Ultimate magazine theme for WordPress.

Why Russia’s Economy Didn’t Collapse Under the Weight of Sanctions

It has been almost three months since Russia invaded Ukraine, and despite Ukraine’s notable resistance and the implementation of an aggressive package of sanctions against Russia, there seems to be no end to the war in sight. So far, much of the analysis has focused on Russia’s military failures, Zelensky’s impressive leadership, and the surprisingly unified response from the international community. What has been relatively overlooked is the resilience of the Russian economy when it comes to weathering sanctions. In a globalized world already suffering from supply chain problems, energy shortages and an economic downturn, it is remarkable that the sanctions failed to bring Russia’s economy to its knees.

Before delving into how Russia has so far managed to avert an economic catastrophe, it is necessary to understand the magnitude of the sanctions it faces. Perhaps most notable is the sanctioning of Russia’s central bank, an unprecedented move that essentially froze over $300 billion of the country’s foreign exchange reserves. Significantly, the sanctions also banned the export of high technology, power industry equipment and aerospace technology to Russia. In addition to these export bans, the USA Prohibited Imports of Russian crude oil, gas, coal, crude products and other energy products from Russia. More recently, the European Union committed to this Ban on coal imports from Russia. Partly as a result of these sanctions, international companies such as McDonald’s, Coca-Cola, Apple and BP have all left the country. Unlike the sanctions imposed on Russia after the invasion and annexation of Crimea, these sanctions had teeth and had an immediate impact. The Russian ruble lost nearly 50% of its value against the dollar, the Moscow stock market shut down and it seemed the West was succeeding in fomenting economic chaos in Russia. But then, remarkably, the ruble began to recover.

Today, the ruble is back above pre-war levels, leaving observers wondering how Russia’s economy survived. This is not to say that the ruble is a true indicator of Russia’s economic health, but when it comes to economic issues, the illusion of stability is almost as important as stability itself. That said, reports that the ruble is trading significantly less against the dollar on the black market would indicate that Russia’s “real economy” is suffering. However, other indicators, such as the central bank interest rate cut from 17% to 14% and reports healthy spending in cafes, bars and restaurants suggest the Russian economy is holding up remarkably well. How did Russia do it?

Also Read: Russia Will Force Oil Buyers to Pay More if EU Imposes Tariffs

First and foremost, it is Russia’s unique position as a net exporter of both energy and essential foodstuffs that has allowed it to stay afloat. For example, if a net importer like China had been hit with similar sanctions, you would eventually face deindustrialization, famine, and mass unrest. It would be a disaster. Russia, on the other hand, is uniquely positioned to survive this economic onslaught. It is also able to run a massive trade surplus because of its energy exports and because oil and gas prices are at multi-year highs. Strong trade ties with both China and India have ensured ample foreign exchange flows to Russia to calm any fears of bankruptcy. More foreign exchange is coming from the EU, which just can’t get rid of Russian natural gas and is struggling to get it ban Russian oil imports. Of course, all this foreign exchange would be worthless if Russia could not use it due to sanctions. This fact prompted rating agencies to warn against one threatened payment default from Russia already in April. But here, too, Russia was able to buck expectations by exploiting a sanctions loophole.

The sovereign debt carve-out is a US government exemption created in its sanctions policy to allow debt repayments. This means that Russia was able to service its debt and avoid defaults. However, this exemption expires on May 25. If not renewed, Russia could still default if it is not renewed, as it has $100 million in interest payments due two days later. Recent news from Washington suggests the Treasury Department is leaning towards it Suspension of Russian debt paymentsthe Russian Finance Minister claims he will resort to paying in rubles.

Russia’s energy and food production and its ability to service its debt were both important, but ultimately it was a lot emergency measures Issued by the Russian government that saved the ruble. Since 2014, when the US and EU sanctioned Russia for its invasion and annexation of Crimea, Russia has been working to create an economic “fortress” capable of withstanding sanctions. This included building up around $640 billion worth of gold and foreign exchange reserves to survive any sanctions. Russia’s other reactions to sanctions indicate that the Kremlin planned such a scenario. The central bank raised interest rates to 20%, forced Russian exporters to convert 80% of their foreign exchange earnings into rubles, and limited the amount of money Russians can withdraw from foreign currency accounts to $10,000. All of this, as well as Putin’s demand that countries should pay for natural gas in rubles, was intended to create false demand for the ruble and control the domestic market. The only problem with all of this, of course, is that it has to come to an end at some point.

While Russia survives, the long-term prospects for the Russian economy are bleak. The extreme measures taken to counter the sanctions are not long-term solutions, and when the ruble’s illusion of stability eventually crumbles, so will the economy. The country also has to deal with its inability to access technologies and goods needed to sustain key industries. Other realities such as the “brain drain” caused by international isolation and the eventual decline in demand for its oil and gas exports will only further diminish its economic strength. Russia weathered the sanctions better than almost any other country, but the struggle is far from over for Moscow.

By Josh Owens for Oilprice.com

Other top reads from Oilprice.com:

Comments are closed.

%d bloggers like this: