Consequences of sanctions for the Russian economy
2023.02.23 02:25
Consequences of sanctions for the Russian economy
By Tiffany Smith
Budrigannews.com – Despite Russia’s unexpected resilience in the face of severe Western sanctions last year, a return to pre-conflict prosperity may be a long way off due to increased military spending.
Even internal forecasts made shortly after Moscow sent troops into Ukraine a year ago predicted that the economy would shrink by more than 10% in 2022, exceeding the slumps that occurred following the fall of the Soviet Union and during the financial crisis in 1998. However, Rosstat’s initial estimate indicates a less severe contraction of 2.1% in 2017.
President Vladimir Putin stated this week to Russia’s political, military, and business elite, “The Russian economy and system of governance proved to be much stronger than the West expected.” Their calculation was incorrect.”
The sanctions aimed at economically isolating Russia were mitigated by high prices for its energy exports, and capital controls saw the rouble rise to a seven-year high. A record current account surplus resulted from a collapse in imports.
Despite losing access to approximately $300 billion in international reserves, the central bank, led by Elvira Nabiullina, remained steady on the tiller.
However, what Moscow refers to as its “special military operation” in Ukraine is still seen by analysts as having a significant opportunity cost that will last for some time. The government had anticipated 3% economic growth last year prior to the conflict.
An analyst for the My Investments Telegram channel, Grigory Zhirnov, stated, “Certainly a positive factor is the fact that the economy surprised everyone last year.” On the other hand, it is preferable to contrast the dynamic with what it would have been like if the previous trend had continued.”
“The level of GDP that could have been achieved in the absence of the crisis of last year will hardly be reached in the next ten years,” Zhirnov stated. “The economy will not regain its size from 2021 until 2025.”
Through a scheme known as “gray imports,” Moscow is maintaining the supply of consumer goods and is locating new markets in Asia for its oil and gas exports, which are the lifeblood of the economy. However, it is turning inward and is increasingly avoiding the Western markets that contributed to its post-Soviet growth.
According to Putin, a drive to “de-dollarize” means that the rouble has doubled its share of Russia’s international settlements. Banks, on the other hand, are looking for domestic ways to boost profits.
According to Putin, ordinary Russians had no sympathy for the yachts and mansions that had been lost, so they should invest in Russia.
In addition, he argued for long-term domestic development and a self-sufficient economy, bringing to mind a criticism leveled against Soviet leaders who were so preoccupied with military expenditures that they neglected people’s welfare.
“There is an expression: “‘Guns, not butter,'” Putin declared. Of course, the country’s defense is the most important thing, but when it comes to solving strategic problems in this area, we can’t make the same mistakes again and we can’t wreck our own economy.
However, Russia is increasing its spending on the military, and diverting funds from schools and hospitals will ultimately impede the growth of civilian economic infrastructure.
In January, there was a $25 billion deficit in the budget and a current account surplus that was more than half what it was a year earlier.
Since Russia’s hydrocarbon exports are now subject to embargoes and price caps, the country is currently selling from the National Wealth Fund in order to make up the shortfall.
Even though the finance ministry has said that the deficit won’t get too big, using the fund could make it harder for Moscow to spend in the future and make inflation worse.
The national bank, whose examination of Russia’s financial wellbeing is reliably more skeptical than Putin’s, has cautioned that the augmenting spending plan deficiency is inflationary and said it is bound to climb loan fees from 7.5% this year than cut them.
Oleg Vyugin, a seasoned economic official, wrote in a report this month that reaching the target for this year’s oil and gas revenue appears to be becoming increasingly difficult, particularly given the falling prices for Russia’s Urals oil blend.
Russia would have to double its planned NWF spending to meet budget plans, putting the country at risk of higher inflation that would necessitate the central bank raising borrowing costs.
According to Vyugin’s writing, “Implementing such a budget is a path to the gradual erosion of financial stability and the further decline of the population’s real wages.”
Last year, real disposable incomes decreased by 1%, causing Russians to save more and spend less. 6.7% of retail sales fell.
According to independent analyst and former central bank advisor Alexandra Prokopenko, Russians’ greater propensity to save is a sign of economic uncertainty.
Prokopenko said that Russia’s financial leadership had grown accustomed to navigating crises. He also talked about the opportunity cost to the economy. Since the 2008 global financial crisis, similar officials have led the country through a deteriorating relationship with the West.
We are absolutely certain that the image is not in black and white. She stated, “Putin can be proud of his ‘Fortress Russia,” which his financial leadership constructed for him.” However, its construction was costly.”
