Russia seems to be resisting the sanctions, as seen by its booming government income and its strong currency. How successful are sanctions imposed by the West?
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| [Sanctions on Russia: How effective are western sanctions] |
When the conflict in Ukraine first broke out, many people appeared to have already made up their minds about what would follow. In a matter of days, the Russian military would emerge triumphant, and not long after that, the unprecedented Western sanctions would drive the Russian economy to its knees, bringing an end to the conflict. It was the complete reverse of what was expected: the invasion has been going on for five months at this point, yet there has been no economic collapse in Russia. The currency is as strong as it was before the invasion of Crimea, unemployment is low, government revenues are bubbling up, and the Kremlin derides the legal default on its government bonds as Western propaganda. All of these factors have contributed to Russia's current economic success. To what extent, therefore, do the punishments not work? Has the West made an incorrect assumption?
Prior to Russia's invasion of Ukraine, the country's economy had been doing rather well. With a gain in gross domestic product (GDP) of 3.5 percent, the recovery from the epidemic has been quite strong. There has been a notable rise in the earnings of households, as well as a drop in the rate of unemployment. Statistics on tourism and the number of people taking out personal loans have also increased. In addition to robust spending, the state budget was in excellent shape. Business was booming. The choice to go to war was then made.
A blockade of this magnitude has never before been placed in front of a globalized economy (Russia has the highest import ratio of GDP among the nations that make up the BRICS). The amount of the frozen assets held by the Russian central bank alone is far more than the total currency reserves held by the German Bundesbank, coming in at between 300 and 400 billion US dollars. The ruble's decline came as a complete shock to Moscow, which was caught off guard by this Western tool. During the first two weeks of the conflict, Russian banks reported a total of $ 30 billion worth of withdrawals from their customer accounts. A real onslaught of counterarguments began to surface.
The government and the central bank reacted in a flash by implementing currency controls, the closure of the stock exchange, a doubling of the key interest rate to 20 percent, and new regulations for the forced sale of foreign currency earnings by private companies. All of these measures were taken in response to the crisis. In point of fact, the Kremlin has prevented liquid money from leaving the Russian economy, which has resulted in the economy being more stable. You cannot deny the fact that it was successful and represents a significant achievement for the Russian administration.
This so-called "manufactured slumber" deftly deflected the first impact dealt by the penalties against the target. The people and businesses have returned the money that was taken from the bank, and it is now remaining there. This has resulted in a notable reduction in general economic activity. The consequence of this defensive tactic is that it is a perceptible slowdown. On the other hand, it is not expected that Russia would see a recovery in its level of foreign investments, which are highly essential to the country.
Undoubtedly, the Russian economy is going through a difficult downturn at the moment. The predicted decline in economic production ranges from ten to fifteen percent of GDP. However, the issue of what comes next is of far more significance. The study of recessions is often accompanied by the use of the letters V, U, W, or K, each of which depicts the progression of the crisis in the shape of a curve and is used to demonstrate the analysis. V signifies a sudden, one-time shock followed by a speedy recovery; this is the "best case" scenario for what may happen after the shock. U has hit rock bottom, which means that it will take longer for the economy to get back on its feet due to the lingering effects of the crisis; W describes the "double dip," which is a longer phase of massive turbulence followed by a subsequent recovery to the level it was at before the crisis; and at K, the difference is differentiated. The recoveries of various sectors differed. The outlook, on the other hand, is rather different for Russia; it is the L. This scenario indicates a significant decrease in the amount of economic production,
When seen against this backdrop, the accomplishments of earlier efforts to stabilize the financial system and the currency seem less impressive. The main obstacle is detaching Russia from its economic and supply links on the continent, which would require Russia to decouple itself. In point of fact, we are seeing a unique deindustrialization that is regressing an otherwise relatively developed capitalist economy by a full three decades. Therefore, we cannot speak of a collapse but rather of a decline. The below four considerations are examples that may serve to explain this point.
To begin, the labor market is reporting the first signs of the crisis, one of which is a nominal decline in pay as a direct result of firm closures or short-term employment. In order to conceal the "real" unemployment rate in Russia, the state requires businesses to carry out this practice, which they are required to pay for out of their own resources. The decrease in salaries ranges anywhere from 8% to 25%, depending on the sector of the economy. Some state-owned businesses provide their employees with dacha plots in order to get them ready for self-sufficiency. This is done so that the salary gap that inevitably develops may be paid privately, at least if the employees feed themselves.
The number of job postings is on the down, but there has been a significant uptick in the number of people applying for open positions. There are around 8 million individuals in Russia who make up approximately 12 percent of the officially employed population and who are reliant on foreign money, the associated business presence, and unimpeded commercial links. The closure or suspension of manufacturing facilities outside (at Volkswagen, Peugeot, Volvo, Bosch, Ikea, and other companies, for example) was devastating for Russian suppliers as well. It seems certain that there will be an increase in the unemployment rate towards the end of the year. The implications of this are already being seen in Russia's retail sector and payment processing systems. The sentiment of the general public is quite gloomy.
Second, official customs and trade statistics are now considered to be classified information, which means that the analysis must rely on indirect data and export statistics from trading partners. This is because official customs and trade statistics were previously considered to be public information. In spite of this, it is impossible to deny the tendency. As a result of the sanctions imposed on imports and exports, the closing of European airspace, and the interruption of logistical lines (the European Union was crucial, accounting for 36.5 percent of total imports), the volume of imports into Russia has dropped by up to 60 percent.
In addition, there are catch-up consequences that are taking place as a result of the global logistics and container crisis that is occurring in the shadow of the epidemic. What can no longer be imported into Russia are not only consumer products but, more importantly, important technological solutions for processing inside the country. The output of steel has decreased by 25 to 30 percent, while the production of wood has declined by up to 80 percent. This is just one example of the many different industrial sectors that are fast contracting. At the conclusion of the month of May, the automobile industry reported a drop in production volume that was up to 97 percent lower than it had been before.
By reviving domestic car manufacturing at a lower technological level - without airbags, anti-lock braking systems, or complex electronics - the Russian government is working to fill the industrial gaps left by companies like Stellantis (Peugeot, Citroen, Opel, Jeep, and Fiat) after they withdrew from the country. This is part of an effort to fill the void left by companies like Stellantis after they left the country. The organization of domestic alternatives to Tetrapak packaging, kitchen equipment, Coca-Cola, and McDonald's is taking place despite intense competitive pressure. Some things will be successful, but changing computer chips, servers, industrial computers, and cellphones on your own is just not doable. Some things will be successful.
Third, China will not come to our rescue at this critical moment. The number of goods coming into the country from the People's Republic has been cut in half. Union Pay, the Chinese credit card association, is unable to fill the void that MasterCard and Visa have created. Because of the possibility of aircraft being seized by Western leasing firms, Russian airlines avoid flying their jets to Chinese airports. Despite the fact that so-called parallel imports are now permitted, the Kremlin's ambitions for a speedy reorganization of Russian economic ties have in no way been realized. Chinese businesses try to steer clear of situations that might put them in danger of receiving secondary penalties from the west.
As a direct consequence of this, China does not produce any replacement parts for civilian aircraft. The Chinese technology companies Huawei, Lenovo, and Xiaomi are all phasing out their operations in Russia in a stealthy and slow manner. Even as a new consumer for energy supplies and as a solution for the Western oil embargo and gas decoupling, China is just a partial alternative. This is because China is a customer for energy supplies. Estimates provided by the Russian government suggest that the construction of the essential pipeline and delivery infrastructure might take up to 10 years.
Fourth, the strength of the ruble is not an indication that the sanctions are ineffective. Rather, the strength of the ruble is the true indicator of the degree to which Russia is isolated from the rest of the world economy and of the massive contraction in domestic demand. In the context of declining imports, the current account surplus amounts to more than 110 billion dollars in United States currency. The sharp decline in the demand for rubles is helping to ensure that the exchange rate for the Russian currency will remain high. As a consequence of this, the competitive environment makes the process of reorienting Russian industry extremely challenging. German Gref, the director of Russia's largest financial institution, Sberbank, commented on the impasse in which the Russian economy is stuck by saying, "Exports are poison, and imports would be medicine."
Are there positive results to report from the western sanctions, or not? That is highly dependent on the expectations that are held. It is abundantly clear that the sanctions were not successful in putting an end to the war. Through astute management of its monetary and financial systems, Russia was able to withstand the initial blow. Additionally, it is highly unlikely that the sanctions will hasten the process of ending the war in Ukraine. In any event, the capacity of sanctions to generally bring about changes in political behavior is called into question when considered in this context.
Sanctions imposed by the West signify a significant turning point in the West's ties with Russia. The weapons of censure are no longer "smart" and selective; rather, they are punitive and systemic in nature. The price is being picked up by Russian society, which, in contrast to the oligarchs and the authorities, who are growing even more powerful, is unable to see any genuine route out of the imminent economic standstill that is looming over the country. The conflict is costing Russia close to half a billion dollars in United States currency every single day. The fines will add another layer of difficulty to an already difficult situation for public finances. It is not yet apparent where the funds will come from to assist less fortunate people in Russia as the economic crisis begins to take hold.
However, Western sanctions are an effective and reasonable reaction to the conflict that has been going on. They started a chain reaction of cumulative consequences, which drove up the cost of Russian infractions. The isolation that Russia has been subjected to has had a cumulative and, as time passes, more detrimental effect. The country's value chains are already in the process of disintegrating as a result of issues with imports, the flight of foreign enterprises, and supply bottlenecks involving Western technological components. Increasingly sizable portions of the industrial sector are becoming incapacitated. In addition, there is a growing backlog of maintenance issues, critical components are missing, and critical software updates are not being installed.
A decline in technological capability is taking place in Russia, and its effects will be felt throughout the country. The Russian Federation is losing its edge as a competitive global power. The previous growth model for Russia is coming to an end as a result of several factors, including a ruble that is too strong, expensive deliveries, consumers who are pessimistic about the future and who have shrinking wallets, and technological problems. The prosperous historical period that started with Putin's first administration 23 years ago and lasted until now has come to an end.