In the past six months, Russia has strengthened its economic defenses after Western countries punished it with sanctions for its invasion of Ukraine.
Despite the crackdown, the Kremlin continues to bring in billions in oil and gas revenues, which helped the ruble’s rally to become the best-performing currency in the world this year.
But the Russian economy is not doing well.
Western sanctions and widespread corporate exodus from Russia since Feb. 24 have devastated Russia’s economy — and the future prospects look even bleaker, according to a new report by researchers and economists at Yale University led by Yale School professor Jeffrey Sonnenfeld. of Management and senior associate dean for leadership studies. It has now become clear that the Kremlin’s “finances are in far, far more difficult circumstances than is conventionally understood” and that the large-scale “withdrawals and corporate sanctions are catastrophically crippling the Russian economy,” the researchers wrote.
On August 4, more than 1,000 companies, including US companies like Nike, IBM and Bain Consulting, restricted their activities in Russia. While some companies have stayed, the mass exodus of companies represents 40% of Russia’s GDP and is undoing 30 years of foreign investment, the Yale report said.
The international retreat is turning into a bigger crisis for the country: a collapse of foreign imports and investment.
Russia has entered a technological crisis due to its isolation from the global economy. It has problems securing critical technology and components. “The domestic economy is largely dependent on imports from various sectors…with a few exceptions,” the report says. Western export controls have largely stopped the flow of imported technology from smartphones to data servers and network equipment, putting pressure on the tech industry. Russia’s largest internet company, Yandex, Google’s version of the country, is short of semiconductor chips it needs for its servers.
At the same time, Russia’s “domestic production has come to a complete standstill — with no capacity to replace lost businesses, products and talent,” the Yale report said. Russian producers and manufacturers are unable to fill the gaps left by the collapse of Western imports. For example, the Russian telecom sector now hopes to be able to rely on China, India and Israel for the supply of 5G equipment.
In the weeks following the invasion of Ukraine, the Kremlin has largely averted a “full-scale financial crisis” thanks to swift and tough measures, such as restricting money movement out of the country and imposing an emergency rate hike of 20%, Laura Solanko, senior advisor at the Bank of Finland Institute for Emerging Economies in Transition, an organization that researches emerging economies, said: Fortune last month. The ruble even recovered from a March low, when it was valued at less than one cent.
Still, Russia’s financial markets are the worst performing in the world this year, the report said. “Putin is resorting to clearly unsustainable, dramatic fiscal and monetary interventions to correct these structural economic weaknesses,” which has led to a government deficit for the first time in years and has exhausted the Kremlin’s foreign reserves, even with continued inflows from petrodollars. the researchers wrote. The Russian government provides subsidies to companies and individuals to cushion any economic shocks caused by sanctions. This “inflated level” of fiscal and social stimulus measures, on top of military spending, is “simply unsustainable for the Kremlin,” the report said.
And the ruble’s recent dramatic turnaround does not indicate a strong Russian economy, but rather marks something much worse: the apparent collapse of foreign imports. Sergei Guriev, scientific director of the economics program at Sciences Po, in France, and a research fellow at the London-based think tank the Center for Economic Policy Research, previously told Fortune that it represents a “very bad” situation for the nation.
The EU is now phasing out Russian energy, which could hurt the Kremlin’s oil and gas profits. Such a scenario would put a strain on the Kremlin’s finances, as Western countries have frozen half of their $300 billion in foreign reserves.
Towards economic oblivion
Russia’s precarious economic position means it faces even greater long-term challenges.
Sanctions are not intended to trigger an immediate financial crisis or economic collapse, but are long-term tools to weaken a country’s economy while isolating it from global markets, the report said. And the sanctions are doing just that for Russia.
The country is losing its richest and most educated citizens as its economy crumbles. By most estimates, at least 500,000 Russians have fled the country since Feb. 24, with “the vast majority being highly skilled and highly skilled workers in competitive industries such as technology,” the report said. Many rich Russians who flee take their money with them. It is estimated that 20% of high net worth individuals in Russia have left this year. In the first quarter of 2022, official capital outflows were estimated at $70 billion by the Bank of Russia, but this figure is likely a “gross underestimate” of the actual amount of money that has left the country, the Yale team wrote.
Russian citizens will also become poorer, despite Putin’s increases in the minimum wage and pension income. A former Putin aide predicts that the number of Russians living in poverty is likely to double — and perhaps even triple, as the war continues. Russia “hasn’t seen the worst yet,” Russian political scientist Ilya Matveev . told Fortune last month.
“There is no way out of economic oblivion as long as the allied countries remain united in maintaining and increasing sanctions pressure against Russia,” the researchers wrote.
This story was originally on Fortune.com