Since February, thousands of Russian businesses and individuals have been subject to an unprecedented onslaught of bans imposed by America, Europe, and their allies. The majority of Russia’s large banks are blocked off from the global payments system, and half of its $580 billion in foreign exchange reserves are frozen. America no longer purchases Russian oil, and in February, a European boycott will take full effect. Russian businesses are not allowed to purchase any inputs, from semiconductors to motors. Asset freezes and travel restrictions applied to officials and other important figures.
The collapse of Russia’s economy was swiftly predicted by many Wall Street specialists. In the weeks following the start of the conflict, such grave predictions seemed destined to come true. After Russia began the war in Ukraine, the country’s economy was nosediving. In relation to the dollar, the ruble lost more than a fifth of its value. Regulators were forced to halt trade after the stock market plummeted. Economic sanctions were imposed by Western governments, including bans on the import of oil and the removal of the Russian ruble from global currency markets. As their governments-imposed sanctions, hundreds of western corporations left Russia or made commitments to do so.
But the Russian economy has proven to be very resilient. They were compelled to reassess such projections after six months. Six months after the launch of Russia’s Special Military Operation (SMO) in Ukraine, the global tectonic plates of the twenty-first century have been dramatically shifted, with profound historical implications already evident.
Sanctions are not new for Moscow
With the express purpose of hurting the Russian economy and preventing the Kremlin from waging its war, the US and Europe have deployed economic warfare tactics. The speed and scope of the Western response, which included freezing Russia’s foreign exchange reserves, severing ties to the SWIFT payment system for numerous Russian banks, and coordinating export controls, hoping to rattle the foundations of the Russian economy.
However, Russia has already experienced similar economic shocks, and the past 25 years have demonstrated that its economy is capable of enduring significant suffering without eroding its political roots. In order to put the strain in perspective, the anticipated 4.5 percent decline in Russia’s gross domestic product (GDP) in the three months following the invasion is comparable to the initial losses during the global financial crisis of 2008 and the nation’s 1998 financial crisis. Furthermore, it is little compared to the shock caused by the COVID-19 pandemic in 2020.
Since the US first imposed the sanctions in 2014 as a result of Russian takeover of Crimea, Russia has likewise been seeking to lessen their impact. There were Russian enterprises present to lessen the blow when significant Western companies like McDonald’s, Starbucks, Visa, and Mastercard fled the nation early in the invasion.
According to the IMF, Russia’s GDP would contract by 6% in 2022, a significantly less decline than the 15% decrease many predicted in March or the decline in Venezuela. This year, energy sales will produce the second-largest current-account surplus in the world, after China, at $265 billion. Russia is finding new suppliers for some of its imports, particularly China, after experiencing a financial crunch. A recession could start in Europe while there is an energy crisis. Due to a supply shortage caused by Russia, natural gas prices increased by another 20% this week.
Import costs have decreased due to a stronger rouble. Inflation expectations among Russians have also decreased. Expected inflation for the following year has decreased from 17.6% in March to 11% in July, according to statistics from the Cleveland Federal Reserve, Morning Consult, a consulting firm, and Raphael Schoenle of Brandeis University. Russia is also less likely to experience a European-style spike in inflation brought on by higher energy prices due to the abundance of gas there.
How Russia is battling sanctions?
Moscow created a Fortress as a defense against economic assaults from the West by ramping up official reserves (even without anticipating those would be sanctioned), launching the System for Transfer of Financial Messages (SPFS) as a SWIFT substitute, and attempting to dedollarize trade. The Kremlin has established a self-adjusting tax system during the past ten years to ensure that its budgets stay viable even in a low oil-price scenario. This is done out of concern that its fate may be too closely tied to oil earnings. Rapid-response measures like dramatic key rate increases overnight, the careful use of foreign currency refinancing instruments, the temporary easing of regulatory environment for banks, and measures for their additional capitalization now seem less shocking because those levers have been pushed before.
Companies and customers have both gained knowledge via experience. Similar to how they did in 2014 during the previous wave of penalties, businesses have already started looking for ways to avoid them. The majority of the risk-averse population now facing the threat of unemployment will be reluctant to withdraw their money because banks have already experienced (and survived) runs multiple times. Due to a lack of consumer confidence after 2014, the saves rate increased quickly in the years that followed, despite rising inflation decimating the value of people’s savings. Russians will probably start saving again due to the high interest rates, and this time, their expectations will be more realistic due to prior experience.
Rising Russian oil sales in Asia
Given that Moscow’s exclusion from the SWIFT financial system hindered the Russian Central Bank from using its foreign reserves, Goldman Sachs predicted in March that Moscow was unlikely to find any additional partners for trading crude oil. This point is illustrated by the fact that there have been no indications of increasing Chinese purchases of Russian crude thus far. In addition, China has not recently increased its imports of crude from Iran or Venezuela.
In spite of this, 7.4 million barrels of Russian oil are being exported daily, according to figures from Bloomberg for July.
Russian oil purchases by India have been a significant factor. Its imports increased for five straight months before modestly declining in June. It continues to import 1 million barrels of Russian oil per day, a rise of 900% since February.
Moreover, Europe has yet to successfully wean itself off of Russian crude. 2.8 million barrels are still imported daily by the EU, according to Bloomberg data. Just 30% less than the 4 million barrels per day in February.
Manufacturing activity on the rebound
Wall Street predicted only suffering for Russia’s services and manufacturing industries as a result of the imposition of Western economic sanctions.
Russia’s composite Purchasing Managers Index, which analyzes trends in the two sectors, fell in the wake of the invasion of Ukraine. In March, it dropped from 50.8 in February to 37.7; a number above 50 indicates expansion and a reading below 50, contraction.
But after a few months, Russia’s composite PMI has climbed back into the growth range. In April, the index increased to 44.4, surpassed 50 in June, and reached 52.2 last month. According to the most recent estimate, Russia’s economy is flourishing, which contrasts sharply with the dire predictions issued by Wall Street.
Multipolar trajectory in a globalized world rendering Western Sanctions ineffective
While politicians rush to address the energy crisis sparked by what experts have characterized as the EU’s poorly thought-out plan to shift away from Russian energy imports, European consumers are suffering from skyrocketing heating and power prices. The growing economic difficulties in Europe have rekindled worries that EU states may begin to break away from the Western sanction’s regime, especially with reports that Germany is on the cusp of a recession.
Even though the West’s GDP outweighs Russia’s, Russian stranglehold on gas cannot be broken by wishful thinking. The main issue is that over 100 countries, accounting for 40% of global GDP, do not impose complete or partial embargoes. Oil from the Urals is moving to Asia. You can fly to Moscow seven times a day with Emirates and other airlines, and Dubai is flush with Russian currency. Particularly because the majority of nations lack the will to impose Western policy, a globalized economy is good at reacting to shocks and opportunities.