The rebound in the Russian ruble is masking the devastating effects of Western sanctions – but it won’t make Putin seek peace
Six weeks after the start of the war with Ukraine, Russia’s economy seems to be holding up better than originally expected.
Despite unprecedented sanctions and an exodus of Western companies, the Russian ruble – a closely watched economic indicator – has recouped all of its earlier losses. Meanwhile, billions of dollars from energy sales continue to flow to Europe and elsewhere, which has allowed the Kremlin to continue paying off its international debt.
However, Russia’s seemingly robust financial position is something of a chimera, masking the real pain Russians are experiencing and the strain on the economy.
I have been a keen observer of Russia for over 30 years. I am struck by the tension between Russia’s integration into the world economy and its growing domestic authoritarianism.
Russia’s integration makes the sanctions stinging. Their authoritarianism makes them irrelevant.
Fast sanctions
After the invasion of February 24, 2022, comprehensive and deep sanctions were immediately imposed on Russia by more than 50 countries.
Notably, joining the sanctions were historically neutral Switzerland – a key location for many of Russia’s foreign banking assets – and Taiwan, the source of 60% of the world’s microchips.
The sanctions had an immediate and dramatic impact. The ruble lost 50% of its value in a matter of days as Russians queued to withdraw dollars and rubles from their bank accounts. Panic buying of sugar, buckwheat and other essentials led to empty shelves and in-store scuffles. The official sanctions were followed by a wave of foreign companies deciding to stop their activities in Russia or to withdraw altogether.
The ruble is recovering
But the bleaker predictions about how this would affect Russia have not come true.
For example, after falling to a record low of 136 to the US dollar on March 10, 2022, the ruble recovered to 83 to the dollar by April 11, roughly the same as before the invasion. This is due to the strict rules of the Central Bank of Russia, which requires exporters to convert 80% of their dollar earnings into rubles, bans individuals from taking more than $10,000 out of the country, and imposes a 12% tax on dollar purchases.
The story goes on
Likewise, Russia made its debt payments in March, and although rating agency S&P declared it a “selective default” in April after paying bondholders in rubles rather than dollars, it still hasn’t fully defaulted on its debt.
While some individual countries such as the US, UK and Lithuania have announced they will stop buying Russian oil and gas, the European Union cannot afford such a move until the alternative fuel supply infrastructure is in place. And China and India remain big buyers of Russian oil.
Additionally, any decline in sales volume due to sanctions was more than offset by a 60% rise in oil prices.
As a result, Russia continues to rake in $35 billion a month from its oil and gas exports, more than enough to meet its international debt obligations — and keep the war going.
Rising inflation
However, the ruble is no longer a convertible currency, so its exchange rate is an artificial indicator that says little about the economy. Its apparent stabilization is a fallacious measure and does not reflect the traumatic shock the real economy is experiencing from the sanctions.
The rising cost of living, on the other hand, is more revealing. This is something the Kremlin is probably concerned about because of the potential for social unrest.
Russian consumer prices rose 7.6% in March, up 16.7% yoy. Part of this is due to rising food prices around the world even before the Ukraine war. The United Nations Food Price Index rose 34% in March from a year earlier.
Russian Prime Minister Mikhail Mishustin offered a glimpse of how bad things really are when he told the State Duma on April 7, 2022 that the crisis was the worst Russia had faced in 30 years. The economy will take six months to adjust, he added – which could turn out to be an overly optimistic assessment. The European Bank for Reconstruction and Development expects the Russian economy to contract by 10% this year.
Soften the blow to workers
The potential for rising unemployment is another concern.
Analysts polled by Bloomberg are forecasting that Russian unemployment will top 9% in the coming months, the first time it has been this high in more than a decade.
To soften the blow, the government is spending 40 billion rubles (about $470 million) to subsidize wages in industries hit by the sanctions. A total of around 400,000 employees are affected.
Meanwhile, the fate of thousands of workers at foreign-owned companies that are now closed remains uncertain. Russia has yet to follow up on its threats to nationalize its assets, but some companies, such as local franchisees of retail outlets like McDonald’s, may seek to reopen under Russian management and build new brands and supply chains. According to reports, the Russian subsidiaries of the leading western accounting firms plan to continue under new names.
A key safety valve for Russian workers is the presence of around 10 million migrant workers, 15% of the total workforce, who are usually the first to be laid off. The drop in remittances they send home will be a blow to Central Asian economies.
Technical problems
Russian consumers and businesses are also facing shortages of a variety of commodities, including pharmaceutical products such as asthma inhalers and medicines for Parkinson’s disease. Even copier paper, which has tripled in price in the past month, has become harder to come by because of a ban on imports of key chemicals, leading to calls for college entrance exams to be suspended this year.
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It looks particularly serious in the field of information technology. Russian companies and state-owned enterprises remain heavily dependent on imported hardware and software – despite a 2017 order to wean themselves off Western software. As part of the sanctions, companies like Microsoft and Google have stopped doing business in Russia, leaving local managers scrambling to find alternative software.
To make matters worse, tens of thousands of IT professionals are leaving Russia because they can easily work abroad, free from the economic and political restrictions of life in Russia. To stem the flow, Prime Minister Mishustin signed a decree on March 29, 2022, exempting IT professionals from the draft.
A bleak future
The aim of the western powers in imposing sanctions was to increase pressure on the government in the hope that President Vladimir Putin will see that the costs of continuing the war in Ukraine outweigh the benefits. Unfortunately, this strategy may exaggerate the extent to which Putin includes the living standards of ordinary Russians in his decision-making calculus.
In addition, the war and resulting sanctions appear to further strengthen stubborn nationalist elements in the Russian government, with some critics calling for a reintroduction of Soviet-style central planning and military mobilization of the economy.
Simply put, the future looks bleak for Russian citizens, who will continue to bear the brunt of the sanctions. Putin apparently expects them to tighten their belts until he achieves his “victory” – which is increasingly seen in Russia as a war with the “collective West” and not just Ukraine.
This article is republished by The Conversation, a nonprofit news site dedicated to exchanging ideas from academic experts. It was written by: Peter Rutland, Wesleyan University.
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Peter Rutland does not work for, does not consult for, own any shares in, or receive funding from any company or organization that would benefit from this article, and has disclosed no relevant affiliations other than his academic appointment.