International sanctions against Russia following its invasion of Ukraine have triggered what some analysts have dubbed an economic cold war.
While US officials like to portray their sanctions as devastating foreign policy tools, the bulk of the West’s economic countermeasures continue to target wealthy elites and their corporations, which are generally well insulated from the globalized economy.
The sanctions fall far short of a ban on Russian energy exports that would traumatize the heavily dependent European economy and exacerbate already skyrocketing energy prices at a time when US inflation is hitting a 40-year high.
Despite this, sanctions against Russia’s central bank have cut Moscow off from its reserves. Russia also had problems finding buyers for its gold.
The sanctions also hit ordinary Russians, bringing back memories of the country’s economic hardship in the past.
Here are five ways US sanctions are hurting Russia.
Russia’s GDP is shrinking
According to economists at JP Morgan, Russia’s gross domestic product (GDP) could shrink by as much as 7 percent for the year and 35 percent for the quarter. They say that inflation in Russia could reach 14 percent by the end of the year.
According to the International Monetary Fund (IMF), lower business confidence and increased investor uncertainty are likely to weigh on asset prices and boost capital flows out of the country. The flight of numerous international companies, following the orders of their governments, is also having a negative impact on the lifestyle of individual Russians.
“Fortunately, my life hasn’t changed drastically yet, but I’m being denied the usual things,” said a Russian woman who asked to remain anonymous for fears for her safety, in an interview via a social media channel. “I can no longer use Apple Pay, watch Netflix, buy anything from foreign websites and need a VPN [virtual private network] use Instagram. Prices are rising for almost everything, especially imported goods.”
“Deep down, I feel very insecure,” she added. “Every day there is something new that can be taken away, blocked or restricted. It’s really hard to plan anything these days.”
Sanctions have wreaked havoc in Russia’s financial sector
Russia’s central bank is struggling to stabilize the ruble’s value and prevent interest rates from soaring without access to about half of its foreign exchange reserves.
The Russian stock market has also been closed for weeks, putting domestic company shares on hold, which are likely to fall once trading resumes.
Russia has so far avoided defaulting on its external debt, even making payment for Eurobonds in US dollars instead of rubles, which are becoming increasingly valuable in Russia.
“The problem for Russia is that if you default, you might trick your creditors into recovering your wealth,” said Chris Miller, a visiting fellow at the American Enterprise Institute (AEI), a right-wing think tank.
“For the Russian state, this is less of an issue because it is difficult for investors to appropriate state assets because they are granted sovereign immunity in most jurisdictions, but if you are a large Russian state company like Gazprom or Rosneft, in addition to the sizable ones assets in Russia, you also have assets abroad,” he continued.
Russian industry and trade were shaken
Russia has slowly integrated into globalized supply chains since the 1990s in sectors such as technology and aviation. Lack of access to parts manufactured, designed, or controlled by intellectual property laws in the United States and elsewhere is now causing disruption.
“We have already seen this in automobile production, for example. About half of Russian automakers have closed their factories because they can’t get the components they need,” said AEI’s Miller. “I think we will see more and more of this in different sectors of Russian industry as supply chain issues accumulate over time.”
A key component used in various industries are semiconductors, the computer chips that store and process data in products ranging from smartphones to weapon systems. Russia gets most of its chips from China, but many analysts say these are inferior to the standards of US and other East Asian hardware.
“The Taiwanese make the most advanced logic chips, followed by the South Koreans, followed by Intel in the US,” Miller said. “Russia’s domestic political capabilities lag behind by more than a decade.”
Even advanced chips made in China are still subject to US export controls as these chips are made using imported US technology. It’s possible manufacturers are trying to illegally circumvent these controls, but leading Chinese chipmaker Semiconductor Manufacturing International Corporation largely complied when similar sanctions were imposed on Chinese telecom giant Huawei in 2019.
The sanctions have cultural implications
The current crisis brings back memories for many Russians of the 1990s, when the country faced a prolonged depression as part of the economic restructuring that followed the collapse of the Soviet Union.
Between 1989 and 1996, Russia’s GDP fell by more than 40 percent, according to the United Nations Conference on Trade and Development. It got so bad that in 1995 the IMF had to stabilize the Russian ruble with tight monetary controls and nominal exchange rate targets.
“People in Russia used to face so many economic crises,” said Ekaterina Selyuzhitskaya, a Russian citizen now living in Dongguan City, China and working part-time as a Russian-Chinese translator, in an interview. “We hardly remember times when we didn’t have an economic crisis.”
“Now the people I know are fine,” she added. “Of course they are afraid for their future and some of them could lose their jobs. And the future is not clear.”
Russian public sector employees enjoy a greater degree of financial stability than private sector workers, especially those working for international companies, Selyuzhitskaya pointed out.
“Buying and selling parts is becoming more and more complicated,” she said. “When people cooperate with China, they prefer to pay in yuan and avoid paying in dollars because currency operations in dollars are too complicated now and the yuan is quite strong.”
The sanctions have led to an exodus of Western companies
A mass exodus of multinational companies from Russia has also revived memories of the Soviet-era limitations of the country’s economy. Dozens of companies have announced plans to cease operations in Russia, citing both the moral implications of operating under Putin’s regime and the risks of violating sanctions.
Russians are now largely cut off from American financial services, technology and entertainment companies like Apple, Netflix, Visa and Mastercard. American brands like McDonalds and Levis, whose overcoming of the Iron Curtain ushered in a new era of economic liberalization in Russia, have also left.
While the US and its partners are likely to reverse some of the economic sanctions against Russia at some point in the future, some of the business ties severed this year may never be restored.
The Russian government has announced plans to seize the assets of all international companies leaving the country in protest during the war, including their intellectual property. That means Russia could help state-owned companies to produce knockoff versions of products and companies that no longer operate in the country and use the same branding as domestic materials.