NEW YORK (AP) – Nearly two months after the Russo-Ukrainian war, the Kremlin has taken extraordinary steps to blunt the Western economic counter-offensive. While Russia may claim some symbolic victories, the full impact of Western sanctions is beginning to be felt in many real ways.
As the West seeks to cut off Russia’s access to its foreign reserves, restrict imports of key technologies and take other restrictive measures, the Kremlin has taken some drastic measures to protect the economy. These include raising interest rates to 20%, introducing capital controls and forcing Russian businesses to convert their profits into rubles.
As a result, the ruble recovered after an initial decline, and last week the central bank reversed some of the rate hike. Russian President Vladimir Putin felt encouraged and proclaimed – provoking images from World War II – that the country had withstood a “flash” of Western 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 Russian economics in its post-Soviet transition.
However, a closer look shows that sanctions are biting the Russian economy:
– The country is experiencing the worst attack of inflation in two decades. Rosstat, the state agency for economic statistics, said inflation reached 17.3% last month, the highest level since 2002. By comparison, the International Monetary Fund expects consumer prices in developing countries to rise by 8.7%. this year, compared to 5.9% last year.
– Some Russian companies were forced to close. Several reports say the tank manufacturer had to suspend production due to a lack of parts. U.S. officials have cited the closure of Lada’s car plants, a brand made by Russia’s Avtovaz and majority owned by French carmaker Renault, as a sign that the sanctions are taking effect.
– The mayor of Moscow says that the city expects the loss of 200,000 jobs from foreign companies that cease operations. More than 300 companies have withdrawn and international supply chains have largely closed after container company Maersk, UPS, DHL and other transport companies left Russia.
– Russia is facing a historic default on its bonds, which is likely to freeze the country from debt markets for years.
Finance Ministry officials and most economists, meanwhile, are calling for patience, saying the sanctions take months to take full effect. If Russia is unable to receive adequate amounts of capital, parts or supplies over time, this will lead to the closure of even more factories and plants, leading to higher unemployment.
It took almost a year after Russia was sanctioned for taking over Ukraine’s Crimean peninsula in 2014, while its economic figures show signs of disaster, such as higher inflation, declining industrial production and slowing economic growth.
“The things we need to look for to see if sanctions work are, frankly, not yet easy to look at,” said David Feldman, a professor of economics at William & Mary in Virginia. “We will look for the price of the goods, the quantity of the goods they produce and the quality of the goods. The latter is the most difficult to see and probably the last to appear. “
Transparency about how sanctions affect the Russian economy is limited, in large part because of the Kremlin’s extraordinary efforts to support it. In addition, its largest sector – oil and gas – is largely unburdened by Europe, China and India’s dependence on Russian energy.
Benjamin Hilgenstock and Elina Ribakova, economists at the Institute of International Finance, estimated in a report published last month that if the European Union, Britain and the United States ban Russian oil and natural gas, Russia’s economy could shrink by more than 20 percent a year. Current forecasts predict a 15% contraction.
While the EU has agreed to ban Russian coal by August and is discussing sanctions against oil, there is still no consensus among its 27 countries on stopping oil and natural gas. The European Union is much more dependent on Russian supplies than Britain and the United States, which have banned or phased out Russian oil. Russia, meanwhile, receives $ 850 million a day from Europe for its oil and gas.
The United States and its allies say they have tried to adjust the sanctions to affect Russia’s ability to wage war and financially hit those at the highest echelons of government, while leaving ordinary Russians largely unaffected.
But the Russians noticed a jump in prices. Residents of a Moscow suburb said 19-liter pots of drinking water, which they regularly order, have become nearly 35% more expensive than before. In supermarkets and shops in their area, the price per kilogram (2.2 pounds) of sugar has risen by 77%; some vegetables cost 30% to 50% more.
Local news sites in various Russian regions have reported in recent weeks that many stores have closed in malls after Western companies and brands shut down or withdrew from Russia, including Starbucks, McDonald’s and Apple.
The Kremlin and its social media allies have repeatedly cited the recovery of the Russian ruble as a sign that Western sanctions are not working. The ruble fell to about $ 150 in the early days of the war, but recovered to about $ 80, roughly where it was before the invasion. Rosstat’s weekly inflation rate showed a slowdown in inflation, but this is not surprising after the central bank raised interest rates as quickly as it did.
Russia’s central bank has doubled its benchmark interest rate to support the devaluation of the ruble and stem the flow of banks. He cut the rate to 17% from 20% this month and signaled he could cut it further.
This is not the first time that Russia has thrown all its strength behind defending the value of the ruble as a symbol of resistance to the West. In the 1970s and 1980s, the Soviet Union had an official exchange rate of one ruble, equivalent to about $ 1.35, while the black market exchange rate was closer to four rubles per dollar. The Russian debt crisis of the late 1990s was also caused in part by the Kremlin’s active protection of the value of the currency.
US Treasury Department officials have denied the importance of restoring the ruble.
“Russia’s economy is really shaken by the sanctions we have imposed,” said Finance Minister Janet Yellen, adding that the ruble had been artificially inflated by central bank intervention.
If and how Russia wins the economic war, it will come down to whether the Kremlin can lead to division in the West, which will make sanctions more uneven and less effective. At the same time, Russia will have time to develop alternatives to goods that are no longer available, a concept known as import substitution.
Looking back on the 2014 sanctions, the Congressional Research Service said in January that the impact on Russia was modest only because the United States acted effectively on its own. This time there are many international actors.
But Alexeev, a professor at Indiana University, sees a glaring void.
“As long as Russia can continue to sell oil and gas, they will be confused,” he said.
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This story corrects the name of the University of Indiana University.
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Hussein reported from Washington. White House reporter Joshua Bowk contributed from Washington.
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Follow all the AP stories about the Russian war against Ukraine
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