented shock to the Russian economy.”

As Western countries prepare for a new round of sanctions following reports of war crimes in cities around Kyiv, this is how the shock is already affecting Russian shops and factories.

Factories are closing

Due to the fact that manufacturers of heavy equipment and cars closed their activities in Russia, the country’s production in March declined at the fastest pace since the spread of COVID-19 two years ago. The S&P Global Purchasing Managers’ Index noted longer delivery times, a “sharp shortage of materials”, and prices for producers and consumers “growing” at a record pace.

The index, which measures manufacturing activity, fell to 44.1 in March, indicating “the sharpest decline in working conditions in Russia’s manufacturing sector in almost two years,” S&P Global said on Friday. (A reading below 50 indicates a reduction; an reading above 50 indicates an increase.)

Against the background of falling orders from domestic and foreign customers, “firms continued to cut jobs, while employment fell at the fastest pace in almost two years,” according to S&P Global.

A woman walks near empty shelves in a supermarket in Moscow.
A woman walks past empty shelves at a supermarket in Moscow on March 23, 2022. Russia was short of women’s sanitary pads, diapers and sugar after many foreign brands announced the suspension of their activities in the country in light of President Vladimir Putin’s full-scale military attack on Ukraine. Apart from these categories, there is no shortage of other high-speed consumer goods in Russian supermarkets.

Vlad Karkov / SOPA Images / LightRocket via Getty Images

Empty shelves

Russian supermarkets are short of basic necessities, including diapers, sanitary pads and sugar. Images of empty store shelves are spreading online, some people compare to North Korea, British newspapers report.

The Russians began to panic buying sugar about two weeks after the invasion, which led to empty shelves and restrictions on grocery shopping, according to the Russian newspaper Kommersant. The rush with food has prompted the Russian government to make public statements against the panic.

Russia has already banned exports of sugar, wheat, rye, barley and corn during the summer to protect domestic food supplies, according to Reuters.

20% inflation

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

According to Insider and the Daily Mail, some major electronics and cars are rising in price even faster as wealthy Russians try to buy goods for their rubles rather than risk losing the value of the currency.

The cost of the new TV, for example, has tripled from January to March, according to the Daily Mail, and now the TV costs two-thirds of the usual monthly salary.

One of the Moscow stock traders told Insider that he bought a new iPhone 13, a Samsung tablet and new tires for his family’s BMW. The investment banker told the publication: “We have all these rubles, and I’d rather buy something now than watch them as insignificant.”

After a sharp drop last month before the cost of one US cent, The ruble has recently recovered much of its value, thanks to tight capital controls imposed by President Vladimir Putin, which limits how much Russians can withdraw from banks and bans the exchange of rubles for foreign currency.

However, the effects of sanctions against Russia are already being seen as consumer spending in the country declines, the IIF notes.

ATMs of Tinkoff Bank in Moscow
MOSCOW, RUSSIA – MARCH 2, 2022: People stand in line at the ATM of Tinkoff Bank in central Moscow. Artsyom Geadakyan / TASS. The Russians hurried to withdraw deposits before President Vladimir Putin introduced control over capital to prevent the ruble from leaving the country.

Artsyom Geadakyan / TASS

Some banks have shut down

Financial sanctions have hit banks unevenly. About seven major banks have been disconnected from SWIFT, a system that allows banks to connect with each other, but about three-quarters of Russian banks remain connected, according to the IIF.

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

“This is the most important common bank,” said Rybakova, in which most Russian retirees collect pensions through Sberbank. “Maybe that’s why the United States decided not to go against it too aggressively.”

Few people want Russian oil

Russia’s fossil fuel exports, which account for 40 percent of Russia’s budget, could be torn apart by Western countries calling for a response to the atrocities surrounding Kyiv. The European Union on Tuesday banned the import of Russian coal, and some European countries are calling for a ban on Russian oil and gas.

According to the IIF, a total ban on Russian fuel would cost the country between $ 250 billion and $ 300 billion in export losses.

Russian oil is already having a hard time finding buyers after the US and UK bans last month. “[O]Il-traders have a significant reluctance to buy Russian oil. Anecdotally, even deliveries at a much lower price ($ 35 per barrel below Brent) sometimes do not find buyers, ”IIF writes in the report.

Russian oligarch explodes with sanctions


Are sanctions effective?

While ordinary Russians are suffering from food shortages and rising prices, it is unclear whether sanctions will affect the political class or Putin’s desire to wage war in Ukraine.

Brian Grodsky, a professor of political science at the University of Maryland in Baltimore County, noted that sanctions against autocratic governments are rarely effective because elites can often evade sanctions by draining resources for their own benefit. Meanwhile, people who bear the brunt of the economic consequences have little influence over their government, Russian protesters or those who are simply discussing war, facing severe punishment, such as long prison terms.

“It will dry up the country, but we have seen authoritarian rulers continue to expose their people,” Grodsky said of Western sanctions. “Such regimes will be squeezed out everywhere if it means security. If it means not cleaning the streets, not filling the potholes, they will do it. ” Grodsky also noted that the sanctions could potentially have the opposite effect if they provoke a lot of anti-Western sentiment in the country.

But because Russia is so dependent on foreign imports, sanctions will complicate the financing of the war in Ukraine, says Rybakova of the IIF.

“Even for domestic military production, [Russia] relies on imports from abroad. A weak ruble complicates this, and direct export control is more difficult. Russia will have a lot of value chains that are collapsing, ”she said.

She added: “The issue here is Russia’s ability to finance the war – more effective sanctions also complicate the financing of the war for Russia and cost the Russian economy. Whether they choose to prioritize war over their own citizens” be noticed.

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