EconomyIssue 02 - 2022MAGAZINE
GBO_ sanctions break Russia

Why couldn’t sanctions break Russia?

Despite the sanctions, Russia's solid economic policy, experience with failing economies, and abundance of natural resources keep it on its feet

Government Debt in Russia decreased to 15503.66 RUB Billion in July from 15947.82 RUB Billion in June of 2022.
Even on a regular day, the Russian economy is about as transparent as a Siberian blizzard. Since Russia invaded Ukraine, the Central Bank of Russia (CBR) and Rosstat, the country’s official statistics agency, have stopped disseminating information on everything from trade to investment.
As a result, many people now doubt the veracity of the statistics still being released. Moreover, investment banks have reduced their research efforts because they are no longer advising clients on Russian companies. In addition, multilateral organizations have called back their economists.
A heated discussion about the state of the Russian economy has broken out in the blizzard. According to a recent paper by five researchers at Yale University, the withdrawal of Western companies and sanctions are “crippling” the Russian economy.
Any economic advantages that seem to exist are mirages. The researchers contend that “Putin-selected statistics are then haphazardly trumpeted across media and used by reams of well-meaning but careless experts in building out forecasts which are excessively, unrealistically favourable to the Kremlin.”
Some people are more upbeat. For example, in a paper, a well-known Russian observer named Chris Weafer recently stated that “the economy is not collapsing.” So where is the truth, exactly?

The country’s economy collapsed after Russia invaded Ukraine. The rouble lost more than a quarter of its value to the dollar. Regulators were forced to halt trade after the stock market plummeted. As their governments imposed sanctions, hundreds of western corporations left Russia or made such commitments.

Within a month, economists reduced projections for Russian GDP in 2022, going from 2.5% growth to a near 10% drop. Some were even more depressing. For example, the White House stated, “experts believe Russia’s GDP will contract 15% this year, erasing the last 15 years of economic progress.”

Both sides of the argument concur that the nation is still in pain. It has entered a recession due to significant increases in interest rates made in the spring to stabilize the depreciating rouble and the departure of foreign companies.

According to official data, the GDP decreased by 4% from the prior year in the second quarter. Many of the 300 single-industry cities in the nation that sanctions have harmed are experiencing a severe slump. Many people—particularly educated individuals—have left the country, while others are moving their valuables abroad. The most recent data shows that foreigners withdrew $15 billion in direct investment during the first quarter of 2022, by far the worst amount ever. In May 2022, Russian remittances to Georgia in dollar terms were startlingly ten times larger than they had been the year before.
The Economist’s study of data from numerous sources indicates that Russia’s economy is performing better than even the most optimistic predictions projected since sales of hydrocarbons have fueled a record current-account surplus. For example, consider a “current-activity indicator,” a current indication of economic growth released by Goldman Sachs. If not on a scale comparable to the 2007 global financial crisis or the invasion of Ukraine in 2014, there was a massive drop in the Russian economy between March and April. However, it recovered in the months that followed.

Other indicators also point to a recession, although not a particularly severe one—at least not by Russia’s unpredictable norms. According to a study released by another bank, JPMorgan Chase, industrial production was 1.8% lower in June than it was a year ago.

A less severe blow than in prior crises is an index of service-sector growth created by sending surveys to managers. After initially declining, electricity usage appears to increase once more. In addition, the quantity of railway loadings, a measure of the demand for goods, is stable.

However, inflation is decreasing. The increase in consumer prices from the beginning of 2022 to the end of May was roughly 10%. Rupee depreciation increased import costs, and the departure of Western businesses reduced supply. Rosstat claims that prices are now declining, though. Similar patterns are shown by an independent source from internet prices and released by the consultancy State Street Global Markets and the data company PriceStats. The CBR now expresses concern for inflation and declining prices in its public remarks.

Import costs have decreased due to a stronger rouble. As a result, inflation expectations among Russians have also been reduced. Expected inflation for the following year has declined from 17.6% in March to 11% in July, according to statistics from the Cleveland Federal Reserve, Morning Consult, a consulting firm, and Raphael Schoenle of Brandeis University. Due to the abundance of gas in Russia, the country is also less likely to experience a European-style spike in inflation brought on by higher energy prices.

Households benefit from a variety of factors, not only falling prices. It is true that the unemployment rate, which reached a record low of 3.9% in June, is inaccurate. Many businesses have placed employees on leave, some without pay, to avoid recording layoffs. However, there isn’t much proof that the jobs crisis is happening.

The ratio of job seekers to openings in the economy increased from 3.8 in January to 5.9 in May—making it harder to find a job than before—and then somewhat decreased, according to data from the Russian employment site HeadHunter. On the other hand, the largest lender in Russia, Sberbank, reports that median real incomes have grown significantly since the spring.

People can continue spending in part because the labour market is holding up. According to Sberbank data, actual consumer expenditure in July was essentially flat from the beginning of the year. Springtime imports decreased, in part because many Western companies stopped supplying them. However, the decrease was not as severe as other recent recessions, and the economy is already quickly recovering.

Russia consistently outperforms expectations for three reasons. In the lead is policy. Vladimir Putin is content to hand over economic administration to those with more expertise, despite his limited knowledge of the subject. The CBR is brimming with highly skilled experts who acted quickly to stop the economy from collapsing. Capital controls and the doubling of interest rates in February stabilized the rouble, which reduced inflation. Even if it does not make her a popular figure, the general public knows Elvira Nabiullina, the bank’s governor, is serious about maintaining a lid on pricing.

The second element has to do with recent economic history. Russia’s defence minister, Sergei Shoigu, may have had a point when he told the British government that Russians “can suffer like no one else” in February, according to the Washington Post. After 1998, 2008, 2014, and 2020, this is the fifth economic crisis the nation has experienced in the past 25 years. Anyone over the age of 40 can recall the immense economic turmoil that the collapse of the Soviet Union caused. However, people now know how to adapt instead than panic or revolt.

Russia’s economy has always been somewhat cut off from the West in some areas. That results in slower growth, but it has lessened the sting of the recent rise in isolation. Compared to the global average of 49%, the amount of foreign direct investment in the nation in 2019 was worth about 30% of the GDP. Compared to more than 2% throughout the wealthy world, only 0.3% of Russians with jobs before the invasion worked for American companies. The nation only needs a small number of raw materials from abroad. So far, the additional isolation hasn’t had much of an effect on the numbers.

Hydrocarbons are the third factor. According to a recent analysis by the International Energy Agency, sanctions have only had a minor effect on Russian oil production. Since the invasion, Russia has sold the EU fossil fuels estimated to be worth $85 billion. Given the sanctions imposed on the government, it is unclear how Russia uses the accumulated foreign currency. However, there is little doubt that these transactions are assisting Russia in continuing to purchase imports—not to mention funding its armed forces and buying weapons.

Investors from the West will be wary of investing in Russia until Mr Putin leaves office. The sanctions will continue. While Russia does not rely heavily on imported resources, the CBR concedes that it is in dire need of imported machinery. As a result of sanctions, Russia will eventually produce goods of lower quality at a higher cost. Its economy is currently faltering, though.

Since the annexation of Crimea in 2014, the West has slapped a series of sanctions on Russia. But despite the economic pain, Russia is still standing. The ruble has lost a lot of value, but it has stabilized. Poverty is rising, but slowly. And while Western companies have pulled out, Russian businesses have stepped in. So there are signs that the worst is over for Russia, and it is slowly adapting to its new reality.

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