Despite Sanctions, Russia’s Economy Still Stands – For Now

Six months after Russia’s war in Ukraine, tough economic sanctions launched by the US and EU appear to have had the double effect of stifling Russian military action. It is the latest by US-based Citibank to announce a formal exit from the Russian market.

Citibank issued a press release on Thursday announcing its intention to wind down its Russian consumer and local commercial banking operations as part of its long-term “global strategy update” first announced in April 2021. did. Business in the last few months. Legacy Franchise CEO Titi Cole said in a release that, given the many complicating factors in the environment, it’s clear that a downsizing path makes the most sense, but as of July. The bank was still trying to negotiate the sale of a local commercial, the Financial Times reported at the time, saying the consumer finance sector had been sold to a local Russian firm. Sanctions complicated the sale to at least one potential buyer, Rosbank. Owner Vladimir Potanin was recently sanctioned by the UK.

Citibank’s announcement and decision to scale back operations rather than continue sales are like indicators that the sanctions and bans are having the intended effect. “A few months ago, the United States banned all new investment in the Russian economy,” Eddie Fishman, a senior fellow at Columbia University’s Center for Global Energy Policy, told his Vox in an email. “Thus, the US companies that remain in Russia are barely keeping the lights on.”

But that doesn’t mean the Russian economy has collapsed. Russia’s central bank has adjusted the country’s monetary policy to keep the ruble at its strongest against the dollar since 2018, he reported Sunday. When the US froze her $600 billion foreign exchange reserves after a crash early in the war, the central bank took aggressive action, raising interest rates to keep inflation in check. Inflation seems to have leveled off after his 18% high in April, and this seems to have paid off.

Moreover, banks and companies in other countries, including China and Japan, have helped soften the blow somewhat by maintaining business ties with Russia or by promising to increase their investments in Russia. India is increasing its purchases of fuels, including coal, despite sanctions on Russia’s fossil fuel industry.

Sanctions take time to affect major economies

Russia has also worked to mitigate the impact of sanctions since the United States first imposed them in 2014 over Russia’s invasion of Crimea. When major Western companies such as McDonald’s, Starbucks, Visa and Mastercard left the country early in the invasion, Russian companies were there to cushion the blow, said Andrei Nechaev, Russia’s former economy minister. “The withdrawal of Mastercard and Visa had little impact on domestic payments because the central bank had its own alternative payment system,” he told CNN. The McDonald’s franchise was relaunched under the name Vkusno i tochka — Tasty, that’s all — and Starbucks became Stars Coffee. Since 2014, the government has encouraged Western franchises to source their supplies locally. This policy worked because imports are now difficult to come by.

The Russian government has made preparations to help the economy weather the aggressive sanctions regimes of the West, but these controls are not sustainable forever. Its economy is heavily dependent on fuel exports and currently benefits from high prices due to inflation.

“Sanctions are having a dramatic impact on the Russian economy,” Fishman said. “Even the most conservative estimate suggests that Russia’s GDP will contract by 6% this year, a bigger blow than the Russian financial crisis of 1998. Without sanctions, the Russian economy could It was poised to grow.” The country’s inability to import goods has resulted in “shortages of foreign parts and a rapid decline in industrial production. The result is a wave of underemployment, which eventually It leads to layoffs and lower living standards.”

Russia’s fuel industry ultimately has a finite lifespan, Sayn Gustafsson claims in his book Climat: Russia in the age of climate change. Russia’s economy is so deeply tied to fossil fuels that it lacks a significant alternative industry to compensate for the gains from those revenues. In 2019, oil and gas exports accounted for 56% of Russia’s export earnings, reaching a total of $237.8 billion. These revenues contribute to his 39% of the state budget, Gustafsson said. Without a strong oil and gas industry (high prices and a large customer base), the Russian economy will ultimately suffer from a lack of diversification.

Moreover, sanctions on fuel have not yet been fully implemented. According to the International Energy Agency, the EU will ban he 90% of all Russian oil imports in December, and by February 2023 Russia’s production of crude oil and petroleum products will rise to a maximum of 230 per day. 10,000 barrel reductions. Bloomberg reports that outflows to Asian markets have stabilized in recent weeks, so it may be difficult to find new customers for these products.

What role do international divestments play?

Sanctions are only part of the strategy. Although less severe than cuts in oil and gas revenues and vital imports, the withdrawal of foreign investment represents a blow to the Russian economy. Many companies, including those from the United States and Europe, continue to operate in Russia, but more than 1,000 companies have announced their intention to withdraw from Russia to some extent, according to a survey by Yale School of Management’s Institute for Chief Executive Officers. is doing.

“It may take months or years for some companies to fully dissolve their operations. [in Russia]’” Fishman told Vox. “But that doesn’t mean they’re pouring money into Russia.” Income level affects people. For example, Russian corporations and the ultra-rich will no longer be able to get loans from Deutsche Bank, and ordinary people will buy Nike shoes when the company pulls out of Russia entirely, as announced in June. You will not be able to

For a consumer product like Nike, the decision to sell doesn’t have a significant impact on earnings. According to Reuters, less than 1% of the company’s revenue comes from Russia and Ukraine combined.

On the other hand, since the collapse of the Soviet Union, Russia has been “skeptical of integration, resistant to openness, ambiguous to foreign investment, and isolated from major scientific and technological currents.” , Gustafson writes. ClimatAccording to Gustafsson, the trend has only increased under President Vladimir Putin’s rule. The promises most foreign companies have seen in the Russian market are likely now gone or short-lived at best.

“The Russian economy is one of the riskiest destinations for foreign investment and will remain so at least until sanctions are lifted,” Fishman said. On the contrary, Gustafsson writes, capital flows often go in the opposite direction. Climat“Russia has suffered particularly from the tendency of Russian companies and individuals to move capital out of Russia”, with the ultra-rich often moving their wealth to offshore havens. Indeed, according to a 2018 study by Filip Novokmet, Thomas Piketty, and Gabriel Zucman, cited by Gustafsson, “the wealth held offshore by rich Russians is about three times the official net foreign exchange reserves, and the size of is comparable to the total wealth of households.Assets held in Russia.”

Early in the war, Putin banned Russian customers from sending money abroad, including to repay foreign debt, but those restrictions were eased somewhat in April. Although Bloomberg does not provide data on outflows, Bloomberg found that in June, as many as 15,000 millionaires, an estimated 15% of HNWIs and billionaires, left Russia and moved to places like Israel and the United Arab Emirates. reported that it may move to Sanctions are coming.

Where is the Russian economy headed — and how will it affect Ukraine?

In theory, the sanctions project is supposed to impose sufficient and appropriate painful conditions that encourage the sanctioned country to change its behavior. Now, six months later, Russia is not fully feeling the future economic pain it would cause, especially if the US, UK and EU were able to maintain their energy embargoes.

“But the big question is whether all this economic damage is advancing worthy policy goals,” Fishman said. “And it’s a hard question to answer because you can never know the counterfactual.”

Despite suffering heavy losses on the battlefield, Russia maintains a presence on the Southern Front and intends to increase its total military strength from 1.9 million to 2.04 million, Reuters reports.. It’s not clear how exactly the military will achieve that, as there are reports that many Russian men are trying to avoid military service. It is a war of attrition that requires sustained military strength and morale. Russia’s victory will depend on the massive mobilization of industrial and social support. Given the challenges sanctions have posed to the industrial sector and the recent sanctions against defense firms and associated individuals, it is unclear how that will come to pass.

“For the past two decades, Putin has used Russia’s access to the world economy to build a military machine and pursue an imperialist foreign policy. “The sanctions have not changed Putin’s desire to bully his neighbors, but they are a means of getting his intimidation to work.” are reducing.”

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