The success or failure of the West’s economic war against Russia is crucial to the outcome of the struggle in Ukraine. But knowing if the sanctions are working will be difficult.
Estimates of the economic damage vary widely. The Institute for International Finance, an association of international banks, expects Russia’s economic output to fall by a third this year. Economists at ratings agency Standard & Poor see a 6.2% contraction in 2022, while Moody’s Analytics estimates the sanctions-induced slowdown will cut economic output by 13.5% to 24%, depending on the length of the conflict and the extent of the contraction of Russian energy exports.
“This is a massive act of self-harm,” said Gaurav Ganguly, an economist at Moody’s.
There are two ways to track the impact of the sanctions: with economic data or with specific details such as layoffs, shortages and production cuts. Russia has made efforts to restrict access to both.
The Central Bank of Russia last week suspended the release of figures on its foreign exchange reserves for three months, saying that during that time “all releases” would use the March 4 figure of $643.2 billion.
The Russian stock market has also been flat for almost three weeks, a sign Moscow is trying to hide economic reality. Russian stocks listed in London have fallen to almost zero and have since been delisted, with Russia’s largest lender, Sberbank Russia PJSC, among those delisted. Stocks traded for as little as a penny before they were delisted.
State economic data such as gross domestic product, unemployment and inflation are published with a delay. February data is mixed, reflecting pre-invasion tensions and the early aftermath of the war. Russia saw its trade surplus rise sharply, reflecting much higher prices for oil and gas, its main exports.
However, other figures pointed to a pick-up in inflation, while a survey of manufacturers’ purchasing managers showed a fall in production and new orders for the first time in six months. This metric, known as the Purchasing Managers Index, is being compiled by a private company and is expected to provide a first look at how the economy is responding to the sanctions when it is released on April 1.
More recent data point to upcoming troubles for the Russian economy. The ruble has weakened, with a dollar buying 112 rubles, up from 75 at the start of the year. The Central Bank of Russia has more than doubled interest rates to 20% to encourage holders not to sell the ruble.
A weaker ruble will drive up the cost of euro- or dollar-denominated imports and increase inflation. At the same time, the sharp rise in interest rates will make borrowing more expensive for households and companies and will weigh on growth. The Russian central bank will meet on Friday and could outline further measures.
Russia’s economic data has historically been considered accurate. The figures showed a 2% decline in economic output due to the sanctions in 2014 and chronicled the major swings in the economy since the end of the Soviet Union. The sanctions are much stricter this time, leading economists to predict a major economic meltdown.
But economists fear Russia’s crackdown on freedom of expression and access to foreign news sources will make it more difficult to determine the impact of sanctions.
The commercial port of Vladivostok on Russia’s Pacific coast. Ship calls from Russian ports in the first six days of March were 40% lower than a year earlier.
Photo:
Yuri Smityuk/Zuma Press
“When there’s war, you don’t care about accurate reporting,” said Maxim Mironov, associate professor of finance at IE Business School in Madrid, who grew up in the Soviet Union and researched the Russian economy and corruption. “They care about propaganda.”
There are already some hints on the ground of the economic pains to come. According to the Yale School of Management, 380 international companies have announced their withdrawal from Russia since the invasion of Ukraine. Some of these companies have committed to paying wages for a limited period, but after that unemployment should rise and these products will not be available, potentially leading to inflation as supply shrinks.
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Russians have been lining up for imported drugs that are not subject to sanctions. However, prices are expected to rise after the ruble plummets.
According to Windward, a shipping data company, calls by commercial cargo and tankers at Russian ports in the first six days of March were 40% lower than a year earlier, a sign that exports and imports are already declining.
There are also signs that shortages of parts and equipment from Western suppliers are affecting factory production, including the suspension of production at a maker of Lada automobiles.
A closed Dior boutique at the GUM department store in Moscow earlier this month. According to the Yale School of Management, 380 international companies have announced their withdrawal from Russia since the invasion of Ukraine.
Photo:
/Associated Press
Any pain from sanctions is offset by continued exports of oil, natural gas and minerals at high prices. Western products could also be replaced by goods from China, potentially keeping prices down and creating jobs for Russians.
Many of the economists who would monitor the impact of sanctions have left Russia over fears they could be fined for publishing accurate economic reports. Some say they will continue to publish from abroad.
Vladimir Putin became President of Russia in 2000 and boasts of stabilizing the economy after the collapse of the Soviet Union. The economy shrank every year from 1990 to 1996, but grew 10% and then 5.1% in his first two years in office and every year thereafter until the global financial crisis.
An economic downturn caused by the war in Ukraine could undermine Mr Putin’s reputation as manager of Russia’s economy.
Russians have been lining up for imported drugs that are not subject to sanctions. However, prices are expected to rise after the ruble plummets.
Photo:
Dmitry Feoktistov/Zuma Press
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