A Blog by Jonathan Low


Apr 20, 2022

How Russia Is Starting To Feel the Impact of Western Sanctions

Financial sanctions are starting to cripple Russian banks and, because almost every Russian-made product relies on at least some imported components, loss of access to those supply chains means that factories will have to shut down. 

The mayor of Moscow warned that 200,000 jobs in that city alone may soon be lost, implying that millions in less affluent areas face the same fate. JL 

Anton Troianovski and Patricia Cohen report in the New York Times:

The chairwoman of the Russian central bank, gave a far-reaching, negative assessment. She told lawmakers that while the sanctions’ impact had largely been on the financial markets at first, they “will now begin to increasingly affect the real sectors of the economy. Practically every product” manufactured in Russia relies on imported components. But because of new Western export restrictions, Russian companies will be forced to make their own components. The central bank is talking about reducing capital requirements to half of what they were previously, a sign that banks risk insolvency.

Russia’s central bank chief warned on Monday that the consequences of Western sanctions were only beginning to be felt, and Moscow’s mayor said that 200,000 jobs were at risk in the Russian capital alone, stark acknowledgments that undermined President Vladimir V. Putin’s contention that sanctions had failed to destabilize the Russian economy.

The bleak assessments from two senior officials align with the forecast of many experts that Russia faces a steep economic downturn as its inventory of imported goods and parts runs low. How Russians react to the financial hardships resulting from Mr. Putin’s invasion of Ukraine will determine in part whether anything can weaken the Russian leader’s grip on power or sap support for the war.

Russia’s economy has avoided a crippling collapse for now, but more sanctions are on the way that would further increase the economic pain. The European Union is formulating a plan to curb imports of Russian oil. And Treasury Secretary Janet L. Yellen is expected to call on American allies to increase economic pressure on Russia at the spring meetings of the World Bank and the International Monetary Fund in Washington this week, according to a Treasury official.

Estimates from international financial organizations of the contraction in the Russian economy range from 10 to 15 percent. On Monday, the Russian central bank said on its website that consumer prices on average were 16.7 percent higher than they were a year ago.


Wally Adeyemo, deputy secretary of the U.S. Treasury, predicted during an economic conference on Monday that Russian inflation would soar and imports would plummet, leaving the Kremlin “with fewer resources to prop up the Russian economy, pursue its invasion in Ukraine and project power in the future.”

But Mr. Putin projected an entirely different scenario on Monday, using the fact that the Russian economy had avoided a full-fledged panic to bolster his claim that the West’s punishing sanctions would not deter him.

Western penalties, he said in a televised videoconference with senior officials, were meant to “rapidly undermine the financial and economic situation in our country, provoke panic in the markets, the collapse of the banking system and a large-scale shortage of goods in stores.”

“But we can already confidently say that this policy toward Russia has failed,” he went on. “The strategy of an economic blitzkrieg has failed.”

Mr. Putin was in part addressing a domestic audience, seeking to reassure Russians who have had to endure fears of cash shortages, a battered stock market and the shuttering of popular Western retailers like Ikea. He has a powerful state propaganda machine to amplify his message.

Mr. Putin said he was prepared to increase government spending to stimulate the economy, an indication that continued revenues from energy exports were giving the Kremlin the flexibility to soften the blow of sanctions. Europe’s energy purchases inject more than $800 million each day into the Russian economy, according to Bruegel, an economics institute in Brussels.

Aggressive capital controls imposed by the central bank have helped the ruble recover from its crash in the days after the invasion. The central bank has also raised interest rates to induce savers to keep their money in the bank, although the high rate makes it more expensive to borrow money to invest. And there are few reports of major layoffs or extensive food shortages in grocery stores.

But contrary to Mr. Putin’s optimism, two top officials cautioned on Monday that more economic hardship was looming. Mayor Sergei S. Sobyanin of Moscow announced a $40 million program to help people laid off by foreign companies find temporary employment and new jobs. According to his office’s estimates, he said, “around 200,000 people are at risk of losing their jobs” in the city of 13 million.

Mr. Sobyanin wrote in a blog post that the newly unemployed could work in the city’s parks, service centers and public health pavilions, “an opportunity to do useful work and acquire new skills.”

In an appearance at the lower house of Parliament, Elvira Nabiullina, the chairwoman of the Russian central bank, gave a more far-reaching, negative assessment. She told lawmakers that while the sanctions’ impact had largely been on the financial markets at first, they “will now begin to increasingly affect the real sectors of the economy."

For example, she said, “practically every product” manufactured in Russia relies on imported components. Factories for now may still have them in stock. But because of new Western export restrictions, Russian companies will be forced to shift their supply chains or start making their own components, she said.

“At the moment, perhaps this problem is not yet so strongly felt, because there are still reserves in the economy, but we see that sanctions are being tightened almost every day,” she said. “The period during which the economy can live on reserves is finite.”

Ms. Nabiullina, an internationally respected central banker who reportedly tried to resign in the days after the war, said about half of the central bank’s $600 billion foreign currency and gold reserves remained frozen because of sanctions. Those reserves that the bank still controlled, she said, were mainly gold and Chinese yuan — of little use in trying to stabilize the ruble — forcing the bank to resort to capital controls like limiting how much foreign currency could be taken out of the country.

“They just cannot continue because they don’t have Western inputs, and it will take years and trillions of dollars to create their own supply chains,” said Michael S. Bernstam, a research fellow at the Hoover Institution at Stanford University.

“Even their most important industries are in trouble,” Mr. Bernstam said, referring to gas and oil.

The central bank is talking about recapitalizing banks and reducing capital requirements to half of what they were previously, which Mr. Bernstam interpreted as a sign that banks risk insolvency.


In his televised videoconference later in the day with Ms. Nabiullina and several other officials, Mr. Putin acknowledged that the Russian economy did face some problems, including inflation. He said he had already directed the pensions and salaries of state employees — part of Mr. Putin’s political base — to be adjusted for inflation, and he indicated that he supported greater government spending to stimulate the economy.

“The budget should actively support the economy, saturate the economy with financial resources, and maintain its liquidity,” Mr. Putin said. “There are opportunities for this. Of course, we need to act carefully.”

But as he has in the past, Mr. Putin couched the acknowledgment of economic challenges in Russia with the insistence that its adversaries were faring far worse. He told officials that because of its sanctions against Russia, the West was seeing “the growth of inflation and unemployment” and “the decline in the standard of living of Europeans.”

It was an echo of a common refrain on Russian state television, which has been airing frequent reports on rising energy prices in Europe and the United States. The Kremlin’s message to the Russian public is that it is only a matter of time before Western unity over the invasion of Ukraine collapses.

On Sunday, Dmitri A. Medvedev, the vice chairman of Mr. Putin’s security council, wrote in a social media post that “hyperinflation” in Europe would soon stoke protests in the form of “smelly bonfires made of tires on the streets of well-groomed European cities.”

He added: “Then the Brussels aunts and uncles will have to change their rhetoric.”



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