Here’s how Western sanctions affect Russia’s economy

Within a month of Russia’s toughest and consolidating sanctions by Western governments, Russia’s economy is showing signs of cracking.

As the ruble depreciates against the dollar, many educated Russians are reportedly leaving the country, and Russia’s economy faces an unprecedented contraction. “The current crisis will destroy 15 years of economic growth,” the Institute of International Finance said in a statement.

The IIF estimates that Russia’s GDP will fall by 15% this year and 3% next year. Goldman Sachs predicts a 10% small but significant contraction in 2022.

“Russia has not had such a recession since the 1990s,” said Elena Rybakova, IIF’s deputy chief economist. “This is an unprecedented shock to the Russian economy.”

Here’s how the shock is already affecting Russian shops and factories as Western nations prepare for another round of sanctions following reports of war crimes in cities around Kiev.

Factories are closing

As heavy equipment and carmakers shut down their operations in Russia, the country’s manufacturing output fell at the fastest rate in March since COVID-19 first spread two years ago. The S&P Global Purchasing Managers’ Index indicates long delivery hours, “severe shortage of goods” and record “high” prices for manufacturers and consumers.

The index, which measures production activity, fell to 44.1 in March, signaling a sharp decline in operating conditions across the Russian manufacturing sector for nearly two years, S&P Global said on Friday. (Reading below 50 stands for abstract; reading above 50 stands for growth.)

Amid a drop in orders from domestic and foreign customers, S&P Global reported that “companies have been cutting jobs, and employment has fallen at a co-curricular pace for almost two years.”

A woman walks on empty shelves at a supermarket in Moscow.
March 23, 2022 A woman walks into an empty cupboard at a supermarket in Moscow. Russia’s sanitary pads, diapers and sugar are in short supply after several foreign brands announced they would cease operations in the country in light of President Vladimir Putin. Full-scale military offensive on Ukraine. Apart from these types, there is no shortage of other fast-moving consumer goods in supermarkets in Russia.

Vlad Kharkov / Sofa Images / Light Rocket via Getty Images


Empty shelves

Russian supermarkets are short of essentials including diapers, sanitary pads and sugar. According to UK newspapers, pictures of empty shop shelves are circulating on the internet, with some comparing them to North Korea.

Two weeks after the invasion, Russians began to buy sugar in panic, which led to empty shelves and restrictions on purchases of groceries by stores, according to the Russian newspaper Commercial. The urgency of the products prompted the Russian government to issue public notices against the panic purchase.

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

20% inflation

While some Western countries are battling inflation of 5% to 8% this year, consumer prices in Russia are expected to rise by a staggering 20% ​​this year, the capital economy said.

According to the Insider and the Daily Mail, the prices of some big-ticket electronics and cars are rising even faster because rich Russians are trying to buy things with their ruble rather than risk losing the value of the currency.

For example, the Daily Mail reports that the price of a new TV has tripled from January to March, and currently costs two-thirds of the usual monthly salary for a TV set.

A stockbroker in Moscow told Insider that he had bought a new iPhone 13, a Samsung tablet and new tires for his family’s BMW. An investment banker told the store, “We have all these rubles. I would rather buy something now than to see that they are completely useless.”

After the collapse last month Worth one US cent, The ruble has recently recovered much of its value, thanks to tighter capital restrictions imposed by President Vladimir Putin on how much money Russians can withdraw from banks and by restricting the ruble’s exchange for foreign currency.

However, the effects of the embargo on Russia are already being felt by reducing consumer spending in the country, the IIF noted.

Tinkoff Bank ATM machines in Moscow
Moscow, Russia – March 2, 2022: People line up at the Tinkoff Bank ATM in central Moscow. Artiom Geotagon / DOS. The Russians rushed to withdraw the deposits before President Vladimir Putin imposed capital restrictions to prevent the ruble from leaving the country.

Artiom Geotagon / DOS


Some banks were cut off

Financial sanctions have hit banks unequally. About seven large banks have been cut off from SWIFT, a system that allows banks to communicate with each other, but three-quarters of Russia’s banks have been merged, the IIF said.

Sberbank, the largest bank in the region, was able to continue most of its operations but could not engage with banks in the United States and was prevented from making long-term loans, Ribakova noted.

“This is a very important common bank,” most retired Russians collect their pensions through Sberbank, Ribakova said. “This may be the reason why the United States has decided not to go too aggressive against it.”

Some need Russian oil

Russia’s fossil fuel exports, which make up 40% of Russia’s budget, could be a cut-off volume as Western nations call for retaliation for atrocities around Kiev. The European Union on Tuesday banned the import of Russian coal and some European countries are calling for a ban on Russian oil and gas.

The IIF estimates that a total embargo on Russian fuels could cost the country $ 250 billion to $ 300 billion in export losses.

It is already difficult to find Russian oil buyers after the US and UK ban Last month. “[O]il traders are significantly reluctant to get Russian oil. As a preview, even exports at high discount prices ($ 35 / ppl below Brent) sometimes do not find buyers, ”IIF wrote in a statement.


Russian oligarchy explodes sanctions

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Are restrictions effective?

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

Brian Gratsky, a professor of political science at the University of Baltimore County in Maryland, pointed out that sanctions against authoritarian governments rarely work because the elites can often avoid them by using resources for their own benefit. Meanwhile, people who bear the brunt of the economic downturn have little influence with their government, either with Russian opponents or with those who simply discuss a war facing harsh punishment, such as long imprisonment.

“It will dry up the country, but we have seen dictatorial rulers continue to bleed their own people,” Krotsky said of Western sanctions. “Safety means regimes like this will be crushed everywhere. If the streets are not cleaned and the ditches are not filled, they will do it.” Krotsky noted that sanctions could be lifted if anti-Western sentiment in the country escalates.

But because of Russia’s dependence on foreign imports, sanctions will make it harder for Ukraine to finance the war, Rybakova said.

“Even for domestic military production, [Russia] Relies on imports from abroad. A weak ruble makes it much harder, and direct export restrictions make it even harder. A lot of value chains will be broken within Russia, “he said.

He added: “The problem here is Russia’s ability to finance the war – the most effective sanctions make it difficult for Russia to finance the war and put a high price on the Russian economy. It remains to be seen whether they will decide to prioritize the war over their own citizens.”

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