Despite sanctions, the Russian economy is still standing – for now

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Six months after the Russian war in Ukraine, severe economic sanctions initiated by the US and the EU seem to have the dual effect of suffocating the Russian economy and encouraging corporate divestments, with US-based Citibank being the latest to announce its formal withdrawal from the Russian market.

Citibank on Thursday issued a press release declaring its intention to wind down its consumer and local commercial banking operations in Russia as part of a longer-term “global strategic renewal” first announced in April 2021. “We have explored multiple strategic options in recent months “Obviously the winding down path makes the most sense given the many complicating factors in the environment,” Legacy Franchises CEO Titi Cole said in the press release, although the bank was still trying to negotiate a sale in July. from its local commercial and consumer banking to local Russian companies, the Financial times reported at the time. Sanctions made it difficult to sell to at least one potential buyer, Rosbank; owner Vladimir Potanin was recently sanctioned by the UK.

Citibank’s announcement and decision to wind down its operations rather than continue selling is somewhat of an indicator that sanctions and bans are having their intended effect. “Months ago, the United States banned all new investment in the Russian economy,” senior researcher at Columbia University’s Center for Global Energy Policy Eddie Fishman told Vox via email. “So all the American companies that stay in Russia barely keep the light on.”

However, that does not mean that the Russian economy has collapsed; Russia’s central bank has adjusted the country’s monetary policy to keep the ruble afloat, and it is currently the strongest against the dollar since 2018. CNN reported Sunday. After a crash early in the war, when the US froze $600 billion in foreign exchange reserves, the central bank took aggressive action by raising interest rates to keep inflation in check. That appears to be paying off, as inflation appears to be leveling off after peaking at 18 percent in April.

In addition, banks and companies from other countries, including: China and Japan have helped soften the blow somewhat, either by maintaining their business ties with Russia or by pushing for more extensive investment there. China and India both have ramped up fuel purchases, including coal, despite sanctions against Russia’s fossil fuel industry.

Sanctions take time to impact a major economy

Russia has also been working to soften the impact of the sanctions since the US originally imposed sanctions in 2014 over Russia’s invasion of Crimea. When major Western companies such as McDonald’s, Starbucks, Visa and Mastercard left the country early in the invasion, there were Russian companies to soften the blow, Andrey Nechaev, the former Russian economy minister, said. told CNN. “The exit of Mastercard, Visa, had little impact on domestic payments because the central bank had its own alternative payment system.” Fast food is now also becoming a homegrown venture, with the reopening of McDonald’s franchises under the name Vkusno i Tochka — Tasty, and that’s it — and Starbucks is now moving on to Stars Coffee. As of 2014, the government forced Western franchises to get their supplies locally; those policies have paid off, as imports are now hard to come by.

Despite the Russian government’s preparations to help the economy weather the West’s aggressive sanctions regime, those controls are not sustainable forever. In addition, Russia is still unable to import critical technology supplies, and its economy is heavily dependent on fuel exports and is currently benefiting from high prices due to inflation.

“Sanctions have a dramatic effect on the Russian economy,” Fishman said. “Even the most conservative estimates suggest that Russia’s GDP will contract by 6 percent this year — a bigger blow than the Russian financial crisis of 1998. Without sanctions, the Russian economy was poised for growth this year.” The country’s inability to import goods “has led to shortages of foreign components and rapidly declining industrial production. The result is a wave of underemployment that will eventually translate into layoffs and falling living standards.”

The Russian fuel industry ultimately has a limited lifespan, Thane Gustafson argues in his book climate: Russia in the age of climate change. The Russian economy is so tied to fossil fuels that it has no significant alternative industry to make up for the money it makes from those revenues. In 2019, oil and gas exports accounted for 56 percent of Russia’s export revenues, totaling $237.8 billion. Those revenues contributed to 39 percent of the national budget, according to Gustafson. Without a strong oil and gas industry – high prices and a large customer base – the Russian economy will eventually suffer from the lack of diversification.

Moreover, the full burden of fuel sanctions has not yet come; in December, the EU will ban 90 percent of all Russian oil imports, causing Russian production to fall by as much as 2.3 million barrels of crude oil and oil products per day by February 2023, the report said. International Energy Agency. It can be difficult to find new customers for those products, Bloomberg reports:as outflows to Asian markets have stabilized in recent weeks.

What role does foreign divestment play?

Sanctions are only part of the strategy; foreign divestments are a blow to the Russian economy, although not as serious as the curtailment of oil and gas revenues and critical imports. While many companies, including US and European companies, continue to do business in Russia, according to research by the Yale School of Management’s Chief Executive Leadership Institute.

“It can take months or even years for some companies to completely dissolve their businesses [in Russia]Fishman told Vox. “But that doesn’t mean they are funneling money to Russia.” Financial services, heavy machinery, airlines, oil companies, fast food and retail companies around the world have suspended their operations in Russia, affecting people of different income levels. For example, Russian companies and the ultra-wealthy can no longer get a loan from Deutsche Bankand ordinary people won’t be able to Buy Nike shoes as soon as the company leaves Russia completely, as it announced in June.

For consumer goods such as Nike, the decision to divest is one that will not have a substantial impact on bottom line; according to ReutersLess than 1 percent of the company’s sales come from Russia and Ukraine.

Russia, for its part, since the collapse of the Soviet Union has remained “suspicious of integration, resistant to openness, ambivalent towards foreign investment and isolated from major scientific and technical currents,” writes Gustafson in climate. Those tendencies, according to Gustafson, have only increased during President Vladimir Putin’s reign; any promise most foreign companies saw in the Russian market is now probably gone or short-lived at best.

“The Russian economy is one of the riskiest destinations for foreign investment and will remain so until sanctions are lifted,” Fishman said. On the contrary, capital flows have often gone the other way, writes Gustafson in climate. “Russia is particularly suffering from the tendency of Russian companies and individuals to move their capital out of Russia,” with the ultra-rich often moving their wealth to offshore havens. In reality, according to a 2018 study by Filip Novokmet, Thomas Piketty and Gabriel Zucman, quoting Gustafson, “the wealth held offshore by wealthy Russians is about three times greater than official net foreign reserves, and is comparable in size to the total financial assets of households in Russia.”

Early in the war, Putin banned Russian customers from sending money abroadincluding repayment of foreign debt, although those restrictions eased somewhat in April. Although Russia does not provide data on capital inflows and outflowsBloomberg reported in June that as many as 15,000 wealthy individuals — an estimated 15 percent of its millionaires and billionaires — could leave Russia for places like Israel and the United Arab Emirates due to the tightness of sanctions.

Where is the Russian economy heading – and how will it affect Ukraine?

Sanctions projects are theoretically supposed to impose sufficient and sufficiently painful conditions that induce the sanctioned state to change its behavior. After six months, Russia has not yet felt the full extent of the economic pain it will feel in the future if the US, UK and EU in particular can maintain the energy embargo.

“The big question, though, is whether all of this economic damage promotes worthy policy goals,” Fishman said. “And it’s a hard question to answer because we can never know the counterfactual.”

Russia has maintained its presence on the southern front despite heavy losses on the battlefield and plans to increase its total military strength from 1.9 million to 2.04 million, Reuters reports:. It’s not clear exactly how the military will achieve that, as reports that many Russian men have reportedly tried to evade military service. And the conflict has entered a grueling new phase – a war of attrition that require sustained military force and morale. A Russian victory would depend on significant industrial mobilization and social support; it is unclear how that would happen given the challenges that sanctions have brought to the industrial sector and recent sanctions against defense companies and affiliates.

“For the last two decades, Putin has used Russia’s access to the global economy to build a military machine and pursue an imperialist foreign policy. That will be much more difficult for Putin in the future, as the Russian economy has little hope of dynamism under these sanctions, which are likely to remain in place for a long time to come,” Fishman said. Sanctions don’t change Putin’s desire to bully neighbors, but they reduce his resources to fulfill his threats.

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