NEW YORK (AP) — Nearly two months into the Russo-Ukrainian war, the Kremlin has taken extraordinary steps to repel a Western economic counteroffensive. While Russia can claim some symbolic victories, the full impact of Western sanctions is beginning to be felt in very real ways.
When the West cut off Russia’s access to its foreign exchange reserves, limited imports of key technologies and took other restrictive measures, the Kremlin took some drastic measures to protect the economy. These included raising interest rates up to 20%, imposing capital controls and requiring Russian companies to convert their profits into rubles.
As a result, the value of the ruble has recovered after an initial slump, and the central bank reversed part of its rate hike last week. Russian President Vladimir Putin felt emboldened and – echoing World War II imagery – announced that the country had withstood the West’s “sanctions blitz”.
“The government wants to paint a picture that things aren’t as bad as they actually are,” said Michael Alexeev, an economics professor at Indiana University who has studied Russia’s changing economy after the collapse of the Soviet Union.
However, a closer look reveals that the sanctions are hurting Russia’s economy:
— The country is experiencing its worst inflation in two decades. Rosstat, the state economic statistics agency, said inflation hit 17.3% last month, the highest since 2002. In comparison, the International Monetary Fund expects consumer prices in developing countries to rise 8.7% this year, versus 5.9% last year.
— Some Russian companies had to close. Several reports state that a tank manufacturer had to stop production due to missing parts. US officials point to the closure of Lada car plants – a brand of Russian company Avtovaz majority-owned by French automaker Renault – as a sign sanctions are having an impact.
– The mayor of Moscow says the city expects 200,000 job losses from the closure of foreign companies. More than 300 companies have pulled out and international supply chains have largely been shut down after container company Maersk, UPS, DHL and other carriers left Russia.
— Russia is facing a historic default on its bonds that will likely freeze the country from debt markets for years.
Meanwhile, Treasury officials and most economists are urging patience, saying sanctions will take months to take full effect. If, over time, Russia cannot source adequate amounts of capital, parts, or supplies, even more factories and businesses will close, resulting in higher unemployment.
It was nearly a full year after Russia was sanctioned for seizing Ukraine’s Crimea peninsula in 2014 before its economic data showed signs of distress, including higher inflation, a drop in industrial production and a slowdown in economic growth.
“The things we should be looking for to see if the sanctions are working are honestly not easy to see yet,” said David Feldman, an economics professor at William & Mary in Virginia. “We will search for the price of the goods, the quantity of the goods produced and the quality of the goods. The last one is the hardest to see and is likely to appear last.”
Transparency on how sanctions are affecting Russia’s economy is limited, largely because of the extraordinary efforts the Kremlin has made to prop them up. Additionally, its largest sector — oil and gas — is largely unencumbered by Europe, China, and India’s reliance on Russian energy.
Benjamin Hilgenstock and Elina Ribakova, economists at the Institute of International Finance, estimated in a report published last month that the Russian economy could shrink by more than 20% if the European Union, Britain and the US banned Russian oil and natural gas this year . Current forecasts predict a 15% decline.
While the EU has agreed to ban Russian coal by August and is discussing oil sanctions, there has so far been no consensus among its 27 nations on stopping oil and natural gas. The European Union is far more dependent on Russian supplies than Britain and the US, which have banned or phased out Russian oil. Meanwhile, Russia gets $850 million a day from Europe for its oil and gas.
The US and its allies have argued that they have sought to tailor sanctions to impair Russia’s ability to wage war and hit the highest levels of government financially, while leaving ordinary Russians largely untouched.
But the Russians have noticed an increase in prices. Residents of a Moscow suburb said that 19-liter jugs of drinking water that they regularly order have become almost 35% more expensive than before. In supermarkets and shops in their area, the price of 1 kilogram of sugar has increased by 77%; Some vegetables cost 30% to 50% more.
Local news sites in various Russian regions have reported in recent weeks that several mall stores have been closed after Western companies and brands have ceased operations or pulled out of Russia, including Starbucks, McDonald’s and Apple.
The Kremlin and its allies have repeatedly pointed to the rebound in the Russian ruble on social media as a sign that Western sanctions are not working. The ruble plummeted to about 150 to the dollar in the early days of the war, but recovered to about 80 to the dollar, about what it was before the invasion. A measure of weekly inflation by Rosstat has shown a slowdown in inflation, but that’s not surprising given the central bank has been raising interest rates as quickly as it has been.
The Russian central bank had doubled interest rates to prop up the ruble’s fall and halt the bank run. It cut the rate to 17% from 20% this month and signaled that it could lower it further.
This is not the first time that Russia has used all its strength to defend the value of the ruble as a symbol of resistance to the West. In the 1970s and 1980s, the Soviet Union had an official exchange rate of one ruble, which was about $1.35, while the black market rate was closer to four rubles per dollar. The Russian debt crisis of the late 1990s was also caused in part by the Kremlin’s active defense of the currency’s value.
US Treasury officials have dismissed the importance of the ruble’s recovery.
“Russia’s economy is really suffering from the sanctions we imposed,” said Finance Minister Janet Yellen, adding that the ruble’s value has been artificially inflated by central bank interventions.
Whether and how Russia wins the economic war will depend on the Kremlin’s ability to further divide the West, making sanctions patchy and less effective. At the same time, Russia will have time to develop alternatives for goods it no longer has access to, a concept known as import substitution.
Looking back at the 2014 sanctions, the Congressional Research Service said in January that the impact on Russia was modest only because the US effectively acted alone. This time there are several international players.
But Alexeev, a professor at Indiana University, sees a glaring gap.
“As long as Russia can keep selling oil and gas, they will muddle through,” he said.
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This story corrects the university’s name to Indiana University.
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Hussein reported from Washington. White House reporter Joshua Boak contributed from Washington.
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