Sanctions hit Russian economy, although Putin says otherwise :: WRAL.com

By Ken Sweet and Fatima Hussain, The Associated Press

NEW YORK — Nearly two months after the Russo-Ukraine War, the Kremlin has taken extraordinary steps to blunt an economic retaliation from the West. While Russia may claim some symbolic victory, the full impact of Western sanctions is beginning to be felt in very real ways.

As the West moved to cut off Russia’s access to its foreign reserves, limit imports of key technologies, and take other restrictive actions, the Kremlin introduced some drastic measures to protect the economy. These included raising interest rates to 20%, establishing capital controls, and forcing Russian business to convert their profits into rubles.

As a result, the value of the ruble has recovered after an initial decline, and last week the central bank reversed part of its interest rate hike. Russian President Vladimir Putin sparked the imagination of World War II—and declared that the country was facing the West’s “blitz” of sanctions.

“The government wants to paint a picture that things are not as bad as they really are,” said Michael Alekseev, a professor of economics at Indiana University who studied Russia’s economy after the collapse of the Soviet Union.

However, a closer look reveals that sanctions are cutting into Russia’s economy:

The country is passing through its worst phase of inflation in two decades. The state’s economic statistics agency Rosstat said inflation stood at 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, up from 5.9% last year.

– Some Russian companies have been forced to close. Several reports stated that a tank manufacturer had to stop production due to a shortage 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 of the impact of sanctions.

Moscow’s mayor says the city is looking at the loss of 200,000 jobs from foreign companies shutting down operations. More than 300 companies have pulled out of Russia after container giants Maersk, UPS, DHL and other transportation firms pulled out, and international supply chains largely shut down.

Russia is facing a historic default on its bonds, which will likely free the country from debt markets for years.

Meanwhile, Treasury officials and most economists urged patience, noting that sanctions take months to take full effect. If Russia does not get the right amount of capital, parts or supplies over time, it will lead to the closure of even more factories and businesses, increasing unemployment.

It took nearly a full year after Russia was granted annexation of Ukraine’s Crimean peninsula in 2014 for its economic data to show signs of distress such as high inflation, declining industrial output and a slowdown in economic growth.

“The things that we should look at to see if the restrictions are working, frankly, are not yet easy to see,” said David Feldman, a professor of economics at William & Mary in Virginia. “We will look for the price of the goods, the quantity of goods they produce, and the quality of the goods. The last is the hardest to see and probably the last to be seen.”

Transparency of how sanctions are affecting the Russian economy is limited, mainly because of the extraordinary lengths the Kremlin has taken to push it forward and its largest sector – oil and gas – due to European, Chinese and Indian reliance on Russian energy. The reason is largely weight-free.

Institute of International Finance economists Benjamin Hilgenstock and Elina Ribakova estimated in a report released last month that the Russian economy could contract by more than 20% if the EU, UK and US impose sanctions on Russian oil and natural gas. . Year. Current estimates project a 15% contraction.

While the EU has agreed to impose sanctions on Russian coal by August and is discussing sanctions on oil, there is no consensus so far among the 27 countries on how to stop oil and natural gas. Europe is far more dependent on Russian supplies than the UK and US, which have banned or are phasing out Russian oil. Meanwhile, Russia receives $850 million a day from Europe for its oil and gas.

The US and its allies have argued that they have tried to design the sanctions to affect Russia’s ability to wage war and economically affect those in the highest echelons of government, while allowing everyday Russians to Left largely unaffected.

But the Russians have seen a jump in prices. Residents of a Moscow suburb said they find regular 19-liter jugs of drinking water nearly 35% more expensive than before. In supermarkets and stores in your area, the price of 1 kilogram (2.2 lb) of sugar has increased by 77%; Some vegetables cost 30% to 50% more.

Local news sites in various Russian regions have reported in recent weeks that many stores in malls have closed after Western companies and brands halted operations or were pulled out of Russia, including Starbucks, McDonald’s and Apple.

The Kremlin and its allies on social media have repeatedly pointed to Russia’s ruble recovery as a sign that Western sanctions are not working. The ruble fell to about $150 in the early days of the war, but rose to about $80, where it was before the invasion. A gauge of weekly inflation by Rosstat showed inflation to be slowing, but it is not surprising that the rate rose as quickly as the central bank raised interest rates.

Russia’s central bank doubled its benchmark interest rate to support the falling value of the ruble and prevent bank runs. It slashed this month’s rate from 20% to 17% and indicated that it may lower it further.

This is not the first time that Russia has used all its might to defend the value of the ruble as a symbol of resistance against the West. During the 1970s and ’80s, the Soviet Union’s official exchange rate for one ruble was about $1.35, while the black-market exchange rate was closer to four rubles per dollar. The Russian debt crisis in 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 recovering the ruble.

“The Russian economy is really struggling with the sanctions we have put in place,” Treasury Secretary Janet Yellen said, adding that the ruble’s value has been artificially inflated by central bank intervention.

If and how Russia wins the economic war it will come down to whether the Kremlin can split in the West, making sanctions weaker and less effective. At the same time, Russia will have time to develop substitutes for goods it can no longer access, a concept known as import substitution.

Given the 2014 sanctions, the Congressional Research Service said in January that the impact on Russia was only modest because the US alone had effectively acted. This time around, there are many international actors.

But Indiana University professor Alekseev sees a clear difference.

“As long as Russia can continue to sell oil and gas, they will tangle through it,” he said.

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Hussain reported from Washington. White House reporter Joshua Bok contributed from Washington.

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