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Just over four months ago, the US and several allied countries imposed unprecedented sanctions on Russia in response to the invasion of Ukraine.
Weeks later, the Russian ruble depreciated, foreign multinationals withdrew from the country and the economic outlook began to look bleak.
But Russia reacted aggressively. It bolstered the ruble’s value and increased oil exports to China and India.
The ruble is now the best performing currency in the world. Thanks to years of preparation, Russia has become much more self-sufficient and has enormous foreign exchange reserves. It has also reopened several companies previously under foreign management, such as McDonald’s.
So, do sanctions work?
“It depends on the criteria,” said Russian political scientist Ilya Matveev. “If the goal is a rapid and complete collapse of the Russian economy, no, sanctions won’t work because the Russian economy is still functioning. But if the goal is to weaken Russia economically in the long run, then sanctions will work 100%.”
We examine how Russia is currently preparing and what sanctions could mean for its war against Ukraine.
How has Russia prepared for this moment?
Russia is now under nearly 11,000 individual sanctions.
After it invaded Ukraine in February, dozens of countries responded by quickly turning Russia into the world’s most sanctioned nation.
Some of the major sanctions included the removal of several major Russian banks from the SWIFT payment clearing network; freezing of Russian assets abroad; restricting Russian oil imports; and cutting off important exports to Russia, such as high-tech components and microchips.
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While the sanctions did some immediate damage, the Russian government has spent years preparing for a situation like this. When Russia faced sanctions in 2014 after annexing Crimea and launching a “hybrid war” in eastern Ukraine, Russia began trying to make its economy sanction-proof.
For example, in 2013, Russia imported about half of its food; but today it is self-sufficient in basic food supplies and has even become a major exporter of products such as grains and wheat, according to Chris Weafer, the chief executive of Moscow-based consultancy Macro Advisory.
Prices were initially high and the quality of many products such as bread, cheese and cereals varied.
“We spent a few years eating what I would best describe as flavored rolling papers, trying to get it right,” Weafer said of many Russian foods at the time. Now he said Russian companies were able to meet many of the country’s food needs, as well as other basic necessities such as laundry detergents.
Russia also reduced its reliance on foreign debt and amassed a huge stockpile of foreign exchange reserves.
What is the long-term outlook for Russia?
This week, Russia defaulted on its foreign debt payments for the first time in more than a century.
That may not have an immediate impact, Weafer said, because Russia doesn’t have much foreign debt compared to countries like the US, and sanctions had already prevented it from borrowing money. But the default “will hang over it like bad credit hangs over people,” he said.
“This is the kind of thing that would be a problem in a few years,” Weafer said. “If Russia gets into a situation where it has to rebuild and want to go back to national projects, it will have to borrow money. And then that could be difficult because of the current lack.”
The ruble’s value was also high “for all the wrong reasons,” according to Michael Alexeev, an economist at Indiana University Bloomington, mainly because the Russian central bank restricted the exchange of the ruble and Russian companies had maintained high exports while imports plummeted, resulting in a record trade surplus.
“If you earn in dollars and spend in rubles, the weaker the ruble, the better,” Weafer said. “So the central bank is now in a dilemma… the current rate is about 54 [rubles] against the dollar. The Ministry of Finance and the Ministry of Economic Affairs say it should be 75 to 80. But the central bank is scratching its head on how to do that without running the risk of collapsing.”
And while Russia is re-marketing versions of some multinational companies that have left, such as McDonald’s, it’s much more difficult for those who depended on imports.
French carmaker Renault, for example, had previously produced Lada cars in factories across the country through a partnership with a Russian state-owned company. When Renault withdrew from Russia, the Russian government decided to nationalize the factories and produce the cars itself. However, since it can no longer import foreign components, the Russian manufacturer is forced to create cars that do not have automatic transmissions, anti-lock brakes or even airbags.
Alexeev said this was an example of where the Russian economy could go if sanctions were continued.
“They will not starve. There will be no famine,” he said. “It’s just that things that they can make and consume will become easier and simpler. Refrigerators, cars, not to mention smartphones. Yes, they will be able to import some of these things from China, but a lot of things that China will do.” either unable or unwilling to deliver.”
Will sanctions stop Putin from continuing the war?
While Russia may have the reserves and revenues to fund his army, maybe not? arm it just as easily as sanctions persist, according to Alexeev.
“Where there is a very important limitation is what kind of armaments for weapons and ammunition they can actually make,” he said.
Restrictions on imports of spare parts and high-tech goods mean that the Russian military “basically can’t make many things they need as the war gets longer. They have very limited capabilities to make tanks, missiles…and fighter jets.”
But a recent survey by the Russian-based independent polling agency Levada Center found that while a majority of respondents were concerned about sanctions, a majority also felt that Russia should continue its current policies rather than make concessions to try to to lift sanctions. Many polls conducted since the start of the invasion have reported that a majority of respondents support the war.
However, Matveev does not believe that polls can be relied upon to determine how the Russian public really feels on important issues.
“These results are highly questionable because polling in authoritarian regimes in general is a very problematic activity,” he said. “You ask people, ‘So what do you think of the government?’ And they are clearly afraid to tell the truth, not even to pollsters, especially now that Russia is under de facto martial law and all criticism of the war is criminalized with very long prison terms.”
According to Alexeev, the sanctions have affected ordinary people. He said that despite government price controls on essentials like food and gas, inflation has made most things more expensive. While many poor Russians in rural areas grow some of their own food and do not rely on goods that are sanctioned, most of what they have yet to buy has become more expensive, Alexeev said, and “those who have no food themselves are suffering quite a bit. .”
Still, Matveev does not believe sanctions will affect Russian President Vladimir Putin’s decision-making on Ukraine.
“Putin is determined to fight this war and in his mental space he is, say, prepared for a long conflict,” Matveev said. “And sanctions as such cannot change his calculation, because for him it is something like an existential struggle. And sanctions do not pose an existential threat to Russia after all.”
The radio interview between Mary Louise Kelly and Ilya Matveev was edited by Sarah Handel.