As the war between the Russian Federation and Ukraine rages into its third month, Russia’s economic engine battles on a “second front” against financial and business sanctions imposed by the West in response to the Feb. 24 invasion.
Despite admitting the economic and financial squeeze, President Vladimir Putin has maintained a stiff upper lip the face of unprecedented international economic sanctions and cancel culture.
In a transcript of remarks Putin made during an April 18 meeting on economic issues among leading Russian officials, Putin said that the West “expected sanctions to rapidly produce a devastating effect on Russia’s finances and economy, sow panic in the markets, bring about a collapse in the banking system and create major shortages of goods in shops.”
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But he brushed off the effects, stating that not only “in all confidence that this policy has failed,” but that “the sanctions affected those who initiated them.”
Nonetheless, the Russian president did precede his position by admitting, “It is obvious that the pressure from sanctions, yet more pressure from sanctions imposed by Western countries has been the main negative factor for the [Russian] economy lately.”
17 percent inflation
The true impact of the effect of western sanctions was somewhat revealed by Elvira Nabiullina, Governor of the Bank of Russia, during an April 18 speech before joint committees of the State Duma.
An English translation of the transcript by Google showed Nabiullina stating sanctions had produced “an increase in demand for foreign currency, an accelerated sale of financial assets, an outflow of cash from banks, as well as a boom in demand for goods.”
As Nabiullina spoke of several measures deployed to protect the economy, she revealed that Russian citizens went on a bank run at the end of February and the beginning of March, taking “more cash from banks than even in the spring of 2014 year or in December 2014.”
However, that cash began to return when the central bank increased its key lending rate north of 20 percent as the ruble’s exchange rate crashed on the forex market, which brought liquidity cascading back into banks.
“In our extreme situation, the high rate protected, rather than undermined, the ability of banks to lend in the medium term,” Nabiullina stated.
As the Governor praised the move for decreasing inflation in March, she revealed that while it was reduced, inflation is still a staggering 17 percent.
According to Reuters, this manifests as a 10.83 percent average increase in the price of consumer goods year-to-date, contrasting sharply against a 2.72 percent increase 12 months earlier.
‘Real sectors’ increasingly affected
Nabiullina further conceded that the Russian economy “is indeed entering a difficult period of structural changes associated with sanctions,” warning that while previously the impact was felt in the financial domain, “they will begin to increasingly affect the real sectors of the economy.”
The Governor elaborated that the impact arising would manifest from “restrictions on imports, foreign trade logistics, and in the future with possible restrictions on the export of Russian products.”
Additionally, she warned the State Duma that because the modern world “is arranged in such a way that almost any product is produced with one or another share of imported components” that it is necessary to “look for new partners and new logistics” for both imports and exports, as well as bring component production home.
This aspect may be notable as concerns Russia’s military effort in Ukraine. In 2014, high ranking officials stated publicly that the country needed to find a replacement for as many as 826 models of weapons and equipment that relied on NATO or EU countries for replacement components.
“At the moment, perhaps this problem is not yet so strongly felt, because there are still reserves in the economy,” Nabiullina warned ominously, “But the period when the economy can live on reserves is finite.”
She stated that Q2 and Q3 of 2022 were forecast to be when Russia “will actively enter the period of structural transformation and the search for new business models for many enterprises.”
The Bank of Russia, the Governor added, is “well aware that this period may be accompanied by a surge in prices for certain goods.”
“Therefore, inflation will be above the target. And you need to understand that such an excess of inflation will be largely due not to high demand, but to restrictions on the supply side of goods, with low supply.”
A tool at its limits
In another issuance of a dire warning, on April 13, finmarket.ru reported that First Deputy Prime Minister Andrey Belousov stated in an address to the Federation Council, according to a Google translation of a Russian-language article, that for “backbone enterprises” and medium-sized companies, “We have certain macroeconomic limits in which we work” to assist with economic troubles.
Belousov continued, “We have now roughly found the limits in which we can work without increasing the burden on inflation.”
“If we talk in total about loans, about lending to the economy through all channels, it is somewhere in the region of 7-8 trillion rubles.”
At the time of writing, 8 trillion rubles is approximately US$98 billion.
The Deputy PM went further to say that when “taking into account” mortgages and loans issued to strategic and medium-sized enterprises that Russia was now on the cusp of being at its lending limits.
“This means that in order to support other groups of enterprises, some other measures need to be taken, including reducing the tax burden and so on,” added Belousov.
Belousov also told the Council that since sanctions began that while consumer prices for long-shelf life products, such as salt and grains, have increased by as much as 20 percent, staples such as sugar and vegetables have increased upwards of 50 to 60 percent.
Tough on jobs
Sanctions have naturally hit the job market hard. An April 18 article published by the Mayor of Moscow, Sergei Sobyanin, promoting a new government-backed stimulus program was forced to admit, “According to our estimates, about 200,000 people are at risk of losing their jobs” as a result of sanctions and corporate pull outs.
The program proposes that residents who are furloughed on paid leave by a company in the process of exiting Russia be given command economy-style temporary work opportunities such as the “acquisition of archives, current repairs of equipment and similar activities.”
For residents who have been laid off and are currently without any income, the program intends to grant employment in public sectors such as at document registrar offices, summer program government program pavilions, and parks.
Additionally, the stimulus package will provide cash flow to Russian companies who are “engaged in mass employment.”
Sobyanin said that the program, which amounts to 3.36 billion rubles (about US$42 billion) paid from the federal budget, is expected to provide provisional employment to as many as 58,000 citizens.