NEW YORK (AP) — Nearly two months into the Russian-Ukraine war, the Kremlin has taken extraordinary measures to soften an economic counter-offensive from the West. While Russia may claim some symbolic victories, the full impact of Western sanctions is starting to be felt in very real ways.
When the West wanted to cut off Russia’s access to its foreign reserves, restrict the import of key technologies and take other restrictive measures, the Kremlin launched some drastic measures to protect the economy.† Those include raising interest rates by up to 20%, instituting capital controls and forcing Russian companies to convert their profits into rubles.
As a result, the ruble’s value has recovered after a first plunge, and last week the central bank reversed part of its rate hike† Russian President Vladimir Putin felt encouraged and proclaimed — evocative of World War II — that the country had survived the ‘blitz’ of Western sanctions.
“The government wants to paint a picture that things aren’t as bad as they really are,” said Michael Alexeev, an economics professor at Indiana University who studied Russia’s economy during the transition period following the collapse of the Soviet Union.
However, a closer look reveals that the sanctions are taking a bite out of the Russian economy:
— The country is experiencing its worst inflationary period in two decades. Rosstat, the state’s bureau of economic statistics, said inflation reached 17.3% last month, the highest level since 2002. By comparison, the International Monetary Fund expects consumer prices in developing countries to rise 8.7% this year. increase from 5.9% last year.
— Some Russian companies have been forced to close their doors. Several reports say that a tank manufacturer had to stop production due to the lack of parts. US officials point to the closure of Lada auto plants – a brand made by Russian company Avtovaz and majority-owned by French automaker Renault – as a sign that sanctions are taking effect.
– Moscow mayor says city is looking at 200,000 job losses due to foreign companies shutting down† More than 300 companies have withdrawn and international supply chains have largely been shut down after container company Maersk, UPS, DHL and other transport companies left Russia.
— Russia faces historic bond defaultwhich is likely to freeze the country from debt markets for years.
Meanwhile, Treasury officials and most economists are urging patience as sanctions take months to take full effect. Over time, if Russia cannot get the right amounts of capital, parts or supplies, even more factories and businesses will close, leading to higher unemployment.
It took nearly an entire year after Russia was sanctioned for taking Ukraine’s peninsula of Crimea in 2014 before its economic data showed signs of distress, including higher inflation, a decline in industrial production and a slowdown in economic growth.
“The things we need to look for to see if the sanctions are working are not yet easy to see, frankly,” said David Feldman, an economics professor at William & Mary in Virginia. “We will look at the price of goods, the amount of goods they produce and the quality of goods. The latter is the hardest to see and probably the last to appear.”
Transparency about how sanctions affect the Russian economy is limited, largely because of the extraordinary efforts the Kremlin has taken to prop it up, and its largest sector – oil and gas – is largely unencumbered due to European, Chinese and Indian reliance on Russian energy .
Benjamin Hilgenstock and Elina Ribakova, economists at the Institute of International Finance, estimate in a report released last month that if the European Union, Britain and the US were to ban Russian oil and natural gas, the Russian economy could contract by more than 20% this year. Current projections predict a 15% contraction.
While the EU has agreed to a ban on Russian coal by August and discussing sanctions against oil, so far there is no consensus among the 27 countries on stopping oil and natural gas. Europe is much more dependent on Russian deliveries 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 tried to align sanctions with Russia’s ability to wage war and financially hit those in the highest echelons of government, while leaving ordinary Russians largely untouched.
But the Russians have noticed a price increase. Residents of a Moscow suburb said 19 liter jugs of drinking water they regularly order have become nearly 35% more expensive than before. In supermarkets and shops in their area, the price for 1 kilogram (2.2 pounds) of sugar has increased by 77%; some vegetables cost 30% to 50% more.
Local news sites in several Russian regions have reported in recent weeks that multiple stores in malls have closed after Western companies and brands shut down their operations. or withdrawn from Russia, including Starbucks, McDonald’s and Apple.
The Kremlin and its allies have repeatedly pointed to the recovery of the Russian ruble on social media as a sign that Western sanctions are not working. The ruble collapsed to about $150 a dollar in the early days of the war, but recovered to about $80 a dollar, roughly where it was before the invasion. A gauge for weekly inflation van Rosstat has shown that inflation is slowing, but that’s not surprising after the central bank raised interest rates as quickly as it did.
The Russian central bank had doubled its benchmark rate to support the ruble’s plummeting value and halt bank runs. It cut the rate from 20% this month to 17% and indicated it could lower it further.
This is not the first time that Russia has committed itself fully to defending the value of the ruble as a symbol of resistance to the West. During the 1970s and 1980s, the Soviet Union had an official exchange rate of one ruble that was equivalent to about $1.35, while the black market exchange rate was closer to four rubles to the dollar. The Russian debt crisis of the late 1990s was also partly caused by the Kremlin’s active defense of the currency’s value.
US Treasury officials have dismissed the importance of the ruble’s recovery.
“The Russian economy is really recovering from the sanctions we have imposed,” said Treasury Secretary Janet Yellen, adding that the ruble’s value has been artificially inflated by central bank intervention.
Whether and how Russia wins the economic war will depend on whether the Kremlin can divide the West, making sanctions patchy and less effective. At the same time, Russia will have time to develop alternatives to goods it no longer has access to, a concept known as import substitution.
Looking back at the sanctions of 2014, the Congressional Research Service said in January that the impact on Russia was only modest because the US actually acted alone. This time there are several international actors.
But Alexeev, a professor at Indiana University, sees one big gap.
“As long as Russia can keep selling oil and gas, they will mud through this,” he said.
Hussein reported from Washington. White House reporter Joshua Book contributed from Washington.