Over the past six months, Russia has bolstered its economic defenses after Western countries hit the country with sanctions over its invasion of Ukraine.
Despite the crackdown, the Kremlin continues to attack billions of revenue from oil and gas, this helped the ruble rally to become best performing currency This year.
But all is not well with the Russian economy.
Western sanctions and the widespread exodus of businesses from Russia since February 24 have wreaked havoc on the Russian economy – and its future prospects are even more bleak, according to a report. New report from Yale University economists and researchers led by Jeffrey Sonnenfeld, Yale professor of management and senior vice chancellor. for leadership studies. The researchers write that “the Kremlin’s financial position is in a much more dire condition than is commonly understood” and that “business withdrawal and sanctions are crippling the economy.” Russia catastrophically.”
Reduce value
As of August 4, more than 1,000 companiesincluding US companies such as Nike, IBM and Bain Consulting, have cut their operations in Russia. However some businesses have stayed, The Yale report says the mass exit of businesses accounts for 40% of Russia’s GDP and reverses the value of foreign investment for 30 years, according to the Yale report.
The international setback is turning into a bigger crisis for the country: a collapse in imports and foreign investment.
Russia has fallen into a technology crisis due to its isolation from the global economy. It is having trouble securing critical components and technology. “The domestic economy is largely based on imports from industries…with some exceptions,” the report said. Western export controls are largely prevent the flow of imported technology are from smartphone to data servers and networking equipment, putting a strain on its technology industry. Russia’s largest internet company Yandex — similar to Russia’s Google — is run without semiconductor chip it needs for its servers.
At the same time, “Russian domestic production has come to a complete standstill – incapable of replacing lost businesses, products, and talent,” the Yale report said. Russian manufacturers and manufacturers are unable to fill the void left by the collapse of Western imports. For example, Russia’s telecommunications sector now hopes to rely on China, India and Israel to provide 5G equipment.
In the weeks following the invasion of Ukraine, the Kremlin largely averted a “full-scale financial crisis” through swift and harsh measures, such as restricting money transfers out of the country and imposing increased 20% emergency interest rate, Laura Solanko, senior. advisor at the Bank of Finland’s Institute for Emerging Economies in Transition, an emerging economy research organization, told Luck last month. The ruble even rebounded from its March low, when it was valued at less than one US cent.
However, Russia’s financial markets are performing the worst in the world this year, the report notes. “Putin is using dramatic, unsustainable fiscal and monetary interventions to remedy these structural economic weaknesses,” which has led to a government budget deficit The researchers write for the first time in years and deplete the Kremlin’s foreign-exchange reserves even as oil money continues to pour in. The Russian government is subsidizing businesses and individuals to mitigate any economic shock caused by the sanctions. The report said the “high rise” of financial and social stimulus, in addition to military spending, was “simply unsustainable for the Kremlin”.
And the recent dramatic change in the ruble does not indicate a strong Russian economy, but marks something much worse: the apparent collapse of foreign imports. Sergei Guriev, scientific director of the economics program at Science Po, in France, and a research fellow at the London-based center for economic policy research, formerly told Luck that it represents a “very bad” situation for the country.
The EU is now phasing out Russian energy, which could hurt the Kremlin’s oil and gas profits. Such a scenario would put a serious strain on the Kremlin’s finances, as Western countries have frozen half of their $300 billion in foreign exchange reserves.
Towards economic oblivion
Russia’s precarious economic position means it faces more severe, longer-term challenges ahead.
The report said sanctions are not designed to cause an immediate financial crisis or economic collapse, but are a long-term tool to weaken a country’s economy while isolate it from global markets, the report said. And sanctions are doing exactly that for Russia.
The country is losing its wealthiest and most educated citizens as its economy collapses. Most estimates say that at least 500,000 Russians have left the country since February 24, with “mostly highly educated and skilled workers in competitive industries such as technology”. , the report said. Many runaway rich Russians are taking their money with them. One estimate is 20% of Russian ultra-high net worth individuals left this year. According to estimates by the Central Bank of Russia, in the first quarter of this year, official capital outflows stood at $70 billion – but this may be an “understatement” of the actual amount that has left. country, the Yale team wrote.
Russian citizens are also becoming poorer, despite the increase in minimum wages and Putin’s pension income. A former aide to Putin guess that the number of Russians living in poverty would likely double – and possibly even triple as the war continued. Russian political scientist Ilya Matveev “has yet to witness the worst”, told Luck last month.
“There is no way out of economic oblivion as long as the Allies remain united in maintaining and increasing sanctions pressure against Russia,” the researchers wrote.
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