Russia’s economy has been isolated, its billionaires have been sanctioned and hundreds of foreign companies have either left the country or cut back on operations there.
And yet the Russian economy has emerged surprisingly resilient; its currency has bounced back and this week found a way to avoid defaulting on its foreign debt.
“All things considered, it’s holding up better than initially expected,” said Art Woo, a senior economist with the Bank of Montreal.
The Russian economy is still projected to fall into a recession later this year, Woo said. But so far, it has managed to blunt the harshest economic consequences of the Western sanctions, brought in amid the country’s invasion of Ukraine.
The Russian ruble collapsed by 30 per cent in late February when Western sanctions were first introduced. A month later, U.S. President Joe Biden said the sanctions were working and that the Russian economy was on track to be cut in half.
“As a result of our unprecedented sanctions, the ruble was almost immediately reduced to rubble,” tweeted Biden in March.
Protecting the ruble
But since then, the value of the currency has almost doubled — largely the result of some deft moves from the country’s central bank as it took quick steps to bolster the ruble.
The Central Bank of the Russian Federation severely restricted the ability of Russian citizens to sell rubles and buy foreign currencies. It has demanded that foreign countries pay for Russian energy products in rubles. And it’s forcing Russian companies still exporting to sell 80 per cent of their foreign-currency revenues and buy rubles instead.
Experts say that has essentially created an artificial demand for the currency, which has boosted its value and kept a floor under the ruble. As the Wall Street Journal put it, the ruble is in “a central-bank-induced coma.”
Meanwhile, the Russian job market has remained solid — and the state has shown its willingness to step in to keep the domestic economy functioning, Woo said.
“We suspect that the government will rely on Soviet‐era tactics (when unemployment was effectively outlawed) and encourage employers to lower salaries/reduce working hours instead of cutting head count,” he told CBC News in an email.
Energy exports in the crosshairs
At the heart of that strength is Russia’s much vaunted oil and gas exports. Since the invasion of Ukraine on Feb. 24, oil and gas prices have surged.
“The sky-high fossil fuel prices and continued imports into Europe have provided the Kremlin with a major windfall and undermined the effect of economic sanctions,” said Lauri Myllyvirta, lead analyst with the Centre for Research on Energy and Clean Air.
His organization tracked shipping patterns to determine just how much money Russia has made since the beginning of the war, finding that Russia made about $65 billion for its oil, gas and coal over the past two months alone. That’s more than $955 million a day.
That kind of money buys an awful lot of wiggle room. And combined with the moves by its central bank, the Russian economy is holding its own.
But now the European Union is threatening to cut off some energy exports as well, with possible sanctions on Russian oil on the table and set to be discussed in a meeting Wednesday.
Russia supplies about 40 per cent of the EU’s natural gas and about 25 per cent of its oil.
“Our goal is simple,” Charles Michel, the head of the European Council, said this week. “We must break the Russian war machine. And I am confident that the council will imminently impose further sanctions, notably on Russian oil.”
The mere idea of cutting off Russian energy exports was nearly unimaginable when the conflict began.
But as the war dragged on, pressure grew on governments to take more action.
“The politics became so toxic,” said Rory Johnston, managing director and market economist at the Toronto-based Price Street Inc. “Russia’s activities and the human rights abuses in Ukraine [were] so offensive that governments of the world really didn’t have a choice.”
If Europe follows through on the threat and bans Russian oil and gas, that would severely limit Russia’s ability to blunt the blow of Western sanctions.
Economic trouble ahead
And it comes as its central bank was already warning that the country was headed for the worst economic downturn it has seen in decades.
“The sanctions imposed against Russia affected the situation in the financial sector, spurred the demand for foreign currencies, and caused fire sales of financial assets, a cash outflow from banks and surging demand for goods,” said Elvira Nabiullina in prepared remarks first published in English on Friday.
For the second time in less than a month, Nabiullina slashed the country’s interest rates by three percentage points. She further warned consumer prices could soar by as much as 23 per cent this year.
As the sanctions drag on, she said, exporters and producers will have to seek out new partners and new markets.
“Currently, this problem might be not as acute because the economy still has inventories, but we can see that the sanctions are being tightened almost every day,” she said in a speech at a joint meeting of the State Duma last month.
The forecast from the International Monetary Fund (IMF) is even more dire.
“The baseline forecast is for a sharp contraction in 2022, with GDP falling by about 8.5 per cent, and a further decline of about 2.3 per cent in 2023,” the IMF wrote in its global forecast.
The hardest part in assessing the state of the Russian economy is accounting for all the unknowns; even the best experts don’t know how the war will progress or how European countries will respond.
Measuring that uncertainty is the unenviable task of economists like Doug Hostland, associate vice-president at TD Economics.
“Because of the unprecedented nature of what’s happening, we’re really beyond our realm as economists to predict,” he said.
Hostland wrote a research paper into the impact of the potential that Russia may default on its debt. “Foreign investors hold only around $20 billion in Eurobonds issued by the Russian government which is small,” he wrote.
But the threat of a default was a mere distraction from the real concern, Hostland said, which is a broader European banning of Russia’s oil and gas.
“That’s the main event,” he said. “That’s what financial markets and the entire geopolitical perspective is: what is Europe going to do next?”