Russia’s economy is being severely affected by Western sanctions. The ruble is falling, foreign companies are fleeing, and prices will rise sharply. Many familiar products could disappear from shops, and middle-class accomplishments like foreign vacations may be in jeopardy.
Russia’s economy will experience a worsening of the stagnation, which began long before the invasion of Ukraine .
However, economists believe that a complete collapse is unlikely. Richard Connolly, an expert in Russian economics at the Royal United Services Institute, said that Russia has created “an economy that’s geared to conflict” despite the harsh financial sanctions.
The Russian government’s involvement in the economy, and the money it still makes from oil and gas exports, even with bans by the U.S. or Britain will help to ease the blow for many workers and pensioners in a country that has suffered three severe financial crises over the past 30 years. Economists also point out that Iran, which is a smaller, less diverse economy, has not been harmed by sanctions for years due to its nuclear program.
The Russian currency has plunged spectacularly which will increase import prices at a time when inflation was already high at 9%. On February 23, the day prior to the invasion, it took 80 rubles for one dollar. It was at 119 by Thursday morning, even though Russia’s central banking took drastic measures to stop it from plunging to 20%.
Marina Albee, the owner of the Café Botanikavegetarian in St. Petersburg’s historic center, has heard from her vegetable supplier that prices are going up by 10% to 50%. Other suppliers are unable to say how much.
The cafe imports dried seaweed from Japan and smoked tofu form Japan. It also has mini asparagus from Chile and broccoli from Benin.
Albee stated, “We are waiting for the tsunami” to strike — the tsunami being an increase in prices for everything we buy. “We must keep an eye on the situation, and if necessary, remove those dishes from the menu.
She said, “We can reengineer the menu to make more Russian-based meals.” “You need to be quick on the feet.” Albee said that after two years of being without tourists due to the COVID-19 pandemic “it takes a lot for us to get scared.”
While sanctions have temporarily frozen large amounts of Russia’s foreign currencies reserves, the state’s finances are in good condition with low debt. The government’s creditors when it does have to borrow are mostly domestic banks and not foreign investors, who could abandon it during a crisis. This week, the government announced support for large companies that are crucial to the economy.
Because of uncertainty surrounding the impact of President Vladimir Putin’s war and additional sanctions, estimates of Russia’s short-term economic growth are not always accurate.
“Russians are going to be much poorer — they won’t have the cash to travel to Turkey or send their children to school in Europe — and even then, due to Putin, they won’t be welcomed,” stated Tim Ash, BlueBay Asset Management senior emerging market sovereign analyst.
He predicts that economic growth will drop 10% while economists elsewhere see a drop as low as 2%, or somewhere in between.
The long-term prospects of a growing economy are poor — because of enduring reasons that predate war: Few favored insiders hold major companies and sectors. This results in a lack competition and new investment. Russia has not been able to diversify from its dominant oil-and-gas sector. In 2020, the per capita income was about the same as it was in 2014.
The collapse of the Soviet Union has seen foreign investment grow over 30 years and many jobs have been lost. Apple, Volkswagen and Ikea are among the big corporations that have shut down plants or halted sales. Meanwhile, BP, Exxon, and Shell, energy giants, have stated they will cease buying Russian oil and gas and exit any partnerships with them.
Fitch, a ratings agency, lowered its credit rating for the country to junk status on Wednesday and warned of a default on sovereign debt.
The central bank intervened to support the ruble and the banking sector, limit withdrawals in foreign currencies and close the stock market for almost two weeks. Foreign investors are also being prevented from fleeing by the government. These restrictions are meant to protect the financial system from total collapse but also prevent the economy from trading or investing that could drive growth.
The Kremlin anticipated that such measures would be the West’s main weapon in any conflict, after it was hit with sanctions for its 2014 seizing of the Crimea peninsula. It responded by creating what Connolly (associate fellow at the Royal United Services Institute, and author of a book about Russia’s response) calls the “Kalashnikov economy”, a reference to Russia’s military rifle.
He said it’s “a durable, but in some ways primitive” system that is based on low levels of debt, government control over most of the banking sector and a central bank capable of intervening to prop up the currency.
Although trade will decline and there will be fewer goods, the Russian government will still earn more from the oil it sells. The dollar-priced oil means that the currency will be less valuable. Connolly believes Russia is receiving 2.7 times more oil from Russia than it did in 2019, a figure that could be used to pay salaries and pensions.
Although the U.S. and British have said that they would ban Russia’s relatively small oil imports, Europe, which is more dependent upon Russian energy_, has not moved.
Connolly stated that the current situation has “a lot of holes” and that Russia will exploit these and find a way to continue.
“I don’t think they will have a great time. He said that he believed they had the resources to solve these problems.
It is difficult to predict the long-term effects of Putin’s government on domestic politics. Simon Commander, Altura Partners managing partner and former World Bank official says that “buoyant popularity” for a regime fueled with increased prosperity is unachievable.
He said, “That may not translate to open dissension or revolt, but it will hardly boost support for the autocrat.”