At first glance, Russia may appear to be adjusting to harsh new sanctions imposed by Western countries for its unprovoked invasion of Ukraine.
The rouble, which slumped in the early days of the war to a record low, rebounded this week to its highest level since early 2020. Grocery stores in Moscow are still stocked with food, albeit at much higher prices , and revenues from the sale of oil and gas continue to flow into the budget.
But the Russian economy is anything but out of the woods, Elina Ribakova, deputy chief economist at the Washington-based Institute of International Finance (IIF), told the Russian service of RFE/RL in an interview. The country is entering a period that is likely to be very difficult as the impact of the sanctions gradually takes hold, she said.
“Everyone is short of spare parts, export markets are gone, many [companies] cannot continue production,” Ribakova said, citing evidence from a recent Russian central bank report.
The United States, the European Union and other allies have banned exports to Russia of key technologies, such as microprocessors – or chips – used in the production of many manufactured goods, including cars and planes.
Meanwhile, many Western companies have voluntarily announced that they will no longer do business in Russia, such as suppliers of components or services to the manufacturing industry.
“State of Denial”
It could take Russian companies months to find new suppliers, and those new parts might not fit perfectly into the production process, leading to further delays, Ribakova said.
Russians living in the country’s wealthiest cities, such as Moscow, may be in a “state of denial” about the bleak economic outlook because they don’t yet see the signs, like impending layoffs, that people in d ‘other regions are beginning to feel.
“In Moscow it may seem that nothing [bad] happened. But if you are in the Kaluga region or near St. Petersburg, where there are car assembly plants, everyone there knows that in a few months they will be unemployed,” Ribakova said in the April 27 interview.
Kaluga, about 160 kilometers southwest of Moscow, had been one of Russia’s most successful cities in attracting foreign investment per capita, thanks in part to its proximity to the capital and the ease of Business. Today, these foreign manufacturers, including automobile manufacturers, are to extinguish production, potentially leaving thousands of people in Kaluga jobless.
The IIF expects the Russian economy to decline by 15% this year due to the impact of sanctions, one of the most bearish forecasts by experts. Such a drop would be the steepest since the early 1990s, when Russia was struggling to make the difficult transition from a state-controlled economy to a free market.
Ribakova says the Russian ruble has held up well so far, largely thanks to the national currency’s supportive policies amid crushing sanctions.
The central bank immediately raised interest rates to 20%, the highest in two decades, making ruble deposits more attractive but also discouraging businesses and individuals from borrowing. It has since reduced them to 14%.
The central bank has also imposed limits on the conversion of rubles into other currencies, banned foreigners from selling their ruble-denominated stocks and bonds, and forced Russian oil and gas exporters to sell 80% of their foreign currency earnings. strong against rubles.
The invasion of Ukraine caused oil and gas prices to spike, benefiting Russia and its ability to protect the rouble. As a result, Russia earned billions more from the sale of oil and gas in the first four months of 2022 compared to the analogous period last year. Oil and gas exports can account for up to half of Russian federal budget revenue.
European countries are now discussing phasing out Russian oil imports by the end of the year and cutting natural gas imports by two-thirds over the same period, a potential hit to US revenue. export from Moscow.
Russia will try to redirect those oil sales to Asia, but will earn less because of the cost of transporting it by tanker to the other side of the world, Ribakova said, adding that China, the world’s second-largest economy, might not. not want to significantly increase his dependence. on Russian energy.
Beijing appears to have an “unspoken rule” of limiting its energy dependence on any country to 15%, and Russia is already slightly above that level, she says.
When will this end?
Russia’s long-term economic prospects will partly depend on how long its invasion of Ukraine lasts, Ribakova told RFE/RL. If the war does not end soon, not only will the West continue with its plans to end energy dependence on Russia, but it could also deploy the approximately $300 billion in frozen funds of the Russian central bank to rebuild the Ukrainian economy.
The United States and Europe imposed a freeze on these central bank assets in the early days of the war and have continued to pile more sanctions as the war continues. Ribakova calls the sanctions “stigma” which is “much worse” for a country’s image than a default.
She points out that due to reputational risk, most foreign companies have not returned to Iran even after the lifting of years-old sanctions – and the same could happen with Russia.
“I think in our lifetime, Russia may never come back to global markets in the same way,” she said.