Finance

Five ways US sanctions are hurting Russia

AP-Dmitri Lovetsky

International sanctions against Russia following its invasion of Ukraine have touched off what some analysts have characterized as an economic cold war.

While U.S. officials have been keen to portray their sanctions as devastating foreign policy tools, the bulk of the West’s economic countermeasures remain targeted at wealthy elites and their businesses, which are generally well insulated from the globalized economy.

The sanctions fall well short of a ban on Russian energy exports, which would traumatize the heavily reliant European economy and exacerbate already skyrocketing energy prices at a time when inflation in the U.S. is hitting 40-year highs.

Even so, sanctions imposed on the Central Bank of Russia have cut Moscow off from its reserves. Russia has also had trouble finding buyers for its gold.

The sanctions also are hitting everyday Russians while bringing back memories of the economic hardships in the country’s past.

Here are five ways U.S. sanctions are hurting Russia.

Russia’s GDP is shrinking

Russian gross domestic product (GDP) could shrink by as much as 7 percent on the year and 35 percent on the quarter, according to economists at J.P. Morgan. They say inflation could reach 14 percent in Russia by year’s end. 

Diminished business confidence and higher investor uncertainty are predicted to drag on asset prices and will spur the movement of capital out of the country, according to the International Monetary Fund (IMF). The flight of numerous international companies, following the leads of their governments, is also negatively affecting the lifestyles of individual Russians.

“Luckily, my life hasn’t changed drastically yet, but I’m being deprived of the usual things,” a Russian woman, who asked to remain anonymous for fear of her safety, said in an interview through a social media channel. “I can no longer use Apple Pay, watch Netflix, buy anything from foreign websites, and I need a VPN [virtual private network] to use Instagram. Prices are going up on almost everything, especially imported goods.”

“Deep down, I feel very uncertain,” she added. “Every day there’s something new that can be taken away, blocked or restricted. It’s really hard to plan anything these days.”

Sanctions have caused havoc in Russia’s financial sector

Russia’s central bank has struggled to stabilize the value of the ruble and prevent a steep rise in interest rates without access to roughly half of its foreign reserves.

The Russian stock market has also been shut down for weeks, suspending shares of domestic companies likely to plunge once trading resumes.

Russia has avoided defaulting on its foreign debt so far and even made a payment on Eurobond with U.S. dollars, which are increasingly valuable in Russia, instead of rubles.

“The problem for Russia is that if you default, then you potentially trigger your creditors trying to recover your assets,” said Chris Miller, a visiting fellow at the American Enterprise Institute (AEI), a right-leaning think tank.

“This is less a problem for the Russian state, because it’s hard for investors to grab state assets, because they’re given sovereign immunity in most legal systems, but if you’re a big Russian state-owned company like Gazprom or Rosneft, in addition to the assets you’ve got in Russia, which are substantial, you’ve also got assets abroad,” he continued.

Russian industries and trade have been shaken

Russia has been slowly integrating into globalized supply chains since the 1990s in industries such technology and aviation. Not having access to parts made, designed or controlled through intellectual property laws in the U.S. and elsewhere are now causing disturbances.

“We’ve already seen this in auto-manufacturing, for example. Something around half of Russian car companies have shut down their factories because they can’t get the components they need,” the AEI’s Miller said. “I think we’re going to see more and more of this in different sectors of Russian industry as the supply chain issues accumulate over time.”

One key component used in a range of different industries is semiconductors, the computer chips that store and process data in products ranging from smartphones to weapons systems. Russia gets most of its chips from China, but many analysts say these are inferior by the standards of U.S. and other East Asian hardware.

“The Taiwanese make the most advanced logic chips, followed by the South Koreans, followed by Intel in the U.S.,” Miller said. “Russia’s domestic capabilities are more than a decade behind.”

Even advanced chips produced in China are still subject to U.S. export controls since those chips are made using imported U.S. technology. It’s possible that manufacturers may try to sidestep these controls illegally, but leading Chinese chipmaker Semiconductor Manufacturing International Corporation largely complied when similar sanctions were imposed on Chinese telecommunications giant Huawei in 2019.

The sanctions are having a cultural impact

For many Russians, the current crisis brings back memories of the 1990s, during which the country faced a prolonged depression as its economy was restructured following the collapse of the Soviet Union.

Between 1989 and 1996, Russian GDP fell by more than 40 percent, according to the United Nations Conference on Trade and Development. It got so bad that the IMF had to stabilize the Russian ruble in 1995 with tight monetary controls and nominal exchange rate targets.

“People in Russia used to face so many economic crises,” Ekaterina Selyuzhitskaya, a Russian citizen now living in Dongguan City, China, and working as a part-time Russian-Chinese translator, said in an interview. “We barely remember times when we didn’t have an economic crisis.”

“Now, people I know are doing OK,” she added. “Of course, they are afraid of their future and some of them may lose their jobs. And the future is not clear.”

Public sector Russian employees enjoy a greater degree of financial stability than workers in the private sector, especially those working for international companies, Selyuzhitskaya pointed out.

“Buying and selling parts is getting more complicated,” she said. “If people are working with China, they prefer to pay in yuan and avoid paying in dollars, because the currency operations are too complicated in dollars now, and the yuan is quite strong.”

The sanctions have led to an exodus by Western businesses

A mass departure of multinational businesses from Russia has also evoked memories of Soviet-era limits on the country’s economy. Dozens of corporations have announced plans to end operations in Russia, citing both the moral implications of operating under Putin’s regime and the risks of running afoul of sanctions.

Russians have now been largely cut off from American financial services, technology and entertainment companies, including Apple, Netflix, Visa and Mastercard. American brands such as McDonalds and Levis, whose crossing of the Iron Curtain ushered a new era of economic liberalization in Russia, have also departed.

While the U.S. and its partners will likely reverse some of the economic sanctions on Russia at some point in the future, some of the business ties severed this year may never be restored.

The Russian government has announced plans to seize the assets of any international business that leaves in protest during the war, including their intellectual property. That means Russia could prop up state-owned firms to make knockoff versions of products and companies no longer operating in the country using the same branding with domestic materials.

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