In response to Russia’s invasion of Ukraine, just over four months ago, the U.S. along with several allies imposed unprecedented sanctions on Russia.
Several weeks later, the Russian ruble lost its value, multinational corporations pulled out of Russia, and economic prospects started to look grim.
Russia responded quickly. Russia responded by stabilizing the value of the ruble and increasing oil exports to China, India.
The ruble is the strongest performing currency in the world. Russia is now much more self-sufficient and has large foreign currency reserves thanks to years of planning. Russia has also reopened many companies previously managed by foreigners, such as McDonald’s.
Are sanctions effective?
Russian political scientist Ilya Mattveev stated that it all depends on the criteria. If the goal is to cause a complete and rapid collapse of Russia’s economy, then sanctions will not work because the Russian economy continues to function. If the goal is to reduce Russia’s economic strength over time, sanctions will 100% work.
We look at how Russia prepared for this moment and what sanctions might mean for its war against Ukraine.
Russia currently has almost 11,000 individual sanctions.
Numerous countries quickly responded to Russia’s invasion of Ukraine in February by making it the most sanctioned country in the world.
Some of the most important sanctions were the removal of several Russian banks from SWIFT’s payment clearing network, the freezing of Russian assets in foreign nations, the restriction of Russian oil imports and the cutting of key Russian exports like high-tech components and Microchips.
Although the sanctions did cause some damage immediately, the Russian government had spent years planning for such a scenario. Russia tried to protect its economy when it was hit with sanctions in 2014, after annexed Crimea and launching “hybrid warfare” in eastern Ukraine.
Russia imported half its food in 2013, according to Chris Weafer (chief executive of Macro Advisory, a Moscow-based consultancy). Today, however, Russia is self-sufficient in basic food supplies, and has even started exporting items like wheat and grains.
Initial prices were high, and quality of many products such as bread, cheese, and breakfast cereals was variable.
Weafer described the Russian food at that time as “flavored tissue paper” after a few years. He said that Russian companies could now supply many of the country’s basic food supplies, such as detergents, and he believes they can continue to do so.
Russia also decreased its dependence on foreign debt and built up large reserves of foreign currency.
Russia has defaulted this week on its foreign debt payments, the first time it had done so in over a century.
Weafer suggested that this might not have an immediate effect because Russia has less foreign debt than countries like the U.S. and sanctions have already stopped Russia from borrowing money. He said that the default would “hang over it like bad credit ratings hang over people.”
Weafer stated that this is the type of thing that could become a problem within a few years. Russia will have to borrow money if it finds itself in a position where it has to rebuild and is unable to return to its national projects. It might not be possible due to today’s default.
According to Michael Alexev, an economist from Indiana University Bloomington, the ruble was also highly valued “for the wrong reason”. This is due to Russia’s central banking limiting exchanges and Russian businesses maintaining high exports despite falling imports. This resulted in a record-setting trade surplus.
Weafer stated that if you earn dollars and spend rubles, the stronger the ruble is. The central bank is currently in a dilemma. At the moment, the rate against the dollar is 54 rubles. Economy Ministry and Finance Ministry both say it should be between 75 and 80. The central bank is still trying to figure out how to do this without causing a financial collapse.
While Russia is trying to relaunch some of the multinational businesses that have gone, like McDonald’s, it is much more difficult for those who depended on imports.
For example, the French carmaker Renault had manufactured Lada cars in Russia through a partnership with a Russian state owned manufacturing company. The Russian government nationalized the plants to produce cars after Renault left Russia. The Russian manufacturer was unable to import foreign components and has had to produce cars without automatic transmissions, antilock brakes, or airbags.
Alexeev stated that this was an example showing where the Russian economy might be heading if sanctions continue.
They will not starve. He said that there will not be famine. It’s only that the stuff they can make and consume will be easier and simpler. Smartphones, refrigerators, and cars are all possible. They will be able import some of these items from China, but many of the things China is unable or unwilling to supply will not be available for them to import.
According to Alexeev, while Russia may have the revenue and reserves to finance its military, it might not be able arm it as easily if there are continued sanctions.
He said, “Where there is an extremely significant limitation, it is what type of armaments weapons and munitions can they actually make.”
Russian military cannot import spare parts or high-tech goods due to restrictions on their ability to make them. They are unable to produce tanks, missiles…and fighter planes.
A recent survey conducted by Russia’s independent polling company, the Levada Center, found that although most respondents were concerned about the sanctions, the majority believed that Russia should continue with its current policies and not make concessions in order to lift them. Since the invasion, many polls have shown that the majority of respondents support war.
Matveev doesn’t believe polling can be used to assess how Russians feel about key issues.
He said that these results were highly suspect because polling under authoritarian regimes is generally a very problematic activity. You ask people to tell you what they think about the government. They are afraid to tell the truth, even to pollsters. This is especially true now that Russia has a de facto martial Law in place and any criticism of the war is punished with extremely long prison sentences.
According to Alexeev, the sanctions had an effect on ordinary people. Alexev stated that, despite price controls by the government on essentials such as food and gas prices, inflation has made most things more expensive. Alexeev stated that even though many rural Russians are able to grow some of their food, they have to rely more on sanctioned goods. He also said that most of the food they need has become more costly.
Matveev believes that sanctions won’t influence Russian President Vladimir Putin’s decision-making regarding Ukraine.
Matveev stated that Putin is determined to wage war on Russia and is mentally prepared for a long conflict. He said that sanctions cannot alter his calculations, as it is an existential struggle for him. Yet, sanctions are not an existential threat for Russia.
