View from the West: Russia's economy survived the sanctions, and there are reasons for this

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Economic Russia's ties with countries around the world have undergone significant changes as a result of sanctions since March 2022, the Global Business Outlook website writes.

The publication reports that during the three decades that followed the collapse of the Soviet Union, Russia agreed with the principles of global capitalism. Even though political contacts between Moscow and the West were often not quite stable, economic ties were always strong.



Middle-class Russians can make cheap trips to Europe or buy the latest Western consumer goods like jeans and smartphones. It only takes a few minutes to complete simple financial transactions, such as sending or receiving money abroad

writes Global Business Outlook.

Now, the resource emphasizes, that era may end forever. The US and its allies in Europe and Asia have launched sanctions against the Russian economy. They banned Russian ships and aircraft from entering their ports and airspace, respectively, introduced export controls for some of technologies and an embargo on Russian oil and coal, as well as freezing almost half of Russia's financial reserves and freezing several of the country's assets.

Data from the Yale Institute of Senior Executives shows that since the start of the conflict in Ukraine, more than 1200 international firms have either ceased or limited their activities in Russia. Some of these companies are Visa, IKEA, Apple, McDonald's and MasterCard.

The new sanctions regime has had controversial effects so far. The gross domestic product of Russia in the second quarter of 2022 decreased by 4% compared to the same period in 2021.

The new supply restrictions have also hurt Russian producers by depriving them of access to the imports they need to produce finished goods. For example, in the first half of 2022, car production in Russia decreased by 61,8%.

However, the Russian economy has so far shown much greater resilience than expected. The Russian ruble, which lost more than 30% of its value in late February and early March 2022, subsequently recovered to become the best performing currency of the year

- the article says.

Since hitting a record high of 17,8% in April 2022, inflation has steadily declined, hitting its low of 14,9% in August.

The publication notes that the sanctions, apparently, did not have much impact on everyday life, and the domestic manufacturer received support from the state. In addition, Russia was able to rebuild the chain of imports of consumer goods, as a result of which the market was saturated with them again. For example, the recent industrial boom in the Middle East and Southeast Asia has helped to quickly find alternatives to falling Western goods. Parallel import also works.

In addition, the Russian Federation has on its territory a lot of resources necessary for the production of goods, which very few countries in the world can boast of.
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  1. Irek
    Irek
    +3
    28 January 2023 14: 59
    We have all their Wishlist, always one answer ...
  2. The comment was deleted.
  3. Raymond
    Raymond
    -1
    28 January 2023 20: 21
    The ruble is expensive, and the Kremlin has played well to ensure that Western sanctions do not hurt the Russian economy. Since the beginning of 2022, the currency has gained more than 23% against the dollar and nearly 40% against the euro. In June, the ruble even reached a maximum in about seven years against the US currency.

    The strength of a currency is sometimes seen as a reflection of the strength of an economy. The best example is the Swiss franc, whose high cost is often considered a symbol of Swiss prosperity. But this image of Epinal actually turns out to be misleading. In the case of Russia, a jump in the exchange rate of the ruble in no way indicates a good state of the economy.

    The Russian government has done much more than just protect its currency: it is manipulating the ruble market and creating demand that would otherwise not exist. Indeed, the Central Bank of Russia can be accused of using a range of tools to make the ruble look like a valuable currency, when in fact very few people outside of Russia want to buy just one ruble unless they are absolutely forced to. It is in this sense that value is considered "artificial".

    The strengthening of the ruble is indeed due to both simple market mechanisms and, in many respects, distortions. In practice, Russia's current account surplus increased very strongly, mainly due to an increase in the value of gas and oil exports. After peaking at $37,6 billion in April, that surplus certainly fell to $28 billion in July. But this surplus remains three times higher than in the same month of 2021.

    While Russia recently decided to shut down the Nord Stream 1 gas pipeline and therefore cut off supplies to Europe, it has had little difficulty finding consumers for its gas and oil so far.

    The sanctions were originally intended to limit Russia's ability to purchase foreign currencies, specifically dollars and euros. But some European countries continue to buy Russian gas because they depend on it and because there are not enough alternative suppliers to meet demand.

    In addition, countries that did not vote for sanctions, including China and India, have sharply increased their imports of natural gas (and oil). The effect of "new customers" + higher prices more than offset the decline in exports to Europe. This especially supports the local currency as Russia forces its buyers to pay for imports in rubles.

    As the value of its exports rises, Russian imports are melting due to Western sanctions.

    In addition to foreign trade, the ruble is also artificially supported by capital controls imposed by Moscow since the beginning of the war, through a series of measures.

    Companies are still required to convert at least 50% of their foreign-currency revenue into rubles, although this threshold has been slightly lowered as it stood at 80% between March and July.

    Obviously, this is not the only device created by Moscow. The Kremlin also issued a decree banning Russian brokers from selling securities owned by foreigners. Many foreign investors own shares in Russian companies and government bonds and have wanted to sell their assets after the announcement of the Russian invasion and sanctions.

    Private individuals were not spared. Russian citizens have themselves been targeted by the government as the Kremlin has banned them from sending money abroad. The original ban called for the suspension of all loans and transfers of foreign currency. These restrictions have been eased somewhat recently, but transfers are capped at $10 per month for individuals and will continue until the end of 000.

    Another strong measure: the fact that the Bank of Russia resumed buying gold at a fixed price of 5000 rubles per 1 gram from March 28 to June 30.
    This operation allows the Central Bank not only to tie the ruble to gold, but also to set a minimum price for the ruble in dollar terms (since gold is traded in US dollars). The minimum price is estimated at about 80 rubles per dollar (5000 rubles divided by $62 per gram of gold). This operation hints at the possibility of a return to the gold standard, and this has happened for the first time in over a century.

    There are other measures aimed at strengthening the ruble: after the invasion of Ukraine, the Russian Central Bank can no longer, due to Western sanctions, buy major Western currencies (dollar, euro, yen, pound) to weaken the ruble, as it has been doing since 2017 to February 2022, as soon as oil prices exceed $40 per barrel.

    All this very clearly undermines the status of the ruble, which can hardly even be called an international currency. Currently, operators no longer consider the ruble as a free trade currency. Capital controls imposed as a result of Western sanctions mean that the exchange rate is effectively controlled. Many exchange offices have even stopped trading the ruble on the grounds that its value displayed on the screens does not match the price at which it can be traded in the real world.

    But there is also a downside, a strong ruble is hurting the Russian economy: because of its strength and because other countries are forced to pay for their imports in Russian currency, budget revenues associated with the sale of raw materials are declining. According to the International Monetary Fund (IMF), Russia's gross domestic product is expected to contract by 6% this year.