Russian President Vladimir Putin has said the barrage of Western sanctions against Russia over its invasion of neighboring Ukraine has failed.
Putin said Monday the West “expects to quickly disrupt the financial and economic situation, provoking panic in the markets, the collapse of the banking system and bottlenecks in businesses.”
He added that “the strategy of the economic blitz failed” and instead led to a “deterioration of the economy in the west”.
The Russian leader spoke to senior economic officials on TV during a video call.
Western countries have imposed unprecedented sanctions on Russia’s corporate and financial system since it deployed troops to Ukraine on February 24, in what it calls a “special military operation.”
Noting that “Russia has withstood unprecedented pressure,” Putin argued that the ruble had strengthened and the country posted an all-time high trade surplus of $58 billion in the first quarter of the year.
Instead, he claimed that sanctions against the United States and its European allies backfired, accelerating inflation and causing living standards to fall.
Acknowledging a sharp rise in consumer prices in Russia, Putin said they rose 17.5 percent year-on-year in April and ordered the government to index wages and other payments to mitigate the impact of inflation on incomes.
Putin said Russia should use its budget to support the economy and liquidity in conditions of contracting lending, even if the central bank’s rate cuts make lending cheaper.
He also said that Russia should speed up the process of using national currencies in foreign trade under the new conditions.
The World Bank expects the economy to contract by more than 11 percent this year.
Must “adapt”
The Central Bank of the Russian Federation more than doubled its key interest rate to 20 percent on February 28, as the first wave of sanctions hit, before cutting it to 17 percent on April 8. She is expected to lower it further at the next board meeting on 04/29.
“We must be able to lower interest rates faster,” Central Bank governor Elvira Nabiullina said on Monday. “We must create conditions to increase the availability of credit for the economy.”
Although inflation in Russia has accelerated to its highest level since early 2002, the central bank “will definitely not try to bring it down – that would prevent companies from adjusting,” Nabiullina said.
The current spike in inflation is being driven by low supply, not high demand, and the central bank is aiming to bring it to its 4 percent target by 2024 as the economy adjusts to western sanctions, it told the House of Commons of Parliament.
“The period during which the economy can live on reserves is finite. And as early as the second and third quarters, we will enter a phase of structural change and the search for new business models,” said Nabiullina.
She also said that Moscow plans to take legal action over the freeze on gold, foreign exchange and assets held by Russian residents, adding that such a move would need to be carefully considered.
Foreign sanctions have frozen about $300 billion of the roughly $640 billion Russia held in its gold and foreign exchange reserves.
The sanctions hit the financial market in particular, “but now they will increasingly hit the economy,” said Nabiullina.
“The main problems will be related to foreign trade import and logistics restrictions, and export restrictions in the future.”
She said Russian companies need to adapt.
“Russian manufacturers have to look for new partners and logistics or switch to the production of products of previous generations,” she said.
Exporters would have to look for new partners and logistical arrangements, and “all of this will take time,” Nabiullina said.
She said the central bank is considering allowing exporters more flexibility to sell FX proceeds.
In February, Russia ordered exporters, including some of the world’s largest energy producers from Gazprom to Rosneft, to sell 80 percent of their foreign exchange earnings on the market because the central bank’s ability to intervene in foreign exchange markets was limited.
The bank could soften conditions on the timing and volume of mandatory sales, Nabiullina said.
Nabiullina’s comments “are aimed directly or indirectly at preventing the ruble from strengthening,” according to Promsvyazbank analysts.
But the Russian currency appreciated on Monday, strengthening to 81.4025 against the euro, a level last seen on April 8, helped by upcoming tax payments that will prompt export-oriented companies to convert foreign exchange earnings into rubles to meet their liabilities to settle.