Despite the sanctions, the Russian economy is still standing – for now

Six months after the Russian war in Ukraine, the United States and the United States imposed harsh economic sanctions European Union It seems to have the double effect of stifling Russia economy and encouraging divestment by major companies, as US-based Citibank announced its official withdrawal from the Russian market.

Citibank on Thursday issued a press release Announcing its intent to wind down its consumer and domestic commercial banking business in Russia as part of the long-term “Global Strategic Update” first announced in April 2021. “We have explored multiple strategic options for selling these businesses over the past several months,” Legacy CEO said. Franchises, Titi Cole, said in the statement, “It is clear that the appeasement path is the most logical given the many complex factors in the environment,” although as of July the bank was still trying to negotiate the sale of its domestic trade and consumer banking sectors to local Russian firms. financial times I mentioned at the time. Sanctions complicated the sale to at least one potential buyer, Rosbank; The owner, Vladimir Potanin, was recently sanctioned by the United Kingdom.

Citibank’s announcement, and the decision to end its operations rather than continue to pursue sales, is to some extent an indication that the sanctions and bans are having the intended effect. “Months ago, the United States banned all new investments in the Russian economy,” lead researcher at Columbia University’s Center for Global Energy Policy Eddie Fishman told Vox via email. So any American company remaining in Russia hardly keeps the lights on.

However, this does not mean that the Russian economy has collapsed. Russia’s central bank has been adjusting the country’s monetary policy to keep the ruble afloat, currently the strongest against the dollar since 2018, CNN reported Sunday. After a crash early in the war, When the United States froze $600 billion in foreign exchange reserves, the central bank took strict measures, raising interest rates to control inflation. That appears to have paid off, with inflation apparently stabilizing after its April high of 18%.

In addition, banks and companies from other countries including China and Japan It helped soften the blow somewhat, either by maintaining their trade relations with Russia or by committing to expanding investments there. China and India Both have boosted purchases of fuels including coal despite sanctions on Russia’s fossil fuel industry as well.

Sanctions take some time to affect a large economy

Russia has also been mitigating the impact of sanctions since the United States originally imposed the sanctions in 2014 over Russia’s invasion of Crimea. When major Western companies such as McDonald’s, Starbucks, Visa and MasterCard left the country early in the invasion, Russian companies were there to soften the blow, Andrei Neshev, the former Russian Minister of Economy, He told CNN. “MasterCard’s exit, Visa, hardly had an impact on domestic payments because the central bank had its own alternative payment system.” Fast food has also become a local venture, with McDonald’s franchises reopening under the name Vkusno i tochka – Tasty, and that’s it – and Starbucks now moving into Stars Coffee. Beginning in 2014, the government paid Western concessions for their supplies locally; This policy has paid off, as imports are now difficult to obtain.

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Despite the Russian government’s preparations to help the economy weather the West’s stringent sanctions regime, these controls are not sustainable forever. Moreover, Russia is still unable to import important technological supplies, its economy is highly dependent on fuel exports and is currently benefiting from higher prices due to inflation.

“Sanctions have a huge impact on the Russian economy,” Fishman said. Even the most conservative estimates suggest that Russia’s gross domestic product will shrink by 6 percent this year – a bigger blow than the 1998 Russian financial crisis. In the absence of sanctions, the Russian economy was poised to grow this year. “The country’s inability to import goods has resulted in” To a shortage of foreign components and a rapid decline in industrial production. The result has been a wave of underemployment that will eventually translate into layoffs and a deterioration in living standards.”

Thein Gustafson says in his book that the fuel industry in Russia ultimately has a limited life kilims: Russia in the era of climate change. The Russian economy is so closely tied to fossil fuels that it has no significant alternative industry to make up for the money it makes on those revenues. In 2019, oil and gas exports accounted for 56 percent of Russia’s export income, totaling $237.8 billion. That revenue contributed 39 percent of the national budget, Gustafson said. Without a strong oil and gas industry – high prices and a large customer base – the Russian economy will eventually suffer from a lack of diversification.

What is more, The full burden of fuel sanctions is yet to come; In December, the European Union will ban 90 percent of all Russian oil imports, which will reduce Russia’s production by up to 2.3 million barrels of crude oil and petroleum products per day by February 2023, according to the International Energy Agency. It can be difficult to find new customers for those products, Bloomberg reportsInflows to Asian markets have stabilized in recent weeks.

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What role does foreign divestment play?

Sanctions are only part of the strategy; The withdrawal of foreign investment is a blow to the Russian economy, albeit not as severe as the curtailment of oil and gas revenues and important imports. Although many companies, including American and European companies, continue to do business in Russia, more than 1,000 companies have expressed their intention to withdraw from the country to some extent, according to research from The Yale School of Management Executive Leadership Institute.

“It can take months or even years for some companies to spin off their entire business [in Russia]Fishman told Vox. “But this does not mean that they are transferring money to Russia.” Financial services companies, heavy machinery, airlines, oil companies, fast food and retail companies located around the world have ceased operations in Russia, affecting people at a variety of income levels. Russian companies and the wealthy, for example, can no longer do this Get a Deutsche Bank loanOrdinary people wouldn’t be able to to buy nike shoes Once the company is completely out of Russia as it announced in June, it will.

For consumer goods such as Nike, the decision to divest will not significantly affect the bottom line; According to Reutersless than 1 percent of the company’s revenue comes from Russia and Ukraine combined.

Russia, for its part, has, since the collapse of the Soviet Union, “remained skeptical of integration, resistant to openness, ambivalent toward foreign investment, and isolated from the main scientific and technical currents,” Gustafson wrote in kilims. These tendencies have increased during President Vladimir Putin’s tenure, according to Gustafson. It is now possible that any promise made by most foreign companies in the Russian market is either gone or short-lived at best.

“The Russian economy is one of the most dangerous destinations for foreign investment, and it will remain so at least until sanctions are lifted,” Fishman said. On the contrary, capital flows often went the other way, Gustafson wrote kilims. “Russia in particular suffers from the tendency of Russian companies and individuals to move their capital out of Russia,” with the super-rich often moving their fortunes to offshore havens. In fact, According to a 2018 study By Philip Novokmet, Thomas Piketty and Gabriel Zucman cited by Gustafson, “The wealth held by wealthy Russians abroad is about three times greater than the net official foreign reserves, and is comparable in size to the total financial assets of Russia’s owned families.”

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early in the war, Putin banned Russian agents from sending money abroadincluding the repayment of external debts, despite those limitations Somewhat in April. Although Russia Do not provide data on capital inflows and outflowsBloomberg reported in June That as many as 15,000 high net worth individuals – an estimated 15 percent of millionaires and billionaires – could leave Russia for places like Israel and the United Arab Emirates due to the pressure of sanctions.

Where is the Russian economy headed – and how does this affect Ukraine?

In theory, sanctions projects are supposed to impose conditions that are sufficiently painful and appropriate to induce a sanctioned state to change its behaviour. Within six months, Russia has not felt the full extent of the economic pain it will feel in the future if the US, UK and EU can maintain the energy embargo in particular.

“The big question, though, is whether all of this economic damage leads to worthwhile political goals,” Fishman said. “It’s a difficult question to answer, as we can never know the counterfactual.”

Russia, despite heavy losses on the battlefield, has maintained its presence on the southern front and intends to increase its total military strength from 1.9 million to 2.04 million, Reuters reports. It is not clear how exactly the military will achieve this Reportedly, many Russian men have tried to avoid military service. The conflict has entered a new, harsh phase war of attrition It requires sustained military strength and morale. Russia’s victory will depend on a large mobilization of industry and social support; It is not clear how this will happen Challenges brought by sanctions on the industrial sector And the Recent Sanctions Against Defense Companies and Associated Personnel.

Over the past two decades, Putin has used Russia’s access to the global economy to build a military machine and pursue an imperial foreign policy. “From now on, it will be more difficult for Putin, as the Russian economy has little hope of dynamism under these sanctions, which are likely to remain in place for a long time,” Fishman said. “Sanctions do not change Putin’s willingness to bully neighbors – but they reduce his ability to make good on his threats.”

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