Impact of Western Sanctions on the Russian Economy
By Ethan Sa
Background Info: what are sanctions, and why were they imposed?
On February 24, 2022, Russia invaded Ukraine with the clear objective of taking over the country. Countries around the world were shocked that a peaceful democracy was invaded, and many responded by punishing Russia. Western allies of Ukraine were quick to find a way to cripple Russia without risking direct military conflict: economic sanctions. Sanctions are financial penalties which can be applied to countries and individuals. There are different types of sanctions which include embargoes, tariffs, asset freezing, and financial prohibitions. Pretty much every type of sanction has been imposed on Russia which has taken a toll on the Russian economy. Sanctions are a popular way to punish a country, with a notable example being the sanctions imposed on Russia after they annexed Crimea in 2014. The main objectives of the recent sanctions imposed on Russia's economy and powerful oligarchs were to deter Putin from continuing the bloody invasion of Ukraine. By cutting off Russia's access to its currency reserves and foreign markets, the West reasoned that Putin would eventually be forced to halt the invasion due to a lack of funding and unrest due to a recession.
The sanctions imposed on Russia
So exactly what sanctions have been imposed on Russia since the invasion started? Some of the most prominent sanctions are the ones that target Russia’s oil exports. Crude oil accounts for more than 50% of Russia’s total exports, meaning that Russia has a heavy dependence on this critical commodity. The United States and United Kingdom have already announced bans on Russian oil imports but many EU countries have yet to agree on a comprehensive oil import ban as most countries rely on Russian gas. The U.S. and its allies have also frozen Russian bank assets, making it impossible for Russia to access valuable US dollar reserves. This makes it more difficult for Russia to repay foreign loans with US dollars, the dominant currency of the world, increasing the chance of Russia defaulting on loans. Furthermore, some Russian banks have been cut off from the SWIFT system (Society for Worldwide Interbank Financial Telecommunication). The SWIFT system is a communication protocol that allows banks to transfer and exchange money internationally. This is a critical system that most international banks rely on to securely transfer funds quickly. Banks that are cut off from SWIFT will have a very difficult time operating globally which would restrict Russia’s access to financial markets. This would also make it tougher for Russia to do business with other countries, reducing it’s exports and a crucial revenue source.
The effects of sanctions on the Russian economy
Due to the unprecedented sanctions, Russia is now in a new major economic crisis. Russia’s GDP (gross domestic product) is expected to drop up to 10% this year as supply shortages and declining foreign investment affect the amount of goods Russian companies can produce. The ruble, Russia’s national currency, collapsed with its value plummeting 40% in the following weeks of the invasion. The devaluation of the ruble has resulted in massive inflation in Russia which has caused widespread panic among Russians. However, the ruble since then has made a recovery and has gone on to reach all time highs relative to the US dollar due to revenue coming in from oil and gas exports which have been somewhat spared by sanctions. Russia currently is still exporting oil to most of the EU and most importantly, China, the largest buyer of Russian oil outside of the EU.
MEOX (Russian Index) dropped 33% the day that Russia invaded Ukraine
The Moscow Exchange (MOEX), Russia’s largest stock market exchange, was closed for a month to limit the selling off of assets. This was also to prevent foreign investors from selling their shares in Russian companies and money leaving the country, reducing the pressure exerted on the stock market.
Since the invasion, many western companies around the world have stopped doing business in Russia or cooperating with Russian businesses. Over 600 multinational companies, including oil giants Shell and BP, have left Russia in wake of the sanctions due to financial risks and government pressure. Due to the sheer amount of assets leaving the country, Russia has announced that foreign assets in the country could be nationalized. This means that foriegn assets such as the hundreds of foreign planes could be seized and never returned to their owners.Russia’s Q1 GDP rose 3.7%, but this was primarily caused by people frantically buying up goods because of supply shortages. As factories started shutting down, supply decreased but demand remained the same which contributed to a rise in inflation. This is why the economic situation in Russia is likely to get worse as the supplies run out. Industries may run out of supplies as foreign materials or components cease to be available. One example is the auto industry. Foreign car companies have all stopped shipping cars and parts to Russia leaving only domestically produced cars or cars imported from India or China to fill the gap. Sanctions have exacerbated the supply chain issues automakers have already experienced due to the ongoing pandemic. This leaves a massive problem for domestic automakers who rely on foregin parts to build cars.
Ukrainian allies such as the US have imposed massive financial sanctions on Russia in order to put pressure on them to end the war. These sanctions have surprised Putin as he did not predict that the West would form a united front and target Russia’s economy, believing that the response would be similar to when he annexed Crimea in 2014. Russia’s economy is currently in decline with their oil exports being banned, their banks cut off from SWIFT and the freezing of their assets, limited foreign investment, and supply chain issues. Russian lenders have little confidence that Russia will return foreign assets or pay off loans which will result in high interest rates in future loans with Russia.
This will also lead to Russia having more difficulty securing foreign loans and investments in the future as their reputation has been seriously damaged. However, the effects of these sanctions has been questionable as the invasion still is ongoing three months after it started. The Russian economy is holding strong through the current sanctions and a globalized, interconnected economy means that the sanctions meant to punish Russia may push the world into a financial recession.
