Sanctions cock Russian economic system – regardless of Kremlin spin

Nearly two months into the Russian-Ukraine war, the Kremlin has taken extraordinary steps to blunt an economic counteroffensive from the West, but the full impact of Western sanctions is starting to be felt.

As the West moved to cut off Russia’s access to its foreign reserves, limit imports of key technologies and take other restrictive actions, the Kremlin launched some drastic measures to protect the economy.

These included hiking interest rates to as high as 20 percent, instituting capital controls and forcing Russian businesses to convert their profits into rubles.

As a result, the ruble has recovered after an initial plunge, and last week the central bank reversed part of its interest rate increase.

Russian President Vladimir Putin felt emboldened and proclaimed that the country had withstood the West’s “blitz” of sanctions.

“The government wants to paint a picture that things are not as bad as they actually are,” said Michael Alexeev, an economics professor at Indiana University who has studied Russia’s economy.

A closer look, he said, shows that the sanctions are taking its toll.

The country is enduring its worst bout of inflation in two decades.

Rosstat, the state’s economic statistics agency, said inflation last month hit 17.3 percent, the highest level since 2002.

Some Russian companies have been forced to shut down. Lada auto plants have closed and reports say a tank manufacturer had to stop production due to a lack of parts.

Moscow’s mayor says the city is looking at 200,000 job losses after more than 300 companies foreign companies shut down operations while container company Maersk, UPS, DHL and other transportation firms exited Russia.

Russia is also facing a historic default on its bonds, which will likely freeze the country out of the debt markets for years.

Meanwhile, US Treasury officials say that sanctions can take months to have their full effect. It took nearly an entire year after Russia was sanctioned for seizing Ukraine’s Crimea peninsula in 2014 for its economic data to show signs of distress

“The things that we should be looking for to see if the sanctions are working are, frankly, not easy to see yet,” said David Feldman, a professor of economics at William & Mary in Virginia.

“We’ll be looking for the price of goods, the quantity of goods they are producing and the quality of goods. The last being the hardest to see and probably the last to appear.”

The Kremlin has taken extraordinary lengths to prop up the economy and its largest sector — oil and gas — is largely unaffected due to European, Chinese and Indian reliance on Russian energy.

According to a report from the Institute of International Finance, if the European Union, Britain and the US were to ban Russian oil and natural gas, the Russian economy could contract more than 20 percent this year compared to the current 15 percent prediction.

While the EU has agreed to ban Russian coal by August and is discussing sanctions on oil, there’s been no consensus.

In the meantime, Russia gets $850 million a day from Europe for its oil and gas.

The US and its allies have argued that they have tried to tailor sanctions to affect Russia’s ability to wage war and financially hit those in the highest echelons of government while leaving everyday Russians largely unaffected.

But Russians have noticed a spike in prices. Residents of one Moscow suburb said 19-liter jugs of drinking water they regularly order have become nearly 35% more expensive than before. In supermarkets and stores in their area, the price for 1 kilogram of sugar has risen 77 percent; some vegetables cost 30 to 50 percent more.

Local news sites in different Russian regions in recent weeks have reported that multiple stores are shuttered in malls after Western companies and brands halted operations or pulled out of Russia, including Starbucks, McDonald’s and Apple.

The Kremlin and its allies on social media have repeatedly pointed to the recovery of Russia’s ruble as a sign that Western sanctions aren’t working. The ruble crashed to around 150 to the dollar in the early days of the war but recovered to around 80 to the dollar, about where it was before the invasion.

This isn’t the first time Russia has thrown its full force behind defending the ruble’s value as a symbol of resistance against the West.

Throughout the 1970s and ’80s, the Soviet Union had an official exchange rate of one ruble equaling about $1.35, whereas the black-market exchange rate was closer to four rubles to the dollar.

The Russian debt crisis of the late 1990s also was caused partially by the Kremlin’s active defense of the currency’s value.

US Treasury officials have dismissed the significance of the ruble’s recovery.

Treasury Secretary Janet Yellen said that the ruble’s value has been artificially inflated by central bank intervention.

“The Russian economy is really reeling from the sanctions that we put in place,” he said.

If and how Russia wins the economic war will come down to whether the Kremlin can drive division in the West, causing the sanctions to become patchy and less effective. At the same time, Russia will have time to develop alternatives for goods it can no longer access, 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 multiple nations on board.

But Alexeev, the Indiana University professor, sees one glaring gap.

“As long as Russia can continue to sell oil and gas, they will muddle through this,” he said.

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