Western Sanctions Are Wounding
But Not Yet Crushing Russia’s Economy

(The Washington Post) – Soon after the Western world launched a broad package of sanctions against Russia for its invasion of Ukraine, President Joe Biden argued that the measures were already causing Russia’s economy to “crater” and “reel.”

Six months later, the picture appears more mixed.
While most economists agree that Russia is suffering real damage that will mount over time, the economy — at least on the surface — does not yet appear to be collapsing. The ruble’s initial nosedive in value quickly reversed after the state limited currency transactions, and after Russia’s imports plummeted — an economic picture that can hardly be described as healthy, but one that calmed public fears about a currency crisis. Unemployment hasn’t noticeably surged, and Russia continues to earn the equivalent of billions of dollars every month from oil and gas exports.

In Moscow and St. Petersburg, restaurants and bars remain busy and grocery stores are stocked, even if prices have jumped and some imported goods, such as whiskey, are harder to find. The International Monetary Fund predicts Russia’s economy will contract by 6% this year — a sharp fall, but less than the 10% or more that some economists were initially forecasting.

To be sure, warning signs are flashing all around, contradicting Russian President Vladimir Putin’s claim that sanctions have failed. Manufacturing of autos and other goods has plummeted because companies can’t import components, creating pockets of disgruntled, furloughed workers in some towns. Airlines have slashed international flights to near zero and are laying off pilots and cannibalizing some planes for parts that they can no longer buy overseas. Thousands of highly educated people have fled the country; hundreds of foreign companies, including Ikea and McDonald’s, are shutting down, and Russia’s federal budget in July showed signs of distress.

Sanctions “are working, definitely, but unfortunately much slower than everybody was expecting six months ago,” said Maxim Mironov, a Russian economist at IE Business School in Madrid.

To inflict more damage, economists say, the European Union must cut Russia’s main lifeline: oil and gas export revenue. The United States and the United Kingdom have banned Russian oil and gas imports, but Europe, which relies heavily on Russian energy, has only agreed to restrict purchases over time. The White House and others are pushing for more immediate action via a worldwide cap on the price of Russian oil, which would force Moscow to sell at a discount to global markets.

U.S. diplomats are pressing allies to accept the cap, which they view as “the biggest macroeconomic measure that remains,” according to a senior Biden administration official, who spoke on the condition of anonymity to discuss sensitive diplomatic talks.

Russia is facing “a sharp economic recession, and the recession is almost certainly going to be protracted in the next year, too,” the official said. “Look, they were able between the higher energy prices and between some of their own management to have a slightly less sharp economic recession than some of the initial estimates . . . but I think what you’re seeing now is a kind of Potemkin economy.”

As Russian authorities promoted festivals, pro-Kremlin concerts and militaristic camps for children this summer, external signs of economic damage were muted in Moscow, where beautiful summer weather drew crowds to parks and outdoor cafes.

One bar owner in the Russian capital told The Washington Post that he is coping with the new reality.
“Many companies and distributors, of course, left the market, but alternatives are popping up every day, so we are switching,” said the businessman, who spoke on the condition of anonymity to talk freely. “For example, there are many Russian gins now. Some of them aren’t half bad.”

Others complained about higher prices for groceries and imported treats.
“In terms of food prices, some things have gotten more expensive, especially some exotic fruits or imported goods, like coffee,” said one woman, a social media manager from Moscow, who also spoke on condition of anonymity. “I’m a coffee lover, but decent ones like Illy or Lavazza have doubled in price.”
The picture is bleaker in provincial Tikhvin, a two-factory town 114 miles east of St. Petersburg, where an Ikea furniture factory and the Tikhvin Freight Car Plant (TVSZ) have halted production.

Ikea joined hundreds of other Western companies in quitting the Russian market after the war in Ukraine. TVSZ was forced to furlough its employees and stop its assembly line after a vital U.S. supplier — Ohio-based Timken, which makes components known as bearings — suspended its Russian operations in March. Dozens of small businesses associated with the plant, including transportation firms and caterers, were hard hit in the town of 58,000 on the Tikhvinka River, a trade route dating to the 15th century.
Plant director Yevgeny Kuzmenko told local media in June that the company was hoping to find a Russian manufacturer capable of making bearings.

“Everyone needs to be saved,” he said. “Today the priority is to save jobs.”
But residents grew angry as machines sat silent for months, particularly after the regional governor’s statement that it would take at least until September to sort out the problem.

“Bearings — what a difficult thing to manufacture! You’re not launching a man into space!” said Sergei Kondakov, 46, of the nearby town Sviritsa, commenting on the Russian social media service V Kontakte under the governor’s statement.

One worker, Maria Schedrina, complained, “We have been sitting at home for almost two months.” She added that she would gladly do any kind of work at the factory, if it was available.

“Huge TVSZ stands still without bearings for its wagons. And it’s like that all over the country,” Roman Seregin, 48, posted.

Collapsing imports of components have hobbled all kinds of manufacturing — most prominently car production, which plummeted by almost 62% in the first half of the year, according to Russia’s state statistics agency.

AvtoVAZ, which makes the popular Russian Lada car, stood idle for months as majority owner Renault suspended operations and then sold its 68% stake to a Russian state entity for 1 ruble.
In June, the manufacturer resumed production with an “anti-sanctions” car model that lacks air bags, anti-lock braking systems, air conditioning and emission controls.

Automakers, which employ 600,000 people across Russia, have in some cases furloughed workers and started paying them two-thirds of their salaries.

To keep the unemployment rate stable at about 4%, the Kremlin has pressured distressed companies to put workers on partially paid leave or to shorten their hours instead of laying them off, said Elina Ribakova, deputy chief economist at the Institute of International Finance, an association of banks and finance companies. That will help prevent unrest in the short term but is not sustainable in the long term, she said.

Russia has stopped publishing many economic statistics, making it difficult to judge how hard sanctions are hitting, but some data show signs of distress.

Retail sales fell 10% in the second quarter compared with a year ago as Russians curbed their spending. Consumer confidence is at its lowest level since 2015, and 78% of Russians do not plan major purchases, according to Maria Shagina, a sanctions expert at the International Institute for Strategic Studies.
In July, Russia reported a federal budget deficit of 900 billion rubles as some sources of tax revenue fell, a “huge, huge gap” equaling 8% of gross domestic product, according to Sergei Guriev, an economist and a provost at Sciences Po in Paris.

“Putin still has cash because he’s earned a lot of cash in the first months of the war when oil prices were high and the economy didn’t tank yet. But now sanctions start to work, start working substantially,” Guriev said.

Economists at Yale University argued in a recent paper that sanctions are inflicting immense pain. “Defeatist headlines arguing that Russia’s economy has bounced back are simply not factual — the facts are that, by any metric and on any level, the Russian economy is reeling, and now is not the time to step on the brakes,” they wrote.

Yet some aspects of sanctions have proved porous or not as hard-hitting as hoped. Europe’s failure to quickly halt Russian oil purchases, due to its dependence, was a big missed opportunity, Shagina said. The E.U. is set to ban most Russian crude purchases in December and refined oil products in February.
“If we had targeted oil from the beginning, we could have seen much more quickly the massive consequences that the politicians were talking about,” Shagina said.

The ruble’s rebound in value is another disappointment for sanctions architects. Its plunge when sanctions first hit sent many Russians scurrying to withdraw money from ATMs. Russia’s central bank responded by placing strict limits on currency exchanges, withdrawals and hard-currency transfers overseas.

That, plus a sharp drop in Russia’s imports, lowered demand for hard currency and propped up the ruble — an artificial and probably unsustainable fix, but one that eased the bank runs and reduced the odds of immediate public unrest.

While many Western and Asian countries have sharply curbed exports to Russia — to comply with sanctions or because individual companies are choosing not to trade with Russia — exports from some nations, including Turkey and China, have rebounded somewhat in recent weeks, Ribakova said.
Russian tour operators, meanwhile, have started offering shopping trips to Belarus, where consumers can buy brands such as Zara and Nike that have quit the Russian market.

Although cars and car parts are especially hard for Russians to find, secondhand sellers on social media are filling some of the gap, offering parts or hardware brought in from Kazakhstan and Belarus.
“We will order and bring you new parts from Europe or Kazakhstan: brake disks, oils, clutch kits for Audis and BMWs, new spare parts for American cars,” one ad in a Telegram group of nearly 18,000 people said. “We won’t find everything but we can find a lot!”

Russian officials have tried to convince the public that all will be well.

Sergei Kiriyenko, first deputy head of the presidential administration, told a youth forum last month that with the departure of foreign companies, Russia just needed to dream big. Listing famous Russians such as writer Anton Chekhov and the first man in space, Yuri Gagarin, he said: “They just created something new. They were not afraid to dream, to follow their dream. In reality, the future of our great country depends on how ambitiously you dream.”

But while sanctions may not be acting swiftly enough to provoke a public uprising or to constrain Russia’s ability to wage war in coming months, the long-term impact will be immensely damaging to the country, experts say.

“The technological gap between Russia and the advanced economies will widen over time,” Ilya Matveev, a political scientist in St. Petersburg, wrote in a recent paper. “In the absence of global cooperation and with hundreds of thousands of skilled professionals having left the country, innovative and technological advancement in Russia is simply
impossible.”