Sanctions are the West’s key weapon in the fight against Putin, but there are signs that Russia’s economy and financial system are weathering the storm better than expected. The ruble has already rebounded and Russia has been able to continue to service its debts, with only a few hiccups. A closer look, however, reveals that the sanctions are tough – and that Russia is losing the economic and military war.
Take the resurgence of the ruble, which is not what it seems. The ability of the Russian currency to rebound reflects the fact that Russian imports have fallen more than the country’s exports as consumers and local businesses cut spending. This means that there is less demand to sell rubles to buy foreign currencies.
The central bank has also supported the ruble, but the measures it has used to do so are unlikely to last long. Conventional market intervention – selling off some of the country’s large reserves of international assets to buy rubles – has helped. So is the authorities’ insistence that foreign companies that still buy raw materials from Russia pay in rubles, thereby ensuring that there is the least international demand for the currency.
The Russian central bank’s offer to buy gold for rubles also triggered the rouble’s revival; he encouraged some (not very well-founded) speculation that he would also be willing to to sell gold against rubles, creating a de facto “gold standard” and therefore supporting the currency in this way.
But while these measures have created an illusion of monetary strength for now, that’s really all: a balance of payments surplus caused by a collapse in domestic demand is a wasted victory that won’t last.
What about interest rates, which have been cut from a high of 20% in March to 14%? Again, this does not give the full picture: interest rates are still higher than they were at the start of the year (8.5%) and inflation has surged. The sanctions have caused a sharp tightening of financial conditions, which is also reflected in stock prices: the main Russian stock indices have further lost between a quarter and a third of their value since February.
Worse for Russians: Russia’s central bank expects inflation to average between 18% and 23% this year, with the economy down 8% to 10%.
These grim data are backed up by business surveys. S&P Global and IHS Markit produce monthly Purchasing Managers Indexes for all major economies. The PMI composite output index for Russia recovered slightly to 44.4 in April from 37.7 in March, but any reading well below 50 still signals a sharp contraction in activity. Employment is also down sharply.
Certainly, the Russian economy is not collapsing, as some might wish. But it would be a mistake to see Russia’s economic resilience as a sign that all is well. Russia is a large country that is relatively self-sufficient in many essentials, including food and energy. Even in areas where Russia is more dependent on Western companies, including professional services, these are often provided by separate legal entities operating in the country. This means that predictions that sanctions would quickly sink the Russian economy have always seemed over the top.
There are also limits to the effectiveness of Western sanctions on Russia’s energy exports. Countries like the United States and the United Kingdom are not particularly dependent on Russian oil and gas, but it is unrealistic to expect others, notably Germany and Italy, to turn off the taps overnight.
Indeed, anything less than comprehensive sanctions could simply play into Putin’s hands, driving up the prices of oil and gas that Russia is still able to sell – including to countries like China and India. .
It should also be remembered that the war in Ukraine is not the fault of the vast majority of ordinary Russians, all 144 million of them, young and old. It’s not clear that Putin cares about them anyway. The Russian economy has underperformed for many years, partly due to international divestment after the annexation of Crimea in 2014.
There seems to be a widespread presumption among some in the West that it would be “morally wrong” to continue doing business in Russia. But it’s easy to think of exceptions. Would we really be prepared to stop supplying drugs, for example? Targeting the rich and powerful, including oligarchs and key figures in the state apparatus, makes much more sense, including from an ethical perspective.
Another point to remember is that economic and financial sanctions are not the only tool to counter Putin’s aggression. Perhaps the most effective thing the West can do is to make Putin lose the war in Ukraine. It seems to happen. Most of the credit obviously goes to the heroic resistance of the Ukrainians themselves. But the growing supply of military and intelligence hardware is clearly helping too.
Softer power also comes into play. Cultural and sports boycotts have a far-reaching impact far beyond simple economic calculations. Making Russia a pariah state undermines morale and drains talent from the country.
In short, there’s more that could – and probably should – be done to tighten the screws on Putin’s regime, including new financial sanctions and faster diversification away from Russian energy and other commodities. . But my hunch is that the West has probably struck the right balance, at least for now.
The combination of military support for Ukraine, existing sanctions and the exercise of soft power is working as well as one could reasonably expect. We must also bear in mind the potential for further collateral damage to innocent parties, both in the West – and in Russia itself – if sanctions are tightened too much.
Russia’s resilience in the face of unprecedented sanctions is not a sign that these measures are failing. Nor should it be seen as an invitation to slap ordinary Russians – who probably oppose Putin’s war anyway – with measures that will make their lives even more difficult.