Russia: sanctions hit an already fragile economy

Russian military power allows Vladimir Putin to impose an asymmetric conflict on the Ukrainian resistance, and the latter manages, despite the supply of Western weapons, only to slow the advance of the enemy, not being able to stop him. However, in the economic field, the consequences of the numerous international sanctions imposed on Russia promise to be devastating and exacerbate the structural weaknesses of its economy.

At first glance, however, Moscow is not devoid of economic assets. The country is the world’s leading exporter of wheat and gas, the second largest exporter of crude oil and benefits from high prices and Europe’s dependence on hydrocarbons. Its public debt is low (17.5% at the end of 2021), its trade with non-Western countries is strong, and its reliance on the dollar has declined.

But the penalties are piling up. On March 9, the EU announced a new package of measures against Russian and Belarusian companies and individuals. First of all, on March 8, Washington imposed an embargo on American imports of Russian hydrocarbons. Even if the United States accounted for just 1% of Russian oil exports in 2020 (compared to China’s 31%), Russia’s economic isolation is growing.

This isolation is also driven by private companies. Thus, the Anglo-Dutch oil company Shell, shortly before the announcement of the US embargo, signaled that it would stop buying Russian crude before “gradually” pulling out of the entire hydrocarbon sector of the country. The company has just been criticized for buying a shipment of Russian oil at a price below the market… A sign that Russian black gold, the income from which is vital for Moscow, is already having difficulty finding a buyer?

First economic damage

At the end of 2021, the French Ministry of Finance recalled that “The Russian economy remains overly dependent on raw materials”. Indeed, while 40% of Russia’s government revenues depend on energy exports, Moscow’s strength can turn into weakness. Rystad Energy estimates that the countries that have imposed sanctions on Russia represent more than $200 billion of Russian hydrocarbon imports per year, compared to less than $50 billion for China and about $25 billion for the rest of the world.

Credit insurer Coface expects a 7.5% recession in 2022, while JPMorgan expects -7%. A shock comparable to the catastrophic Russian crisis of 1998.

While we wait to determine the real impact of the sanctions on Russia’s energy exports, we can already see other effects on the streets of the country. Many multinational corporations — Coca Cola, Starbucks, McDonald’s, Apple, Nike, Adidas, Puma, Ikea, Zara, H&M, LVMH, Kering, Chanel… — have suspended their sales or operations in Russia. An even more notable consequence was the storming of ticket vending machines. Less visible, but just as disruptive, the exclusion of some Russian banks from Swift’s interbank messaging system slows down their financial exchanges with foreign countries. Despite being spared this sanction, the first Russian bank, Sberbank, was still forced to leave the European market on March 2.

This beginning of the banking panic is associated with the risk of default on payments. Courses credit default swaps (CDS), these derivatives that serve as insurance against default have risen sharply as markets estimate the risk of default at 80%, according to Les Echos. For its part, the Fitch ratings agency points to the risk of “imminent default” and, like other agencies, has heavily downgraded Russia, which will find it difficult to obtain financing in the markets.

As a result of this financial spiral and trade isolation, Russian GDP forecasts are frightening. Credit insurer Coface expects a 7.5% recession in 2022, while JPMorgan expects -7%. A shock comparable to the catastrophic Russian crisis of 1998.

The fall of the ruble that began in 2014

These series of plagues strike an already weakened Russia. The ruble fell by almost 50% from 1uh January, but it was already suffering from structural weakness: after the annexation of Crimea and the first series of international sanctions, it had already lost 50% in 2014 and never regained its original value.

To support the value of its currency and curb capital flight, the Russian central bank raised its main key rate from 9.5% to 20% at the end of February, risking choking the economy by raising the cost of credit. He also introduced strict capital controls, barring brokers from selling local securities owned by foreigners living in Russia to freeze their savings.

The Central Bank has already raised the key rate eight times since March 2021.

He then banned banks from publishing their balance sheets and from selling foreign currencies. Finally, the Kremlin obliges Russian exporters to convert 80% of their foreign currency into rubles to maintain the exchange rate, and obliges Russia’s creditors to receive ruble refunds if they are on a list of “hostile” countries, including the EU, US, UK or Japan.

These multiple measures are aimed at containing the runaway inflation that had already returned to Russia before the invasion of Ukraine. After briefly falling below 5% between 2017 and 2020, it doubled in 2021 to 6.7%, and even before the start of the war, it was only accelerating. To cope with this, the Russian Central Bank has already raised the key rate eight times since March 2021, Alexander Mirlicourtua from the Xerfi Institute recalled in February.

Loss of purchasing power and inequality

Of course, this return on inflation increases the cost of imports, which are plentiful given the weakness of the Russian manufacturing industry. This price increase is also linked to the stagnation of Russian incomes since 2014 and the start of the war in Donbass. GDP per capita in Russia in 2020 is indeed slightly higher than in 2013. This Russian-style stagflation has reduced purchasing power by about 10% since 2014, according to Rosstat.

The looming severe economic crisis risks catastrophic social consequences as Russia already suffers from inequality. The country has experienced strong development, declining poverty and unemployment since the late 1990s and during Vladimir Putin’s first two terms, but the distribution of wealth and income remained highly unbalanced. The Russian Gini index, which measures income inequality, is higher than in all European countries except Bulgaria.

The inequality in wealth is even more glaring. According to World Wealth Report Published annually by Credit Suisse, the richest 1% of Russians own 58.2% of the country’s wealth in 2020. This is far more than in any other major economy: in France, the top 1% own 22.1% of the wealth; in the US, 35.3%; and in Brazil, 49.6%.

These extreme social inequalities are combined with equally strong territorial inequalities exacerbated by a lack of investment in infrastructure. If the GDP per capita in Moscow is equivalent to the GDP of the Czech Republic, then Chechnya is equivalent to the GDP of India. This is a ratio of 1 to 10 between these two territories.

Demographics half mast

In its analysis of the Russian economy at the end of 2021, the French Ministry of Finance also highlights other structural weaknesses, such as low labor productivity or the country’s technological backwardness. Finally, the document refers to Russia’s “demographic decline” which was not reversed during Vladimir Putin’s mandates. However, it is noteworthy that this rate fell below 2 children per woman during the collapse of the USSR. Then it fell to 1.16 in 1999 when the President of Russia came to power, then rose again to 1.78 in 2015 … And since then it has been falling to 1.5 children per woman, preventing the natural renewal of generations.

Adding to this demographic decline is the very high price Russians are paying due to Covid-19. According to Rosstat, 660 thousand people would die from the virus in 2020 and 2021. The country lost almost 690,000 people in 2020 – life expectancy fell by almost two years that year after increasing in the previous 17 years – and the situation worsened in 2021, with more than a million fewer inhabitants, a record since the breakup. THE USSR.

To go further, find our special file dedicated to the war in Ukraine.

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