On February 24, 2022, Russia initiated an undeclared war on Ukraine. The US and other nations have criticized Russia’s unprecedented military attack as “unprovoked and unjustifiable. Members of legislatures, local governments, corporations, and the public in the United States and internationally have backed Ukraine and criticized Russia’s aggression. Hundreds of companies from the United States and other countries have withdrew, halted, or reduced their activities in Russia. Companies have also responded by tightening down on misinformation and decreasing the internet presence of Russian state-owned media sites such as RT News and Sputnik News. Google and Twitter have pulled their advertising from Russia. The United Nations General Assembly voted 141-5 on March 2, 2022, to demand that Russia immediately, totally, and unconditionally withdraw from Ukraine.
In contrast to the anti-Russian sanctions implemented following the annexation of Crimea, these measures were quite harsh and had an instant effect. The Russian ruble lost over half its value against the U.S dollar, and the Moscow stock market crashed. For a brief while, it appeared like the West might be successful in its attempts to cause economic catastrophe in Russia. However, suddenly, the ruble began to regain its positions. However, the ruble exchange rate is now significantly higher than it was before the beginning of the war, leaving many to wonder how the Russian economy survived. This is not to imply that the currency is a reliable barometer of Russia’s economic stability, but in the economy, the appearance of stability is almost as significant as actual stability. However, claims that the Russian ruble has dropped significantly versus the U.S dollar on the black market indicate that Russia’s “real economy” is struggling. However, there are additional indicators that contradict the narrative of that “struggling.” Consider the Central Bank’s reduction of the interest rate from 17 to 14 percent, or the increasing spending of Russians in cafés, bars, and restaurants. These factors show that the Russian economy is doing quite well. So, how did Kremlin pull it off?
Russia has a significant trade surplus as a result of energy exports and increasing oil and gas prices. Russia has strong trade relations with China and India, which provide it with a steady infusion of foreign currency and alleviate any concerns about its insolvency. More foreign money is also pouring in from the EU, which is unable to reject Russian gas and is having significant difficulty attempting to block Russian oil shipments. Of course, all of this foreign currency is meaningless if Russia cannot utilize it due to sanctions. An imminent debt default was expected as a result of this situation, but Russia has once again conned the international community by exploiting vulnerabilities in the sanctions regime.
Russian oil and food supply, as well as Moscow’s capacity to fulfill its debt, are critical to global stability. However, the ruble was ultimately maintained by a series of emergency measures implemented by the country’s administration. Since 2014, when the United States and the European Union sanctioned Russia over its annexation of Crimea, Russia has been constructing an “economic fortress” capable of withstanding the sanctions. These steps include accumulating $640 billion in foreign exchange reserves to support Moscow in the event of sanctions. Russia’s reaction to the sanctions indicates that the Kremlin was anticipating such a scenario. The Central Bank boosted interest rates to 20%, required exporters to convert 80% of their foreign exchange earnings into rubles, and limited withdrawals from foreign currency accounts to $10,000. All of this, together with Putin’s demand for foreign payments for gas in rubles, was intended at inflating the ruble’s value and seizing control of the domestic market. However, the difficulty is that it all has to come to an end at some point.
The Russian Ministry of Finance predicts that the country’s GDP would decline by 12% in 2022, the lowest year since 1994. According to April figures, the Russian government has already received 133 billion rubles less in revenue from oil and gas exports. It is difficult to predict which specific parts of economy will suffer next because, now, we are only seeing losses in industries that are directly affected by the sanctions. It is obvious that travel companies, airlines, and the automobile sector would struggle. However, the decisive blow will be indirect rather than direct. When compelled to cut expenses, it will fall on firms whose products Russians will stop buying. When people have less money, they reconsider their spending habits. There are several businesses that will likely suffer even more than tourism or aviation. First and foremost, the customer service and, perhaps the financial sector will go down. While it is difficult to predict, all of that will likely happen within a few years. The Russian economy is now being converted to a wartime economy style. The Russian government is becoming considerably more centralized and planned than it was before. First of all, that is due to the fact that the outputs of market systems no longer serve the government. As a result, the authorities impose all of these controls, restrictions, and increased authorities to oversee businesses, among other things. According to Russian economists, the next phase would likely be a planned economy. That was the path that led to the demise of the Soviet Union 30 years ago. By the end of the USSR, the economy had deteriorated to the point that the country had collapsed for economic reasons. Although that prognosis is questionable, if the Kremlin is actually considering it, Russia’s future might be quite dark.
References
Cohen, P., & Safronova, V. (2022, May 19). In Russia, as prices soar, the outlook for its economy grows ‘especially gloomy’. The New York Times. Retrieved June 19, 2022, from https://www.nytimes.com/2022/05/19/business/economy/russia-economy.html
Cordell, J. (2022, May 30). Analysis: Russians feel little economic pain now, long-term outlook darkens. Reuters. Retrieved June 19, 2022, from https://www.reuters.com/markets/europe/russians-feel-little-economic-pain-now-long-term-outlook-darkens-2022-05-30/
Mihalcik, C. (2022, June 8). Companies that have left Russia: The list across Tech, entertainment, finance, sports. CNET. Retrieved June 19, 2022, from https://www.cnet.com/news/politics/companies-that-have-left-russia-the-list-across-tech-entertainment-finance-sports/
By The European Institute for International Law and International Relations.
