The Russian economy has held up surprisingly well in the face of Western sanctions designed to cripple it– with the rouble ending up being the world’s best performing currency so far this year.
Russia‘s rouble rose to a seven-year high versus the dollar on the Moscow Exchange on Monday, as the currency has actually confused expectations to end up being the best-performing currency in the world this year.
Vladimir Putin was eager to stress this in his address to the St Petersburg International Economic Online forum, until now a sign of post-Soviet Russia’s financial ties with the West, on June17 The “blitzkrieg” of Western sanctions was “stupid”, the Russian president said But they have “failed”.
In addition to allies like the UK, Australia and Japan, the United States and EU have enforced enormous sanctions on Russia for its February 24 intrusion of Ukraine– consisting of the unprecedented freezing of some $300 billion in Russian foreign currency reserves which Moscow believed would be an insurance policy versus Western pressure.
But while the Russian economy is holding up well, analysts say the worst is yet to come for Moscow.
A week after Russia attacked, provoking a swift storm of sanctions, the rouble had been up to its most affordable level ever against the dollar and euro. By denying Russia of that gigantic arsenal of foreign currency reserves, the West denied it of an essential methods of holding up its currency’s worth.
The Russian Reserve bank countered, nevertheless, by raising rate of interest to 20 percent and enforcing remarkable capital controls on business and residents alike.
The soaring rouble reveals the Russian Reserve bank is prospering. The currency’s high value is “undoubtedly a political true blessing” for Russia, stated economic expert Julien Vercueil, co-president of INALCO University in Paris. “At the outset of the war Moscow really feared a monetary panic that would trigger runaway inflation and completely undermine people’s confidence in the rouble. They have actually prevented that risk for the time being.
” On the other hand, the rouble’s existing worth is so high that Russian-made products are uncompetitive versus foreign competitors in terms of rate,” Vercueil continued. “That may complicate the import replacement policy Putin has actually called for.”
The gift of oil
Durations of high oil prices have actually long used Moscow a treasure trove. It permitted the USSR to hide its financial weakness and offer its people unmatched living standards under Leonid Brezhnev in the 1970 s and under Putin in the 2000 s, who nursed the Russian economy back to health after the disaster of the 1990 s.
This phenomenon is playing out again, with hydrocarbons still making up over 60 percent of the fossil fuel-rich nation’s exports.
Amid surging oil costs, Russia received EUR93 billion in fossil fuel exports throughout the war’s first 100 days, according to a report by the Helsinki-based Centre for Research Study on Energy and Clean Air released in June.
For all the tough talk in EU capitals– and for all the pressure put in by Kyiv– the report discovered the EU represented 61 percent of Russian hydrocarbon exports, amounting to about EUR57 billion.
Germany has been a significant importer of Russian gas ever since Brezhnev remained in the Kremlin. Accordingly, Berlin rejected in early April an EU restriction on Russian gas imports.
Nevertheless, the EU consisted of a gradually enforced embargo on Russian petroleum and petroleum products in its 6th round of sanctions adopted in early June, with the expectation of cutting these imports by 90 percent by2023
Russia accounts for more than 11 percent of global oil production, so the EU embargo dangers further boosting the price at a time of widespread inflation. But the ban will be a potent weapon for the EU to wield versus Moscow, said Philippe Waechter, head of economic research study at French monetary services firm Ostrum Possession Management.
” This is a definitely important step due to the fact that it’s oil that’s permitting Russia to hold out in this war,” Waechter put it. “Individuals talk a lot about Russian gas because Europe is extremely dependent on it which offers Russia substantial utilize. Oil brings in three times more cash than gas to Russia, so [the EU] can actually make a difference here.”
Dangers to manufacturing
Russia’s monetary services sector has so far cushioned the effect of Western sanctions. However much of the production sector has been hit hard– significantly the automotive market, which in April saw an extraordinary 78.5 percent year-on-year plunge in car sales.
This was a repercussion of international companies like Mercedes-Benz, Volkswagen and Renault leaving and certainly the Western embargo on electronic parts at a time of worldwide shortages.
In a context of “really strong” post-Covid need for manufactured goods, some Chinese factories are “still operating at a slow speed, for example in the Shanghai location, which is still impacted by the pandemic”, Waechter kept in mind.
” For other big Asian manufacturers of electronic parts such as Japan, South Korea and Taiwan– which have great relationships with the West– providing Russia with parts is not precisely a leading priority,” he included.
Confronted With the exact same supply disturbances, Russia’s air travel industry has actually likewise had to handle the EU, US, UK and Canada closing their air area to Russian airplanes which has actually considerably disrupted air travel while sending Russian ticket prices increasing.
However, main figures for April reveal that it’s not just sectors like oil and mining that are holding up relatively well in Russia– they recorded small year-on-year output declines of 1.6 percent and 2.1 percent respectively — however so too the pharmaceutical and drink industries which registered double-digit growth.
However Vercueil concerns whether Russia’s financial strength is sustainable. ” For the minute, main figures aren’t showing a sharp total drop in production; the preliminary effect of sanctions has been basically absorbed, in spite of a substantial spike in inflation,” he said. “But in the medium to long term, Russia’s decoupling from Western economies will have serious effects for its living requirements and technological capabilities. The relationship with some Asian countries can limit the damage– however in my view it won’t suffice to completely compensate.”
” Russia is cushioning the stock today– however what about its capability to rebound?” Waechter included. “Not just is this war monopolising state profits, it’s also depriving Russia of the innovation transfers Western business provide. This represents a major development deficit, one that Moscow will have a hard time making up unless it substantially increases its dependence on China.”
Russia’s economy ministry said in May that it expects an economic crisis of 7.8 percent to 8.8 percent in 2022, prior to returning to growth the list below year through a “structural improvement” throughout the economy. That would be the nation’s biggest annual fall in GDP in the last 20 years.
This article was translated from the initial in French