A month after the toughest and most coordinated sanctions by Western governments, Russia’s economy is showing signs of collapsing.
With the ruble fluctuating in value against the dollar and many educated Russians reportedly fleeing the country, Russia’s economy is poised for a contraction like never 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 shrink by 15% this year and 3% next year. Goldman Sachs forecast a smaller but still significant decline of 10% in 2022.
“Russia has not experienced a recession of this magnitude since the 1990s,” said Elina Ribakova, deputy chief economist at the IIF. “This is an unprecedented shock to the Russian economy.”
As Western nations brace for another round of sanctions following reports of war crimes in cities around Kyiv, here’s how the shock is already affecting Russian businesses and factories.
close factories
In March, as heavy machinery and automakers shut down operations in Russia, the country’s manufacturing output fell at its fastest pace since COVID-19 first spread two years ago. The S&P Global Purchasing Managers’ Index noted longer delivery times, “serious material shortages” and prices for producers and consumers “skyrocketed” to record highs.
The index, which measures manufacturing activity, fell to 44.1 in March, signaling “the sharpest decline in operating conditions in Russia’s manufacturing sector in nearly two years,” S&P Global said on Friday. (A reading below 50 indicates contraction; a reading above 50 indicates growth.)
Amid a drop in orders from domestic and overseas customers, “firms continued to cut jobs, with employment falling at the fastest pace in nearly two years,” S&P Global said.
A woman walks past empty shelves at a supermarket in Moscow, March 23, 2022. Russia has seen shortages of sanitary napkins, diapers and sugar after many foreign brands announced they would halt operations in the country amid President Vladimir Putin’s full-blown military attack on Ukraine. In addition to these categories, there was no shortage of other fast-moving consumer goods in the supermarkets of Russia. Vlad Karkov/SOPA Images/LightRocket via Getty Images
empty shelves
Russian supermarkets are short of essential items such as diapers, sanitary napkins and sugar. Images of empty store shelves are circulating the internet, according to British newspapers, with some people drawing comparisons to North Korea.
Russians began panic-buying sugar about two weeks after the invasion, resulting in empty shelves and the imposition of purchase restrictions on groceries by stores, Russia’s Kommersant newspaper reported. The rush for products has prompted the Russian government to make public statements against hoarding.
The Russian government had this message for the public today regarding sugar and buckwheat: “Don’t panic buy. There is enough for everyone.” Not in this Moscow supermarket. pic.twitter.com/U8evl1qcZn
— Steve Rosenberg (@BBCSteveR) March 21, 2022
Russia has already banned summer exports of sugar, wheat, rye, barley and corn to protect the domestic food supply, Reuters reported.
20% inflation
While some western nations are grappling with inflation of between 5% and 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 expensive electronics and cars are rising in price even faster as wealthy Russians seek to buy goods with their rubles rather than risk the currency depreciating.
The cost of a new TV, for example, tripled from January to March, the Daily Mail reported, with a TV now costing two-thirds of a typical monthly salary.
A stock trader in Moscow told Insiders he’s bought a new iPhone 13, a Samsung tablet and new tires for his family’s BMW. An investment banker told the outlet, “We have all these rubles, and I’d rather buy something now than watch them become utterly worthless.”
After falling to around one US cent last month, the ruble has recently regained much of its value thanks to tight capital controls imposed by President Vladimir Putin, which limit how much Russians can withdraw from banks and the Exchange of rubles into foreign currencies prohibit currency.
Still, the impact of sanctions on Russia is already being seen as consumer spending in the country plummets, the IIF noted.
MOSCOW, RUSSIA – MARCH 2, 2022: People queue at a Tinkoff Bank ATM in central Moscow. Artyom Geodakyan/TASS. Russians rushed to withdraw deposits before President Vladimir Putin introduced capital controls to prevent rubles from leaving the country. Artyom Geodakyan/TASS
Some banks failed
Financial sanctions have hit banks unequally. About seven major banks have been disconnected from SWIFT, the system that allows banks to communicate 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 cooperate with banks in the US and is barred from long-term borrowing, Ribakova noted.
“It’s the main common bank,” Ribakova said, and most retired Russians get their pensions through Sberbank. “Maybe that’s why the US decided not to be too aggressive about it.”
Few want Russian oil
Russia’s fossil fuel exports, which account for 40% of Russia’s budget, may be on the brink as Western nations demand a response to the atrocities surrounding Kyiv. The European Union on Tuesday banned Russian coal imports and some European nations are calling for bans on Russian oil and gas.
According to the IIF, a total ban on Russian fuels would cost the country $250 billion to $300 billion in lost exports.
Russian oil is already struggling to find buyers after being banned by the US and UK last month. “[O]il traders are very reluctant to purchase Russian oil. Anecdotally, even deliveries at a heavily discounted price ($35/bbl below Brent) have failed to find buyers at times,” the IIF wrote in a report.
Russian oligarch blasts sanctions 05:51
Are the sanctions effective?
As ordinary Russians suffer from a lack of products and rising costs, it’s not clear whether the sanctions will affect the political class or Putin’s desire to wage war in Ukraine.
Brian Grodsky, a political science professor at the University of Maryland Baltimore County, pointed out that sanctions against autocratic governments rarely work, as elites can often evade sanctions by siphoning resources for their own benefit. Meanwhile, the people who are bearing the brunt of the economic fallout have little leverage over their government, while Russian protesters or those who simply discuss the war face severe penalties, including lengthy prison terms.
“It will bleed the country dry, but we’ve seen authoritarian rulers continue to bleed their people dry,” Grodsky said of Western sanctions. “Regimes like this will push from everywhere when it comes to security. If it means not cleaning the streets, not filling the potholes, they will.” Grodsky also noted that sanctions could potentially backfire if they incited strong anti-Western sentiment in the country.
But since Russia is so dependent on foreign imports, sanctions will make it harder to fund the war in Ukraine, the IIF’s Ribakova said.
“Also for domestic military production [Russia] dependent on imports from abroad. A weaker ruble makes it harder, and direct export controls make it harder. There will be many value chains inside Russia that will collapse,” she said.
She added: “The problem 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 costly for the Russian economy. Whether they decide to prioritize war over their own citizens remains to be seen.”
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