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Geopolitics

How Sanctions Are Quietly Destroying Russia's Economy

The European Union has prepared the sixth package of sanctions against Russia, which includes restrictions on Russian oil imports, as well as disconnecting more Russian banks from the SWIFT bank circuit. The effectiveness of these measures are not always visible, but they are real ... and potentially fatal .. for the Russian economy.

​Photo of a man withdrawing Russian rubles

Withdrawing Russian rubles in Moscow

Oleksandr Detsyk

-Analysis-

KYIV — Are sanctions working? To answer that question, it makes sense to first ask which sanctions have been most effective so far?

Economic sanctions against Russia for its aggression toward Ukraine began to be imposed immediately after the 2014 occupation of Crimea and the outbreak of the war in Donbas, but those cannot be considered effective. In any case, they did not deter Moscow’s invasion in 2022.

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But the sanctions imposed by the U.S., the European Union and their allies since February 24 have already hit the aggressor's economy significantly. The blocking of Russia's foreign exchange assets abroad has become the most painful. According to various estimates, this has affected about half of its gold and foreign exchange reserves, worth around $300 billion.


Moreover, restrictions on the import of cash dollars and euros into Russia, financial settlements and the sale of euros and dollars are most likely leading the country to a technical default.

China and India fear collateral damage

This will continue until the restrictions are lifted. But even if they are, it will take more than a year to restore global financial trust in the country.

The so-called secondary sanctions of the White House turned out to be equally effective. They can hit companies of any country if they help Russia circumvent restrictions and bans.

IMF Chief Economist Pierre-Olivier Gourinchas believes the prospect of secondary sanctions continues to hinder China and India's trade with Russia, despite both countries opposing sanctions pressure on Moscow.

“We see this in a number of Chinese companies: They are afraid of secondary sanctions. Because if you do business with sanctioned companies, you can be sanctioned yourself,” he says.

He adds that India and China will face a difficult choice: trade further with the rest of the world or get short-term benefits from buying Russian oil and gas at lower prices, but at the cost of breaking trade ties with the West, where they earn many times more.

Moscow's revenue hit

When it comes to Russia's income from exports, the lion's share (almost half) comes from products connected to fuel and energy: oil (28.7%), gas (12.6%), petroleum products (17.4%), and coal (3.8%).

According to Ukrainian experts, Russia still receives about a billion dollars a day from energy exports. And due to rising prices, they can earn even more this year than last.

Despite the restrictions, Russia ramped up its oil tanker shipments to Europe in April to 1.6 million bpd, up from 1.3 million bpd in March. The EU promises to be able to abandon Russian oil by the end of 2022, and gas by 2024. At a press briefing, Gourinchas said that Western sanctions against Russia's energy exports could lead to a 17% drop in Russia's output by 2023.

Russia still receives about a billion dollars a day from energy exports.

He said that if sanctions are extended to Russia's energy sector, the country will be left with very few trading partners. This will lead to the shutting down of the economy and its transition to autarchy.

Even the existing restrictions are already affecting the Russian oil industry, as Russian companies are having problems with oil delivery due to restrictions in ports, with cargo reinsurance and difficulties with foreign currency payments, forcing them to sell oil at a 30% discount.

\u200bRussian soldiers rehearsing for their 9 May 2022 'Victory Day' Parade

Russian soldiers rehearsing for their 9 May 2022 'Victory Day' Parade in Moscow on Wednesday

Cover Images/ZUMA

A chain reaction

Sanctions do not mean the instant death of the Russian economy, but provoke a chain reaction of its destruction.

“As long as these sanctions are in place, which can be long enough, the Russian economy will move along a different growth path," said Gourinchas. "The shock is already quite significant... And we do not expect the Russian economy to recover."

According to IMF forecasts published in the April World Economic Outlook, Russia's real GDP will shrink by at least 11% this year. The unemployment rate in Russia will double, up to 8-9% of the working population.

The IMF expects the sanctions to lead to the severance of Russia's financial and trade ties with the outside world. In turn this will eventually undermine the productivity of the Russian economy and have long-term negative consequences.

Reputational risks may lead Western firms to avoid commercial agreements with Russian counterparts, even in sectors not affected by the sanctions.

Ten years to recover

Overall, Russians are gradually feeling the impact of sanctions — from a banal shortage of sugar and paper to downtime and part-time work for employees in factories and enterprises.

"We can already say that Russians will have to face hyperinflation, mass unemployment and economic downturn. Even the Russian government confirms the forecasts of Western analysts and financial institutions that the economy will fall by more than 10%, inflation will reach about 20%, and 2 million Russian citizens will potentially lose their jobs," said Yaroslav Zheleznyak, an economist and advisor to the Ukrainian Prime Minister on parliamentary relations.

Russians will have to face hyperinflation, mass unemployment and economic downturn.

Since Russia now holds the world record for sanctions with over 8,000 and more are planned, it is very difficult to estimate the scale of the impact. However, Standard and Poor's analysts believe that Russia will need 10 years to restore the economy to pre-war levels.

The Research and Forecasting Department of the Bank of Russia released an analysis in April stating that the onset of the most shocking consequences for the Russian economy today are slowed down because a large number of companies are still operating on old stocks of imported materials and components. Central Bank analysts have concluded that under restrictions Russia will come to self-sufficiency at the pre-digital technological level in a few years.

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FOCUS: Russia-Ukraine War

Kharkiv Revisited: Inside Russia's New Assault On The "Hero City" Of Ukraine

The nation's second-largest city, Kharkiv was quiet for weeks after Ukrainian forces took control. But now it is again under attack as Russia pushes to capture the city that's considered the "gateway" to Ukraine. Die Welt reports from the frontline.

Damages due to Russian shelling in Kharkiv, Ukraine

Alfred Hackensberger

KHARKIV — "Come, I want to show you something," Denys Vezenych says, opening the door of his dental office.

The 40-year-old begins to tell the story in the waiting room: "It was April 16 when the Russian artillery shell hit. The windowpanes were broken, the walls had holes everywhere and the roof was destroyed. But I renovated everything."

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The repairs cost him several thousand euros. "You have to think positively, because life goes on," he explains with a smile. But this attitude is not so present generally in Saltivka, a neighborhood in northeastern Kharkiv. The dental practice may be like new, but the rest of this area in the northeastern Ukrainian city is completely destroyed.

The Russian army has done a great job in its three-month offensive on Ukraine's second largest metropolis. Countless flats have been burned out, the facades of houses have been shot to pieces, entire shopping centers have been bombed. Debris still lie in the streets everywhere.

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