In response to Russia’s invasion of Ukraine, the West launched an economic war. The United States has banned the sale of a wide range of goods to Russia; Big companies withdraw by the dozen; And several countries together have frozen 60% of the central bank’s international reserves. The idea was to send Russia’s economy into a free fall, punishing President Vladimir Putin for his aggression. The ruble fell one-third against the dollar in the week following the attack, and shares of many Russian companies fell.
Is Western strategy still going to be planned? The chaos in the Russian market seems to have subsided. The ruble has jumped since its fall in early March, and has now reached its pre-war stage (see chart). The main benchmark of Russian stocks has sunk by one-third, but has since recovered a portion of its losses. The government and most of the companies are paying in foreign currency bonds. A race has ended with banks withdrawing about 3trn rubles (31bn), with the Russians returning most of the cash to their accounts.
The policy has helped stabilize a battery market. Some are orthodox. The central bank has raised interest rates from 9.5% to 20%, encouraging people to keep interest-bearing Russian assets. Other principles are less common. The government has ordered exporters to convert 80% of their foreign exchange earnings into rubles. Trading on the Moscow Stock Exchange has become, to use the central bank’s accent, “negotiable”. Short-selling is prohibited, and non-residents will not be able to offload the stock until April 1st.
The real economy, though, is in some ways a financial mirror image: it’s healthier than it seems at first glance. A weekly measure of consumer prices shows that they have risen more than 5% since the beginning of March alone. Many foreign companies have pulled out, reducing supply of goods, while a weaker currency and sanctions have made imports more expensive. However, the price of everything is not increasing. Vodka, primarily domestically produced, costs a little more than before the war. The price of petrol is almost the same. And although this is early days, there is still very little evidence of a major blow to economic activity.
According to an estimate using Internet-search data produced by a rich think-tank OECD, Russia’s GDP was about 5% higher than the previous year in the week since March 26th. Collected by other “real-time” data Economist, Such as electricity consumption and rail loading of goods, are up. A cost tracker, produced by Sberbank, Russia’s largest lender, has grown slightly over the years. Part of that reflects the fact that people stockpile products before prices rise: the cost to household is particularly strong. However, the cost of services has dropped slightly and is much healthier in most epidemics.
Russia still seems certain to enter a recession this year. But whether it will turn out as bad as most economists predict, both of which are penciling in the fall of 10-15% of GDP, depends on three factors. The first is that ordinary Russians began to worry about the economy as soon as the war broke out and cut spending – as happened in 2014, when Russia invaded Crimea. The second is whether imports from the West will eventually shut down production due to restrictions on companies’ access. Russia’s aviation sector is particularly vulnerable, as is the car industry. Yet many large businesses that began during the Soviet era are accustomed to operating without imports. If any economy can come close to dealing with isolation from the world, it will be Russia.
The third and most important factor relates to Russia’s fossil-fuel exports. Despite the sheer number of sanctions, Russia still sells about $ 10 billion worth of oil a month to foreign buyers, the equivalent of a quarter of its pre-war exports; Revenue from the sale of natural gas and other petroleum products is still flowing, too. It provides a valuable source of foreign exchange through which it can buy some consumer goods and parts from neutral or friendly countries. If this does not change, the Russian economy may still stumble for some time. 3
Read more in our recent coverage of the Ukraine crisis