War in Ukraine: in the face of sanctions imposed by the West, is the Russian economy at an impasse?

What are the effects of the economic sanctions taken against Russia? In response to the recognition of the separatist territories of Donbass and the invasion of Ukraine that began three months ago, the European Union wants to adopt a sixth package of sanctions, while a summit is scheduled for the end of May.

>> What are the European sanctions against Russia?

Last consequence in date of the economic war which is played out parallel to the conflict on the Ukrainian territory, the French automobile group Renault, leader in the country, ended up selling its assets to the Russian State, resulting in the first major nationalization since the start of the war. The American fast food giant McDonald’s, present in Russia for more than 30 years but which had temporarily closed its 850 restaurants in early March, also announced its permanent withdrawal.

The unemployment rate in Russia, at 4.1% in February, is much lower than that observed in France. However, two million jobs could be lost by December, which would bring the unemployment rate to more than 7%, according to an estimate released at the end of March by the Center for Strategic Research. In addition, the Russian government has launched a business support policy, notes the economist Julien Vercueil, in order to “to help companies in difficulty, a bit like the measures taken during the Covid crisis” in Russia.

The sole criterion of employment is not sufficient to measure the effect of sanctions. According to experts from the Institute of Economics of the Russian Academy of Sciences, employers prefer to avoid layoffs and resort to forced leave or part-time work, which is on the rise today. Some categories are already affected for obvious reasons. With the closure of airspace, 10% of airline pilots are for example sidelined, according to newspaper information Kommersant* and the Ministry of Transport fears an exodus of these skilled workers.

Another consequence: the real income of the population could have decreased by 5 to 10% at the end of the year, according to estimates by the Moscow economist Natalya Zoubarevich, quoted by the RBK* site.

Between February and March, consumer prices increased by 8% or more in 32 Russian regions (7.2% in Moscow and 7.7% in Saint Petersburg), according to Rosstat*, the Russian statistical institute. Last month, for example, the price of onions increased by more than 50%, that of carrots by 29.5% and that of rice by 12.9%. And if the ruble gradually recovers due to the very strict monetary policy adopted by Moscow, inflation, which reached 17.6% over one year in April according to the Russian Central Bank (BCR), could exceed 20 % this year, forecasts the IMF (the BCR gives a range between 18 and 23%).

The customer of a supermarket in Moscow (Russia), April 6, 2022. (NATALIA KOLESNIKOVA / AFP)

This surge in prices is the combined result of uncertainty, a fear of ever higher prices in the future and the weakening of the currency, noted the Russian Central Bank* in mid-March. Several factors could be added to the sanctions to maintain this dynamic, continues Julien Vercueil: “Fiscal policy, which to deal with the recession could eventually take an inflationary turn – this has not been the case so far -, disruptions in the supply of critical components or poor agricultural harvests, which would have an pressure on food prices”.

The inflationary surge now seems less intense, notes however Janis Kluge, economist at the German institute SWP. But “this indicator partly loses its meaning in a situation of sanctions”, he wrote. The way of life of Russians is indeed disrupted by the disappearance of certain goods and services, and “not simply by raising the prices of those that are still available”.

Interviewed by franceinfo in early April, researcher Anna Colin Lebedev believes that the situation will be untenable over time. LSanctions hurt, especially because the Russian economy is extremely dependent on European products, European technologies, European raw materials.” This is the case, for example, in the automotive industry. Due to the cessation of imports of Western models, delivery companies are now setting their sights on Russian brands (UAZ, Lada, GAZ, etc.). But here again, the sanctions imposed by Western countries pose a problem: the share of imported electronic components sometimes reaches 50% in these models.

“Companies are experiencing considerable difficulties in production and logistics.”

The Russian Central Bank

in a press release

These tensions threaten whole sections of Russian industrial production. “The lasting, less visible effect of the sanctions is to complicate the supply of critical components for many technology industries in Russia, foremost among which is the military-industrial complex”summarizes the economist Julien Vercueil. “The question is how long these difficulties will persist and how quickly companies can find new suppliers”comments (in English) for her part Elvira Nabiullina, freshly renewed for five years at the head of the Russian Central Bank.

Russian companies are hastily trying to develop their imports and exports, by diversifying the partners and the goods concerned. But here again, the equation is delicate. Even in the event of Chinese support for the purchase of raw materials and technology supplies, “the economic asymmetry between the two countries risks resulting in financial, economic and technological dependence on Russia”while “the economy of its neighbor is about ten times more powerful”analyzes Julien Vercueil.

However, Russia can still count on its oil and gas companies, which earned 1.8 trillion rubles in April (compared to 890 in 2021) and 1.2 trillion in March. Despite the war, these companies have already collected half of their expected income this year. However, the United States has already stopped its imports and the EU is in the process of doing so, provided Hungary is convinced. “If Europe refuses Russian oil, Russia loses about 40% of its oil exports”believes financial analyst Andreï Movchan, interviewed by Novaya Gazeta*. New buyers, on the other hand, will be in a strong position to negotiate lower prices.

“A withdrawal of European demand would have strong consequences on the financing capacity of the economy and the Russian state if Moscow did not find alternative customers.”

Julien Vercueil, economist

at franceinfo

In the medium term, the IMF has calculated that around 60 to 70% of the current demand for oil and natural gas could disappear over the next few years, “which will force Russia to diversify its exports to other regions”. Moscow is already talking about the possibility of further exploiting its Eastern Siberia-Pacific Ocean (Espo) pipeline, but the outlets are limited. And the companies will therefore have to solve a logistical puzzle to sell their crude. “We don’t have a special pipe to China and we will have to load in tankers”summarizes prosaically Andrei Movchan with Novaya Gazeta.

“Russia can resist as long as its commodity exporters can enjoy high export earningssummarizes Julien Vercueil. If the rent dries up, the authorities will have to face a global crisis that will be very difficult to contain.” Besides hydrocarbons, a quarter of Russian coal was exported to the EU, but imports to European countries were banned in early April.

The Russian government is trying to display its serenity, but the outlook is not very encouraging. The loss of Russian competitiveness could turn out to be more pronounced than assumed in the reference scenario”acknowledges the Russian Central Bank (in English). “The worse is yet to come”writes economist Sergei Guriev, professor at Sciences Po Paris, for the independent media The Conversation (in English). “Even though the Russian economy could build a new equilibrium in a year or two, it will not soon recover to pre-war levels; and will continue to lag behind developed economies.” Investments in research and development are at a standstill, which will permanently penalize the country’s innovation capacities.

The Bloomberg agency was able to consult (in English) the internal forecasts of the Russian Ministry of Finance, which is planning on a 12% contraction of the economy this year. Unheard of since 1994. Also according to this source, Western sanctions alone would be responsible for a contraction of 10.8% and around 5% in 2023. The Russian government, quoted by the Tass* agency, then denied these figures, but the BCR had already unveiled forecasts of between 8 and 10% at the end of April. Other estimates point to a more pronounced recession at 10% (Goldman Sachs) or 15% (Institute for International Finance). The Russian economy could therefore plunge back ten years.

* These links refer to content in Russian language

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