Here’s how Western sanctions are pummelling Russia’s economy

A month after the harshest and most coordinated sanctions by Western governments, Russia’s economy is showing signs of breaking down.

With the value of the ruble swinging against the dollar and, it is said, many educated Russians fleeing the nation, Russia’s economy is facing a contraction different from any that has ever been seen. “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 fall by 15% this year and 3% next year. Goldman Sachs predicted a smaller but still significant 10% contraction in 2022.

“Russia has not had a recession of this magnitude since the 1990s,” said Elina Ribakova, the IIF’s deputy chief economist. “This is an unprecedented shock to the Russian economy.”

As Western nations prepare for a new round of sanctions following reports of war crimes in Kyiv cities, this is how the shock is already affecting Russian shops and factories.

Factories are closing

With heavy equipment and carmakers closing down operations in Russia, the country’s manufacturing output fell at its fastest pace in March since COVID-19 first expanded two years ago. S&P’s global purchasing managers’ index noted longer delivery times, “severe material shortages” and prices for producers and consumers “soaring” at record rates.

The index, which measures manufacturing activity, fell to 44.1 in March, indicating “the sharpest drop in operating conditions in the Russian manufacturing sector for nearly two years,” S&P Global said on Friday. (A reading below 50 indicates a contraction; a reading above 50 indicates growth.)

Amid falling orders from domestic and foreign customers, “companies continued to shrink jobs, and employment fell at the fastest pace overall in nearly two years,” S&P Global said.

Empty shelves

Russian supermarkets lack essential items such as diapers, sanitary napkins and sugar. Images of empty store shelves are circulating on the Internet, with some people making comparisons with North Korea, according to UK newspapers.

The Russians began buying sugar in a panic about two weeks after the invasion, which led to empty shelves and the imposition of limits on grocery purchases by stores, the Russian newspaper Kommersant reported. The rush for the products has led the Russian government to issue public statements against panic buying.

Russia has already banned exports of sugar, wheat, rye, barley and corn over the summer to protect domestic food supplies, Reuters reported.

20% inflation

While some Western nations are struggling with inflation at between 5% and 8% this year, consumer prices in Russia are expected to rise by 20% this year, according to Capital Economics.

Some high-value electronics, as well as cars, are rising in price even faster as wealthy Russians try to buy goods with their rubles instead of running the risk of losing currency value, insider reports and the Daily Mail.

The cost of a new TV, for example, has tripled from January to March, the Daily Mail reported, with a TV now costing two-thirds of a typical monthly salary.

A Moscow stockbroker told Insider that he bought a new iPhone 13, a Samsung tablet and new tires for his family’s BMW. An investment banker said at the point of sale, “We have all these rubles, and I’d rather buy something now than see that they’re not worth it at all.”

After plummeting last month at the worth a penny, The ruble has recently regained much of its value, thanks to strict capital controls imposed by President Vladimir Putin, which limit the amount that Russians can withdraw from banks and prohibit the exchange of rubles for foreign currency.

However, the effects of sanctions on Russia are already being seen with falling consumer spending in the country, the IIF noted.

Some banks were cut

Financial sanctions have affected banks unequally. About seven major banks have 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 relate to U.S. banks and is blocked for long-term indebtedness, Ribakova noted.

“It’s the most important common bank,” with the majority of retired Russians collecting their pensions through Sberbank, Ribakova said. “Maybe that’s why the United States decided not to go against it too aggressively.”

Few want Russian oil

Russia’s fossil fuel exports, which account for 40 percent of Russia’s budget, could be lurking as Western nations call for a response to atrocities around Kyiv. The European Union banned Russian coal imports on Tuesday, and some European nations are calling for a ban on Russian oil and gas.

A total ban on Russian fuels would cost the country between $ 250 billion and $ 300 billion in export losses, according to the IIF.

Russian oil is already struggling to find buyers after the US and UK bans last month. “[O]traders are very reluctant to buy Russian oil. Anecdotally, even shipments at a very low price ($ 35 / bbl below Brent) have not found buyers at times, ”the IIF wrote in a report.

Are the sanctions effective?

While ordinary Russians suffer from a shortage of products and rising costs, it is unclear whether the sanctions will have an impact on the political class or Putin’s desire to wage war on Ukraine.

Brian Grodsky, a professor of political science at the University of Maryland County Baltimore, noted that sanctions against autocratic governments rarely work, because elites can often evade sanctions by diverting resources for their own benefit. Meanwhile, people who bear the brunt of the economic consequences have little influence with their government, with Russian protesters or those who simply discuss the war face severe punishments, such as long prison sentences.

“It will bleed the country, but we have seen authoritarian rulers continue to bleed their people,” Grodsky said of Western sanctions. “Regimes like this are tightened everywhere if it means security. If it means not cleaning the streets, not filling the potholes, they will.” Grodsky also noted that sanctions could be counterproductive if they generate strong anti-Western sentiment in the country.

But with Russia so dependent on foreign imports, sanctions will make it difficult to finance the war in Ukraine, Ribakova said.

“Even for national military production, [Russia] depends on imports from abroad. A weaker ruble makes it more difficult and direct export controls make it more difficult. There will be many value chains in Russia that will be broken, “he said.

He added: “The problem here is Russia’s ability to finance the war; more effective sanctions also make it difficult for Russia to finance the war and make it more costly for the Russian economy. If they decide to prioritize war over their own citizens , is still “to be seen”.

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