Russia’s economy has avoided collapse so far, but trouble is looming. Here’s why (msn.com)
After Western nations announced their first rounds of economic sanctions in the days after Russia invaded Ukraine on Feb. 24, the Russian ruble lost nearly half its value and stock markets were closed for the first month of the war to avoid a crash.
Two months later, the ruble has largely recovered, becoming the best-performing currency globally in March. Trading also bounced back once the stock markets were reopened last month.
Economists say steps taken by the Kremlin and the Russian Central Bank — raising interest rates to 20 per cent, forcing Russian businesses to exchange 80 per cent of their overseas earnings into rubles — contributed to the recovery.
Russia has also dipped into the half of its estimated $620 billion in foreign currency holdings not invested in the U.S. and Europe — currently frozen by Western sanctions — to protect the ruble and fuel government spending.
Sundstrom says Putin's popularity could drop off "pretty quickly" if domestic discord grows — particularly if the economic situation worsens.
Moscow Mayor Sergei Sobyanin warned on Monday that around 200,000 people are at risk of losing their jobs as Western companies pull out of the capital in protest over the war. He announced $40 million will be spent on helping those workers laid off by foreign firms find temporary employment and new jobs.
The Russian Central Bank's chairwoman, Elvira Nabiullina, sounded even more dire in her reports to Russian lawmakers this week.
Inflation in Russia now stands at 17.6 per cent and is on track to accelerate to 22 per cent this year, while the economy is set to shrink by 9.2 per cent in 2022, according to a poll of economists conducted by the bank in April.
Nabiullina told the Duma, Russia's lower house of parliament, on Thursday that nearly every product made in Russia relies on parts imported from overseas, which have largely been banned amid the sanctions. Bans on Russian exports are also due to be felt as soon as the second quarter of this year, she added.
Plus, she warned that "the period during which the economy can live on reserves is finite." She explained the reserves not frozen by the West are largely invested in gold and Chinese yuan, which can do little to further resuscitate the ruble.
Brander, the UBC economist, said it will take years for Russia's manufacturing sector to find ways to make up for the lack of Western parts and create new supply chains.
"As time goes on, it's going to be harder and harder to produce in Russia," he said.
"My only worry is that (the economic pain) won't accumulate fast enough," he added, pointing to how little impact such shortages will have on the Ukrainian battlefield right now.
The European Union, meanwhile, is mulling how to curb imports of Russian oil, seeking a phased approach in line with the four-month transition away from Russian coal the bloc announced earlier this month.
If approved, it would strike a blow to a revenue stream for Russia currently estimated at over $800 million per day, according to the Belgian economic institute Bruegel.
Sundstrom says the accumulation of these looming catastrophes may very well lead to real impacts on average Russians, threatening Putin's support.
"At a certain point, the rubber is going to hit the road when the government finds itself unable to pay people's pensions, provide parts for manufacturing, all these things that Russians rely on day-to-day," she said.
"What happens after that, we really don't know at this point."
After Western nations announced their first rounds of economic sanctions in the days after Russia invaded Ukraine on Feb. 24, the Russian ruble lost nearly half its value and stock markets were closed for the first month of the war to avoid a crash.
Two months later, the ruble has largely recovered, becoming the best-performing currency globally in March. Trading also bounced back once the stock markets were reopened last month.
Economists say steps taken by the Kremlin and the Russian Central Bank — raising interest rates to 20 per cent, forcing Russian businesses to exchange 80 per cent of their overseas earnings into rubles — contributed to the recovery.
Russia has also dipped into the half of its estimated $620 billion in foreign currency holdings not invested in the U.S. and Europe — currently frozen by Western sanctions — to protect the ruble and fuel government spending.
Sundstrom says Putin's popularity could drop off "pretty quickly" if domestic discord grows — particularly if the economic situation worsens.
Moscow Mayor Sergei Sobyanin warned on Monday that around 200,000 people are at risk of losing their jobs as Western companies pull out of the capital in protest over the war. He announced $40 million will be spent on helping those workers laid off by foreign firms find temporary employment and new jobs.
The Russian Central Bank's chairwoman, Elvira Nabiullina, sounded even more dire in her reports to Russian lawmakers this week.
Inflation in Russia now stands at 17.6 per cent and is on track to accelerate to 22 per cent this year, while the economy is set to shrink by 9.2 per cent in 2022, according to a poll of economists conducted by the bank in April.
Nabiullina told the Duma, Russia's lower house of parliament, on Thursday that nearly every product made in Russia relies on parts imported from overseas, which have largely been banned amid the sanctions. Bans on Russian exports are also due to be felt as soon as the second quarter of this year, she added.
Plus, she warned that "the period during which the economy can live on reserves is finite." She explained the reserves not frozen by the West are largely invested in gold and Chinese yuan, which can do little to further resuscitate the ruble.
Brander, the UBC economist, said it will take years for Russia's manufacturing sector to find ways to make up for the lack of Western parts and create new supply chains.
"As time goes on, it's going to be harder and harder to produce in Russia," he said.
"My only worry is that (the economic pain) won't accumulate fast enough," he added, pointing to how little impact such shortages will have on the Ukrainian battlefield right now.
The European Union, meanwhile, is mulling how to curb imports of Russian oil, seeking a phased approach in line with the four-month transition away from Russian coal the bloc announced earlier this month.
If approved, it would strike a blow to a revenue stream for Russia currently estimated at over $800 million per day, according to the Belgian economic institute Bruegel.
Sundstrom says the accumulation of these looming catastrophes may very well lead to real impacts on average Russians, threatening Putin's support.
"At a certain point, the rubber is going to hit the road when the government finds itself unable to pay people's pensions, provide parts for manufacturing, all these things that Russians rely on day-to-day," she said.
"What happens after that, we really don't know at this point."
Rubles per USD in case you didn't know)
