The success or failure of the West’s economic war against Russia is crucial to the outcome of the fight in Ukraine. But knowing whether the sanctions are working will be difficult.
Economic damage estimates vary widely. The Institute for International Finance, a group of international banks, expects Russian economic output to fall by a third this year. Economists at ratings firm Standard & Poor’s predict a 6.2% contraction in 2022, while Moody’s Analytics estimates the sanctions-induced slowdown will reduce economic output by 13.5% to 24% depending on the length of the conflict and the magnitude of the decline in Russian energy exports.
“This is a massive act of self-harm,” said Gaurav Ganguly, economist at Moody’s.
Russian President Vladimir Putin acknowledged on Wednesday that the sanctions had hurt the country’s economy.
“Our economy will need deep structural changes in these new realities, and I won’t hide it – they won’t be easy, they will lead to a temporary spike in inflation and unemployment,” Putin said in remarks. televised on Wednesday ahead of a video meeting with Russian government officials.
There are two ways to track the impact of sanctions: with economic data or with on-the-ground details like layoffs, shortages and production cuts. Russia has decided to limit access to both.
Russia’s central bank last week suspended the publication of figures on its foreign exchange reserves for three months, saying that during this period “all publications” would use the $643.2 billion figure which was valid on March 4.
The Russian stock market has also not traded for almost three weeks, a sign that Moscow is trying to hide economic reality. London-listed Russian shares fell near zero and have since been delisted, with Russia’s biggest lender, Sberbank Russia PJSC, among those withdrawn from trading. The shares were trading for as little as a penny before being delisted.
Government economic data like gross domestic product, unemployment and inflation are released with a lag. February’s data is mixed, reflecting pre-invasion tensions and the early fallout from the war. Russia saw a sharp increase in its trade surplus, reflecting much higher prices for oil and gas, its main exports.
However, other figures pointed to a pick-up in inflation, while a survey of purchasing managers at manufacturers recorded a drop in production and new orders for the first time in six months. This measure, known as the Purchasing Managers’ Index, is produced by a private company and will likely give the first glimpse of how the economy has responded to sanctions when it is released on April 1.
More recent data points to trouble ahead for the Russian economy. The ruble weakened, with a dollar buying 112 rubles, against 75 at the start of the year. Russia’s central bank more than doubled interest rates to 20%, to encourage holders not to sell the rouble.
A weaker ruble will increase the cost of imports denominated in euros or dollars, increasing inflation. At the same time, the sharp rise in rates will make borrowing more expensive for households and businesses, weighing on growth. The Russian central bank will meet on Friday and could define further actions.
Russia’s economic data has been considered accurate in the past. The figures showed a 2% drop in economic output due to sanctions in 2014 and recorded the big swings in the economy since the end of the Soviet Union. Sanctions are much tougher this time around, leading economists to predict greater economic decline.
But economists fear that Russia’s crackdown on free speech and access to foreign news sources could make it harder to determine the impact of the sanctions.
“When you have war, you don’t care about accurate reporting,” said Maxim Mironov, an associate professor of finance at Madrid’s IE Business School, who grew up in the Soviet Union and researched economics. and corruption of Russia. “You care about propaganda.”
On the ground, there are already some hints of the economic pain to come. According to the Yale School of Management, 380 international companies have announced their withdrawal from Russia since the invasion of Ukraine. Some of these companies have pledged to pay wages for a limited period, but after that unemployment is expected to rise and these products will no longer be available, potentially leading to inflation as supply shrinks.
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Russians lined up for imported drugs, which are not covered by the sanctions. But prices are expected to rise following the fall of the ruble.
According to Windward, a shipping data company, calls to Russian ports by commercial cargo ships and tankers were 40% lower in the first six days of March than a year earlier, a sign that exports and imports are already down.
There are also signs that parts and equipment shortages from Western suppliers are hitting factory output, including the suspension of production at a Lada automaker.
The compensation for any pain caused by the sanctions will be the continued export of oil, natural gas and minerals at high prices. Western products could also be replaced by products from China, which could keep prices low and create jobs for Russians.
Many economists who would follow the impact of the sanctions have left Russia, fearing punishment for publishing accurate accounts of the economy. Some say they will continue to publish from abroad.
Mr Putin became Russia’s president in 2000 and takes credit for stabilizing the economy after the collapse of the Soviet Union. The economy shrank every year from 1990 to 1996, but grew by 10% and then by 5.1% during his first two years in office, and every year thereafter until the global financial crisis.
An economic decline caused by the war in Ukraine could undermine Mr. Putin’s reputation for managing the Russian economy.
—Alexander Osipovich contributed to this article.
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