Russia seems to be coping well with the sanctions imposed by the West. But the country is facing a severe recession. And that is just the beginning.
As the West imposes sanctions package after package against Russia, Vladimir Putin is relaxed. The Russian president has stated that the “economic blitzkrieg” against his country has failed. In fact, Russia has so far withstood the economic pressure.
There are two main reasons for this: the income from the sale of raw materials continues to flow. Russia has an enormous current account surplus – in the first four months of the year it was the equivalent of almost $96 billion. That is more than three times as much as a year earlier. This fills the Kremlin’s war chest and enables the Russian government to cushion the consequences of the sanctions for its own people.
On the other hand, the sanctions are not a “lightning war” but only take effect slowly. Behind the huge surpluses lies an immense problem for Putin: They have shot up because Russia imports less – including Western technology, from spare parts to machines to microchips. “It takes time for the full effect to show,” says Russia expert and “Capital” columnist Bernd Ziesemer in the podcast “The Zero Hour”. “If you ask around on the ground, outside of Moscow or St. Petersburg in the industrial cities of the Urals, you will learn that the sanctions are hitting companies hard and hard.”
The sanctions work. But if an energy exporter can continue to export most of the energy, that limits their impact. The ruble, which initially fell, is now costing as much as it did before the war. The key interest rate, which the Russian central bank raised after the first sanctions salvo, has already been sharply reduced in several steps and should be back at the level it was before the attack next month .
But Russia is facing a severe recession. Central bank chief Elvira Nabiullina is currently anticipating a 10 percent slump this year. But there are also much more powerful forecasts – which are difficult because the Russian government has stopped publishing trade data. The Institute of International Finance, a global association of financial institutions, expects Russia’s gross domestic product to fall by 30 percent. Chief economist Robin Brooks tweeted that he assumes that the Russian economy will “implode”. He looked at exports from 20 countries to Russia in April. They were down by half compared to the same month last year.
Even if this prediction were to be exaggerated and economic output contracted more in the magnitude envisaged by the central bank governor, this would erase the growth of the last ten years.
Unemployment is also likely to rise noticeably. This development is reinforced because numerous companies have withdrawn from Russia or scaled back their business. There are currently more than 1,000, according to a list compiled by Yale University economist Jeffrey Sonnenfeld.
So far, most Russians have felt the sanctions primarily through inflation. Before the attack on Ukraine it was 9 percent, but it has now shot up to 18 percent – ??the highest level in around 20 years.
This is also remarkable because the ruble is stable. Nevertheless, prices are rising for almost all goods – whether for vegetables, sugar or smartphones. Initially, inflation was fueled by panic buying. In the meantime, imports from the West have collapsed. This not only heats up prices, but also disrupts supply chains and slows down production. For example, spare parts are missing.
“Problems can arise even with production with a high degree of localization,” says central bank boss Nabiullina. For example, Russia produces paper, but relies on imported bleach. Russia also needs packaging materials produced abroad for domestically produced food. Russia wants to end these dependencies – but the transition will take a long time. Time is of the essence: “The period in which the economy can live on the reserves is finite,” says Nabiullina. So far, the sanctions have mainly hit the financial market. “Now they will increasingly affect the economy,” she says.
Putin responded to accelerating inflation by ordering a 10 percent increase in pensions and minimum wages. According to the Russian VEB Bank, the increase in social benefits will slow down the decline in real income, wages and pensions, but will not prevent it. The bank estimates that 13 percent of Russians will soon be living in poverty.
The feared slump in economic output could only be the beginning of a long period of stagnant economic activity. Even with a ceasefire in Ukraine and peace at the negotiating table, it is likely that at least most of the sanctions will remain in place and Russia will continue to be denied Western technology. It cannot be completely replaced by Chinese products. The West will also permanently bid farewell to Russian energy imports.
The Russian economist Sergei Gurijew, who teaches in Paris, is convinced that the new package of sanctions agreed at EU level will hit Russia hard economically. “This will deal a very heavy blow to the Russian budget,” he told the “FAZ”. Diverting oil to China and India as a substitute will not be easy for Russia, as the EU will most likely impose further measures in the coming months against Russian tankers, against the transport of Russian oil by ships of other countries and against the insurance of such transports. In six months, Putin will be faced with the choice of who to cut the salaries of – soldiers, civil servants or police officers.
According to economist Branko Milanovic, Russia is on the way to re-Sovietization. The country is completely dependent on Western technology, the economist writes in his blog. For many years he was the chief economist of the research department of the World Bank. According to Milanovic, Russia has neglected industry, the backbone of economic development, for decades and has limited itself to raw materials and food production. The country must revive its industry on the basis of an infrastructure that “has been rusting away for 30 years”.
