Russian Economy and the effects of sanctions

Initially the Russian currency Ruble fell but after Ukraine war the value of the currency recovered. Russia's President Vladimir Putin claimed that the country had managed to withstand the sanctions. He referred to the situation as a victory, and he said that the country had shown the world that it can still fight back. Despite the government's claims that the sanctions are not affecting the country's economy, it's clear that they are taking a toll on it. According to the ROSSTAT, Russia's inflation rate reached 17.3 per cent in December, which is the highest level in over a decade. It's expected to increase to 18.7 per cent this year.

Several companies in Russia have reportedly been forced to close due to the sanctions. Some of these include the country's largest tank manufacturer. The United States also noted that the closing of several car plants in Russia was a sign of the sanctions' effect.

According to the mayor of Moscow, the city is expected to lose about 200,000 jobs due to the sanctions. Over 300 companies have already left Russia. Many of these companies have also stopped sending their goods through the country's international supply chains. Due to the sanctions, Russia is expected to default on its debt for the first time in history. This will likely cause the country to remain out of the debt markets for several years. Economists and officials from the US urge Russia to be patient as the sanctions will eventually have their full effect. This will allow the country to get the necessary supplies and capital it needs to continue its economic growth. It took Russia almost a year to report its economic distress after it was sanctioned for its actions in Ukraine. Some of the indicators that showed the country's distress included higher inflation and a slowdown in industrial production. David Feldman, an economics professor at William & Mary, said that it's not yet clear if the sanctions are having a positive effect on Russia's economy. He noted that various factors such as the quality of the goods being produced and the prices charged by the companies are still being looked at. Due to the government's efforts to prop up the Russian economy, it's difficult to determine how the sanctions are affecting the country's business. Its biggest industry, namely oil and gas, is largely unaffected by the restrictions. A report released by two economists last month warned that the sanctions could cause the Russian economy to shrink by up to 20%. They noted that if the US, the EU, and Britain decide to ban the country's natural gas and oil, it could cause the country's economy to shrink by up to 15%.

Despite the European Union's agreement to ban Russian coal by August, there's been no consensus on halting the flow of oil and natural gas from Russia. Europe is still heavily reliant on Russian energy supplies, as both the US and Britain have banned or phased out their imports of Russian oil. The US and its allies have claimed that they have tried to target Russia's military capabilities and financial interests in order to prevent it from wage war. However, they have also left the country's everyday citizens largely unaffected.

In Russia, the price of various food and drink products has increased significantly due to the country's energy shortages. For instance, the cost of drinking water has gone up by around 35%. In supermarkets, the price of sugar has increased by around 77%. Several stores in Russia have reportedly closed their doors due to the country's sanctions. Some of the companies that have stopped operating in the country include Apple, Starbucks, and McDonald's.

The recovery of the ruble has been a point of concern for the Kremlin, as it shows that the sanctions are not working. During the early days of the war, the ruble fell to around 150 to the dollar, but it eventually recovered to around 80 to the US dollar. A gauge of weekly inflation released by Rosstat has shown that the rate of inflation has slowed down. In response to the falling value of the ruble, the Russian central bank has increased its key interest rate to 17% from 20% earlier this month. It also signaled that it might lower it further. This isn't the first time that Russia has defended the value of its currency against the West. During the 1970s and 1980s, the country's government had a policy of defending the ruble's value. The actions of the Kremlin during the 1990s helped to stabilize the country's financial situation. US officials have also dismissed the recovery of the ruble as a result of the sanctions. They noted that the central bank's actions have artificially inflated the value of the currency.

The conflict in Ukraine and the sanctions imposed on Russia have caused global economic growth to slow down. Many developing countries are expected to bear the brunt of the effects. This conflict in Ukraine has caused the region's economy to shrink by over 4 percent this year, which is significantly worse than the previous estimate of 3 percent. It is also twice as large as the contraction caused by the pandemic in 2020.

Although the exact impact of the war on Ukraine's economy will vary depending on its duration and intensity, it is widely expected that the country's economy will shrink by over 45.1 percent this year. In Russia, the country's economy is expected to shrink by over 11 percent in 2022. The humanitarian crisis caused by the conflict in Ukraine has been described as the biggest threat to the country's economy since the Soviet era. It has also damaged the country's infrastructure. As the country struggles to recover from the effects of the war, it needs immediate financial support. The government is also running out of funds to support its citizens.

The war in Ukraine has also affected the economies of other countries in the region, such as Central Asia and Europe. This region was already expected to experience a slowdown due to the pandemic. In addition to Russia and Ukraine, Belarus, Kyrgyz Republic, Moldova and Tajikistan are also expected to experience a negative impact on their economies. Due to the war's effects on their trade and financial sectors, various economies have downgraded their growth projections. In terms of wheat imports, Russia and Ukraine are the biggest producers in the region. They are also major exporters to other countries. Remittances from Russia are also a major source of income for some Central Asian economies. The ongoing conflict in Ukraine and the pandemic have shown that even minor crises can have a significant impact on the country's economy. To avoid a sudden and significant decline in their economies, governments in the region should strengthen their macroeconomic policies and their social safety nets. They should also avoid losing focus on their efforts to improve energy efficiency.

The humanitarian crisis that has been caused by the war in Ukraine has been regarded as one of the most significant global shocks. It is expected that the number of refugees from the country will dwarf the number of people affected by previous crises. while The World Bank is currently working on programs to support the countries that are hosting refugees and the refugee communities. and the spike in oil prices that has been triggered by the war in Ukraine has highlighted the need for increased energy security. This is also expected to encourage the development of renewable energy sources.

World Bank Response to The War:

The World Bank has been providing humanitarian assistance to Ukraine. Since the invasion of the country by Russia on February 24, the organization has been mobilizing a $925 million emergency financing package. The funds from the emergency financing package will be used to support the country's social programs and pay the wages of its hospital workers and pensioners. This is part of a larger $3 billion support package that the Bank Group is currently preparing for Ukraine. The invasion has caused the biggest refugee crisis in Europe since the Second World War. The Bank Group is also exploring the possibility of supporting refugees in host countries.

Conclusion:

The success of Russia's economic war against the West will largely be decided by how it can drive division in the West. At the same time, it will have time to develop its own alternatives to the goods that it can no longer buy due to the sanctions. The implementation of the sanctions has also brought about various international actors to participate in the political and economic activities in Russia.

Pic Courtsey-Russia Today

(The views expressed are those of the author and do not represent views of CESCUBE.)